His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand & Anor v The Macedonian Orthodox Community Church St Petka Inc

His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand & Anor v The Macedonian Orthodox Community Church St Petka Inc - [2007] NSWCA 287 - NSWCA 2007 case summary — Zoe

[17]

Costs of the appeal out of the Schedule A property 6 The appellants did not ask for an order that the costs to which they were entitled be paid out of the Schedule A property; indeed, they opposed recourse to that property. The Association sought an order that any costs payable to the appellants and its own costs be paid out of the Schedule A property. 7 The Court is presently concerned with making orders as to costs, not with whether apart from its orders the Association is entitled to reimbursement out of trust property. Sections 93(2) and (3) of the Trustee Act 1925 and Pt 42 r 25 of the Uniform Civil Procedure Rules are relevant. The discretions under s 93(2) and (3) are to be exercised according to what seems to the Court to be just or what the Court thinks fit. The prima facie entitlement under Pt 42 r 25 can be displaced by an exercise of discretion if the trustee has acted unreasonably or in substance for the trustee's own benefit rather than for the benefit of the fund. 8 I fully appreciate the matters which have led Ipp JA to conclude that the Association did not act unreasonably within Pt 42 r 25, and should have a favourable exercise of discretion under s 93(2) or (3). I respectfully see it otherwise. 9 The principal basis of the Court's decision was that the application for judicial advice was used adversarially, to protect the Association from the claims of breach of trust made by the appellants. Thus Ipp JA said at [82] that the Association did not ask for the advice as a neutral party, disinterested in the outcome, but urged an order "that would protect its interests against the interests of [the appellants]", and at [94] - "The main reason for the Association being interested in the terms of the trust is to prove that it has not breached the trust. Knowledge of the true terms of the trust would, undoubtedly, be of benefit to the Association as trustee. But there can be no doubt that the principal motivation for the Association's desire to have the terms of the trust determined is to prove that it has not breached the terms of the trust and should not be removed as trustee. As I have pointed out, the Association is not a disinterested observer seeking advice as to whether it should follow one course of conduct or another. It strongly propounds its views and asks that the court endorse them." 10 Although only on appeal was this seen as fatal to giving judicial advice, it was always thus, and I do not think applying for judicial advice as an adversarial step in this long-running litigation should be regarded as reasonable in the context of recourse to trust property. Reasonableness calls for regard to the interests of the trust, not the interests of the trustee in contesting claims of breach of trust. Further, although the Main Proceedings are yet to be resolved it is necessary to focus on the conduct of the Association in applying for judicial advice. I consider that it should be concluded that in applying for judicial advice the Association was in substance acting for its own benefit rather than for the benefit of the trust fund: cf Nowell v Palmer (1993) 32 NSWLR 574 at 581-2. 11 In Harrison v Mills (1996) 1 NSWLR 42 a trustee's application for judicial advice was refused essentially because it was directed to resolving matters of basic controversy between trustees. The plaintiff trustee asked for his costs out of the trust property, but did not obtain them; no order was made for his costs. In In re Evans (1986) 1 WLR 101 costs of a trustee's failed application for judicial advice were paid out of the estate, and similarly in Marley v Mutual Security Merchant Bank v Trust Co Ltd (1991) 3 All ER 198, but expressly in the latter case (at 210) without any suggestion to the contrary. The discretion must be exercised on the facts of each case, and in neither of these cases was there the controversy found in the Main Proceedings and the circumstances of the application found in the present case. They are distinguishable. 12 Accordingly, I would not make an order under s 93(2) or (3) whereby costs payable by the Association to the appellants and the Association's own costs are paid out of the Schedule A property; and I would order under Pt 42 r 25 that the Association's costs not be paid out of that property. Whether that order trumps s 59(4) of the Trustee Act could arise, but need not presently be explored.

[33]

Section 93(3) provides: "In any proceedings with respect to the management or administration of any property subject to a trust or forming part of the estate of a testator or intestate, or with respect to the interpretation of the trust instrument, the Court may, if it thinks fit, order any costs to be paid out of such part of the property as in the opinion of the Court is the real subject matter of the proceedings." 23 Mr Blake SC for the Association submitted: "The Court should find that the power to order costs under ss 93(2) and (3) of the Trustee Act does not apply to the question of a trustee's indemnification for costs out of trust assets which is governed by s 59(4) of the Trustee Act and Pt 42 r 25 of the UCPR." 24 In Gatsios Holdings Pty Limited v Kritharas Holdings Pty Ltd (in liq) (2002) ATPR 41-864; [2002] NSWCA 29, Spigelman CJ (at [9]) emphasised that the inquiry under s 59(4) was "whether or not expenses incurred do in fact answer the description of having been so incurred 'in or about execution of the trustee's trusts or powers'". 25 If Bishop Petar and Father Mitrev are successful in the Main Proceedings, it would follow that the Association's conduct in defending the Main Proceedings was not in furtherance of the purposes of the trust. This issue, however, is incapable of determination at this stage. 26 It may not necessarily follow that it is not now possible to determine whether the costs in question were incurred "in or about execution of the trustee's trusts or powers". But, in my opinion, s 59(4) is not a factor of significance in determining what costs order should be made in regard to the unsuccessful appeal. 27 Section 59(4) is an empowering provision of general application. Unlike ss 93(2) and 93(3), it is not expressed to concern the costs to be awarded in litigation involving a trustee. Section 59(4) is usually relied on in declaratory proceedings. A trustee may seek a declaration that it is entitled to be indemnified from trust assets in accordance with s 59(4): National Trustees Executors and Agency Company of Australasia Limited v Barnes (1941) 64 CLR 268; Gatsios. But no such declaration is presently sought. This Court is now concerned only with what costs order should be made in the ordinary course of legal proceedings, Bishop Petar and Father Mitrev having succeeded in their appeal. 28 In my view, the principal relevance of s 59(4) to the costs question is that it underpins a trustee's right to recover the costs of litigation from the trust estate. The section is in accordance with the general law entitling trustees to an indemnity from the trust estate for all costs, charges and expenses properly incurred: National Trustees Executors and Agency Company of Australasia Limited v Barnes (at 274 per Starke J and 277 per Williams J). See also Mead v Watson (2005) 23 ACLC 718 (at 721, [11]), [2005] NSWCA 133. The question as to what costs order should be made in legal proceedings to which a trustee is a party calls other considerations into play. Sections 93(2) and (3) govern the Court's power to order costs of the kind now in issue. 29 Bishop Petar and Father Mitrev contended that Pt 42 r 25 of the Uniform Civil Procedure Rules 2005 (NSW) was of application, while the Association disputed this. Part 42 r 25 provides: "(1) Subject to sub-rule (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." 30 There are difficulties attendant upon the application of Pt 42 r 25. On its face, it limits the power conferred by ss 93(2) and (3). Neither party addressed the question how the subordinate legislation constituted by Pt 42 r 25 could vary these sections. Complicating this question is the fact that, while s 104(1) of the Trustee Act provides that rules of court may be made under the Supreme Court Act 1970 (NSW) "for better carrying the provisions and objects of this Act into effect", Pt 42 r 25 was made under the Civil Procedure Act 2005 (NSW) and not the Supreme Court Act. I would add that s 98(1)(a) of the Civil Procedure Act provides that costs are in the discretion of the Court, subject to "this or any other Act". Prima facie, it seems that Pt 42 r 25 cannot detract from ss 93(2) and (3). As this issue was not properly ventilated in the parties' written submissions, I would prefer not to express any final opinion in regard to it. 31 I shall, however, assume (without deciding) that Pt 42 r 25 is of application. 32 At the outset, I would repeat that the question whether the Association has in substance acted for its own benefit rather than for the benefit of the trust can be decided only after the Main Proceedings are determined. Therefore, at this stage, Pt 42 r 25(2)(b) cannot be established. Thus, the Court's power under Pt 42 r 25 to order the Association's costs to be paid out of the trust property is dependent upon whether it acted unreasonably. I turn now to that issue. 33 In In re Beddoe; Downes v Cottam [1893] 1 Ch 547, Bowen LJ (at 562) accepted that: "[T]rustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness."

[34]

On the other hand, his Lordship said: "[I]t is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrongheaded and perverse." 34 In Adsett v Berlouis (1992) 37 FCR 201, the Full Federal Court (Northrop, Wilcox and Cooper JJ), after referring to Bowen LJ's remarks in Beddoe, said (at 211 to 212): "The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs - whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation - was proper in the sense explained in Beddoe ; that is, whether the expenditure was reasonably, as well as honestly, incurred. … [W]e issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Beddoe , which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expenses is not 'properly incurred' … Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment." 35 The passages quoted from Beddoe and Adsett were cited by Campbell J in Hypec Electronics Pty Limited (in liq) v Mead (2004) 61 NSWLR 169; [2004] NSWSC 731 and repeated by this Court (Sheller, Ipp and Tobias JJA) in Mead v Watson (at 720 to 721, [11] to [13]) on appeal from the judgment of Campbell J. The Court said (at 721 to 722, [14]): "A degree of personal misconduct or wilful recklessness on the part of the liquidator was not required: mere negligence or mistake or the incurring of costs unreasonably or unnecessarily was sufficient to constitute the relevant degree of impropriety to justify an order that the costs be paid by the liquidator personally." 36 Applying these authorities, the question of unreasonableness on the part of the Association is finely balanced. I have, however, concluded that the Association did not act unreasonably in seeking judicial advice. There are a number of factors that lead me to this view. 37 Firstly, the trial judge was persuaded that the Association was entitled to judicial advice; the Association's case was reasonably arguable. 38 Secondly, the three grounds on which this Court found that his Honour had erred in exercising his discretion were only articulated with clarity during the course of the hearing on appeal and after intervention from the Bench. It does not seem to me that the case was put before the trial judge in the way it eventually was put on appeal. 39 Thirdly, there is no suggestion that the Association, in seeking judicial advice, was acting otherwise than in good faith; this was regarded as relevant in Harrison v Mills [1976] 1 NSWLR 42 (at 46 per Needham J) and Marley v Mutual Security Merchant Bank and Trust Co Limited [1991] 3 All ER 198 (at 210 per Lord Oliver). 40 Fourthly, in other cases of this kind, courts have ordered that the costs of unsuccessful applicants for judicial advice be paid out of the trust property: see Harrison v Mills; In re Evans (deceased) [1986] 1 WLR 101 and Marley. 41 Thus, even on the assumption that Pt 42 r 25 is of application, in my opinion the conditions in Pt 42 r 25(2)(a) and (b) have not been fulfilled. 42 The matters to which I have referred in [37] to [40] are relevant to the exercise of the discretion that has to be exercised under ss 92(2) and (3). On the basis of those matters, I have concluded that the Association's conduct in applying for judicial advice was not unreasonable. Accordingly, I am of the view that the Association is entitled to be indemnified out of the Schedule A property in respect of its own costs (that exceed any costs that it might recover under the Suitors' Fund Act 1951 (NSW)) and the costs it is required to pay Bishop Petar and Father Mitrev. As I understand both parties' submissions, both accept that the Schedule A property is the appropriate trust property that should be used should such an order be made. 43 I should add that I was not persuaded to the contrary view by the fact that, prior to commencing proceedings for judicial advice, independent counsel had advised the Association "that permission to use trust funds to defend the proceedings was 'an unlikely exercise of discretion' and that any application should be 'a last resort'". I have expressed the opinion that the Association's case in this regard was reasonably arguable. 44 Other costs orders in relation to certain other proceedings have been made in favour of the Association in the past, but I see no reason to make an order in relation to any set-off (as the Association requested). 45 Bishop Petar and Father Mitrev should pay the Association's costs in respect of their applications for leave to appeal in respect of the orders of 7 May 2004 and 10 June 2005. 46 I turn, finally, to the costs of the trial. 47 The arguments raised on behalf of the Association in regard to these costs are complex. They are difficult to follow without a detailed knowledge of what in fact occurred at the trial and the interlocutory proceedings that preceded it. In my view, this Court is not in a position to rule reliably on all the matters the Association has raised in regard to the trial costs and any other costs that might be affected by the judgment in [2007] NSWCA 150. 48 Accordingly, in my view, it would be appropriate to remit the issues concerning the costs referred to in the preceding paragraph to the trial judge for decision by him. 49 I propose the following orders: (a) The Association is required to pay the costs of Bishop Petar and Father Mitrev in relation to the appeal. (b) The Association is entitled to be reimbursed out of the Schedule A property for the balance of its costs incurred in conducting the appeal (being those it is required to pay Bishop Petar and Father Mitrev and those it incurred itself) after taking into account any monies that may be paid to it under the Suitors' Fund Act 1951 (NSW). (c) The Association is entitled to a certificate under the Suitors' Fund Act 1951 (NSW) if otherwise qualified. (d) Bishop Petar and Father Mitrev are required to pay the Association's costs of the application for leave to appeal against the orders made on 7 May 2004 and 10 June 2005. (e) The matter is remitted to the trial judge to determine the costs of the trial and any other related costs that might be affected by this Court's judgment in [2007] NSWCA 150. **********

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