Dixon v Dixon

Costs as between Lois and James

On the face of it, James' entitlement to an order for costs in his favour is clear. No relief was obtained against him. He was successful in defending the family provision application, which was effectively withdrawn as a result of the amendments to the summons on 1 April. He did not thereafter participate in the determination of the s 70 application.
It will be recalled that the letter sent to Eunice about her position as trustee of Lois' trust in September 2020, before the institution of the proceedings, was sent to Eunice and copied to Mr O'Neill. Mr O'Neill responded on Eunice's behalf. But I was informed that Mr O'Neill's costs of responding to the letter were kept separate and were billed to Eunice. Those costs did not form part of James' costs of the proceedings. When I raised the matter in argument, counsel for James and Eunice also accepted that the costs of the s 70 application on the papers were Eunice's costs and would be billed to her.
When I asked counsel for Lois how an order for costs against James was justified when no relief had been obtained against him, counsel replied that Eunice had been actively involved in defending the proceedings. According to counsel, she attended the mediation and appeared to play an active role in it; indeed the compromise which was accepted, or purportedly accepted, by Ms Quayle, but was never put into effect, centred on Eunice agreeing to give up her role as trustee. Counsel submitted that at least by that point it was the s 70 application which was the heart of the dispute between the parties.
One difficulty with this argument is that there was little actual evidence before me as to the conduct of the negotiations between the parties, and none at all about the course of the mediation (which was of course privileged). When I put this to counsel for Lois, however, he submitted that I could infer from the correspondence that Eunice was really calling the shots behind the scenes of the defence.
This submission pays insufficient attention to the role of the family provision application in the proceedings. As executor, James was the appropriate (and indeed necessary) respondent to that application. He was obliged to defend the application on the estate's behalf. And, while it may have been indicated on Lois' behalf that she was prepared to abandon the family provision claim if Eunice would resign as trustee, no final settlement to that effect was ever reached. As late as 23 March this year, at the pre-trial directions hearing, I was told by counsel for Lois that the family provision claim was still being pursued and Lois would be seeking up to fifty per cent of her siblings' share of the estate.
James was the sole defendant up until the amendment of the summons. The costs incurred in defending the proceedings up to that date are, on the face of it, his costs. I find it impossible to infer just from Eunice's involvement in settlement negotiations that the defence was somehow being conducted in her interests behind the scenes.
Counsel for Lois noted that under the proposed settlement Eunice was to provide her consent to being replaced as trustee of Lois' trust. Counsel submitted that this illustrated the integral role she played in the defence of the proceedings. I cannot agree. To my mind, what it reflects is that compromising the s 70 application was a matter for Eunice, and for her alone. As executor, James' responsibilities were limited to realising the assets of the estate and handing over the share which was the subject of Lois' trust to Eunice as the trustee appointed by the will. James could not have consented to a s 70 order on Eunice's behalf.
It is true that the affidavit of Eunice which was filed in the proceedings canvassed the merits of the s 70 application. But it was also relevant to the family provision application. It would have been proper to file such an affidavit even if there had been no s 70 application in the summons.
It is also true that part of James' costs would have included work on the proposed settlement whereby Eunice was to resign as trustee. In particular, there was correspondence with the public trustees to see whether they would accept appointment in the manner proposed in the settlement. It might be argued that, strictly speaking, these costs were Eunice's costs as trustee. But a settlement on the terms proposed would have advantaged the estate by resulting in the withdrawal of the family provision application. Eunice had not been joined as a party. The costs are unlikely to have been substantial and in the circumstances I do not think it was unreasonable for James to have incurred them.
What has emerged with the benefit of hindsight is that the s 70 application should have been brought by way of separate proceedings, or at least Eunice should have been joined as a separate defendant, so that the burden of responsibility for responding to that application fell upon her. Had this been done, it might even have been possible to insist on separate representation for James and Eunice. It is true that this point was not taken by James' and Eunice's legal representatives. But the constitution of the proceedings was the responsibility of Lois' legal representatives.
The offer of compromise of 31 August last year does not assist counsel's argument. That offer plainly did not comply with the requirements of UCPR r 20.26. It provided for costs, contrary to subr 20.26(2)(c). Counsel referred to subr 20.26(3)(a)(i), but that applies only to defendants' offers. More importantly, while the offer proposed the abandonment of the family provision claim, it did so on the basis that Lois would have no liability for the costs of that claim. That is less favourable to James on costs than the result to which he is prima facie entitled.
For these reasons, I conclude that there should be an inter partes costs order in favour of James and against Lois. The order will, of course, only cover costs incurred by James in responding to the family provision application and I will make that clear in the form of the order. For similar reasons, James will also receive the usual order for a successful executor-defendant in family provision proceedings that his costs as executor be paid out of the estate on an indemnity basis.

Costs as between Lois and Eunice

Eunice's position as the respondent to the s 70 application is quite different. The application to remove her as trustee succeeded. Prima facie the costs of the application should follow the event. But this can only apply to costs incurred after 1 April when Eunice was joined as a defendant and directions were made for the separate determination of the s 70 application.
I therefore turn to the application by Eunice that both Lois' costs and Eunice's costs should be paid out of the estate. The first point to make is that if any order is to be made out of funds under administration, it should be made against the assets of Eunice's trust rather than the estate generally. The s 70 application concerned Eunice's trust only and there is no justification for costs associated with the administration of that trust to be imposed on the general estate.
In support of Eunice's application, counsel relied on UCPR r 42.25, which provides: 42.25 Costs of trustee or mortgagee (1) Subject to subrule (2), a person who is or has been a party to any proceedings in the capacity of trustee or mortgagee is entitled to be paid his or her costs in the proceedings, in so far as they are not paid by any other person, out of the fund held by the trustee or out of the mortgaged property, as the case may be. (2) The court may order that the person's costs not be so paid if - (a) the trustee or mortgagee has acted unreasonably, or (b) in the case of a trustee, the trustee has in substance acted for his or her own benefit rather than for the benefit of the fund.
Counsel submitted that Eunice's conduct had at all times been reasonable (or at least not unreasonable). In counsel's submission, she was therefore entitled to indemnity for her own costs and the costs awarded against her. Counsel emphasised in particular that the Court is generally reluctant to appoint a family member as trustee of a trust of the present type, a point which Eunice had taken in her written submissions in opposition to the application (see J1 [25]).
Rule 42.25 was enacted against the background of longstanding equitable principles which govern a trustee's right of indemnity from the trust assets for expenses incurred in the course of administering the trust. Those principles apply to the costs incurred in legal proceedings (both the trustee's own costs and costs which may be awarded against the trustee) just as they apply to any other expense incurred by the trustee in administering the trust.
Generally speaking, a trustee is entitled to indemnity for all expenses which are honestly and reasonably incurred in execution of the trust. In New South Wales, the indemnity has been put on a statutory basis by TA s 59(4), which provides: A trustee may reimburse himself or herself, or pay or discharge out of the trust property all expenses incurred in or about execution of the trustee's trusts or powers.
Another basic feature of equity's administration of trust is that a trustee may obtain judicial advice about the administration of the trust from the Court (now put on a statutory basis by TA s 63). Generally speaking, and assuming that proper disclosure has been made to the Court, a trustee who acts in accordance with such advice will be immune from any liability for breach of trust.
The Court also has power to relieve a trustee who acts in breach of trust from the consequences of that breach. But in such a case a failure to obtain advice may be relevant. TA s 85(2) provides: The relief may not be given unless it appears to the Court that the trustee has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the direction of the Court in the matter in which the trustee committed the breach.
The interplay between judicial advice and the trustee's right of indemnity, in the context of litigation by the trustee in the course of administering the trust, was authoritatively considered by the High Court in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66. The Court stated at [70]: … trustees who are sued, particularly for breach of trust, may sometimes experience uncertainty about whether they will be able to obtain indemnity as to the costs of their defence under s 59(4) in any event. Perhaps they will if their breach is excused under s 85(2); but they cannot be sure, in advance, that the court's discretionary power to excuse the breach will be exercised in their favour, and one of the matters to be excused is their failure to obtain the court's direction under s 63 or otherwise.
After making the point that an application for judicial advice resolves doubt about whether it is proper for a trustee to prosecute or defend litigation (and thus doubt about the trustee's entitlement for indemnity for the costs of the litigation), the Court stated at [74]: A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings.
Earlier, at [47], the High Court had quoted the following statement of principle from the judgment of Lindley LJ in the leading English decision of In re Beddoe [1893] 1 Ch 547 (at 557): .. a trustee who, without the sanction of the Court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel's opinion; and when the trustee seeks to obtain such costs out of his trust estate, he ought not to be allowed to charge them against his cestui que trust unless under very exceptional circumstances. If, indeed, the Judge comes to the conclusion that he would have authorized the action or defence had he been applied to, he might, in the exercise of his discretion, allow the costs incurred by the trustee out of the estate; but I cannot imagine any other circumstances under which the costs of an unauthorized and unsuccessful action brought or defended by a trustee could be properly thrown on the estate.
The High Court continued (at [48]): That warning that trustees who become involved, or wish to become involved, in litigation should seek the court's sanction is the significant, and in later years influential, aspect of In re Beddoe.
In Bovaird v Frost [2009] NSWSC 917 Brereton J (as his Honour then was) dealt with a contested application by an executor for indemnity for legal costs incurred as executor out of the estate. His Honour referred to UCPR r 42.25 and stated that the rule "in substance reflect[ed] the position at general law". After discussing some of the cases expounding the general law principles his Honour stated at [32]: Cases such as Re Beddoe and … Macedonian Orthodox Community Church [citation omitted], [70], demonstrate the desirability and prudence of trustees acting promptly to obtain judicial advice, lest it otherwise be suggested that they have been gambling with money that is not their own, but the absence of such advice does not reverse the prima facie position established by UCPR, r 42.25. The statement was repeated by his Honour in Fay v Moramba Services Pty Ltd [2010] NSWSC 725 (a case where a belated application was made for judicial advice to sanction the defence of proceedings after the trustee had already embarked on that defence) at [29].
His Honour returned to the point in Grizonic v Suttor [2011] NSWSC 471, a case in which trustees were seeking indemnity out of the trust assets for their costs in defending proceedings concerning the assets of a trust. His Honour stated at [60]: It was also submitted that the trustees should not be entitled to costs, having not sought the advice of the court before embarking on the defence of the proceedings, invoking Macedonian Orthodox Community Church [citation omitted]. However, while it may well be advisable or prudent for a trustee to seek judicial advice prior to incurring costs, so as to avoid personal risk in the event that it ultimately be found that the costs were not "properly" incurred in the administration of the trust, the decision of the High Court of Australia in The Macedonian Church case does not mean that a failure to seek such advice prophylactically disentitles a trustee from resorting to the trust funds if such resort is otherwise proper, and the absence of such advice does not reverse the prima facie position that prevails in equity, and is reinforced by statute: for example, UCPR r 42.25, and (NSW) Trustee Act 1925, s 59(4) [Bovaird v Frost, [32]; Fay v Moramba Services Pty Ltd, [29]]. In this case, the trustees were vindicated; they successfully resisted the proceedings Mr Grizonic brought against them (albeit by obtaining a dismissal for failure to provide security), and obtained a costs order against him.
Wales v Wales [2014] VSCA 101 was a case in the Victorian Court of Appeal concerning the costs of a successful application for the removal and replacement of the trustees of four family trusts. Ashley JA gave the judgment of the Court.
At [85] his Honour referred to the decision in Beddoe and the statement by the High Court in Macedonian Orthodox Community Church at [74] that a trustee faced with proceedings should take no step before obtaining advice. But his Honour added at [86]-[87]: 86. It is, however, the fact that their Honours made other observations in less prescriptive language. So, in the passage immediately preceding the second passage cited by the judge, their Honours said that an application under s 63 by a trustee sued for breach of trust should be seen as a standard instance to which s 63 'can in appropriate cases apply. Further, in the second passage cited by the judge, their Honours stated that 'a trustee who is sued should take no step … without first obtaining judicial advice'. Earlier on, their Honours had stated that the legislative scheme 'is that it is desirable that trustees in doubt as to a course of action … should seek s 63 advice first'; and that it was understandable that the legislature should enact provisions enabling trustees to take advice before embarking on a course which might carry a risk of incurring costs outside the indemnity. 87. … failure to seek advice is likely to be most weighty in a case where breach of trust is alleged. That was the situation in Macedonian. Further, … the apparent rigour of the obligation to seek advice was modified in its application where a trustee had acted on legal advice. Those two matters would have assisted to put into perspective the significance of the appellants' failure to seek advice whether to contest the removal application.
In Beddoe, the trustee had acted on legal advice in unsuccessfully defending proceedings. As appears clearly from the passage already quoted, this was not enough to justify the trustee having indemnity against the costs of those proceedings. But the English Court of Appeal recognised that some costs would have been properly incurred had advice been sought, even if the advice had been (as the Court thought it would have been) that the proceedings should not be defended. A sum was allowed in favour of the trustee, representing the costs he would have incurred in making the application. It seems that this was what Ashley JA was referring to when he said that "the apparent rigour of the obligation to seek advice" had been "modified".
On the facts in Wales, the reasonableness or otherwise of the trustees' actions was not clear-cut. The argument for their removal was based, at least in part, on a conflict of interest which had arisen as a result of a previous failure to pay amounts due from the trust to an estate of a family member of which the trustees were executors. Although the trustees did not seek judicial advice before defending the removal application they did, before the removal application had been made, seek judicial advice on how to deal with the underlying overpayment issue.
But in the end his Honour accepted that the costs of defending the removal action had been somewhat higher than they would have been if the question had been pursued through judicial advice. His Honour made an assessment that the increase was about fifty per cent. The trustees' indemnity was confined to half of their costs.
Free Serbian Orthodox Church Diocese for Australia and New Zealand Property Trust v Bishop Irinej Dobrijevic (No 3) [2017] NSWCA 109 concerned the costs of an unsuccessful appeal by a trustee. Payne JA, who gave the judgment of the Court, stated at [42]: I accept as correct the statement of Brereton J in Bovaird v Frost [2009] NSWSC 917 at [32] that Macedonian Orthodox Community Church does not mean that a failure by a trustee to obtain judicial advice reverses the prima facie position established by UCPR, r 42.25. In my view, however, the absence of an application for such advice is a matter highly relevant to the question of whether the trustee has "acted unreasonably".
Indemnity was denied. Part of the reason was the weaknesses in the appeal. But his Honour did refer to the failure to obtain advice observing (at [43(1)]): … the failure of the Property Trust Company to seek judicial advice before embarking on the appeal was unreasonable. Had it done so, the very real problems with the way it proposed to conduct the case would no doubt have become apparent.
In the present case, Eunice did not seek judicial advice about her position as trustee at any point after the issue was raised in correspondence with her in September 2020. But her counsel submitted that this was not fatal to her claim for indemnity. Counsel relied on what Emmett AJA, speaking for the Court of Appeal, said in Ludwig v Jeffrey (No 4) [2021] NSWCA 256 at [83]-[84]: 83. Ordinarily, the question of judicial advice is relevant only where a trustee commences proceedings which are unsuccessful or unsuccessfully defends proceedings brought against the trustee. However, the mere fact of being unsuccessful is, of itself, not sufficient to deprive a trustee of entitlement to indemnity in respect of the costs. It would be necessary, at the end of the day, for an inquiry to be conducted as to whether the Trustee acted reasonably in commencing proceedings or in defending proceedings in respect of which a trustee is unsuccessful. The part that s 69 [sic; s 59(4)?] of the Trustee Act plays is that that inquiry will be unnecessary if the trustee has sought advice and has been advised that commencing and prosecuting the proceedings on the one hand, or defending proceedings, on the other, would be justified. 84. To the extent that the High Court has said, in the passage cited by the primary judge, that a trustee "should" obtain judicial advice before commencing or defending proceedings, the High Court should be understood as saying no more than that it would be prudent for a trustee to seek judicial advice before commencing or defending proceedings. However, there is no legal obligation to do so. The rationale for doing so is to avoid an argument at the end of the day as to whether it was reasonable to commence and prosecute the proceedings or to defend the proceedings.
In support of the proposition that there "is no legal obligation" to obtain advice, his Honour cited Bovaird at [32], Grizonic at [60], Wales at [85]-[87] and Free Serbian Orthodox Church at [42].
Counsel for Eunice referred to the passage in [83] about the need for an "inquiry" into the reasonableness of the trustee's conduct. But if counsel's purpose in doing so was to suggest that it was not open to the Court in the present application to deprive Eunice of her right of indemnity unless some such inquiry had been undertaken, then I cannot agree.
I have already mentioned that the principles which apply to indemnity for expenses incurred by a trustee in litigation are only a particular application of the principles which apply generally to indemnity for costs incurred in the administration of the trust: see Beddoe at 555. The reference to an "enquiry" is a reminder that, as with any indemnity issue, a dispute about a trustee's indemnity for legal costs may give rise to a discrete substantive dispute. It may be necessary to join beneficiaries who have not been made parties to the litigation itself but who have an interest in the administration of the estate, and it may be necessary for there to be factual enquiries about the trustee's course of conduct and the reasons for it which will not necessarily have been canvassed in the litigation.
Usually such a dispute would fall to be determined in administration proceedings under UCPR Pt 54. There are unanswered questions about how this fits with UCPR r 42.25: see Olsen v James [2020] NSWSC 1015 at [127]-[130]. But it is not necessary to go into those questions for the purposes of the present judgment.
In some cases it may be better for the Court not to determine the trustee's right to indemnity for costs of proceedings as an ordinary issue arising in, and between the parties to, the proceedings themselves. Particularly is this so if the dispute about indemnity for costs of the proceedings is only part of a wider dispute which extends to other expenses as well. But if the Court has power to defer such an issue to be dealt with in administration proceedings, that does not mean that the Court is obliged to do so in every case. Independently of UCPR r 42.25, the Court's powers as to costs under TA s 93 clearly allow the Court to deal with the question of indemnity in a summary way.
In the present case, the estate is relatively small. The affected parties are Lois and Eunice, both of whom are represented in the proceedings. The issue has been fully argued. The question of indemnity should be dealt with in these proceedings.
I therefore come to the argument on the merits. In my view, the passage from Ludwig cited by counsel for Eunice does not go far enough for counsel's purposes in the present case. It may be accepted that trustees have no affirmative obligation to obtain judicial advice before embarking on the prosecution for defence of litigation. They are free to litigate first and seek indemnity later. If they succeed in the proceedings, they will usually obtain indemnity. If they fail, they may still receive indemnity but that does not mean that they must necessarily do so.
Read in isolation, what Brereton J said in Bovaird at [32] appears to suggest that the strict view taken in Beddoe has been relaxed by the enactment of UCPR r 42.25. But I do not think that, in the broader context, his Honour intended to say that. As we have seen, only a few paragraphs earlier in the judgment his Honour has stated that the enactment of the rule had not changed the established equitable principles.
The decision in Beddoe was referred to with apparent approval by the High Court in Macedonian Orthodox Community Church. It is also consistent with the language of TA s 85(2). That enactment proceeds on the basis that a trustee who could have avoided a breach and who seeks to be relieved from the consequence of it will ordinarily need to explain why advice was not sought in advance. As Macedonian Orthodox Community Church illustrates, the relationship between breach by a trustee (the subject matter of s 85(2)) and the trustee's indemnity from trust assets is, in the context of litigation, a close one.
In this context, there is every reason to treat the failure to obtain advice as a factor which potentially goes to unreasonableness for the purposes of UCPR r 42.25. That proposition is expressly supported by what Payne JA said in Free Serbian Orthodox Church.
In Olsen at [97]-[103] I discussed the general equitable principles which apply to the onus in a trustee's claim for indemnity. I concluded, by reference to the Court of Appeal decision in Gatsios Holdings Pty Ltd v Kritharas Holdings Pty Ltd [2002] NSWCA 29, that the legal onus lies on the trustee to show that the expense in question has been reasonably and honestly incurred, but usually this is an undemanding test, but the onus of demonstrating reasonableness is not demanding; in usual circumstances, it only requires that the incurring of the expense was not unreasonable.
As Brereton J has pointed out, the language of r 42.25 is different. All that is required for the rule to apply is that the trustee is, or has been, a party to proceedings in the capacity. The rule creates an entitlement to reimbursement unless the trustee has acted in his own interest or has behaved unreasonably. In that sense, there is a reversal of the previous onus. But this makes little practical difference. Even if the trustee does not bear any onus, the Court may take a failure to obtain judicial advice into account, and if that failure is unexplained it is open to the Court to conclude that the trustee's behaviour was unreasonable.
In Ludwig and Grizonic the trustee or executor was successful in the litigation. Moramba was a case about the availability of judicial advice, not indemnity. In Bovaird the trustee was unsuccessful but the Court found that had advice been sought in advance to sanction the trustee's actions in the proceedings, it would have been given.
These are all points of distinction from the present case. But in any event there is more to the present case than a mere failure to obtain judicial advice in advance.
As I explained at J1 [19], whether or not the complaints made on behalf of Lois against Eunice were justified, the fact that she was subject to an order which prevented her from having any contact with Lois made her position as trustee untenable. From the outset she was unable to discharge her duties. Administering the trust was an affirmative obligation. It was not open to her to do nothing and wait for someone else to take action on Lois' behalf.
In my view the proper course for Eunice would have been to make her own application under s 70. It would of course been perfectly legitimate for her to propose that she be replaced by a public trustee, in accordance with the usual approach of the Court, and to leave it to Lois, as the respondent to the application, to suggest Stephen or someone else. Had she taken this approach there could have been no criticism of her and she would undoubtedly have received an order that her costs be paid out of the trust, whether or not Stephen was ultimately appointed as trustee.
I feel confident that if Eunice had asked for judicial advice in September 2020, she would have been advised to take this course (or, perhaps, simply to resign in Stephen's favour, having regard to the financial issues which ultimately led me to conclude that Stephen should be appointed). Instead she chose, for reasons which were never fully explored in the proceedings, to hold on as trustee.
In Miller v Cameron (1936) 54 CLR 572 Latham CJ at 579 took the view that a trustee who unreasonably resisted a request for resignation, and then proceedings to remove him, was not, in defending the proceedings, acting in his capacity as trustee at all. Rather he was in substance acting for his own benefit. It is unnecessary to consider whether, in the present case, Eunice "acted for her own benefit" for the purposes of r 42.25(2)(b). I think that she did on any view act "unreasonably" for the purpose of r 42.25(2)(a).
Counsel for Eunice did not make any submission that an amount should be allowed to reflect the indemnifiable costs which would have been incurred if advice had been sought, as was done in Beddoe and Wales. I therefore propose to pass over that issue. But in doing so, it does seem to me that, following receipt of the September 2020 letter, Eunice adopted a quite uncompromising position. She did not accept that there was any conflict of interest, or any other reason for her to withdraw as trustee. The position ultimately taken in her submissions in the s 70 application was moderate and reasonable, but by then it was too late. Lois had had no practical alternative but to pursue the application.
Eunice might arguably have been entitled at least to recover the costs of obtaining advice in response to the September 2020 letter which raised the question of her continuation as trustee. But the fees for that advice were billed separately to Eunice and do not form part of the costs of these proceedings. It may be that it remains open to Eunice to claim them as expenses of acting as trustee. It is not necessary to consider this any further for present purposes.
For these reasons, I decline to grant Eunice any indemnity for the costs awarded against her on the s 70 application, or for her own costs. She will have to bear the costs herself.
But otherwise, trustees who embark on litigation and are unsuccessful have only themselves (or, more realistically, their lawyers) to blame if the Court refuses to allow them to pass on to the trust beneficiaries liabilities and expenditure which has had no benefit for the trust.

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