Johnston v Johnston

Court of Appeal (NSW)|2016-03-11|Before: Ward JA, Leeming JA, Simpson JA, Santow J, Rein J

Background

The late Edward Richard Johnston died on 21 August 2014. He had no surviving spouse, issue or parents. He was one of six siblings, one of whom had predeceased him leaving a son (the third applicant). The first two applicants are two of the deceased's surviving siblings. The respondents are the remaining two of his surviving siblings.
The deceased executed his only will on 6 December 2010. A copy of that will was not in evidence on the present application but it was accepted by the parties that the applicants were the sole executors and trustees named in the will and the sole beneficiaries. It follows that no provision was made for the respondents under the will.
The course by which the matter came to be before the primary judge can be gleaned only from the pleadings filed in the probate proceedings. Notice of the applicants' intended application for probate of the will was published on the NSW Online Registry website on 22 October 2014 (see [4] of the Statement of Claim). On 7 November 2014, the respondents filed a caveat requiring that no grant of probate be made in the estate of the deceased without prior notice to them (see [5] of the Statement of Claim). Neither of those matters appears to be in contest between the parties on this application.
The applicants then apparently commenced proceedings seeking the removal of the caveat. Senior Counsel for the applicants informed this Court that this was by way of a notice of motion. It is not clear whether a summons for removal of the caveat was filed (the respondents' submissions say that one was but the applicants seem to dispute this) although ordinarily one would expect that there be a formal document initiating the proceedings. What is clear is that the applicants must have accepted that it was necessary for the matter to continue on pleadings. They filed a statement of claim in the probate list on 7 April 2015.

Rule 42.13A UCPR

Rule 42.13A UCPR provides as follows: 42.13A Where offer accepted and no provision for costs (1) This rule applies if the offer: (a) is accepted by the offeree, and (b) does not make provision for costs in respect of the claim. (2) If the offer proposed a judgment in favour of the plaintiff in respect of the claim, the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, assessed on the ordinary basis up to the time when the offer was made. (3) If the offer proposed a judgment in favour of the defendant in respect of the claim (including a dismissal of a summons or a statement of claim), the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, assessed on the ordinary basis up to the time when the offer was made.
The first point to note is that r 42.13A UCPR in its terms prescribes the costs outcome that follows on acceptance of an offer of compromise made under r 20.26 with respect to a plaintiff's claim (defined as "the claim" - see r 42.13).
The second point to note is that the present version of the rule, unlike that applicable before amendments to the rules in Division 3 Part 42 of the UCPR on 7 June 2013, in its terms preserves no discretion as to the costs consequences on acceptance of an offer complying with r 20.26 UCPR. The previous version of the rule provided that: 42.13A Where offer accepted (1) This rule applies if the offer concerned: (a) is made by the plaintiff and accepted by the defendant, or (b) is made by the defendant and accepted by the plaintiff. (2) The plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, assessed on the ordinary basis up to the time when the offer was made, unless: (a) the offer states that it is a verdict for the defendant and the parties are to bear their own costs, or (b) the court otherwise orders. (my emphasis)

Submissions before primary judge

There is no transcript of the oral argument before the primary judge. However, the Court was provided with the respective parties' written submissions.
In summary, in their written submissions the applicants contended that there should be no order as to costs (which I note would, in practical terms, have the effect that the respondents' costs of the proceedings would be borne out of the monetary judgment in their favour, reducing the net benefit of that judgment to them by whatever costs they had themselves incurred).
The applicants characterised the terms of the offer as being partly in favour of them (the grant of probate in solemn form and the dismissal of the cross-claim) and partly in favour of the respondents (as to the payment of money) (see [2]). They argued that if either of the two limbs of r 42.13A UCPR applied, the applicable limb prescribed the outcome for costs; and that each limb was mutually exclusive ([3]). They contended that where the offer provided for judgments in favour of both parties, the rule prescribed no costs outcome and was inapplicable, and hence that the respondents' reliance on r 42.13A(3) was misplaced.
They conceded that, absent any prescribed outcome under the UCPR, the costs discretion under s 98 of the Civil Procedure Act 2005 (NSW) applied but that it should not be exercised where to do so would impose a costs obligation on an offeror different to that which the offeree had accepted in the compromise of the proceedings, placing emphasis on the words "the whole of the claims" in the offer of compromise and referring to the decision of the primary judge in an earlier case (Owners Corporation SP 74667; 74670 and 74662 v Auburn City Council [2015] NSWSC 86).
The applicants also invoked the principle articulated by McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 (at 625) to the effect that unless a party has acted unreasonably usually there will be no costs order where proceedings are settled in advance of the hearing.
Pausing there, the written submissions provided to the primary judge by the applicants do not, as I read them, support the proposition put in their written summary of argument in this Court that they had submitted to his Honour that r 42.13A(2) was engaged. Rather what was being put to his Honour (and addressed in his Honour's reasons) was the submission that, as the offer was partly in favour of each side, r 42.13A prescribed no costs outcome and was inapplicable. I note this because part of the applicants' criticism of his Honour's decision is that his Honour rejected or did not deal with their primary submission that r 42.13A(2) applied (see [7(a)]; [8] of their summary of argument). Their primary submission on the appeal, if leave be granted, appears to be that they were entitled to a costs order in their favour against the respondents as a result of r 42.13A(2) (see [5]; [14]).
The respondents, on the other hand, contended that r 42.13A(2) did not apply, as this was not a case where the applicants' claim involved a claim for a money sum; the offer dealt compendiously with both the applicants' claim and their cross-claim; and the litigation was not inter partes litigation but litigation in which the applicants sought rights in rem. They argued that r 42.13A(3) was "the most applicable" in circumstances where monetary judgment in favour of the respondents was proposed in the offer and accepted by them.
Alternatively, the respondents submitted that if neither limb of r 42.13A was applicable then they should be entitled to their costs from the estate of the deceased ([24]). Although not expressly put by reference to the costs discretion under s 98 of the Civil Procedure Act, it appears that this was how that submission was understood by the applicants (see [7] of the applicants' written submissions), although in this Court they submitted that the respondents did not make any submission to the primary judge to the effect that the costs discretion under s 98 ought be exercised in their favour if r 42.13A(3) did not apply.

Primary judgment

The primary judge, not surprisingly having regard to the written submissions that had been made, approached the matter on the basis that the respondents contended that r 42.13A(3) applied (because the offer proposed a judgment in their favour in respect of the claim) and that the applicants contended that the offer should be characterised as a "mixed offer", with the result that r 42.13A did not apply, and further contended that although there was a discretion as to costs the Court should not exercise that discretion in favour of the respondents (see [5], [7]-[8] of his Honour's reasons).
His Honour considered that the applicants' argument did not give due weight to what the offer, looked at as a whole, achieved or offered, namely the payment of a "not insubstantial sum" to each of the respondents (to which they would not have been entitled if the 2010 will were the will in force) ([9]). His Honour also considered that an aspect of the matter relevant to the costs issue was that, the respondents having accepted the offer of $100,000 each, it would be necessary for the applicants to obtain a grant of probate "to validate their agreement to pay the respective amounts out of the estate". His Honour noted that, as executors, the applicants needed to obtain a grant of probate irrespective of any position of the respondents ([10]).
At [10], his Honour expressed the opinion that, looked at as a whole and in its substantive effect, the respondents had obtained a victory (albeit not of huge proportions) and said (at [11]) that to deny the respondents the benefit of reliance on the rule (i.e., r 42.13A(3)) would involve a very narrow interpretation of the rule and one which would discourage rather than encourage offers of compromise to be made and to be accepted. His Honour further said (at [11]): Parties should understand that if the offer gives them a substantial benefit and they accept it they will obtain their costs (on the ordinary basis) of achieving that result.
His Honour thus concluded that a realistic and substantive view of the offer was that it was one that permitted the respondents to rely on r 42.13A(3) to obtain an order for costs.

Proposed appeal grounds

If leave is granted, the applicants wish to argue that his Honour erred in making the costs orders that he did: in holding that the offer of compromise enlivened r 42.13A(3) (ground 1); in failing to hold that the offer of compromise enlivened r 42.13A(2) (ground 2); and, in the alternative to ground 2, in failing to hold that the offer of compromise did not enliven either r 42.13A(2) or r 42.13A(3) (ground 3). They maintain that his Honour should have ordered the respondents to pay their costs of the proceedings up to the making of the offer and of the contested costs application or alternatively should have ordered that there be no order as to costs of the proceedings.
As already noted, the substance of ground 2 does not accord with the basis on which the applicants' position was put in the written submissions provided to his Honour. It may have been expanded or amended in oral submissions but this Court does not have the benefit of those (and the fact that his Honour did not refer to them suggests that his Honour did not understand that a submission to the effect of that now contended for by ground 2 was being put by the applicants).
The applicants submit that his Honour incorrectly assumed (at [10]) that the respective sums would be paid from the estate of the deceased and that a grant of probate was necessary to "validate" the applicants' agreement to pay the amounts offered to the respondents. The applicants say that the obligation to pay was a personal obligation and that the reference to the grant of probate in that part of the offer regulated only the time for payment.
In that regard, I accept that the offer of compromise did not specify the capacity in which the applicants were making the offer to pay the said amounts (though the capacity in which they commenced the proceedings was clearly as executors named under the will) and it seems unlikely that an estate of the net worth of this deceased estate could have been finally administered within 28 days of the grant of probate in solemn form (though that is speculation on my part).
Nevertheless, the conclusion that the applicants would have been required in any event to seek a grant of probate in solemn form is not on its face surprising given that by the filing of a statement of claim the applicants may be taken to have accepted that there was an issue or at least some doubt as to the validity of the will.
The applicants maintain that his Honour also erred in addressing the question of the substantive effect of acceptance of the offer (i.e., that it represented a victory for the respondents in that they received a not insubstantial sum that they would not have received had the will been admitted for probate in the absence of the challenge raised by them to its validity) when considering the applicability of r 42.13A. The force of the applicants' submissions in this regard is that, if either limb of r 42.13A is applicable, it prescribes the costs outcome that is to follow and does not encompass any element of discretion in that regard. Hence considerations of the kind referred to at [9]-[11] of his Honour's reasons would be irrelevant, other than to the extent that they explore whether the offer in question is an offer that proposes in substance a judgment in favour of the respondents in respect of the applicants' claim (that being the factual circumstance that would enliven r 42.13A(3)).

Consideration

In my opinion this is a case where, perhaps because of the particular context in which the offer is made (probate proceedings), the offer is capable of being read as enlivening both limbs of r 42.13A. An offer requiring consent to the grant of probate in solemn form and the dismissal of the cross-claim seeking a grant of administration in favour of the respondents is an offer which, if accepted, secures to the applicants the very relief they sought in the proceedings (and the abandonment of an application for contrary relief) (within r 42.13A(2)). By the same token, however, the offer to pay a monetary sum to the respondents can be seen as an offer proposing judgment in their favour "in respect of" the applicants' claim in the sense that it is the inducement for the agreement to consent to the grant of probate sought by the applicants. Rule 20.27(3) makes it clear that a party may apply for judgment to be entered on acceptance of an offer that complies with the rules. Hence it is not to the point that the offer in this case does not expressly propose entry of judgment for the monetary sum. It is an offer that, if accepted, would entitle the applicants to apply for judgment for the said sums. Moreover, the orders made by the primary judge did not merely note an agreement to pay. Rather, they imposed an obligation upon the applicants to pay the monetary sum within 28 days. Considered from that perspective, the offer enlivens r 42.13A(3).
It makes no sense for r 42.13A as a whole to apply in circumstances where there is a mixed offer of this kind, since if that were the case there would be opposing orders for each side to pay the other's costs. While a set-off of that kind is not necessarily unworkable, it seems hardly consistent with the objective purpose of the cost rules in relation to offers of compromise - as identified quite some time ago in Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724. The object of the rules governing offers of compromise was there identified as being to facilitate the proper compromise of litigation, including the promotion of settlements, the saving of public costs and protection of the party who is not the real cause of the litigation. It is unlikely to be sensible or practicable to apply the costs rules separately to the discrete aspects of the offer in circumstances where there would be costs orders going either way for the whole of the proceedings and would no doubt give rise to the real potential for further costs in working out how those orders were to apply. Nor would such a construction be likely to achieve the overriding purpose of the rules as stated in s 56 of the Civil Procedure Act, since it would be likely as a practical matter to encourage further disputes.
The submission by the applicants that, on the construction adopted by the primary judge, it would have been impossible for them to formulate an offer of compromise under the rules attracting the operation of r 42.13A(2) (because an offer limited to the grant of probate of the will in solemn form would have involved no real and general element of compromise - referring to Prosperity Advisers Pty Ltd v Secure Enterprises Pty Ltd t/as Strathearn Insurance Brokers [2012] NSWCA 192 at [108]-[109]) is of no assistance in the construction of the rule. There must be many occasions where a party is faced with an "all or nothing" claim or where the conditions it wishes to attach to an offer are such that it may not be possible to make (or may at least be doubtful whether they can make) an offer of compromise containing a genuine element of compromise as required under the rules and that party is then left (as the applicants seem in the present case also to have made provision for) to contemplate other avenues of settlement, such as the making of a Calderbank offer.
I consider that the better construction of r 42.13A is that where there is a "mixed offer" of the kind in the present case (i.e., an offer that proposes both judgment for the plaintiff and judgment for the defendant in respect of the plaintiff's claim), the rule does not apply. That is because the rule contemplates two mutually exclusive situations. One is therefore left with the general discretion as to costs (informed as it would be in the present case by the particular context of this being litigation in the probate list).
The consequence of that conclusion is not, as the applicants' draft notice of appeal seems to contemplate, that there should necessarily be no order as to costs. Rather, it leads to the need for the exercise of the costs discretion. His Honour did not exercise that discretion as it was not necessary to do so on the view he had formed as to the applicability of r 42.13A(3). It might well be inferred, however, from his Honour's reasons that had the discretion been exercised it would have been to award costs in the ordinary course to the respondents as parties who had, in substance, had the victory in achieving a result that they could not have achieved in their favour without the expense of the litigation.
For the applicants it is said that they would have wished to adduce evidence had the matter fallen to be approached on the question of discretion, and there was a suggestion that the matter ought be remitted to the primary judge. However, that course is not appropriate for a number of reasons.
First, the parties had the opportunity before his Honour to put whatever evidence or submissions they wished on the question of costs. It is not in the interests of the quick, cheap and just resolution of the real issues in dispute for them to have a fresh opportunity to do so. A forensic decision was clearly made to run the application on the basis that it was run by both sides. They should be left to that decision.
Second, the principle articulated in Lai Qin must be balanced against the fact that this was probate litigation. In Re Estate of Hodges (deceased); Shorter v Hodges (1988) 14 NSWLR 698, Powell J noted (at 709) that in probate litigation there are two recognised exceptions to the general principle in adversary litigation that costs follow the event and that those costs be taxed on a party and party basis. The first of those exceptions was that: [W]here the testator has, or those interested in residue have, been the cause of the litigation, the costs of unsuccessfully opposing probate may be ordered to be paid out of the estate[.]
The second exception, recognised as having some overlap with the first, was that if the circumstances led reasonably to investigation of the document propounded, then the costs may be left to be borne by those who respectively incurred them.
There is authority (see Orton v Smith (1873) LR 3 P & D 23; Shorten v Shorten [2001] NSWSC 363; on appeal [2002] NSWCA 73 and [2003] NSWCA 60 at [28], and Middlebrook v Middlebrook (1962) 36 ALJR 216), for the proposition that where testamentary capacity is in issue the ensuing litigation is not "caused" in the relevant sense by the testator. However in Estate of Moyle: Moyle v Moyle (Supreme Court (NSW), Santow J, 18 June 1998, unreported; referred to by Giles JA and Brownie AJA in Perpetual Trustee Company Limited v Baker [1999] NSWCA 244), Santow J expressed the view that if a testator is by his mental frailty and other circumstances in a position where the circumstances reasonably call for an investigation of the validity of the will then "in one sense the testator, though usually with no sense of blameworthy fault, has by his or her conduct caused the litigation to occur".
In Perpetual Trustee Company Limited v Baker, their Honours said (at [14]): A party reasonably but unsuccessfully propounding or challenging the will, and so bringing about the necessary investigation, should no more have to bear his own costs than pay the costs of the other party. So it has been said that where the conduct and habits and mode of life of a testator have given ground for questioning his testamentary capacity the costs of the unsuccessful party should be paid out of the estate, as distinct from being left to be borne by that party.
In Redroff v Miegoch (Supreme Court (NSW), Santow J, 22 April 1996, unreported) Santow J said: If there is a distinction to be made between what are in truth frequently overlapping exceptions, I doubt whether that distinction should be carried to the point where there is automatically, under the second exception, never any order that costs be paid out of the estate but only an order that the unsuccessful party should be left to pay his or her own costs. That could be quite unfair in some cases. Thus there are many cases where circumstances reasonably call for an investigation to be made before the court could properly pronounce in favour of (or against) a will. They would involve serious hardship for the contesting party who thereby performs a public service, if that unsuccessful party were nonetheless required to pay his or her own costs. I do not consider, therefore, that this should be the inevitable consequence of coming within the second exception, though in some cases that may be the proper order.
In Re Estate late Hazel Ruby Grounds; Page v Sedawie [2005] NSWSC 1311, Campbell J, as his Honour then was, noted the overlap that had been recognised between the two exceptions referred to in Shorter and was of the view (at [30]) that: In that area of overlap, the principles which are recognised by the two exceptions are insufficient to produce a result. It is a matter for the trial judge, in light of the circumstances of the particular case before him or her, to decide which costs order better achieves justice.
In the course of debate on the present application, Counsel's attention was not drawn to the above authorities though it was noted that in probate matters the ordinary costs principles might have a particular operation where there is a challenge to testamentary capacity. I raise this issue not as being determinative on the present application (say, were the costs discretion to be re-exercised or, more accurately, exercised for the first time) but simply to note the potential for yet further costs to be incurred in addressing the issue as to the reasonableness or otherwise of the challenge made to the testamentary capacity of the deceased and to note that the application of the principle in Lai Qin may be affected by the particular context of this litigation.
The applicants maintain that there were issues of unreasonable conduct to which they would have pointed had the question of discretion been argued more fully before the primary judge. The respondents maintain that their conduct was reasonable (as they submitted to his Honour) but there is no evidence before this Court on that issue. This Court is not in a position to form a view one way or another and in my opinion the parties should be left on the question of costs with the material that was before the primary judge (in effect, the submissions alone).
Third, there seems likely to be a disproportionate expense in allowing the question of costs to be further agitated. The applicants' position was that their costs were in a relatively small amount (compared to the amount of the monetary judgment entered on acceptance of the offer of compromise). That points strongly against any grant of leave to appeal and even more strongly against any remittal of the matter if leave were to be granted.
Finally, regard must be had to r 51.53, which mandates that a new trial must not be ordered unless it appears to the Court that some substantial wrong or miscarriage has been occasioned by reason of the relevant matter. Here, I am not satisfied that any error in the application of r 42.13A has given rise to a substantial wrong or miscarriage. It is conceded by the applicants that the costs in dispute are in a relatively small amount. The applicants will recoup their own costs from the estate. The cost of remitting the matter for the exercise of the residual costs discretion (particularly if the parties then sought to adduce evidence as to the reasonableness or otherwise of each other's conduct of the proceedings) seems to me likely to be wholly disproportionate to the amount in dispute.
In the circumstances, there having been an issue as to the construction and operation of the rules, and there being nothing on the face of his Honour's reasons to suggest that the costs discretion would not properly have been exercised to order the respondents' costs out of the estate (which is the practical effect of his Honour's orders as the applicants are the sole beneficiaries of the estate), I would grant leave to appeal and dismiss the appeal.
In those circumstances, though the applicants' construction of the rule has in the context of a "mixed offer" been successful, nothing in practical terms has flowed therefrom. The appropriate order is that they bear the costs of the application for leave to appeal and appeal.
LEEMING JA: I agree with Ward JA.
SIMPSON JA: I agree with Ward JA.

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: 21 March 2016

Judgment

WARD JA: This is an application for leave to appeal from a decision made as to costs orders following the settlement of contested probate proceedings (The Estate of Edward Richard Johnston [2015] NSWSC 1559). Relevantly, the primary judge ordered that the applicants (the executors and sole beneficiaries under the deceased's will) pay the costs of the respondents on the ordinary basis up to the date of the making of an offer of compromise which, on acceptance by the respondents, led to the settlement of the proceedings. His Honour also ordered that the applicants pay the costs of the application for costs.
Leave is necessary pursuant to s 101(2)(c) of the Supreme Court Act 1970 (NSW) as the sole issue on the proposed appeal is that of costs. Leave is opposed by the respondents on the basis that no issue of principle is involved. It should also be noted that the applicants accept that the amount of costs in issue (though not assessed at this stage) is relatively small. The deceased's estate is apparently worth about $3 million.

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (7 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (13)

Cited By (4)