Cowan v Lai

Judgment - EX TEMPORE 1The genesis of these proceedings lies in a matrimonial dispute between the first plaintiff, Joanne Cowan and the defendant, Mark Lai. They were married in 2002 and were divorced in 2007. There was one child of the marriage, a daughter named Ashley, who has just turned nine. On 18 May 2007, Joanne Cowan and Mark Lai entered into a Financial Agreement pursuant to Part VIIIA of the Family Law Act 1975 (Cth). Clause 3 of that Agreement concerns a property in Wunulla Road, Point Piper ("the Property"). The Property had been a gift to the couple from Joanne Cowan's mother, Crystal Cowan. The Property was held jointly by Joanne Cowan and Mark Lai. 2Clause 3 of the Financial Agreement is in the following terms: "3. That within 42 days of signing of this Agreement upon compliance with the clauses relating to this Property: (a) Mark shall do all things necessary and sign all documents necessary so as to caused the [sic - cause to be] transferred to Joanne the Property at XX Wunulla Road, Point Piper ("XX Wunulla Road") into her sole name; (b) Simultaneously with Clause 3(a) Joanne will sign all documents necessary to register a mortgage in favour of a trustee company to be established by Mark for a sum equal to the full value of the said Property; (c) Such trust will hold the benefit of the mortgage in favour of Ashley; (d) Joanne will consent to the registration of caveat in favour of the trust; (e) That forthwith and up until the time that Ashley turns 18 all income received from this Property shall pass to Joanne; (f) That on Ashley's attaining the age of 18 and thereafter all income received from the rental of this Property shall pass to Ashley; (g) Upon the signing of this Agreement Joanne is hereby restrained from allowing this Property to be used as security for any loan or debt; (h) Joanne will prepare an enduring Will and irrevocably bequeath the said Unit XX Wululla Road, Point Piper to Ashley; (i) All costs and expenses associated with the establishment and administration of the trustee company including but not limited to the payment of all taxes, stamp duty and the like, shall be the sole responsibility of Mark." 3The above clause provides for the transfer of the Property into the sole name of Joanne Cowan and for a mortgage to be granted in favour of a trustee company who would hold the benefit of the mortgage for Ashley. It appears that in October 2007, the Property was transferred into the sole name of Joanne Cowan. However, a mortgage was not granted in favour of a trustee company as envisaged by clause 3(b). Instead, in about February 2008, a mortgage was granted in favour of Mr Lai. He lodged a caveat over the Property in relation to his interest as a mortgagee. The principal features of the mortgage are summarised in paragraph 8 of the Statement of Facts essentially as follows: (1)an immediate irrevocable appointment of Mr Lai as attorney of Joanne Cowan upon any default by Joanne Cowan of her obligations under the mortgage to exercise in the name of Joanne Cowan any rights expressed in the mortgage; (2)an acknowledgement by Joanne Cowan of having received a principal sum of $1,400,000 (in circumstances where Joanne Cowan had not in fact received $1,400,000) together with a covenant to pay the principal sum on demand; (3)a covenant by Joanne Cowan to pay interest on the principal sum upon demand or in any event for breach of her obligations under clause 3 of the Financial Agreement; (4)a covenant that Joanne Cowan will observe the provisions set out in the registered memorandum filed in the Land Titles Office with dealing number Q860000; (5)a covenant that Joanne Cowan will not mortgage, charge, lease, let, transfer, assign, part with possession of the premises mortgaged or any part thereof without first obtaining Mr Lai's consent; and (6)a covenant that Joanne Cowan will not seek or accept further advances from any other party. 4In fact, no money was advanced to Joanne Cowan as mortgagor. 5These proceedings raise various issues in relation to the mortgage, including questions of construction and an issue as to whether the mortgage should be rectified. The proceedings were commenced by a Summons filed on 20 December 2013 by Joanne Cowan and Crystal Cowan. Crystal Cowan, who held a General Power of Attorney from Joanne Cowan, entered into the mortgage on her behalf. By the Summons, declaratory relief and rectification of the mortgage is sought. In essence, it is alleged that there was a common intention that the mortgage be consistent with the terms of clause 3 of the Financial Agreement and that the terms of the mortgage failed to accurately express that intention. 6By a Cross-Summons filed on 17 April 2014, Mark Lai seeks the inclusion in the mortgage of a declaration to the effect that Joanne Cowan holds the Property on trust for Ashley in accordance with clause 3(e) of the Financial Agreement. 7The matter was listed for hearing before me on 7 May 2014. Shortly prior to the commencement of the hearing, the Court was informed that the parties had reached a settlement. That settlement is recorded in Short Minutes of Order. In brief, the settlement proposes that the parties enter into a variation of the mortgage upon certain terms "provided that the defendant is able to obtain Court approval of the variation pursuant to s 63 of the Trustee Act 1925 (NSW) having regard to the interests of Ashley Lai". The settlement further proposes that there be no order as to costs of the proceedings, including the anticipated application for judicial advice. 8Directions were then made for the filing of an Amended Cross-Summons (seeking judicial advice), a Statement of Facts and an opinion of Counsel. 9The application for judicial advice is before the Court today. The relief sought is set out in an Amended Cross-Summons which was filed on 27 June 2014. The Court has also been provided with a Statement of Facts (to which there are thirteen attachments), an opinion dated 19 August 2014 from Mr D W Rayment of Counsel (who appears for Mr Lai), and an Outline of Joint Submissions dated 19 August 2014 from Mr Rayment and Mr D R Pritchard of Senior Counsel (who appears for the plaintiffs). 10Mr Pritchard informed the Court that the plaintiffs consent to, and support, the making of the orders sought in the Amended Cross-Summons to the effect that Mr Lai would be justified in compromising the proceedings on the terms of the proposed settlement, namely, the terms of the settlement embodied in the Short Minutes of Order and the further terms agreed between the parties as referred to in paragraph 22 of the Statement of Facts. 11It is noted in the Joint Submissions that whilst the respective Counsel have different opinions concerning the true construction of clause 3 of the Financial Agreement, both submit that it is not necessary, for the purposes of giving the judicial advice sought, for the Court to determine any question of construction of that clause. Moreover, both Counsel submit that this is an appropriate case for judicial advice as it relates to the management of a trust (namely, the trust in respect of the mortgage over the Property), and that it is in the best interests of the beneficiary of that trust for the compromise to be effected with the benefit of such advice and, if necessary, the conferral of power upon Mr Lai as trustee to enter into the compromise. 12The primary relief now sought in the Amended Cross-Summons is in the following terms: "The cross-claimant seeks the opinion, advice and direction of the Court pursuant to s 63 of the Trustee Act 1925 (NSW) or the Court's inherent jurisdiction that: (a) the cross-claimant would be justified in compromising proceedings 2013/383030 on the terms annexed to the Statement of Facts and marked "SF13" or, in the alternative, on some of the said terms, and subject to such terms as the Court thinks fit; or, in the alternative, (b) the cross-claimant would be justified in doing all things reasonably necessary to defend proceedings 2013/383030." 13Orders are also sought pursuant to s 50 of the Minors (Property and Contracts) Act 1970 (NSW) or s 81 of the Trustee Act 1925 conferring any necessary power on Mr Lai to compromise the proceedings. 14Mr Rayment has suggested that Mr Lai may not have the power to vary the terms of the mortgage if such variation was inconsistent with the terms of clause 3 of the Financial Agreement. If there is any doubt about the existence of the power to compromise, it is sensible for a trustee to also seek relief under s 81 of the Trustee Act. Under that section, the Court can confer power on a trustee if the Court considers that it is expedient to do so in the management or administration of any property vested in trustees. 15I agree that Mr Lai, as trustee of the trust, does not have a general power to vary the terms of the trust. However, the terms of the trust are embodied in the agreed provisions of clause 3 of the Financial Agreement (and possibly any later variation to that agreement), and the parties are at odds including as to whether the existing mortgage conforms with the agreement. In the present litigation, the plaintiffs seek the rectification of the mortgage so that it does so conform. Mr Lai resists the claim for rectification, and instead seeks a variation of the mortgage to include a provision stating that Joanne Cowan holds the Property on trust for Ashley, consistent with an alleged agreement of Joanne Cowan to that effect. 16There is thus a controversy as to whether the existing mortgage conforms with the agreement or agreements made by the parties. In those circumstances, I would have thought that Mr Lai has the power, as trustee, to compromise the dispute, including on terms that involve a variation of the terms of the mortgage (see s 49(1)(d) of the Trustee Act). Mr Pritchard submitted that there was no lack of power for the trustee to enter into the proposed compromise. He stated that in circumstances where the compromise was not a device or sham, and there is no suggestion of any want of good faith on the part of Mr Lai, he clearly had the power to compromise on the terms proposed. 17I consider that in the circumstances of this case, Mr Lai does have the power to enter into the compromise. Of course, any such power could only be exercised in a manner that is consistent with the duties of a trustee, and questions may arise as to whether any purported exercise of the power involves a breach of trust. It is therefore appropriate for Mr Lai to seek the advice of the Court before proceeding to exercise the power to compromise. 18I agree that the question whether Mr Lai would be justified in compromising the proceedings on the terms proposed is a question respecting the management or administration of the trust property, and the Court's jurisdiction under s 63 of the Trustee Act is thus enlivened (see Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand & Anor [2008] HCA 42; (2008) 237 CLR 66 at [58]). 19I have read and considered all of the material that has been placed before the Court and had the benefit of written and oral submissions from both Counsel. It is clear that the parties hold very different views as to the meaning of clause 3 of the Financial Agreement, and as to whether the existing mortgage conforms with the clause on its proper construction. I do not propose to describe all of the differences. It is sufficient to note that the essence of the dispute concerns the nature and extent of the interest in the Property conferred upon Ashley, although the parties have tended to focus upon a narrower but related question. That question is whether (as contended by the plaintiffs) it was intended that, in the event that Ashley predeceases Joanne Cowan without leaving issue, Ashley's interest in the property would revert to Joanne Cowan who would be entitled to have the mortgage discharged, or whether (as contended by Mr Lai) Ashley's interest would form part of her estate. 20The competing contentions are canvassed in Mr Rayment's opinion (see paragraphs 10 to 28). I agree with the submission made by both Counsel that it is not necessary for the Court to determine any questions of construction of clause 3 of the Financial Agreement. I also do not think that it would be desirable to do so. The central question for the Court is whether Mr Lai would be justified in compromising the proceedings on the terms that have been agreed. It is necessary for that purpose to have regard to the strength of the respective arguments, the range of possible outcomes if the issues were determined following a trial, and the terms of the proposed settlement. 21Mr Rayment concedes, correctly in my view, that there are matters that favour the plaintiffs' construction. In circumstances where it does not appear that the parties intended that any money would actually be paid to Joanne Cowan as mortgagor, I think there is something to be said for the view that the mortgage was intended (in conjunction with the caveat envisaged by clause 3(d)) to do no more than prevent Joanne Cowan from using the Property as security (something she was prohibited from doing by clause 3(g)), and was not intended to give an immediately enforceable charge in an amount equal to the value of the Property. So viewed, the mortgage would serve to support Ashley's rights to receive rental income (see clause 3(f)) and her position as the subject of a specific bequest of the Property (see clause 3(h)), but not give her the benefit of an equitable interest in the nature of an immediately enforceable charge. 22Mr Rayment referred to a letter, written shortly prior to the making of the Financial Agreement, in which it appears that it was agreed that Joanne Cowan would have a right of residence in the Property. Both Counsel submitted that this evidence was relevant and, if accepted, would be a further factor in favour of the plaintiffs' construction. Plainly, if there was such a right of residence, the interest granted to Ashley would be significantly diminished. 23The variations to the mortgage sought by the plaintiffs in the proceedings include: (1)the deletion of the provisions concerning the principal sum of $1,400,000; (2)a restriction upon the mortgagee's power to take possession, so that the power can only be used following default for the purpose of collecting and accounting for income from the Property; and (3)the inclusion of a provision that the mortgage can be discharged if Ashley predeceases Joanne Cowan. 24The proposed compromise is broadly consistent with what the plaintiffs seek, save that it is provided for the mortgage to be discharged only if Ashley predeceases Joanne Cowan and leaves no issue. That is, if she predeceased Joanne Cowan and left issue, the mortgage would remain, consistent with the operation of s 41 of the Succession Act 2006 (NSW) upon the specific bequest of the Property in her favour. However, if she predeceased Joanne Cowan without leaving issue, the mortgage would be discharged, consistent with the lapsing of the specific bequest that would occur in such circumstances. The proposed compromise further provides that in the event that Ashley attains the age of 18 and then predeceases Joanne Cowan, any rental income from the Property is to be paid to the issue of Ashley. 25As mentioned earlier, the proposed compromise includes the further terms agreed between the parties as referred to in paragraph 22 of the Statement of Facts. These terms include: (1)an acknowledgement that the mortgage is for a sum equal to the full value of the Property; (2)a covenant that upon Joanne Cowan's death, an amount equal to that value is payable to the mortgagee; and (3)a covenant that upon Joanne Cowan's death, the mortgagee will discharge the mortgage and release the mortgagor if Ashley or, in the event of her death, her issue, receive an absolute and unencumbered legal and beneficial title to the Property. 26Mr Rayment has analysed the differences between the provisions of the existing mortgage, and the provisions of the proposed compromise (see paragraphs 39 to 62 of his opinion). He has identified the respects in which the compromise may be said to be disadvantageous to Ashley. These are, principally, the provisions concerning the amount secured by the mortgage; the provisions concerning the powers of the mortgagee to take possession; and the provisions concerning the discharge of the mortgage in the event Ashley predeceases Joanne Cowan and leaves no issue. Of those matters, the last mentioned matter is perceived to have the greatest consequence. 27The existence of these relative disadvantages is clear but need to be considered in the context of the issues raised in the proceedings. There is plainly a significant risk that the plaintiffs will succeed in having the existing mortgage rectified along the lines they seek. As mentioned, there is something to be said for the plaintiffs' contention that the mortgage contemplated by clause 3 of the Financial Agreement was intended to do no more than prevent Joanne Cowan from using the Property as security, and was not intended to give an immediately enforceable charge in an amount equal to the value of the Property. 28Further, as Mr Rayment has stated, it is appropriate that the perceived disadvantages to Ashley be looked at in the broader context of the on-going dispute between her parents. He has set out (in paragraphs 66 of his opinion) a number of matters that, to his mind, indicate that Mr Lai would be justified in agreeing to the provisions concerning the discharge of the mortgage in the event that Ashley predeceases Joanne Cowan and leaves no issue. Those matters also seem to me to provide reasons for Mr Lai to compromise so as to achieve an agreed resolution of these proceedings. 29I further note that the compromise provides that there be no orders as to the costs of the proceedings. 30Viewing the matter overall, and having heard submissions from both Mr Rayment and Mr Pritchard, I consider that Mr Lai would be justified in compromising the proceedings on the terms proposed. That is, on the terms of settlement embodied in the Short Minutes of Order and the further terms agreed between the parties as referred to in paragraph 22 of the Statement of Facts. The Court gives advice to Mr Lai accordingly, pursuant to s 63 of the Trustee Act. 31It should be noted that in giving such advice, the Court does not in a formal sense give its approval to the compromise. It is, rather, advising that the trustee, in the exercise of his powers as such, would be justified into entering into the compromise. Of course, if Mr Lai acts in accordance with that advice, he will obtain the protection given by the terms of s 63(2) of the Trustee Act. 32Finally, it should be recorded that Mr Rayment raised a further matter, namely, whether Ashley, as the beneficiary of the trust, should be joined as a party to the proceedings. Such joinder is not generally ordered (see s 63(4) of the Trustee Act and Uniform Civil Procedure Rules r 7.12(2)) but the Court may do so in appropriate circumstances. 33It is acknowledged that there is a conflict between Mr Lai's duty as trustee, and his personal interest in settling these proceedings and thereby reducing the likelihood of further litigation with Joanne Cowan. Nevertheless, I am satisfied that the arguments as to why it may not be appropriate for Mr Lai to enter into the compromise have been fully and fairly put by Mr Rayment, and in all the circumstances I do not think that the additional expense that would be involved in the joinder of Ashley (by a tutor) would be warranted. 34The Court advises pursuant to s 63 of the Trustee Act that the defendant would be justified in compromising the proceedings on the terms of settlement embodied in the Short Minutes of Order and the further terms agreed between the parties as referred to in paragraph 22 of the Statement of Facts.