(2) If the answer to question 1 is "yes", are the defendants liable by clause 17 of the trusts to repay to the trustee all money and other benefits received by each of them under any of the trusts?
11 Whether or not it would otherwise have been necessary to resolve this question in proceedings 5032/06, it is obviously a question of considerable significance to the future management of the trusts, regardless of what if any relief is granted in the substantive proceedings. Moreover, its resolution now will remove one of the disputed issues which potentially separates the parties, and may facilitate the reduction of the overall issues between them.
12 As I now apprehend it, with the benefit of the careful argument of Mr R M Smith SC for Leerac, and Mr D E Grieve QC for the defendants, there are three main issues to be resolved. The first is one of construction, which itself has two aspects: namely, just what "actions against the trustee" are caught by clause 17 on its proper construction; and is the operation of clause 17 limited to "specified trusts" or does it extend to the trustee in respect of the head trust? The second main question is that of the validity of clause 17 upon its proper construction, and in particular whether it is void as contrary to public policy for purporting to oust the jurisdiction of the Court. And the third main issue is the application of the clause, properly construed, to the present circumstances: in particular, is proceeding 5032/06, in which the only defendants are the executors, an action against the trustee Leerac?
Construction of clause 17
13 I turn first to the question of the construction of the "non-contest" clause. One must start from the position that it is plainly established that exemption clauses, not only in the field of negligence, but a fortiori in the field of trusts, are to be construed strictly [McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623, 641C (Young J); AN v Barclays Private Bank & Trust (Cayman) Ltd [2007] WTLR 565, [71] (Smellie CJ); Midland Bank Trustee (Jersey) Ltd v Federated Pension Services Ltd [1997] 2 LRC 81 (Jersey CA)].
14 Although it did not initially feature in the argument, as it ultimately transpires a central question is just what is meant in clause 17 by the concept of "any action in any Court whatever or wheresoever situated against the trustee ... other than for wilful default". Much of the argument in support of the validity of the clause 17 has focused on its relationship with the preceding clause 13, which effectively exonerates the trustee from liability except in respect of dishonesty, a concept substantially equivalent to wilful default [see Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 (Romer J)]. On the other hand, the argument for the invalidity of clause 17 has focused largely on the proposition that conditions against taking proceedings that have the effect of preventing any questions of administration without limit, and that would prevent beneficiaries from securing due administration of the Will by the trustees, are void as contrary to public policy [Permanent Trustee Company v Dougall (1931) 34 SR (NSW) 83, 86-87 (Harvey CJ in Eq)]. Accordingly, a fundamental question to be resolved is whether clause 17, on its proper construction, is limited to actions asserting liabilities against the trustee, or extends to actions to secure the due administration of the trust.
15 If the type of action contemplated by clause 17 includes the latter, then it would have the effect that any action seeking the trustee's removal and replacement by another - for example, on grounds of bankruptcy, or (in the case of a natural trustee) insanity, or absence from the jurisdiction or other inability to perform the trusts - would nonetheless be an action against the trustee, attracting the consequence that the plaintiff beneficiary's interest would be forfeited. Prima facie, it seems unlikely that the settlor would have intended to bring about that consequence in the case of an action brought to secure the due administration of the trust in circumstances where the trustee was no longer able or appropriate to administer it. Moreover, while bearing in mind that questions of construction should be resolved before questions of validity, so that whether the clause is valid depends on its proper construction and not vice versa, nonetheless the Court will, in cases of ambiguity, favour a construction which promotes validity over invalidity.
16 The nature of the action contemplated by clause 17 is informed to some extent by the nature of the action specifically excluded - namely, one for wilful default. Wilful default is a well-understood concept in respect of actions asserting liabilities against trustees, in which context trust deeds and even statutory provisions often provide exemptions "other than for wilful default". But wilful default is neither a necessary nor sufficient material fact in an action for a removal of a trustee - although facts which would amount to wilful default in a suit for breach of trust would be relevant considerations in an application for removal. The exclusion of actions for wilful default from the protective effect of clause 17 suggests that the settlor's intention was to deter actions asserting liabilities against the trustee, as distinct from actions for administration of the trusts (even if they include actions for removal and replacement of the trustee).
17 For those reasons, the better construction of clause 17 is one to the effect that it is triggered only by actions asserting liability against the trustee for breach of trust, and not by actions to secure the due administration of the trust - including actions for the appointment of a new trustee, notwithstanding that the trustee is a necessary defendant to such actions. On that construction, the present suit - which claims no relief beyond the removal of the trustees and their replacement, and does not assert a liability against them - would not trigger clause 17.
18 The second question of construction is whether clause 17 is limited in its operation to actions "in respect of any matter arising under or in relation to a specified trust".
19 Each of the trust deeds makes provision for a partial vesting or distribution by the establishment of a sub-trust or separate trust for one or more of the beneficiaries and the transfer of trust assets to such a trust, called "a specified trust". The evidence is that no specified trust, as defined, has ever been constituted. The defendants submit that the plain wording of clause 17 has the effect that it is only an action against the trustee, or a present or former trustee of a specified trust, "in respect of any matter arising under or in relation to a specified trust", that is caught.
20 The concept of an action against the (head) trustee in respect of a matter arising under or in relation to specified trusts is at best an improbable one. Moreover, the fact that the clause provides, in effect, for forfeiture of the "right of a beneficiary hereunder" suggests that it is concerned as much with the head trust as with any specified trust. The reference to an action against the (head) trustee would be inapt to a situation in which the clause related only to matters arising under or in relation to a specified trust; as the head trust is not itself a "specified trust", and liability in respect of any matter arising under or in relation to a specified trust would be incurred by the trustee of that trust, and not by the head trustee.
21 In my view, Mr Smith's submission is correct: the clause should be read as if it were punctuated as "against the trustee, or any person who shall at any time have been a trustee of a specified trust in respect of any matter arising under or in relation to a specified trust, other than for wilful default ... ".
Validity of clause 17
22 I turn then to the question of validity, lest my conclusion on the first question of construction be incorrect. The defendants submit that clause 17 is void as contrary to public policy, on the ground that it would oust the jurisdiction of the Court.
23 The position on the authorities can, I think, be summarised as follows: First, there is no general rule against the validity of conditions discouraging beneficiaries from taking proceedings to contest a Will, although there are some limits on this [Evanturel v Evanturel (1874) LR 6 PC 1; Cooke v Turner (1846) 15 M & W 727; (1846) 153 ER 1044; AN v Barclays Private Bank & Trust (Cayman) Ltd, [54]]. Secondly, however, where there can be seen in a statute conveying a beneficial right to make applications for provisions out of an estate an intention that such jurisdiction cannot be excluded by private arrangement - as, for example, under the testators family maintenance legislation - conditions which are calculated to deter the invocation of that jurisdiction are contrary to public policy and void [Leiberman v Morris (1944) 69 CLR 69; Barns v Barns [2003] HCA 9; (2003) 214 CLR 169; In the will of Gaynor [1960] VR 640, 642-644 (O'Bryan J)]. This rule is based on discerning an (unexpressed) statutory policy against it being possible to contract out of the rights given by the relevant legislation [Leiberman v Morris; Smith v Smith (1986) 161 CLR 217, 235 (Gibbs CJ, Wilson and Dawson JJ)]. Thirdly, a condition against the taking of any proceedings whatsoever having the effect of preventing any question of administration of a trust or Will, or securing the due administration of the trust or Will by the trustees, is too wide and will be void for ousting the jurisdiction of the Court, although one which merely discourages disputing the validity of the Will or trust will not offend that rule [Permanent Trustee Company v Dougall, 86-87]. Fourthly, a clause in a trust deed may validly exempt the trustee from obligations and liabilities other than those contained in that irreducible core of a trustee's obligation - namely, to act honestly and in good faith. It is not contrary to public policy to exclude a trustee's liability even for gross negligence, but it is to exclude liability for dishonesty or bad faith [Armitage v Nurse [1998] Ch 241 (CA)].
24 There is nothing irreconcilable about the observations of Harvey CJ in Eq in Permanent Trustee Company v Dougall and those of Millet LJ in Armitage v Nurse. The observations of Harvey CJ in Eq were to the effect that a condition against taking any proceedings whatever was too wide, as it would have the effect of preventing beneficiaries from securing due administration without limitation. Armitage v Nurse does not suggest that trustees may be exonerated from all obligations whatsoever, recognising that there is a reducible core of obligation to act honestly and in good faith from which they cannot be exempted.
25 Reference was made to the judgment of Madden CJ in the Supreme Court of Victoria in Wallace v Wallace (1898) 24 VLR 859, in which his Honour held that a provision in a Will - to the effect that any person entitled to any benefit under the Will who took any proceedings against the executors or instituted any suit for the administration of the estate should absolutely forfeit all benefit under the Will - was void to the extent that it had no force or effect upon a bona fide and reasonable claim, although it might have been effective against a frivolous or vexatious action. (In New South Wales, Permanent Trustee Company v Dougall would tell against its validity in respect of administration suits). Somewhat similarly, in AN v Barclays Private Bank & Trust (Cayman) Ltd, Smellie CJ held that a non-contest clause was not to be construed as to operate contrary to established principles and must be read by implication as permitting not only contests which were successful but also contests which were justifiable, so that it should be read "whosoever unjustifiably contests the validity of this deed ...". I regret to say that, to my mind, the approach adopted by Madden CJ and Smellie CJ appears to put the question of validity before the question of construction. Construction is a process intended to ascertain the intent of the settlor or testator, and it is only once that intent is ascertained that one can decide whether the clause is valid or not. This principle is often recognised in the field of covenants in restraint of trade, where it is plainly established that one construes the covenant first and then determines whether as so construed it offends public policy. To my mind, nothing is clearer than that the testator in Wallace v Wallace and the settlor in AN v Barclays Private Bank & Trust (Cayman) Ltd intended to deter all suits, justifiable or unjustifiable, and such clauses, it seems to me, cannot be saved by reading them down, contrary to the settlor's intention, to bring them within the scope of public policy.
26 Ultimately, two things, follow. The first is that if the construction of clause 17 which I have preferred is correct, then it does not offend against public policy. It would not prevent actions to secure due administration. It would only deter actions asserting liability for breach of trust against the trustees, other than those for wilful default. Armitage v Nurse shows that liability for such breaches may permissibly be excluded, and it must follow that a provision which has the effect of deterring a party from approaching the Court to assert such a liability, where that liability has already been permissibly excluded by another clause in the deed, is not contrary to public policy. The second is that if I be incorrect as to the construction of clause 17, and its true purport would be to operate on an application to secure due administration of the trust (including an application for the removal of the existing trustee), it would, in my view, be contrary to public policy. Neither Madden CJ nor Smellie CJ suggested that the clauses which confronted them could be valid if given effect according to their absolute terms. Consistently with what Harvey CJ in Eq said in Permanent Trustee Co v Dougall, to give effect to clause 17 if it operated on actions to secure the due administration of the trust and for the removal and appointment of the trustees would be inconsistent with the rights of the beneficiaries to have the trust duly administered, and would exclude the Court's inherent jurisdiction in the supervision of trusts to remove and appoint trustees, and the statutory jurisdiction conferred by Trustee Act 1925, s 70.
27 Accordingly, if contrary to my view, clause 17 properly construed has the wider operation that it would be triggered by the present proceedings, then in my opinion it would be void as contrary to public policy.
Application of clause 17 to present case
28 I turn then to the third question, which is the application of the clause in the present case. The trustee Leerac is not a defendant. No relief is sought against Leerac - not even its removal as trustee of the inter vivos trusts. Leerac submits that nonetheless, in substance, the proceedings are against it because they are adverse or hostile to it, or because they are brought against its directors and officers for acts and omissions in their capacity as its directors or officers. Leerac further submits that the purpose of clause 17 is served by giving it a broader construction, encompassing actions brought against the trustee's directors as well as actions brought against the trustee itself.
29 The Statement of Claim in proceedings 5032/06, originally and as amended, asserts in paragraph 15 that as directors of Leerac, the executors owed certain duties to the plaintiffs and their sisters. Elsewhere, breach of those duties is alleged. But what is alleged is a duty owed by the executors - albeit one in their capacity as directors of Leerac - to the beneficiaries; not a duty owed by Leerac.
30 There is significant authority against the proposition that directors of a trustee company owe fiduciary obligations to the beneficiaries of the trust merely by reason of their position as directors [Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504; Young v Murphy [1996] 1 VR 279, 301-2 (JD Phillips J); Cope v Butcher (1996) 20 ACSR 37; Collie v Merlaw Nominees Pty Ltd [1998] VSC 203, [96] (Byrne J); but cf Hurley v BGH Nominees Pty Ltd (No 2) (1984) 37 SASR 499]. On the other hand, there is clear authority that, notwithstanding the legal distinction between a company and its shareholders, the office of a director in a proprietary company may, at least for some purposes, be a fiduciary one in relation to the shareholders, so that a direct duty is owed by the director to the shareholder or shareholders [Coleman v Myers [1977] 2 NZLR 225, 276-280 (Mahon J); Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538, not following Percival v Wright [1902] 2 Ch 421]. Whether such a duty is owed by the executors, by reason of their capacity as directors of Leerac, to the beneficiaries is, and no doubt will remain, a live issue in the proceedings. But if any such duty as that for which the present defendants contend is established, it remains the fact that it will be a duty owed by the executors personally - albeit derived from their position as directors of Leerac - to the beneficiaries, and not a duty owed by Leerac.
31 The relief claimed in proceedings 5032/06 is sought exclusively against the executors, and it is their removal from their position as trustees of the Will that is the ultimate relief sought. Nothing is sought against Leerac. Leerac is not a party. In my view, it cannot be said that this is an action against Leerac.
32 That conclusion is reinforced by two matters. The first is the rule that exclusion clauses of this type are to be construed strictly, to which I have already referred. The second is the decision of Wild J in the High Court of New Zealand in Hansen v Young [2003] 1 NZLR 83. Mr Hansen and Mr Young were co-trustees and co-executors of a deceased estate, Mr Hansen also being the residuary and major beneficiary and Mr Young also being the estate's solicitor. The Will contained a clause indemnifying the trustees in respect of loss caused by them in the administration of the estate. Mr Hansen brought proceedings against Mr Young, alleging a breach of Mr Young's duty in his capacity as solicitor to the executor, and of his retainer to manage and administer the estate competently. The main question in the case was the capacity in which Mr Young acted: if he were acting as executor, he was entitled to be indemnified out of the trust estate; if he were acting as solicitor, he was not. The Court held that he was acting as solicitor, illustrating that a narrow operation is to be given to clauses indemnifying or excusing trustees, and that differences in legal personality and in the capacity in which the person concerned is acting are important.
Conclusion
33 Accordingly, I conclude that upon the proper construction of clause 17, the proceedings brought by the defendants in 5032/06 are not proceedings of the type contemplated by clause 17: first, because they are proceedings for the administration of the trust and not proceedings asserting a liability for breach of trust against the trustee; and secondly, because they are not against the trustee at all. Were I wrong in my view that these were not caught by clause 17 because they are not proceedings asserting a liability for breach of trust, then I would hold that clause 17 was void as contrary to public policy.
34 It follows that question 1 in the Summons will be answered in the negative. Question 2 then does not arise. My orders are: