Ludwig v Jeffrey

(1) A Further Costs Assessment?

1. The parties are at issue about the appropriate form of order to be made for the release of funds from the account of the independent solicitor. Mr Jeffrey's proposal requires the immediate release of $139,558.78, which is the sum of the three amounts identified in his proposed declarations 3(a), (b) and (c), and he seeks the release of further funds relating to the motion before Lindsay J (declaration 3(d)) after a costs assessment. Orders 5 and 6 of the orders proposed by Mr Jeffrey are as follows: "5. ORDER that the amount of $139,558.78, being the sum of the amounts in declaration (3)(a) to (c), is to be released by the independent solicitor to the defendant/cross-claimant within 7 days of notification of these orders. 6. ORDER that the independent solicitor release to the defendant/cross-claimant: a. any amount jointly notified by Shad Partners and Whitfields Solicitors as being the amount referred to in declaration (3)(d), with that amount to be released within 7 days of such notification; or b. any amount assessed as being the amount referred to in declaration (3)(d), notified by service of a Certificate of Determination of Costs pursuant to the Legal Profession Uniform Law Application Act 2014 (NSW), with that amount to be released within 7 days of such notification."
2. Mr Jeffrey's proposal treats the maximum cost limits imposed by the Court in declaration 3(b) and (c) of the amended draft standard short minutes as reflecting actual Court approval of the reasonableness of the legal costs in question, so that they can be immediately released.
3. In contrast, the short minutes of order proposed by the Ludwigs accepts that the amount of $29,558.78 provided for in their proposed declaration 3(a) can be released by the independent solicitor within seven days of these orders. But the Ludwigs' proposed orders do not permit the immediate payment out of any of the sums in declarations 3(b), (c) or (d) other than by agreement or as a result of the determination and certification of an amount after the completion of a costs assessment under Legal Profession Uniform Law Application Act 2014.
4. Orders 5 and 6 of the orders proposed by the Ludwigs are as follows: "5 ORDER that the amount of $29,558.78, being the sum of the amount in declaration (3)(a), be released by the independent solicitor to the defendant/cross-claimant within 7 days of notification of these orders. 6 ORDER that the independent solicitor release to the defendant/cross-claimant: a. any amount jointly notified by Shad Partners and Whitfields Solicitors as being the amount referred to in declaration (3)(b) - (d), with that amount to be released within 7 days of such notification; or b. any amount assessed as being the amount referred to in declaration (3)(b) - (d), notified by service of a Certificate of Determination of Costs pursuant to the Legal Profession Uniform Law Application Act 2014 (NSW), with that amount to be released within 7 days of such notification."
5. The parties are therefore at issue as to whether there should be a costs assessment before payment out from the independent solicitor's fund under declarations 3(b) and (c). They approach the issue in different ways.
6. Noting that the Court's draft of declaration 3(b) and declaration 3(c) refers respectively to "a maximum of $90,000" and "a maximum of $20,000", the logic of Mr Jeffrey's proposal to pay out those sums immediately is that it is highly likely that, on a costs assessment where Mr Jeffrey has claimed considerably more than those two sums for those two periods ($120,000 and $25,000 respectively), the amount recoverable will exceed the maxima the Court has imposed. Mr Jeffrey is essentially saying: why go through the burden of a full costs assessment, if it can readily be determined that the cap is going to be exceeded?
7. But the Ludwigs' draft insists on a costs assessment before any payment out under declarations 3(b) and (c), unless there is agreement. The logic of the Ludwigs' position is that it is unlikely that the cap will be exceeded after a costs assessment. They may be right about this. They may be wrong. But if they want this tested they are entitled to have it tested. But the test will be at the parties' risk as to costs.
8. But the parties should not have to go through a full costs assessment to find out if the Court's imposed maximum amounts are exceeded. The Court has already emphasised the disproportionate expenditure of legal fees in relation to the trust property in this case. Adding the burden of a costs assessment will further aggravate the disadvantages that these parties are suffering through this litigation.
9. If the parties cannot reach agreement on this issue, the Court will cut through the problem. This is an apt case for the Court to order a specified gross sum instead of assessed costs, under Civil Procedure Act 2005, s 98(4)(c). The case law emphasises the adaptability of s 98(4)(c) to new circumstances: Harrison v Schipp (2002) 54 NSWLR 738; [2002] NSWCA 213 (Giles JA) at [21]-[22]; Hamod v New South Wales [2011] NSWCA 375 at [819]; Zepinic v Chateau Constructions (Aust) Ltd (No 2) [2014] NSWCA 99 at [28].
10. All the Court needs to do here is to determine if the quantum of a specified gross sum instead of assessed costs in respect of the periods in declarations 3(b) and (c) is more or less than $90,000 and $20,000 respectively. If it is less, the Court will fix the figure. If it is more, the Court will authorise out the payment of those two sums. The Court will also make a specified gross sum costs order in respect of the costs of the motion before Lindsay J: declaration 3(d). There is no reason why the sum of $29,558.78 provided for in declaration 3(a) cannot be paid out by the independent solicitor to Mr Jeffrey immediately and the orders will so provide.
11. The Court has made directions below that are preliminary to fixing a specified gross sum instead of assessed costs. The parties will need to direct the Court with precision to the materials already filed and to identify their bills of costs to reduce expenditure on this issue. The Court does not require and will not permit expert evidence on the s 98(4)(c) determination. All that is required is the memoranda of fees and the parties' short submissions.
12. But the Court points out that, to the extent that further expenditure is incurred on this issue, the Court may make a costs order against the party who is unsuccessful. And if Mr Jeffrey is the successful party, that costs order may be made on an indemnity basis.
13. Success must be defined in advance. Mr Jeffrey will be successful if the specified gross sum instead of assessed costs exceeds the combined cap amounts in declaration 3(b) and 3(c) by more than 5%. The Ludwigs will be successful if the specified gross sum instead of assessed costs falls short of the combined cap amounts in declarations 3(b) and 3(c) by more than 5%.

(2) Costs of the Motion before Lindsay J

1. Mr Jeffrey's short minutes of order propose that the costs of the motion before Lindsay J be recoverable on an indemnity basis. The Court's draft amended standard short minutes indicated that "reasonable" costs could be recovered. This obviously excludes costs which are "unreasonably" incurred. In light of the Court's discussion in Ludwig v Jeffrey (No. 2), there is no difference in substance between these positions. Costs awarded on an indemnity basis will not include costs unreasonably incurred. The Court will amend declaration 3(d) as Mr Jeffrey has requested to refer to costs recovery on an indemnity basis.

(3) The Possible Application of Trustee Act 1925, s 100A

1. The Ludwigs seek to amend declaration 3(b) of the draft standard short minutes. The amendment the Ludwigs seek is the addition of the words "subject to s 100 Trustee Act 1925" after the words "of this declaration" in their proposed declaration 4(b). The effect of the amendment is to limit the capacity of Mr Jeffrey to exercise his right of personal indemnity against the Ludwigs, to the extent that the fund held by the independent solicitor might be insufficient to provide complete indemnity to him.
2. The Court had not understood from the parties' previous submissions that there was any issue about the Ludwigs' personal obligation in equity to indemnify Mr Jeffrey in respect of liabilities he incurred as an incident of his ownership of the trust property. Indeed, so far as the Court can see, Trustee Act, s 100A was not mentioned anywhere in the Ludwigs' written submissions in these proceedings until it was raised in the Ludwigs' draft short minutes of order forwarded to the Court on 7 December 2020.
3. The Ludwigs are seeking to raise a new issue. This is regrettable, given the history of these proceedings. If the Ludwigs now wish to propound this issue, the Court will require them to explain why it was not raised earlier. It may be that it could have been dealt with earlier and more cost-efficiently, at the same time as all the other issues. But if it now requires a separate set of submissions, another appearance and generates further delay to the final resolution of these proceedings, the Ludwigs may have to bear the costs of the litigation of this issue, whatever the outcome. The Court has not decided that yet, but these observations are included to explain a direction at the end of these reasons for the Ludwigs to file a one page submission at the time of relisting the matter to deal with this issue, if that is the course they take.
4. The Court will briefly state the law applicable to this issue as the Court presently understands it. The Court is doing this for three reasons: to assist the parties to decide what course to take in relation to this issue, to assist the parties to minimise their further costs expenditure, and to help the parties decide whether they wish to attempt to resolve the issue by negotiation or mediation.
5. The long-standing principle upon which the Court's declaration 3(b) of the draft standard short minutes was based is stated in the decision of the Privy Council in Hardoon v Belilios [1901] AC 118 ("Hardoon"). Hardoon stands as authority for the proposition that the sole beneficiary of a trust who is sui juris and absolutely entitled is personally bound to indemnify the trustee for liabilities properly incurred as incidental to the trustee's retention of the trust property. The principle in Hardoon extends to trusts with more than one beneficiary, provided all the beneficiaries are sui juris and absolutely entitled: see McGarvie J's decision in JW Broomhead (Vic) Pty Ltd (in liquidation) v JW Broomhead Pty Ltd [1985] VR 891 at 936-937; (1985) 9 ACLR 593, and Cole J's decision, when his Honour was a member of the Court of Appeal, in Causley v Countryside Pty Ltd (No 3) (Unreported, NSWCA, 2 September 1996), at 5-6 and see H A J Ford, "Trading Trusts and Creditors' Rights" (1981) 13 Melbourne University Law Review 1, 7.
6. In this trust the Ludwigs would appear to be both sui juris and between them they are absolutely entitled to the whole of the trust property. There are no successive interests involved here. Therefore (subject to the Court hearing any argument to the contrary), the Ludwigs would appear to be prima facie personally liable in equity to indemnify Mr Jeffrey in respect of all the liabilities he incurred as an incident of his legal ownership of the trust property.
7. But the Ludwigs' proposed amendment highlights the recent introduction of s 100A into the Trustee Act, a provision which has the effect of abolishing the rule in Hardoon. Section 100A provides as follows: "100A Limitation of liability of beneficiaries in respect of trustees (1) The rule of equity known as the rule in Hardoon v Belilios is abolished. [Note: The rule is considered to have originated in the decision of the Privy Council in Hardoon v Belilios [1901] AC 118. The NSW Law Reform Commission recommended the abolition of the rule in Report 144 (2018): Laws relating to beneficiaries of trusts. This section gives effect to Recommendation 2.1 of that Report.] (2) Accordingly, a beneficiary under a trust (whether created before, on or after the commencement day) is not liable to indemnify the trustee or make any other payment to the trustee or any other person for any act, default, obligation or liability of the trustee arising on or after the commencement day unless - (a) the beneficiary has agreed in writing to be liable, or (b) subsection (3) applies. (3) This section does not prevent a trustee of an investment trust from recovering any amount that a beneficiary under the trust is liable to pay for a right, interest or other entitlement to profits, income or other returns generated by the trust. (4) To avoid doubt, this section does not affect any liability that a beneficiary under a trust may have in a capacity other than as a beneficiary. (5) In this section - "commencement day" means the day on which this section commenced. "investment trust" means any trust (however described) created for the purpose of generating profits, income or other returns for its beneficiaries using funds provided by them and includes a unit trust scheme within the meaning of the Duties Act 1997."
8. As the legislative note to s 100A indicates, the provision was introduced into the Trustee Act as a result of a report of the NSW Law Reform Commission recommending the abolition of the rule in Hardoon: New South Wales Law Reform Commission, Report 144 (2018): Laws Relating to Beneficiaries of Trusts, Recommendation 2.1.
9. Trustee Act, s 100A was introduced into the Trustee Act by the Justice Legislation Amendment Act (No 2) 2019, Act number 20 of 2019, which commenced on the date it received the royal assent, 22 November 2019. If the parties are going to argue about the possible application of s 100A, the provision raises several sub-issues in relation to both Mr Jeffrey's liability for legal costs and his tax liability for his transfer of his interest in the Chester Hill property. Both these will need to be addressed.
10. As to Mr Jeffrey's liability for costs, the rule in Hardoon was not abolished until 22 November 2019. The requirement for a beneficiary's agreement in writing as a statutory precondition to the beneficiary's equitable liability "to indemnify the trustee", only arises "for any act, default, obligation or liability of the trustee arising on or after the commencement day": s 100A(2). The rule in Hardoon operates here without statutory intervention until 22 November 2019. Section 100A only covers the last 2 or so months of the period from May 2018 to February 2020, during which the Court has capped Mr Jeffrey's costs at $90,000. And it covers Mr Jeffrey's costs of the subsequent period, which the Court has capped at $20,000, and the costs before Lindsay J on 2 June 2020. The total costs caught by s 100A may not be very large.
11. But if Mr Jeffrey signed cost agreements with Mr Whitfield before 22 November 2019, requiring Mr Whitfield to act generally in these proceedings until their conclusion, a question arises as to whether costs liabilities under those costs agreements, but incurred after that date, will be caught by s 100A.
12. As to Mr Jeffrey's tax liabilities, the sale of the Chester Hill property occurred after 22 November 2019, in the first half of 2020. But this does not automatically mean that s 100A absolves the Ludwigs from personal liability to indemnify Mr Jeffrey. Sub-section 100A(4) is carefully crafted to preserve a beneficiary's personal liability to indemnify a trustee other than by virtue of being a beneficiary: "this section does not affect any liability that a beneficiary under a trust may have in a capacity other than as a beneficiary".
13. The case law in this area considers as a separate category situations where the beneficiary acts beyond the role of beneficiary in relation to the trustee, especially where the beneficiary is also the creator of the trust or positively encourages the trustee to incur trust liabilities. The beneficiary can incur liability at law in such situations, in contract or in restitution. A common feature of such liability in restitution is one person requesting another to incur a liability which would otherwise have fallen on the first person: see for example the statements of this principle in Matthews v Ruggles-Brise [1911] 1 Ch 194 and Fraser or Robinson v Murdoch (1881) 6 App Cas 855, 872. In this case, the way the trust was created, and the way that the Ludwigs proposed the sale of the Chester Hill property, might give rise to such liabilities.
14. Although ultimately the Court made orders on 19 December 2019 for the sale of the property, the history may well be consistent with the Ludwigs requesting the sale and Mr Ludwig acquiescing in the sale. His incurring a legal liability at their request may give rise to an independent liability in restitution to the Ludwigs. If the application of s 100A becomes an issue, these are some of the matters that may have to be argued. They are presently all open questions.
15. The application of Trustee Act, s 100A should not be left unresolved to some future application or future proceeding. The issue must be faced now and brought to finality will all other issues. This will allow this intra-family dispute to be quelled.
16. If the Ludwigs wish to maintain this proposed amendment to the orders, then the issue cannot be determined without further written submissions from the parties. If the Ludwigs decide they wish to pursue this issue, then they should apply to the chambers of Slattery J within 14 days for the relisting of the proceedings, providing at the same time a one page submission explaining why they did not raise this issue earlier in these proceedings. If they contend the issue has been raised before they should point out where and when they say it was raised. If they do not apply within 14 days to relist the proceedings to pursue this issue, they will be taken to have abandoned it.
17. In the meantime, the Court will not make the declaration in the draft standard short minutes dealing with the Ludwigs' personal liability to indemnify Mr Jeffrey, if the funds held by the independent solicitor are insufficient. The orders will reserve that issue for further consideration. As the 30 November 2020 judgment foreshadowed, the Court was proposing to make no order as to costs to the intent that each party would bear his or her own costs of the proceedings. But the Court will now not make this notation. Instead, it will reserve the issue of the costs of the proceedings, until these additional issues are resolved.
18. In conclusion, the conduct of these proceedings has now turned what started out as an honourable voluntary family arrangement into a legal calamity that none of these parties deserves. The accumulation of legal fees has now substantially destroyed the trust property, contrary to the objectives specified in Civil Procedure Act 2005, s 60. An arresting feature of this case is that the Court has not yet seen clear evidence that the lawyers engaged in this matter have sought with any vigour to avoid such a disastrous outcome.
19. But containing costs is not just a matter for lawyers. The Court expects that the legal representatives of the parties will have provided a copy of Ludwig v Jeffrey (No 2) to the parties and will do the same with this judgment. The Court's observations in both judgments should assist the parties to guide their legal representatives towards a more conciliatory posture in these proceedings.
20. And so far as Mr Jeffrey is concerned, the Court's restatement of the principle from Australian Securities and Investments Commission v Letten (No 17) (2011) 286 ALR 346; (2011) 87 ACSR 155; [2011] FCA 1420 in Ludwig v Jeffrey (No 2) (at [84]) reminds that to be indemnified from the trust a trustee must not act "with an absence of the care and diligence that a person of ordinary prudence should exercise". A person of ordinary prudence involved in litigation would commonly take active steps to attempt to contain legal costs of the trust at a level that is proportionate to the trust estate.
21. The Court will not force another mediation upon these parties at this stage. The first one failed. Another will generate more legal costs. But negotiations may be a way to limit further financial damage to the parties.

Conclusions and Orders

1. For these reasons, the Court makes the following orders and directions: 1. Note that for the purposes of these orders the expression "the Trust" means the trust by which the defendant/cross-claimant held a one third interest as joint tenant in the Chester Hill property described in the Statement of Claim on trust for the benefit of the plaintiffs/cross-defendants; 2. Note that the independent solicitor, Mr Zaki Hajjar, holds approximately $204,052 in trust pursuant to Order 3 made by the Court on 19 December 2019; 3. Declare that the defendant/cross-claimant is entitled to indemnity out of and may apply the fund held by the independent solicitor, for the defendant/cross-claimant's legal costs and expenses incurred as trustee in the administration of the Trust, for the following periods in the following amounts, or up to the following maximum limits: 1. $29,558.78 for legal costs and expenses incurred for the period prior to the commencement of these proceedings on 9 May 2018; 2. a maximum of $90,000 for legal costs and expenses incurred in the period between 9 May 2018 and 20 February 2020; 3. a maximum of $20,000 for legal costs and expenses incurred in the period after 20 February 2020 up to the date of judgment on 30 November 2020 but excluding costs associated with the conduct of the motion before Lindsay J in June 2020; and 4. the legal costs and expenses incurred on an indemnity basis in the conduct of the plaintiffs/cross-defendants' motion before Lindsay J on 2 June 2020; 1. Declare that the defendant/cross-claimant is entitled, subject to Note (5) and Order (6), to apply the funds presently held by the independent solicitor, 1. in satisfaction of the indemnities described in Declaration (3); and 2. to meet any taxation or other liabilities associated with his administration of the Trust, other than legal costs and disbursements; and 1. Note that the independent solicitor is at liberty to pay the sum of $29,558.78, referred to in Declaration 3(a), to the solicitors for the defendant. 2. Stay the payment by the independent solicitor of any monies pursuant to Declarations 3(b) to (d), until the Court makes a determination pursuant to Civil Procedure Act 2005, s 98(4)(c) of a specified gross sum instead of assessed costs in respect of the costs the subject of Declaration 3(b) to (d) ("the unassessed costs"). 3. To facilitate the determination of a specified gross sum instead of assessed costs in respect of the unassessed costs, direct the defendant by 16 February 2021 to: 1. Identify and provide the memoranda of fees and bills of costs and costs agreements that make up the claim for the unassessed costs; and 2. Provide a submission of no more than three pages, as to what specified gross sum the Court should fix instead of assessed costs in respect of the unassessed costs. 1. Direct the plaintiffs to provide by 23 February 2021 any evidence in reply and any submissions in reply (of no more than three pages) contesting the defendant's claim to a specified gross sum instead of assessed costs in respect of the unassessed costs. 2. The independent solicitor is at liberty to release to the defendant/cross-claimant any amount jointly notified by Shad Partners and Whitfields Solicitors as being the amount referred to in Declaration (3)(b) - (d), with that amount to be released within 7 days of such notification. 3. Reserve for further consideration the question of whether if the funds held by the independent solicitor are insufficient to satisfy the indemnities described in Declaration (3), or to meet any taxation or other liabilities described in Declaration 4(b), that the defendant/cross-claimant is to be indemnified by the plaintiffs/cross-defendants personally for any such shortfall ("the personal indemnity issue"). 4. If the plaintiffs/cross-defendants wish to contest the personal indemnity issue they should notify the chambers of Slattery J by 10 February 2021 of a request to relist the proceedings and such notification should include a one page submission explaining why the personal indemnity issue was not raised earlier in these proceedings. 5. Reserve the question of whether any further costs orders will be made in the proceedings.

Amendments 05 March 2021 - [33] line 1, "caselaw" made two words 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: 05 March 2021