Latham v Hubbard; Estate of Ross

Judgment 1HIS HONOUR: This is an application under s 73 of the Civil Procedure Act 2005 (NSW) for a determination of questions arising under orders made by consent on 7 August 2013 in relation to costs. 2The application arises out of a contested probate suit concerning the estate of John Ross who died on 4 August 2010. Mr Ross made a will on 27 February 2004 by which he appointed his solicitor, Mr Sheather, as his executor and trustee, but if Mr Sheather were unable or unwilling to act, then he appointed Mr Stuart Latham in lieu of Mr Sheather as his executor and trustee. Mr Latham had been employed as a solicitor by Mr Sheather. By his 2004 will the deceased left his estate to two sisters, two sons, a daughter, and two grandchildren. 3Mr Sheather declined to take probate of that will. Mr Latham commenced proceedings seeking a grant of probate in relation to the 2004 will. 4The deceased executed another will on 2 October 2009. This will revoked all prior wills and appointed another solicitor, Mr Joel Hubbard, as executor and trustee. By the 2009 will the deceased left smaller shares of his estate to his sisters, sons, daughter and grandchildren and left the balance of the estate for charity. 5On 13 December 2010 Mr Latham was appointed as administrator of the personal estate and receiver of the real estate pendente lite. 6Mr Hubbard filed a defence to the statement of claim in which Mr Latham sought a grant of probate in solemn form of the 2004 will. Mr Hubbard sought a grant of probate in solemn form in relation to the 2009 will. Mr Latham contended that the deceased lacked testamentary capacity at the time he executed the 2009 will and said that the will was executed as a consequence of undue influence being applied by Mr Hubbard to the deceased. An agreement was reached "in principle" at a mediation on 22 June 2012 attended by the family beneficiaries as well as Mr Latham and Mr Hubbard. The "in principle" agreement was not immediately binding. It was subject to approval being obtained from the Attorney-General as the protector of charities and, to the extent necessary, the approval of the Court. 7The probate proceedings went to a contested hearing. They were settled on the third day of the hearing when I made orders by consent. The settlement in substance provided for the appointment of a third party, a Mr Richard Watson, to be administrator of the estate and provided for part of the estate to be applied towards specified charities and for the balance of the estate to be distributed between the family beneficiaries. There was an element of compromise. The family beneficiaries received less than they would have received under the 2004 will, but substantially more than they would have received under the 2009 will. The settlement involved the family beneficiaries releasing claims for family provision orders. The Crown Solicitor on behalf of the Attorney-General indicated that the Attorney had no objection to the settlement which involved 20 per cent of the estate being provided to specified charities. The orders made on 7 August 2013 included: "1. Order that a grant be made of letters of administration of the estate of the late John Gordon Ross with the will annexed, being the will of the late John Gordon Ross executed on 2 October 2009, to Richard Anthony Watson, solicitor of Level 9, 300 George Street, Sydney. ... 4. The Court notes the terms of a Deed of Family Arrangement dated 7 August 2013 executed by the Plaintiff, the Defendant, the beneficiaries under the will of John Gordon Ross made on 27 February 2004 and the said Richard Anthony Watson. ... 6. Order that notwithstanding the terms of the will of the late John Gordon Ross executed on 2 October 2009, the administrator, Mr Richard Anthony Watson, would be justified in administering the estate in accordance with the terms of the Deed of Family Arrangement dated 7 August 2013. ... 9. Order that the appointment of Stuart Latham as executor pendente lite of the estate of the late John Gordon Ross be revoked. 10. Order that the plaintiff's claim be dismissed. 11. Order that the cross-claim be otherwise dismissed. 12. Order that the costs of the proceedings be paid in accordance with the Deed of Family Arrangement. ..." 8The matter now in issue concerns order 12 that "the costs of the proceedings be paid in accordance with the Deed of Family Arrangement." Clause 11 of that deed provided: "11.1 The parties agree that: (a) The legal costs and expenses of the each of the Family Beneficiaries and Mr Latham and Mr Hubbard, as detailed in bills of costs in accordance with the Legal Profession Act 2004 (NSW), are to be paid out of the Estate on a trustee basis as agreed by the said Administrator and the individual costs claimant or as assessed in the event that agreement cannot be reached; (b) The costs and expenses of each of Mr Latham and Mr Hubbard for their professional time spent in relation to the Probate Proceedings, including the resolution of the proceedings, as detailed in bills of costs in accordance with the Legal Profession Act 2004 (NSW) are to be paid out of the Estate on the trustee basis as agreed by the said Administrator and the individual costs claimant or as assessed in the event that agreement cannot be reached. (c) The legal costs and expenses for professional time detailed in itemised bills of costs to be paid out of the Estate as agreed or assessed by the said Administrator of this deed on the trustee basis." 9On 14 August 2013 Mr Latham served Mr Watson with a bill of costs said to be for his costs and expenses incurred in the proceedings. Mr Watson requested access to Mr Latham's files. These were provided. In December 2013 Mr Latham referred his bill of costs for assessment. The bill was referred to Mr Gordon Salier as a costs assessor. On 28 February 2014 Mr Salier wrote to Mr Latham and Mr Watson as follows: "As you would be aware I have been appointed by the Supreme Court of New South Wales to assess the subject application for costs. I thought I should raise some preliminary aspects given I have a little difficulty in proceeding with the application as presently based. It is my understanding that since 1 July, 1994 there has been no jurisdiction in New South Wales for Judges to award costs on a trustee basis. Costs ordered by a Court or Tribunal can only be ordered on either the party/party or the indemnity basis. Further, it seems to me Mr Latham has entitlement to fees firstly in his role as trustee of the estate of the late John Gordon Ross and secondly for time engaged in his professional capacity as lawyer. I find a little comfort in that statement when I have regard to the agreement reached between the parties with respect to costs and as reflected at 11.1 of the deed of settlement. It is also my understanding that a trustee is usually entitled to an indemnity for his or her costs out of the trust fund. A trustee may forfeit his or her indemnity if guilty of misconduct or neglect. It therefore seems to me that in his role as a trustee Mr Latham is entitled to be protected for the fees he incurred in carrying out that role unless there is assertion that any such indemnity be forfeited for any reason. Given the approval of Court to the deed of settlement I would have thought if there was any suggestion Mr Latham was not entitled to the indemnity I have stated that should have been raised at the time of Court approval. If I am correct there are no fees to assess and whatever Mr Latham renders as a trustee he should be paid. As to the fees that Mr Latham incurred in his professional capacity it seems to me to be understood that what was really intended was he was entitled to such fees on the indemnity basis. That is to say again he is entitled to recover all fees except to the extent the fees are either in an unreasonable amount or unreasonably incurred. The onus of establishing any such unreasonableness would lie with Mr Watson. ... Subject to response from Mr Watson if there is an issue as to the fees charged by Mr Latham it may become appropriate for Mr Latham to provide separate memoranda for the fees he incurred as a trustee and the fees he incurred in his professional capacity. I do not think the former would be subject to assessment and as to the latter Mr Watson would carry the onus of disputing such costs on the bases I have stated. Naturally I do not wish to embark upon an assessment course when there may be no need to do so. In that background I thought it better to let the parties know my views following an initial reading of the papers sent to me by the Supreme Court." 10On 19 March 2014 Mr Latham wrote to Mr Watson to complain that his costs and expenses of the litigation had not been paid. He noted that although seven months had passed since service of his bill of costs, Mr Watson had not raised any objection to the bill of costs, nor taken any meaningful step to seek to reach an agreement with Mr Latham in respect of the costs to be paid. 11On 21 March 2014 Mr Watson wrote to Mr Salier. Mr Watson enclosed a detailed notice of objection to the bill of costs. The notice of objection includes a general narrative of objections and specific objections to individual items of charge. The document runs to 118 pages without annexures. In his letter of 21 March 2014 Mr Watson accepted that an assessment would not extend to the work done by Mr Latham as administrator pendente lite. Mr Watson proposed that the orders be amended to provide for costs and expenses to be assessed on the indemnity basis, but noted that that amendment would require the consent of all parties affected by the orders. He foreshadowed that he would be objecting to a substantial part of the costs claimed even on an indemnity basis pursuant to Pt 42 r 5(b) of the Uniform Civil Procedure Rules. The same proposal was made to Mr Latham. 12On 31 March 2014 Mr Latham wrote to Mr Salier. He said that all of the costs and disbursements in the bill of costs related to work done in his professional capacity concerning the contested probate application. He said that he did not intend that his costs be paid on the indemnity basis, but that his costs be paid on a "trustee basis" which was what the parties had agreed to in the deed. Mr Latham said that he understood that Mr Salier considered that he did not have capacity to assess costs on a "trustee basis" and asked him to return the file to the registry if that were so. 13On 3 April 2014 Mr Salier wrote to the Manager, Costs Assessment, stating that he should decline to assess the costs as presently sought to be assessed. 14The orders made on 7 August 2013 included liberty to restore. Pursuant to that liberty Mr Latham restored the proceedings before me on 13 May 2014. Mr Latham sought leave to file a notice of motion that sought to vacate the costs orders made on 7 August 2013 and instead to order that the plaintiff's costs be paid out of the estate "on a trustee basis pursuant to r 42.25(1) of the Uniform Civil Procedure Rules". The orders sought also included orders for payment of his costs in a gross sum of $324,384.20 and interest. 15I refused the plaintiff leave to file that summons. Because the orders made on 7 August 2013 were made by consent, it seemed to me that in the absence of consent by the other parties (which was not forthcoming) the orders could not be varied or set aside except on a ground on which the contract between the parties could be rectified or discharged (Harvey v Phillips (1956) 95 CLR 235 at 243-244) and that any such claim would need to be pleaded. I gave leave to Mr Latham to file a notice of motion seeking orders under s 73 of the Civil Procedure Act to determine any question in dispute concerning the meaning and effect of the orders made on 7 August 2013 and for appropriate orders to give effect to such a determination. 16Mr Latham filed a notice of motion that in substance sought orders pursuant to s 73(1) of the Civil Procedure Act that upon the proper construction of the deed the words "on a trustee basis" in clause 11.1(a), 11.1(b) and 11.1(c) should be construed as meaning, "on the indemnity basis and in accordance with Pt 42 r 5(a) of the Uniform Civil Procedure Rules 2005" or alternatively, "on the trustee basis in accordance with Pt 42 r 25(1) of the Uniform Civil Procedure Rules". The notice of motion also sought such further or other orders as might be appropriate to resolve the questions as to what the current orders and provisions of the deed mean with respect to the basis upon which costs of Mr Latham and any other party to the deed are to be paid and how those provisions are to be implemented. 17A requirement that costs be assessed "on a trustee basis" has a clear meaning. In Dal Pont, Law of Costs, 3rd ed, LexisNexis Butterworths, Professor Dal Pont says (at [10.8]): "10.8 If a court makes an order entitling the trustee to costs out of the trust fund, it will commonly order that the costs be quantified on an indemnity (sometimes termed 'trustee' or 'common fund') basis, that is, an indemnity for all expenses properly incurred. This reflects the policy that persons engaged in proceedings in a representative capacity should not, if a costs order is made in their favour, be out of pocket because of the litigation. The same outcome can be achieved pursuant to the exercise of the trustee's right of indemnity, which by definition extends to all expenses properly incurred in the course of trusteeship. It should not be assumed, though, that a trustee always secures a full indemnity for costs out of the trust fund. The court's order, or the general law limits on the exercise of the right of indemnity, may restrict the extent of any such indemnity. A court will not by a costs order penalise the trust fund for costs incurred by a trustee that are not reasonable in the circumstances. A trustee must, in the capacity of a litigant, do all reasonably within his or her power to contain costs, and will be deprived of costs that are excessive or unnecessarily incurred, and may be required to pay costs to the extent they are excessive or unnecessary." [Citation of authority omitted.] 18As this passage makes clear, a trustee's right to costs "on the trustee basis" entitles the trustee to all costs properly incurred in the exercise of his or her duties as trustee. It is an incident of the trustee's right to be indemnified in respect of expenses properly incurred. In the absence of any particular provision in the trust deed conferring on a trustee a right to costs calculated on a specified basis, or the informed consent of all beneficiaries, being sui juris, the trustee's right to costs will not extend to costs that were not reasonably incurred or were not reasonable in amount, as it would not be consistent with the trustee's duty to incur costs that are not reasonable in the circumstances. 19Two questions remain. First, whether there is power to order costs that will have to be assessed on any basis other than the ordinary basis or the indemnity basis. Secondly, if so, what the order means in the circumstances of this case. 20Section 98(1) of the Civil Procedure Act provides: "98 Courts powers as to costs (cf Act No 52 1970, section 76; SCR Part 52A, rules 5, 6, 7 and 8; Act No 9 1973, section 148B; Act No 11 1970, section 34) (1) Subject to rules of court and to this or any other Act: (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis." 21The question is whether s 98(1)(c) although expressed as a conferral of power should be read as a limitation on power so that costs can only be ordered on either the ordinary basis or on the indemnity basis. 22The power conferred by s 98(1) is subject to the rules. Rule 42.2 provides that unless the court otherwise orders or the rules otherwise provide, costs payable under an order of the court or under the rules are to be assessed on the ordinary basis. 23Rule 42.5 provides: "42.5 Indemnity costs (cf SCR Part 52A, rule 37) If the court determines that costs are to be paid on an indemnity basis: (a) in the case of costs payable out of property held or controlled by a person who is a party to the proceedings: (i) in the capacity of trustee, executor, administrator or legal representative of a deceased estate, or (ii) in any other fiduciary capacity, all costs (other than those that have been incurred in breach of the person's duty in that capacity) are to be allowed, and (b) in any other case, all costs (other than those that appear to have been unreasonably incurred or appear to be of an unreasonable amount) are to be allowed." 24Rule 42.25 provides: "42.25 Costs of trustee or mortgagee (cf SCR Part 52A, rule 42) (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." 25Amendments to the Supreme Court Rules concerning costs were made with effect from 1 July 1994 by the Supreme Court Rules (Amendment No. 285) 1994. The object of the amendments was to make changes which had become necessary or desirable as a result of the Legal Profession Reform Act 1993. Prior to 1 July 1994 costs were to be taxed by a taxing officer of the Court. The rules and practice provided for taxation on a number of different bases: party and party basis (Pt 52 r 23), the indemnity basis (Pt 52 r 28A), the common fund basis (Pt 52 r 30), the trustee basis (Pt 52 r 31) and the solicitor and client basis (Pt 52 r 33). In addition costs could be taxed on a solicitor and own client basis (see Re National Safety Council of Australia, Victorian Division (in liquidation) (No. 2) [1992] 1 VR 485). 26On a taxation on a party and party basis only those costs as were "necessary or proper for the attainment of justice or for enforcing or defending the rights of the party" were allowed. The Legal Profession Reform Act 1993 replaced the system of taxation of costs by court officials with the system of assessment of costs by costs assessors who were expected to have a better knowledge of market conditions for the provision of legal services. Barristers and solicitors were obliged to make disclosure to clients as to the basis upon which costs would be charged. By s 208A a costs assessor was required to consider whether or not it was reasonable to carry out the work to which the costs related, whether or not the work was carried out in a reasonable manner and the fairness and reasonableness of the amount of the costs in relation to that work. Unlike a taxation of costs on a party/party basis, the focus of the enquiry was on the reasonableness of the costs incurred, not the necessity for them to be incurred. That principle is now found in s 364 of the Legal Profession Act 2004. The avowed purpose of the changes was to increase the amount of costs recoverable by a successful party. In introducing the bill the Premier stated that "the difference in the tests applied to party-party and solicitor-client costs will be eliminated" (Hansard, 9 November 1993, 3rd series, Vol 238, p 4983). 27In the new Pt 52A introduced to the Supreme Court Rules the rules provided that a reference to "party and party basis" meant the basis of assessment set out in Div 6 of Pt 11 of the Legal Profession Act 1987. Part 52A r 37 provided that where costs were payable on the indemnity basis, if the person was a party to the proceedings in the capacity of a trustee, legal representative of a deceased estate or other fiduciary and the costs were payable out of property held or controlled by that person in that capacity, then all costs incurred by that person should be allowed except to the extent that it appeared that they were incurred in breach of that person's duty in that capacity. Otherwise, all costs incurred by the person should be allowed except to the extent that such costs were of an unreasonable amount or had been unreasonably incurred. This is the same principle as applies under the present rules. 28Part 52A r 32 provided that: "Costs payable by or under the rules or any order of the Court shall be payable on a party and party basis unless the rules or an order provide that they are payable on an indemnity basis." 29Hence, Mr Salier was correct in saying that in 1994 costs could only be ordered payable on a party and party basis or on an indemnity basis. 30Rule 42.2 of the Uniform Civil Procedure Rules is expressed differently from the old Pt 52A r 32 of the Supreme Court Rules. In their notes to r 42.2 the learned editors of Ritchie's Uniform Civil Procedure NSW say that: "The present rules specifically refer to costs being payable on the ordinary basis; see [42.2.20]; and on an indemnity basis: see [42.5.5]. However both the terms of the present rule and the width of the power conferred by CPA s 98(4) suggests that the court may order the payment of costs on some other basis." 31Unlike Pt 52A r 32 the current rules do not limit the costs orders that can be made to costs to be assessed on either the ordinary basis or the indemnity basis. However, as Hodgson JA said in The Owners Strata Plan N4o. 36131 v Dimitriou [2009] NSWCA 27; 74 NSWLR 370 at [39] there are now broadly three different bases on which costs may be assessed under statutory provisions: solicitor and own client costs under s 363 of the Legal Profession Act, party and party costs on the ordinary basis under s 364 of the Legal Profession Act, and party and party costs on the indemnity basis in Uniform Civil Procedure Rules r 42.5. Nonetheless, there have been many orders for payment of costs on a trustee basis or a solicitor-client basis (e.g. Johnson v Krishnan [2008] NSWSC 665, trustee basis, Palmer J; Agusta Pty Ltd & Ors as trustees for the Cavallino Unit Trust v The Official Trustee in Bankruptcy [2008] NSWSC 685, trustee basis, Nicholas J; De Martin v Jacobs [2008] NSWSC 1378, trustee basis, Young CJ in Eq; Chang v Tijong [2009] NSWSC 122, trustee basis, Young CJ in Eq; Simpson v Trust Company Fiduciary Services Limited [2009] NSWSC 912, trustee basis, Ward J; Re Cuesuper Pty Ltd [2009] NSWSC 981, trustee basis, Palmer J; Johnson v Krishnan [2009] NSWSC 1284, trustee basis, White J; Colantuono v Colantuono [2009] NSWSC 1445, trustee basis, Ward J; Application of NSFT Pty Ltd [2010] NSWSC 380, trustee basis, Biscoe AJ; Fay v Moramba Services Pty Ltd [2010] NSWSC 725, trustee basis, Brereton J; Re Perpetual Investment Management Limited as responsible entity for Perpetual's monthly income fund and Perpetual's wholesale monthly income fund [2011] NSWSC 615, solicitor-client basis, Ward J; Zang v Middleton; Estate of Cook [2011] NSWSC 881, solicitor-client basis, Slattery J; Myles v Myles [2011] NSWSC 1184, trustee basis, McDougall J; Loblay v Loblay [2013] NSWSC 1195, trustee basis, Robb J; Re Retail Employees Superannuation Pty Ltd [2013] NSWSC 1681, trustee basis, Darke J). 32In Agusta Pty Ltd v Official Trustee in Bankruptcy as trustee of estates of Gustavo Ferella and Angelo Ferella [2009] NSWCA 129, Tobias JA (with whom Beazley and McFarlan JJA agreed) said (at [48]): "[48] With respect to his Honour's discussion, in my opinion the OT was not a party to the proceedings before him in the capacity of a trustee of the Trust: rather, it was there in the capacity as a lien holder, a status which is different from that of a trustee and which does not attract the provision of r 42.25 of the Uniform Civil Procedure Rules. In my opinion, therefore, if the primary judge ultimately makes a costs order in favour of the OT, and I am not suggesting that he should or should not, then the costs awarded should be on the ordinary basis and not on a trustee basis." 33In my view s 98(1)(c) does not impliedly limit the bases on which the court can order costs to be assessed. But the question is arid. When an order is made for payment of costs on the trustee basis, it usually means on the indemnity basis in accordance with rules 42.5(a) and 42.25. In the present case had a grant of probate been made to Mr Latham, he would have been entitled to his costs assessed on that basis. Whether that was described as the indemnity basis or the trustee basis would make no difference. 34The problem arises in this case because Mr Latham was not appointed executor of the estate. 35By the parties agreeing that Mr Latham should be entitled to his costs on the trustee basis, they are to be taken to have intended that he should be entitled to recover costs on the same basis as he would have been entitled to recover his costs had he been appointed as executor. Costs should be assessed on that basis. 36Unless the will otherwise provides, or the beneficiaries being sui juris give their informed consent, an executor who is a solicitor is not entitled to profit from his office by charging his profit costs to the estate. Mr Latham obtained the consent of the beneficiaries under the 2004 will to his firm's acting in the probate proceedings and charging costs at an hourly rate. Notwithstanding that that will was not admitted to probate and that the persons entitled to the estate under the orders made on 7 August 2013 included charities, Mr Latham is entitled to have his costs assessed as if he were the trustee of the estate and the beneficiaries were the beneficiaries under the 2004 will. That is the effect of the orders that his costs be assessed on the trustee basis. He is not precluded from recovering his profit costs because the persons entitled to part of the estate include charities who did not consent to his doing so. 37It follows that any costs which would not be allowed had probate of the 2004 will been granted to Mr Latham, because they were incurred in breach of the duty he would have owed the beneficiaries of the estate had probate been granted to him, should be disallowed. 38Accordingly, I will direct that the Manager, Costs Assessment, refer Mr Latham's bill for assessment pursuant to the orders of 7 August 2013, such assessment to be in accordance with these reasons. 39Mr Latham sought an order that if Mr Watson contended that costs had been incurred by Mr Latham or any other party in breach of that person's duty, or costs had been incurred by a party having acted unreasonably in terms of Pt 42 r 25(2)(a), or for his own benefit in terms of Pt 42 r 25(2)(b), then Mr Watson should file and serve a notice of motion seeking orders to that effect, so that the charge would be determined by a judge rather than by a costs assessor. 40It would not be appropriate to make such an order. All the parties to the deed that was implemented by the orders of 7 August 2013 agreed to Mr Latham's costs being assessed on the trustee basis. They invoked the provisions of the Legal Profession Act and the rules that provide for a costs assessor to determine whether, and if so, to what extent, costs were not properly incurred, and provide rights of appeal and review from the costs assessor's determination. Nor would it be possible to draw any clear line as to what kinds of charges of impropriety would be more appropriate to be determined by a judge than by a costs assessor. 41There is an implied liberty to apply if any further orders are needed for the working out of the orders made on 7 August 2013 (Phillips v Walsh (1990) 20 NSWLR 206 at 210). 42Mr Hubbard was properly joined as a respondent to the present application. He took no substantive part in it, but asked for his costs of the motion. Mr Watson is entitled to his costs of the application on an indemnity basis because he is the trustee of the estate. Mr Latham has substantially succeeded on his application. The appropriate orders are that Mr Watson's costs of Mr Latham's notice of motion filed on 14 May 2014 be paid out of the estate on the indemnity basis and that the costs of the plaintiff (Mr Latham) and defendant (Mr Hubbard) be paid out of the estate on the ordinary basis. Those costs should include the costs of the hearing on 13 May 2014 where I refused leave to file the notice of motion originally proposed and made directions for the filing and hearing of the motion that was filed. The hearing on 13 May was incidental to the notice of motion. 43For these reasons I make the following orders: