Australian Youth & Health Foundation v Perpetual Trustee Company Ltd

Judgment

1. BATHURST CJ: The late Mr Eric Storm (the deceased) died on 24 February 2000, having made a will dated 16 November 1999 and two codicils dated 18 February 2000 and 21 February 2000 respectively.
2. By his will, the deceased appointed Permanent Trustee Co Ltd his executor and trustee and, after making certain monetary bequests and directions concerning his former home, made the following provisions in respect of the residue of his estate: "7. MY TRUSTEE shall invest The Eric Storm Charitable Trust in the manner hereinafter authorised and apply the nett income arising from such investments during any year ending on 30 June (hereinafter referred to as the 'nett income') in the following manner:- (a) as to forty-four percent (44%) to AUSTRALIAN YOUTH & HEALTH FOUNDATION to be applied for the promotion of natural health in accordance with the present philosophy and practices of the Hopewood Health Centre at Wallacia; (b) as to twenty-two percent (22%) to MISSION AUSTRALIA for the use of Sydney City Mission; (c) as to twenty-two percent (22%) to THE SALVATION ARMY (NSW) PROPERTY TRUST to be applied for the benefit of young people; (d) as to two percent (2%) to MAMRE PLAINS LTD of Lot 1 Mamre Road, St Marys; PROVIDED ALWAYS that if in the opinion of my Trustee any of the said organisations shall either cease to exist or cease to operate under their respective fundamental objects and purposes as at the date of this my Will or shall not apply the funds for the charitable purposes set out above then my Trustee shall apply the income which such organisation would otherwise have received to such well-established and well organised charities as my Trustee shall select in equal proportions but so that no individual charity receives in excess of TEN THOUSAND DOLLARS ($10,000.00) per annum; PROVIDED FURTHER THAT the sum of TEN THOUSAND DOLLARS ($10,000.00) referred to in this Clause 7(d) shall be varied on each anniversary of my death so that such amount bears the same relation to TEN THOUSAND DOLLARS ($10,000.00) as the Consumer Price Index for the weighted average of the eight (8) capital cities for all groups or the index which has been substituted for it current at the date of each anniversary bears to that index at my death; (e) as to the remaining ten percent (10%) of the nett income, my Trustee shall accumulate same as an accretion to the capital of The Eric Storm Charitable Trust; (f) I DIRECT that all income paid in accordance with this clause shall be paid within three (3) months of the 30th June each year."
3. Permanent Trustee Company Ltd was replaced as trustee by Perpetual Trustee Company Ltd (the Trustee) as a result of the former company's estate, assets and liabilities being transferred to the Trustee by a voluntary transfer determination made on 2 February 2015 by the Australian Securities and Investments Commission under the provisions of the Corporations Act 2001 (Cth).
4. At the time of the making of his will and at the time of his death, the deceased was a director of the Appellant, Australian Youth & Health Foundation, the beneficiary named in cl 7(a) of the will (the Foundation). In 1961 the Foundation established the Hopewood Health Centre at Wallacia (the Centre) which was described in the Annual Report of the Foundation for 1962 as a "30 bed resort primarily for people who seek to regain health by natural means".
5. On 14 March 1972 Hopewood Health Centre Pty Ltd (Hopewood) was incorporated and thereafter operated the Centre. The shares in Hopewood were either directly or beneficially owned by the Foundation.
6. Distributions were made to the Foundation pursuant to the terms of the will up to 23 August 2013. Thereafter no distributions were made as the Trustee sought to satisfy itself on the question of whether the Foundation had ceased to operate under its fundamental objects and purposes as at the date of the will or had not applied funds it had received from the Eric Storm Charitable Trust (the Trust) for the promotion of natural health in accordance with the philosophy and practices of the Centre.
7. The Trustee ultimately formed the view that it would be open to it to form the opinion that the Foundation had ceased to operate under its fundamental objects and purposes and had not applied funds received from the Trust for the promotion of natural health in accordance with the philosophy and practices of the Centre. The Trustee sought advice of this Court pursuant to s 63 of the Trustee Act 1925 (NSW) as to whether it was justified in forming this opinion. It also sought advice that if it was justified in forming that opinion, whether any further or suspended distributions to which the Foundation would otherwise have been entitled, should be paid to charities selected by the respondent as referred to in the proviso in cl 7(d) of the will of the deceased.
8. The primary judge gave advice to the Trustee, that whilst it was not justified in forming the opinion that the Foundation had ceased to operate under its fundamental objects and purposes, it was justified in forming the opinion that $155,000 of the monies received by the Foundation from the Trust were not applied for the promotion of natural health in accordance with the philosophy and practices of the Centre.
9. The primary judge also held that if the Trustee formed the opinion contemplated by the proviso in cl 7(d) of the will, then it should cease applying monies from the Fund to the Foundation and was not thereafter obliged to reconsider the Foundation's entitlement to receive distributions from the Trust.
10. The Foundation was given notice of the proceedings as a consequence of which it is bound by the directions and orders made by the primary judge by virtue of s 63(11) of the Trustee Act. It has appealed against the directions and orders. It was not disputed that it was entitled to do so as of right: Beck v Henley (2014) 11 ASTLR 457; [2014] NSWCA 201 at [58].

Procedural background

1. Because it was contended on the appeal that the primary judge erred as a matter of discretion in giving the advice sought, it is necessary to make some reference to the procedural background.
2. As the primary judge pointed out, the proceedings were commenced on 8 April 2016. On 5 August 2016 the Foundation sought an order that it be joined as a defendant in the proceedings, that it have leave to file a cross-summons and the cross-summons be heard together with the summons for judicial advice. The cross-summons was not in the appeal books but the primary judge recorded it alleged a breach of trust by the Trustee. The submissions on the appeal made it clear that the breach alleged was a failure to distribute income to the Foundation at the time provided for in cl 7(f) of the will.
3. On 11 August 2016 the Registrar ordered that the Attorney General be joined as respondent and that the Foundation serve all evidence in support of its proposed cross-summons by 18 August 2016.
4. The Foundation did not comply with those directions and served an affidavit by one of its directors a little over a day before the hearing. Further, the Attorney General refused to give consent to the bringing of the cross-summons under s 6(1)(a) of the Charitable Trusts Act 1993 (NSW). That section provides that proceedings, defined as charitable trust proceedings, can only be brought with the consent of the Attorney General or the leave of the Court. Charitable trust proceedings include proceedings for breach or supposed breach of a charitable trust (Charitable Trusts Act s 5(1)).
5. In those circumstances, the primary judge refused leave to file the cross-summons. However, the Foundation participated in the proceedings for judicial advice.

The primary judgment

1. The primary judge construed the proviso as operating as a condition subsequent. That is to say, that if the Trustee formed the opinion that funds previously distributed to the Foundation had been applied other than for the purposes of natural health in accordance with the philosophy and practices of the Centre, then any further distribution of funds to which the Foundation otherwise would be entitled would be distributed amongst the charities referred to in the proviso.
2. In reaching this conclusion the primary judge acknowledged that the word "shall" in the phrase "shall not apply", absent context, suggested the need for a prospective inquiry. However, he concluded that in the context in which the word appeared, it was clear that the deceased intended the inquiry be retrospective. He said the words "shall not apply" should be taken as meaning "did not apply" or "has not applied" and that "the funds" referred to any part of distributed funds.
3. In the circumstances, the primary judge held that this element of the proviso was enlivened if the Trustee formed the opinion that the Foundation had applied any of the funds distributed to it other than for the relevant charitable purpose. He concluded the result was that once the proviso was enlivened, the Foundation's entitlement to receive any distribution from the Trust ended and there was no need for the Trustee to reconsider the matter. He stated the terms in the will in effect forbade the Trustee from so doing.
4. As I indicated, the primary judge found the Trustee would not be justified in forming the opinion the Foundation had ceased to operate under its fundamental objects and purposes. No challenge has been made to that conclusion.
5. However, the primary judge concluded the Trustee was justified in forming the opinion that the Foundation had not applied funds received from the Trust for the promotion of natural health in accordance with the philosophy and practices of the Centre.
6. The transactions said to enliven this limb of the proviso were payments of amounts totalling $155,000 to the general account of the Foundation, rather than being applied to the Centre for the purpose specified in the will. The money was applied to reimburse the Foundation for money it had advanced to Hopewood to fund its operation of the Centre. Having regard to the approach taken by the Court on the hearing of this appeal and the conclusion I have reached, it is unnecessary to determine whether the primary judge was in error in reaching this conclusion.

The appeal

1. On the appeal, the Foundation contended that the primary judge erred as a matter of discretion in giving the advice sought, erred in his construction of the proviso and erred in concluding that the Trustee was justified in forming the opinion that the sum of $155,000 was applied other than for the purposes specified in the will.
2. It is unnecessary to set out the grounds of appeal so far as they relate to the first and third issue. However in relation to the second issue, the only ground relating to it in the original notice of appeal was Ground 5 which was in the following terms: "5. His Honour erred in holding, Paragraph [55], that on a proper construction of the Will, there was no obligation of the Trustee to reconsider, either at all or annually, the question for opinion under the Proviso to Clause 7 of the Will, so that the entitlement of the Appellant was determined once and for all by the Trustee forming an opinion described in the Proviso."
3. At the hearing senior counsel for the Foundation argued faintly that this ground encompassed the conclusion of the primary judge, that the proviso operated by way of a condition subsequent as well as his conclusion that once the requisite opinion was formed, the entitlement of the Foundation was terminated once and for all. Ultimately he sought and was granted leave to amend the notice of appeal. The amended grounds were as follows: "5A. His Honour erred, at Paragraph [52], in construing the words in the Proviso to Clause 7 of the Will, 'shall not apply', as meaning 'did not apply', or 'has not applied', and the words 'the funds' as referring to distributed funds; that is, any part of the previously distributed funds. 5B. His Honour erred at paragraph [50] where his Honour held that it was clear that Mr Storm intended that the enquiry as to the operation of the Proviso be retrospective. 5C. His Honour also erred at paragraph [52], in finding that the Proviso is enlivened, as to the gift over, if the Trustee forms the opinion that the Foundation had previously applied any of the funds in fact distributed to it from the Trust otherwise than for the relevant charitable purpose. 5D. His Honour erred at paragraph [51] in that His Honour failed to hold that the words of the Proviso called for the Trustee to form an opinion in each year as to whether the Foundation 'shall' (in the future) apply its share of the nett income of that year to the charitable purpose described in Clause 7(a)."
4. On the hearing of the appeal, the Court decided to deal first with the construction issues; the further conduct of the appeal to be determined after those issues were decided.

The submissions

1. In its written submissions in chief, the Foundation submitted that the construction of the proviso preferred by the primary judge undermined the underlying purpose of the bequest, namely, to subsidise Hopewood on an ongoing basis. It submitted that because of the explicit annual payment requirements contained in the will, the construction preferred by the primary judge did not fit with the object or purpose of the Trust or its express terms. The Foundation submitted that the Trustee's obligation to form an opinion for the purpose of the proviso arose every year. It submitted that if in any particular year the funds were not applied for the requisite purpose, the Trustee was entitled to form this opinion. However, if in a subsequent year the Trustee was satisfied that the funds would be applied for the requisite purpose, the Trustee was obliged to distribute the funds to the Foundation.
2. The Foundation submitted that the question of the construction of the will was not a matter of discretion.
3. Senior counsel for the Foundation submitted at the hearing that the third limb of the proviso speaks to the future. He contrasted with the first and second limb which he submitted spoke to an existing fact. He submitted the word "shall" indicates a future meaning.
4. Senior counsel submitted the words "as at the date of this my will" in the proviso referred to the date of the will having effect by death (or possibly grant of probate) rather than the date it was made. It is unnecessary to determine this issue, as there is nothing to suggest that the operation of the Foundation or the Centre changed between the date of the will or the date of death.
5. Senior counsel for the Foundation accepted that a prior application of funds other than for the requisite purpose could be relevant in forming a view whether further funds were to be dispersed in a particular way. He submitted, however, that the question remained prospective.
6. The Trustee submitted that assuming the phrase "shall not apply" meant "did not apply" or "have not applied", the natural meaning of the proviso is that it is enlivened once and for all if the Trustee concludes the Foundation did not apply or had not applied distributed funds for the requisite purposes. It submitted that the purpose of the Trust was that money was to be distributed to the Foundation for so long as it did not fail to apply distributed funds for the charitable purpose contemplated by the will.
7. Senior counsel for the Trustee submitted that the proviso operated on the assumption that the beneficiaries had received their share of income and applied if the money is not used for the requisite charitable purposes. He submitted that there was a prospective or futuristic element in that the proviso looked at the question of whether the organisation, having received the money, thereafter applied it for the requisite charitable purpose.
8. Senior counsel for the Trustee submitted that the word "shall" in the third limb of the proviso ("shall not apply …"), could be read as "does not apply after the date of my will". He submitted that this rendered the use of the word "shall" consistent with its use in the earlier limbs ("shall either cease to exist or cease to operate under their respective fundamental objects") which in that context was looking forward from the perspective of the testator. Senior counsel for the Trustee submitted it would be a sensible use of the language to treat the proviso as operative upon the beneficiary having received money and not applying it for the requisite purpose, rather than the more difficult question of what the beneficiary might do after it received the money.

Consideration

1. The principles to be applied in the construction of wills were not in dispute. Those principles were conveniently set out by Isaacs J in Fell v Fell (1922) 31 CLR 268; [1922] HCA 55 at 273-276. Relevantly, they included the following: "(1) Every will must by law be in writing, and it is a necessary consequence of that law that the meaning must be discovered from the writing itself, aided only by such extrinsic evidence, as is necessary in order to enable us to understand the words which the testator has used. (2) The instrument … must receive a construction according to the plain meaning of the words and sentences therein contained. But … you must look at the whole instrument, and, inasmuch as there may be inaccuracy and inconsistency, you must, if you can, ascertain what is the meaning of the instrument taken as a whole in order to give effect, if it be possible to do so, to the intention of the framer of it [Emphasis in original; Citations omitted]. See also Gale v Gale (1914) 18 CLR 560; [1914] HCA 53 at 563; James v Douglas [2016] NSWCA 178 at [26].
2. Subject to the proviso, the obligation on the Trustee is to apply 90% of the income arising from the Trust during each year ending 30 June to the nominated beneficiaries within three months following the end of the year in question. The Trust envisaged that, subject to the trust for accumulation contained in cl 7(e) of the will, the whole of the income in each year should be distributed.
3. The proviso can operate in three circumstances. The first is where the beneficiary ceases to exist and the second is where the beneficiary ceases to operate under its fundamental objects and purposes. These two limbs envisage what might be described as a permanent change in the beneficiary, be it ceasing to exist or operating under different purposes or objects to those under which it operated at the date of the will. In these circumstances, the word "shall" where it first appears in the proviso, is referring to the occurrence of a particular event.
4. The third limb of the proviso, "shall not apply the funds for the charitable purposes set out above", assumes the beneficiary has neither ceased to exist nor ceased to operate under its fundamental objects and purposes. In my opinion the word "shall" in that context looks to the application of funds to be distributed rather than funds which have been distributed.
5. There are two matters which I think support this construction. First, if the testator intended the contrary construction it would have been a relatively simple matter, in what is a professionally and carefully drafted will, to use the words "has not applied" or, to adopt the language used in respect of the first and second limbs, "ceased to apply". Second, it seems to me unlikely that the testator, who wished a significant portion of his estate to be applied for particular charitable purposes, would wish to deprive those charities permanently of any distribution merely because on some occasion during the life of the Trust the Trustee formed the opinion that the beneficiary applied some part of the funds for a purpose other than the designated purpose.
6. Perhaps the most powerful argument to the contrary is the use of the word "funds" in the third limb of the proviso in contrast to the word "income" in the phrase "shall apply the income which such organisation would otherwise have received", which appears in the direction to the Trustee as to the manner of distribution where the proviso applies. It is possible that different words were used to refer in the case of "funds" to money which had been distributed whilst "income" was used to refer to what was to be distributed in the year in question. However, I do not think that was the reason for the distinction. Rather, in my opinion, the distinction was to recognise that what was being distributed was income in the hands of the Trustee which it was obliged to distribute whilst the word "funds" was intended to refer to the money in the hands of the beneficiary following such distribution.
7. I do not think that any difficulty the Trustee has in ascertaining how distributed monies would be used affects the position. It is a matter for the Trustee to form the requisite opinion in good faith and upon real and genuine consideration properly informed: Finch v Telstra Super Pty Ltd (2010) 242 CLR 254; [2010] HCA 36 at [28], [66]. In doing so the Trustee would be able to take into account in the formation of its opinion that monies in preceding years had not been applied for the requisite purpose.
8. It follows that the obligation on the Trustee is to consider in each year whether the proviso applies. At least where the beneficiary is continuing to operate in accordance with its fundamental objects and purposes, it seems to me the beneficiary is entitled to the income provided for it under the will unless the Trustee in the year in question forms the opinion referred to in the proviso. Once it is appreciated that the proviso looks to the application of monies to be distributed, there is nothing to suggest the operation of the proviso in any one year determines once and for all the beneficiary's entitlement to its share of income.

Conclusion

1. In the result, the primary judge erred as a matter of law in giving the advice sought. It follows Orders 1 and 2 under the heading "Judicial Advice" in the orders made by the primary judge on 16 September 2016 should be set aside. Order 1 should be set aside as it was sought in the context of an incorrect construction of the proviso. Whether or not the funds were applied other than for the requisite purpose in the past is irrelevant, unless it formed the basis for the Trustee forming an opinion that a distribution in a subsequent year would not be used for the requisite purpose. That was not the opinion which the Trustee considered it would be open to it to form.
2. Order 2 is based on a construction of the proviso which I consider to be incorrect.
3. It seems to me that the first order numbered 1 in the orders should also be set aside as any orders made in the "Order Document" were repeated in the formal orders made by the primary judge.
4. There seems to me no reason to disturb Orders 3-6 of the orders made by the primary judge, although the Trustee should be released from the undertaking referred to in par [7] of the orders and the Foundation from its undertaking as to damages.
5. So far as costs of the appeal are concerned, it seems to me the cost of each party should be payable out of the Trust Fund on an indemnity basis.
6. However, the parties should have an opportunity to agree on or make submissions as to the appropriate form of orders.
7. I would only add the following. Although I have formed the view that the advice given and directions made should be set aside on what might be described as substantive grounds, I do not think that in the particular circumstances of the present case the primary judge erred as a matter of discretion in determining to give the judicial advice. The fact that it may involve contested questions, whilst a relevant factor, is not determinative in deciding whether to give the advice sought: Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 at [60]-[61]. In circumstances where the Foundation's cross-summons was unable to be heard because of its failure to comply with directions, it seems to me that the primary judge was justified in taking the course which he did. That does not mean that it is not desirable that any future disputes on the issues raised in the proceedings be resolved by a formal adversarial proceeding rather than a summons under s 63 of the Trustee Act.
8. In the result I would make the following orders: 1. Direct the parties within 7 days to bring in short minutes of orders to give effect to this judgment. 2. In the event the parties are unable to agree on the appropriate orders within the period of 7 days, direct that each of them within 14 days of the date hereof file with the Court draft short minutes of orders together with submissions in support of them.
9. BEAZLEY P: I have had the advantage of reading in draft the reasons of the Chief Justice. I agree with his Honour's reasons and proposed orders.
10. MEAGHER JA: I agree with Bathurst CJ that the primary judge misconstrued the third limb of the main proviso to cl 7. I also agree with the orders that his Honour proposes. I add the following observations in support of my agreement in relation to what ultimately is a question of construction.
11. Clause 6 of the will creates the Eric Storm Charitable Trust of Mr Storm's residuary estate. Clause 7 requires the Trustee to invest that trust property and apply 90% of the net income during any year ending 30 June by paying it to four named charitable organisations in the percentages specified. That distribution is to be made within three months of the respective year end.
12. The Trustee's duty to apply annual income in this way is countermanded in relation to any of the four organisations if the Trustee forms an opinion as to any one of three matters in relation to that organisation. Each matter describes a potential state of affairs which would mean that any distribution to the organisation concerned either would not, or would be likely not to, result in the monies distributed being applied by the organisation for the applicable purpose relating to it as described in cl 7.
13. The first two matters concern the continued existence of the organisation and its remaining subject to some obligation to apply funds paid to it for the relevant charitable purpose. They are introduced as alternatives by the expression "shall either cease to exist or cease to operate under their respective fundamental objects and purposes". The first describes a state of affairs which is not retrievable in the sense that once it has occurred the fact of its occurrence cannot be undone or cured. It is not necessary to decide whether the second also describes a situation which is not retrievable in the same sense. In the expression "shall either cease to exist or cease to operate under" the use of "shall" to indicate futurity is explained from the perspective of the testator addressing two events, either of which might happen to any of the four organisations between the making of the will and the time it takes effect, or at any time during the life of the trust.
14. The third subject matter to which the Trustee's opinion must be directed is whether "any of the said organisations… shall not apply the funds for the charitable purposes set out above". The use of "shall" again indicates futurity, here with respect to the application of "the funds", but considered at a time when no distribution of income has been made for the year concerned. As the definite article indicates, "the funds" is a reference to the monies at that time available for distribution in accordance with the opening words of cl 7.
15. So understood, this last matter requires the Trustee to consider in each year in which there is net income to be distributed, whether any of the four organisations will not apply the funds which it is to receive "for the charitable purposes set out above". If the Trustee forms the opinion that the organisation will not do so, the relevant percentage of income for that year is to be distributed in accordance with the proviso "to such well-established and well organised charities" as the Trustee shall select.

Amendments 04 July 2017 - [7] replace "the opinion" with "the view that it would be open to it to form the opinion" [42] amend final sentence to read "That was not the opinion which the Trustee considered it would be open to it to form" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 04 July 2017