Makaritis v Makaritis

Supreme Court of NSW|2023-03-10|Before: Parker J

il Refining Pty Ltd v Hydrodec Australia Pty Ltd (No 2) [2021] NSWSC 336 Stanley v Lane Christensen Company [2006] WASCA 56 Ventura v Higgins [2018] NSWSC 909 Wardle v Agricultural and Rural Finance Pty Ltd (No 2) [2012] NSWCA 388 Woods v McKinlay (No 2) [2021] NSWSC 1510 Texts Cited: Jacobs' Law of Trusts in Australia, Heydon JD and Leeming MJ, (2016, 8th ed, LexisNexis Butterworths) Law of Costs, Dal Pont GE (5th ed, 2021, LexisNexis) Category: Costs Parties: Bill Makaritis (Plaintiff) Luke William Makaritis (First Defendant) Hellenic Property Holdings Pty Limited (Second Defendant) Representation: Counsel: B Zipser (Plaintiff) M Condon SC (Defendants)

Solicitor: Armstrong Legal (Plaintiff) File Number(s): 2020/221695 Publication restriction: Nil

Claims against Luke

Bill made claims for damages, or alternatively equitable compensation, against Luke personally. It was alleged that Luke (who was, and is, a solicitor) acted for his father in connection with the transfer of the Maryland property to HPH, and had breached his professional and fiduciary duties in that capacity. I found that Luke did not relevantly act as Bill's solicitor and the claims failed (J2 [186]-[189]). The parties agreed that, as a result, Bill's claims against Luke would be dismissed.

Form of constructive trust order over property

One of Bill's claims against HPH was a claim for the imposition of a constructive trust over the property because its acquisition had been the subject of a joint endeavour which had failed. The claim was based on the equitable doctrine recognised in Muschinski v Dodds (1985) 160 CLR 583 and Baumgartner v Baumgartner (1987) 164 CLR 137. I upheld this claim. It is common ground that, as a result, there will need to be a declaration imposing a constructive trust for the sale of the property and the distribution of the net proceeds of sale (after repayment of secured debt) to the parties, to be followed by a process of working out the precise quantum of the parties' entitlements under the trust. But the parties disagree about the form of the declaration.
I discussed this type of relief in some detail in my judgment in an earlier failed joint endeavour case, Woods v McKinlay (No 2) [2021] NSWSC 1510. I set out in the judgment some proposals about how the quantification process would work and how the orders would be formulated. The parties did not, however, proceed to the making of formal orders following delivery of my judgment and instead embarked on an accounting process which still has not been completed. As I understood them, however, counsel for the parties in the present case did not seek to re-argue any of the conclusions I reached in Woods, although there was some debate about whether those conclusions would necessarily apply here.
I take as my starting point the orders proposed by Deane J in Muschinksi, with which a majority of the High Court agreed. His Honour said (160 CLR at 623-624) that he would: make … an order declaring a constructive trust of the … property to the effect that, on and after the day on which the reasons for judgment of this Court are published, [the parties] hold their respective legal interests as tenants in common upon trust (after payment of any joint debts incurred in improvement of the property) to repay to each her or his respective contribution and as to the residue for them both in equal shares.
Deane J spoke of making a declaration to a particular "effect" and noted that there had been no argument about whether the parties' "financial contributions" might need to be "increased" to take account of contributions in the form of labour, or otherwise "adjusted". In the end, no declaration in final form was made by the High Court and the proceedings were remitted to this Court (see the note at 625). I have therefore treated the terms of his Honour's proposed orders as a guide, rather than as a rigid precedent, for the purposes of this judgment.
Five issues arise. I will deal with them in turn.
Date of imposition of constructive trust: Deane J's proposed declaration was expressed so as to impose a constructive trust on the parties from the date of delivery of the High Court's judgment. A constructive trust of this type is remedial in nature, but, as Deane J made clear in his judgment (160 CLR at 614), the imposition of such a trust reflects rights and obligations which, in the eye of equity, came into existence when the circumstances which gave rise to them occurred. In Woods (at [289]), I proposed a declaration imposing a constructive trust as from the date on which the relevant joint endeavour broke down. The parties in the present case were content to adopt the same approach and agreed that the date should be 16 March 2020.
On reflection, however, I think that backdating the imposition of the trust could cause accounting and taxation difficulties. Deane J's proposed declaration was to operate from the date of delivery of the High Court's judgment, rather than the date of final orders. But in the present case I see no advantage in pushing the date of imposition of the trust back to December 2022. Instead, it will be imposed as from the date final orders are made when this judgment is delivered. The agreed breakdown date will, nonetheless, remain relevant for some purposes in determining the quantum of the parties' entitlements under the trust.
Quantification of both parties' contributions: Deane J's proposed declaration provided for both parties to have their contributions to the joint endeavour quantified and paid out of the proceeds of sale of the property in question. It was of course necessary for both parties' contributions to be quantified if the surplus left over was to be divided between them, as the declaration went on to provide.
At trial, counsel for Bill presented a more limited claim than this. Counsel indicated that Bill was seeking only a constructive trust for his contribution to the joint endeavour. This would have left the surplus, if any, to HPH, and it would have been unnecessary to quantify HPH's contribution. I recorded this at J2 [173].
But in February this year, Bill's position changed. The most recent valuation information suggests that that there may be a surplus of several hundred thousand dollars, and Bill wishes to share in that surplus. That would make it necessary to quantify HPH's contribution.
Counsel for the defendants acknowledged, on HPH's behalf, that Bill never made any absolute commitment at trial to limit his claim to his contribution: see J2 [175]. But counsel submitted that I should not, at this point, permit an enquiry into the quantum of HPH's contribution.
Counsel pointed out that the proceedings had already been lengthy and expensive. The quantum of Bill's contribution had virtually been agreed: the parties' rival figures lay between $242,000 and $244,000. If HPH's contribution now had to be quantified, there would be a further process which, based on experience so far, would in all probability prove lengthy and expensive. Counsel submitted that the cost of the litigation was becoming, if it had not already become, disproportionate to the amount at stake. Counsel also noted that Bill had so far been legally aided, and the limit on costs recoverable against him (see [146] below) had long since been exceeded. In counsel's submission, this made the further prolongation of the proceedings especially unfair.
The concern with cost and delay is a point well taken. I shall have something more to say about this when dealing with costs in due course. But in the end, on my findings, Bill has a legal entitlement to a share of the surplus. It appears likely that there will be a surplus, and the amount in question, although not large in absolute terms, could be significant for Bill. Furthermore, it may be necessary to work out both contributions anyway, for the purpose of determining the taxable capital gain on the sale.
It must, however, be understood that the making of the declaration will be a watershed in the conduct of the proceedings. It will represent the final determination of Bill's rights as against HPH. The further process of quantifying the parties' entitlements will be a distinct step. Usually, a trustee who is required to take accounts as part of the administration of the trust is entitled, subject to disqualifying conduct, to reimbursement out of the trust assets of all the costs of doing so (to the extent that those costs are not recovered from other parties): Trustee Act 1925, s 59(4); Uniform Civil Procedure Rules 2005, r 42.25; Heydon JD and Leeming MJ, Jacobs' Law of Trusts in Australia (2016, 8th ed, LexisNexis Butterworths) at [21-04].
In the course of final submissions, at counsel's request, I adjourned to allow counsel to explain this to Bill, but the result was that Bill reaffirmed his instructions. In these circumstances, I do not think that I should deny Bill his entitlement to share in the surplus if he insists on it. Hopefully, the exercise will be relatively simple and will not require formal accounting proceedings. But if it does, Bill accepts that, in the ordinary course, HPH will have priority for its costs of the process. HPH will also be fully recompensed for its contributions to the joint endeavour before there is any surplus to divide.
The declaration will therefore provide, in the usual way, for both HPH's and Bill's contributions to the venture to be paid out of the proceeds of sale and for the surplus to be divided between them. I return to the basis of the division below.
Definition of contributions: Deane J's proposed declaration referred simply to the repayment of the parties' "contributions". The parties in the present case agreed that, in order to reduce dispute about the working out of the orders, the declaration should go on and should specify the nature of the contributions in question.
On my findings (J2 at [160]-[162]), the essential elements of the joint endeavour were: 1. Bill transferring the property to HPH at an undervalue; 2. HPH constructing a granny flat at the property; 3. HPH financing its acquisition of the property and its construction of the granny flat by borrowing from an external financier; 4. HPH allowing Bill to continue to live at the property, and otherwise renting it out to cover interest and other holding costs (such as rates and taxes), so that Bill's occupation would be rent-free if possible.
Counsel for Bill, in his written submissions, referred at several points to the assessment and repayment of "contributions" made to the joint endeavour by Luke. In particular, counsel pointed to evidence that some of HPH's expenditure was financed by loans from Luke to HPH. Counsel also proposed that Luke should bear the cost of appointing independent trustees for sale (see below).
But the joint endeavour which I found existed was between Bill and HPH. Luke personally was not a party to it. It is therefore unnecessary for present purposes to go into the loan account between Luke and HPH. To the extent that monies lent by Luke to HPH were used to meet expenditure on the joint endeavour, then those monies will be taken into account as contributions by HPH. The same applies to loans by Bill to HPH (see below).
The starting point for HPH's contributions would ordinarily be the amount paid by HPH to Bill to acquire the property, together with any fees associated with the purchase and any fees associated with establishing the loan (since the borrowing of money was an integral part of the joint endeavour). But nearly all of this expenditure was covered by the loan from Prime Capital (later refinanced with Pepper Money: see J2 [46]) which is to be repaid out of the proceeds of sale. Similarly, most, if not all, of HPH's contribution to the construction of the granny flat appears to have come from monies provided by Prime/Pepper.
HPH's contributions for present purposes are therefore limited to capital repayments and interest paid to Prime/Pepper, and any other expenses of the joint endeavour paid directly by HPH out of its own monies (including monies borrowed from Bill or Luke). Recurrent expenditure by HPH will need to be applied against any rental income received by HPH from third parties; it is the net amount which represents HPH's contribution. If income exceeded expenditure, it would be necessary to allow for tax, but I was informed by counsel for the defendants that, owing to the high rate of interest charged on the borrowings, this will not arise.
On Bill's side, some of the monies borrowed from Prime were used to pay off his existing mortgage on the property and to make a cash payment to him of $296,000 (see J2 [42]). His contribution, therefore, includes the difference between this sum and the market value of the property at the time. Bill's contribution also includes any fees or costs associated with the purchase which he paid directly. However, Bill cannot claim amounts that he has lent to HPH. Those amounts will be repayable by HPH to Bill and are therefore not relevant contributions by him. It would be double-counting otherwise. I am not sure that the parties' existing calculations (see [18] above) proceed on this basis. If they do not, they will need to be reconsidered.
In Woods I proposed that the parties' contributions should be indexed (in that case, the joint endeavour, which involved the acquisition of a residential property for one of the parties to live in, had lasted almost twenty years and the parties had made differing contributions at different times). I also proposed (at [277]) that the indexation factor be linked to property prices to reflect the nature of the joint endeavour.
In the present case, counsel for Bill pressed for indexation of the parties' contributions but indicated that it was not worthwhile from his client's point of view to obtain expert evidence on property-market indexation figures. Counsel suggested that the published "All Groups CPI, Australia" index be used unless the defendants insisted on indexation by movements in property prices. I did not understand counsel for the defendants to do so.
In the course of argument however there was some debate about the period of time over which indexation should take place. The debate took place in the context of the claim advanced by counsel for the defendants that Bill should make allowance for occupation of the property during the joint endeavour period (this is addressed below). I suggested that indexation would arguably not apply during that period.
On reflection, I do not think that it would be right to limit indexation in that way. In a sense, Bill had the benefit of the joint endeavour, in the form of rent-free accommodation, while it was operating. But the contemplation was that the endeavour would operate indefinitely (or at least so long as Bill wanted to live at the property), and its ending was premature. In such a case, the fundamental remedial principle is that the parties should have their contributions returned, in recognition of the fact that they did not receive what they understood they would receive when those contributions were made. The present case is a much less spectacular example than Woods was, but it seems to me that, in principle, indexation of the parties' contributions is desirable to achieve full restitution of those contributions, at least where they are unequal.
The declaration will therefore spell out the parties' entitlements to repayment of their contributions to the joint endeavour objectives identified above at [24], and will provide for those contributions to be indexed (using the indexation factor proposed by Bill) from the dates on which the contributions were made. In the case of expenditure by HPH of a recurrent (tax-deductible) nature, it will be the net expenditure over each financial year or part thereof which will be brought to account and indexed. Any dispute about quantum will have to be resolved through the taking of accounts.
Allowances to be made by Bill: Bill occupied the Maryland property, or part of it, for the period from June 2019 to March 2022. He did not pay rent for that period. It was common ground that he should make a rental allowance at market rates in favour for HPH for the latter part of the period. But there was a dispute about when the allowance should begin.
Counsel for the defendants submitted that the rental allowance should begin on the date when HPH became the owner of the property and Bill became HPH's tenant or licensee. Counsel relied on the principles which apply to co-ownership of land. Counsel submitted that the authorities establish that co-owners who have been in occupation and who seek an allowance for capital improvements are obliged to make an allowance for the value of occupation they have enjoyed. Counsel pointed out that Bill was seeking to recoup contributions in the form of capital improvements, and the result was that he had to make an allowance for the whole period of his occupation.
The relevant principles were authoritatively stated by RP Meagher JA, speaking for the Court of Appeal, in Forgeard v Shanahan (1994) 35 NSWLR 206. His Honour said (at 223, citations omitted): Turning to the liability of a co-owner in occupation to pay an occupation fee, the position at law is fairly clear. He was not liable unless he excluded his co-owner, in which case he rendered himself liable in ejectment and for mesne profits, or if he constituted himself a bailiff, in which event he would be liable in an action of account, like any other bailiff. … As far as equity is concerned, an occupation fee will be exacted in at least two situations: first, in a partition suit (or related litigation): if there has been an exclusion, the tenant in occupation will be charged with an occupation fee; this is an example of equity following the law; and secondly, if the owner in occupation claims an allowance in respect of improvements effected by him, equity will permit such an allowance only on terms that he is accountable for an occupation fee - this is an example of he who comes to equity having to do equity
In the present case, there was no co-ownership of the Maryland property at law. Following the acquisition of the property by HPH, Bill was in occupation with HPH's consent until 16 March 2020, the agreed date on which the joint venture broke down. Thereafter, he was at law a trespasser and HPH is entitled to mesne profits in the nature of rent, but only from that point onwards.
So far as equity is concerned, the present case is not a partition suit. Bill is seeking equitable relief and is obliged to do equity as a condition of obtaining that relief. But I do not think that failed joint endeavour constructive trusts are necessarily governed by rules which apply as between co-owners in equity, as counsel for the defendants submitted. For a start, the context is different. It is a matter of dividing up the proceeds of a property so as to reflect the parties' contributions, not a claim by one co-owner to payment from another. What is required to do equity must depend upon the nature of the joint endeavour and the other circumstances of the case.
One of the objectives of the joint endeavour, in the present case, was to provide Bill with rent-free accommodation to the extent that it was possible. HPH's expenditure during the period will be recouped, and the liabilities HPH incurred will be discharged. In no sense will Bill's occupation during the period have been an occupation at HPH's expense. In my view, the obligation to do equity only requires Bill to make an allowance by way of rent for the period after the joint endeavour broke down. From that point, and only from that point, the relationship between the parties changed, and HPH became entitled to insist upon the property's rent-earning potential being maximised, in the interests of both beneficiaries, under the trust which is now to be declared. In the circumstances of this case, the obligation to make an allowance in equity is not different from Bill's obligation at law to pay mesne profits in the nature of rent.
Counsel for the defendants contended for further allowances. According to evidence in Luke's affidavit, in the course of Bill's occupation he damaged the property. There were also periods of time when Bill's behaviour prevented other rooms being let out. Counsel submitted that Bill should be obliged to make allowances in favour of HPH for the costs of repair of damage he had caused, and for rent due to unreasonable behaviour on his part.
I did not understand counsel for Bill to dispute that Bill should be required to make allowances in favour of HPH for any damage or loss his occupation caused to it. Indeed, I am not sure how far the allegations made by Luke are actually contested by Bill.
The making of the declaration will therefore be conditional upon Bill submitting to an obligation to make allowances in favour of HPH for: (1) mesne profits in the nature of market rent from 16 March 2020 to 22 March 2022 for that part of the property occupied by him; and (2) any costs or losses incurred by HPH as a result of damage he may have caused to the property or as a result of any interference by him in renting to third parties those parts of the property not occupied by him. The quantum of the allowances, if not agreed, will be determined by way of account. This will probably occur at the same time as any other quantification exercises which may need to be carried out.
Shares of surplus: Counsel for Bill proposed that the declaration should provide for any surplus, once the respective contributions of the parties are determined, to be split equally, as in Deane J's proposed form of order in Muschinski. But this was opposed by counsel for the defendants. Counsel submitted that Bill should not receive any part of the surplus and the whole of it should go to HPH.
In support of this submission, counsel emphasised that HPH was incorporated, and the Trust was established, to permit external finance to be obtained, in circumstances where there was no practical alternative to doing so (see J2 [153]). That external finance was underwritten by Luke's earning capacity.
Counsel also emphasised that, on my findings, Bill was to receive no more than a right of occupation, rent free, of the granny flat, when ultimately constructed. Most of the contributions to repayment and interest had been made by HPH. Bill had contributed some funds, but this had only reflected the parties' understanding that he might need to do so if there was a revenue shortfall. Counsel submitted that it was impermissible for Bill to receive any part of the surplus, for the simple reason that it would not accord with the parties' intentions.
Counsel also submitted that this was not a case for the application of the maxim that "equity is equality". Counsel relied, in particular, on the recent decision of the Court of Appeal in NSW Trustee and Guardian v Togias [2022] NSWCA 225. In that case, which also concerned the imposition of a constructive trust, and where the parties' contributions to the joint endeavour had been unequal, the Court rejected an equal division of the property in question. The decision in turn applied the decision of the High Court in Baumgartner, where the property in question was divided between the parties 55:45 to reflect their respective contributions, financial and non-financial.
In my view, however, the circumstances in Togias and Baumgartner were different from the circumstances of this case. It is not being suggested here that the property should be divided equally between the parties irrespective of their respective contributions. What is being suggested is the equal division of the surplus left after the parties' contributions have been returned to them. I think that gives rise to quite separate considerations.
It is also, in my view, too simple to say that an equal division of the surplus would not accord with the parties' intentions. The fact is that the parties did not consider what was to happen with the property if they fell out and their joint endeavour was frustrated.
It is also too simple to say that the deployment of Luke's earning capacity through HPH was the only relevant element in financing the joint endeavour. While Luke's earning capacity was the only thing that the borrowers were prepared to lend against, it had been contemplated from the start that the property itself would be capable of generating income, and that this would be available to help pay down the loan: see for example J2 [63].
It is true that Luke took on the risk of financing the venture (to the extent that rental income could not be obtained from third parties). But in fact, as we have seen, HPH will not be obliged to discharge the mortgage from its own monies: the loan will be repaid from the proceeds of sale of the property.
Most importantly, HPH was never in a position to borrow enough money to purchase the property for its full value and then to undertake the construction of the granny flat. The transaction only happened because the property was transferred by Bill to HPH at an undervalue. Bill thereby made a crucial contribution to the joint endeavour. Indeed, it appears that when the contributions are calculated in the manner I have discussed above, Bill's contribution will have exceeded HPH's.
Counsel for the defendants referred in submissions to the statement of principles by Robb J in Hansen v Noble [2021] NSWSC 138 at [43]-[49]. That statement of principles, however, also concerned resulting trusts and common intention constructive trusts, which are different in important respects from failed joint endeavour constructive trusts: see Jemmark Pty Ltd v 10 Egan Street Pty Ltd [2022] NSWSC 865 at [74]. Furthermore, the particular issue which I am now considering was not addressed by his Honour.
It is true that in Baumgartner (and in Togias), the declaration ultimately made provided for the property to be shared in defined percentages, and did not deal separately with the contributions and the surplus. I discussed this in Woods at [262]-[270]. I pointed out that the difference between return of contributions and equal division of the surplus, on the one hand, and a percentage division of the whole proceeds, on the other, will not necessarily be of great practical significance, depending on the amount of the surplus and the percentages adopted. I also pointed out that that although Baumgartner post-dated the decision in Muschinski, it was not suggested that the form of order suggested by Deane J in Muschinski had been inappropriate to the circumstances in that case.
At [275] of Woods, I concluded: To my mind, an order in the Muschinski form best reflects the rationale for equity's involvement, namely to deal with a capricious outcome of the breakdown of the relationship between the parties, being an outcome which they did not anticipate in their earlier agreement. In the present case, the parties did not, on my findings, consider how the equity in the Telopea property, if there was to be any, would be shared. In my opinion the fairest way to deal with this is, subject to a point I will make in a moment, to split the equity equally. The qualification which I made in this passage concerned indexation, which I have already discussed.
It may be significant that Baumgartner was a case involving non-financial contributions, which of their nature were not capable of being valued (as was Togias). Whether that is so or not, all of the authorities in this area emphasise the that the court has a wide discretion in formulating its orders, to tailor them so as to achieve justice in the individual circumstances of the case. Counsel for the defendants did not invite me to reconsider my reasoning in Woods.
In Woods, there was a substantial percentage increase in the value of the property in question between when the joint venture was entered into and the time the Court came to consider the form of the orders to be made. It appears that the same may be so in the present case. In my view, justice will best be done by returning to Bill and HPH their contributions (as indexed) and then dividing the surplus equally. There will be no unfairness to HPH. It will be fully recompensed for its contributions to the joint endeavour. It can hardly complain about having to share a profit which it would never have achieved outside that venture.

Appointment of trustees for sale

Through his counsel, Bill sought orders for the property to be vested in independent trustees for sale who would determine the parties' contributions and pay out the proceeds accordingly. The directions included provisions for the assessment of the costs sought in favour of Bill, and the payment of the assessed amount out of the proceeds as well.
The main reason given by counsel for appointing independent trustees was a lack of trust in Luke (as the controller of HPH). Counsel articulated various complaints about Luke's conduct. I do not however find it necessary to go into those complaints.
It is true that Luke, on behalf of HPH, contended that Bill had no proprietary entitlement to the Maryland property, and that this contention has been rejected by the Court. But it does not follow that HPH will be unwilling to comply with its obligations as trustee once the declaration of trust has been made. According to the evidence before me, HPH has already taken steps to retain an agent for the sale of the property.
It is not essential that the terms of a constructive trust imposed by the court, following the failure of a joint endeavour involving the acquisition of property, should provide for the property to be sold by an independent trustee. Deane J's proposed order in Muschinski did not make any such provision (although in that case both parties were appointed as trustees, so they both would have had to co-operate in the sale). The appointment of independent trustees for sale in this case might well lead to delay and increased costs, because they would have to acquaint themselves with the details. So far as I can see, Luke, through HPH, has every incentive to maximise the sale proceeds, in the interests of both parties.
In these circumstances, I do not consider that there is any demonstrated need to make orders providing for the appointment of independent trustees for sale. The order will declare HPH to be a constructive trustee and HPH will administer the trust. This will include not only undertaking the sale but also the task of lodging tax returns and perhaps other administrative tasks to wind up the affairs of the trust.
When I indicated at the hearing that I was proposing to take this course, counsel for Bill nevertheless pressed for me to make directions as to the procedure to be followed in selling the property and distributing the proceeds. In the end, counsel for the defendants indicated that he would not oppose the making of directions specifying the expenses to be paid from the sale proceeds (such as agent's fees and the like) and requiring the net proceeds to be deposited into an interest-bearing joint account until they are distributed in accordance with the parties' entitlements.
I do not, however, consider this necessary. The parties are apparently agreed about the payment of sale expenses and the deposit of the net proceeds into an interest-bearing joint account. For the moment, there is no occasion for the making of any formal directions. As trustee, HPH will be subject to the Court's jurisdiction over the administration of trusts, which will allow the Court to step in and give directions should any issue arise in future.
As I have already indicated, it will be necessary to reserve leave for the parties to approach the Court for directions if they cannot agree on the quantification of their respective entitlements and obligations under the constructive trust. When those entitlements and obligations have been quantified, the net proceeds will be paid out. But I do not contemplate that this process will include the payment of costs awarded to Bill. That is a separate unsecured entitlement (costs of administering the constructive trust once established are of course different).

Other bases for claims against HPH

The claim against HPH was propounded on bases other than a failed joint endeavour constructive trust. A cause of action in undue influence was pleaded but abandoned at the hearing. Reliance was also placed on the doctrines of unconscionable transaction and proprietary estoppel (J2 [13]). Those causes of action were not sustained (J2 [176]-[179]; J2 [180]-[185]). There will be an order that the plaintiffs' claims against HPH be otherwise dismissed.

Costs

The course of the proceedings up to March 2022 is set out at J1 [24]-[39] and [51]-[54]. For present purposes, it can be summarised as follows.
The proceedings were commenced in July 2020 and for the first year or so were managed in the General List. It was not until September 2021 that the question of Bill's continued occupation of the property was raised and a notice of motion was filed for HPH seeking orders for possession of the property.
The application came before me in the Applications List on 12 November 2021. I dismissed the motion, on the ground that an order for possession is a final order which should have been sought by way of cross-claim. But I granted leave to file such a cross-claim. At the same time, I raised with the then counsel for Bill some issues about the form of the statement of claim. In particular, I thought it was unclear what claims for relief could properly be made, and what causes of action could properly be pursued, based on the facts alleged.
Both parties went back to the drawing board. On HPH's behalf, a cross-claim was then filed for possession. On behalf of Bill, a notice of motion was filed on 9 December which in substance sought leave to amend the statement of claim. Following a debate on 10 December, I granted Bill a further adjournment until early in the new term to formulate further revisions to the proposed statement of claim.
On 29 January last year, a further notice of motion was filed on behalf of Bill which sought to restrain HPH from proceeding with its claim for possession. I had suggested on 10 December that such an application would be necessary if the claim for possession was to be resisted, as, on the face of it, HPH had a legal right to possession. On the same day, an amendment was notified to Bill's motion of 9 December. The amendment substituted a new version of the proposed statement of claim, which had been prepared by Bill's new counsel, Mr Zipser.
Bill's motion to restrain the possession proceedings came before me on 8 February. For reasons explained in my April 2022 judgment, I dismissed the application. I ordered Bill to pay HPH's costs of the motion (J1 [69]).
Two days later, on 10 February, the proceedings came before me again. A notice of motion, returnable instanter, was filed for HPH seeking summary judgment on its cross-claim. The motion also sought to strike out the existing statement of claim as inadequately pleaded. I made orders for possession in HPH's favour which were not contested. I also ordered Bill to pay HPH's costs of the cross-claim and its costs to date of its motion (J1 [70]).
The order for possession which I made on 10 February contained a stay of execution for a few weeks. On 25 February, Bill applied by way of notice of motion (filed 21 February) for an extension of his period of possession until the proceedings had been determined. For reasons explained in my April 2022 judgment, I dismissed this application and ordered Bill to pay HPH's costs of the motion (J1 [71]).
While the dispute about possession played out, the motion to amend the statement of claim remained effectively in abeyance. Following my orders of 25 February, the proceedings were accepted into the Expedition List and leave was granted to Bill to amend his statement of claim. The amended statement of claim was filed on 1 April.
The trial began on 17 October last year and ran for four days. There was a further day of submissions on 26 October.
Although the amendments to the statement of claim had tidied it up to some extent, they still left the form of the equitable interest in the property which Bill was claiming by way of constructive trust somewhat undefined. One declaration claimed was that if HPH was capable of continuing to service the loan secured by the mortgage over the property, Bill would be entitled to live there rent-free. Another was for a constructive trust by way of equitable interest in the property "to an extent determined by the court".
The amended statement of claim did contain, as an alternative, an order for the property to be sold, but not in the form ultimately made. The sale order sought to have the whole of the net proceeds paid to Bill; alternatively, they were to be distributed between the parties in proportions determined by the Court. It was not until final submissions that counsel for Bill clearly and unambiguously limited Bill's claim to recoupment of contributions in a claimed amount of $244,000.
Although Bill was unsuccessful in remaining in possession in February 2022, he had been permitted to lodge a new caveat preventing HPH from dealing with the property until further order: see J1 [68]. In the course of the trial, counsel for the defendants floated the idea of a variation to the interlocutory regime to allow HPH to borrow further monies against the property for the purpose of paying its legal costs. In November, Luke sought to have the proceedings relisted in order to make a variation application. In his correspondence, Luke purported to act on behalf of both himself and HPH, but the application concerned the caveat over HPH's property and HPH was effectively the moving party (as was reflected in Luke's affidavit in support). The application came before me on 16 December, only a few days after I had delivered judgment, but, after some debate, was not pursued.
As already mentioned, in my December judgment I invited the parties to agree on the form of orders to be made to give effect to my reasons, and also as to costs. The hearing on the areas of dispute took place on the afternoon of 10 March.
Throughout the proceedings neither Luke nor HPH has retained a solicitor. Instead, Luke has acted for himself and for HPH (as its sole director). An affidavit was filed pursuant to rule 7.2 of the UCPR in November 2020, regularising his representation of HPH. It does not appear to have been suggested at any point that he was not entitled to act for the company.
Initially, Luke appeared both for himself and for HPH at interlocutory hearings. But from September 2021, junior counsel appeared for HPH, alongside Luke, who continued to represent himself. Since February last year, Mr Condon SC has appeared, on a direct access basis, both for Luke and HPH. According to Luke, Mr Condon has split his fees 50-50 between the two defendants.
Luke, having been self-represented, cannot of course recover any professional fees for his work on the case: Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333 at 339-340. But counsel's fees are recoverable (together with any other disbursements which Luke may have incurred on behalf of himself or HPH).

Costs as between Bill and HPH

Counsel for Bill submitted that he should receive an order for the whole of his costs of the proceedings as against HPH, on the ground that he had substantially succeeded against HPH in the proceedings. Counsel acknowledged that this would not cover the costs of the cross-claim and of the motions concerning possession of the Maryland property, which I have ordered against Bill. But counsel proposed orders which would confine those costs, which I will refer to for convenience as "possession costs", to the period from 9 December 2021 to 25 February 2022. Counsel also submitted that the costs order in favour of Bill on the cross-claim would be limited to costs solely referable to the cross-claim, relying on the principles I discussed in Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd (No 2) [2021] NSWSC 336 at [30]-[45].
In the course of argument, counsel also referred to some specific events in the proceedings. Counsel submitted that HPH's September 2021 motion for possession (see [68] above) in effect failed and HPH should pay Bill's costs of that motion. Counsel also submitted that Bill had incurred costs as a result of the abortive application to permit HPH to borrow money to pay its legal costs (see [79] above), which should be paid by HPH. Finally, counsel submitted that, as the successful party overall, Bill should receive an order in his favour for the costs of the hearing on final orders and costs on 10 March.
Counsel acknowledged that Bill had succeeded in only one of the four causes of action upon which he relied against HPH. In this regard, counsel referred to my decision in Akierman Holdings Pty Limited v Akerman (No 3) [2021] NSWSC 869. In that case I referred to authorities in which the rule that costs follow the event has been applied distributively between different claims in the proceedings. I also referred to what I described as the "traditional rule" that where a party has been successful overall, costs are not awarded against that party on points on which the party has failed unless such points are "clearly dominant or severable". I suggested that these two rules could be reconciled by accepting that in general, the costs of discrete claims should be treated as separate events for the purposes of the rule that costs follow the event, but at the same time, costs associated with factual or legal issues arising in connection with a particular claim would follow that claim unless "clearly dominant or severable" (at [85]).
Counsel submitted that, although four different causes of action were articulated, they were all based on the same factual substratum. Even if an order were made that Bill pay HPH's costs solely referable to the unsuccessful claims, few if any costs would be covered by such an order.
Counsel for the defendants, for his part, contended that, even though Bill's joint endeavour constructive trust claim had been successful, it would be unreasonable for HPH to have to bear his costs in full. Counsel submitted that Luke's success in defending the proceedings should be taken into account, which I deal with below. But counsel also submitted that Bill's case against HPH had been unnecessarily lengthened by unsuccessful allegations of misconduct against Luke. An "all points" approach had also been taken to the presentation of the case. This had carried through to the argument on 10 March concerning the form of the final orders and costs: 33 pages of submissions were presented in advance of the hearing and the argument ultimately extended over more than three hours.
Bill has been successful in obtaining relief of a substantial nature against HPH. Prime facie, he is entitled to the general costs of the proceedings as between himself and against HPH. The costs of the application to permit HPH to raise funds on the property to pay its costs were expressly reserved. The costs of HPH's September 2021 motion were ordered to be costs in the cause. They will therefore both be picked up by a general costs order in favour of Bill and it is unnecessary to make any specific order about them.
Nor do I think I should make any order limiting the period for which HPH may recover its possession costs (if making such an order would now be possible). Although the two motions for which HPH was awarded its costs fell within the period nominated by counsel, the cross-action did not: it was commenced on 15 November 2021: J1 [30]. The identification of the costs covered by the orders should be left to the costs assessor.
I do agree that the order in favour of HPH on the cross-action will not include costs common to both the main action and the cross-action (in addition to Southern Oil, see Mao v Bao (No 3) [2023] NSWSC 261 at [24]-[27]). But while it is a matter ultimately for the costs assessor, most, if not all, of the costs associated with the hearings in February last year, would seem to have been costs referable to the cross-action or the motions on which HPH was successful.
I also agree that the inclusion of the unsuccessful causes of action would have made no appreciable difference to the costs of the proceedings. Indeed, it seems to me that it may be better to see the "event" not as success on a joint endeavour cause of action, but as success on a claim to a proprietary interest in the property by way of constructive trust. Seen in this way, any costs associated with the unsuccessful causes of action, if they could be separately isolated, would be costs associated with an issue arising in that broader claim, and which would not be "clearly dominant or severable".
This does not however mean that the whole of the costs of defending the proceedings, apart from the possession costs, should be thrown onto HPH. I think there should be two qualifications.
First, generally a party who amends a pleading must pay the costs thrown away by reason of the amendment and (unless opposition has been unreasonable) the costs of the amendment application itself: see Stanley v Lane Christensen Company [2006] WASCA 56 at [52]. In my view that should apply to the amendments to Bill's statement of claim. As counsel for Bill accepted, the initial formulation of the statement of claim was inadequate. The amendment motion of 9 December 2021 was itself amended more than once; failure to consent to it at an earlier point was clearly not unreasonable. Rather than allowing the amendment costs to fall into the general costs of the proceedings, I will now order that Bill pay HPH's costs of the amendment motion and HPH's costs thrown away by reason of the amendment made on 1 April 2022 (Luke's amendment costs will be covered by a general costs order in his favour: see below).
Secondly, I think there is substance in the points made by counsel for the defendants about the way the trial was conducted. Considerable time was taken up in Bill's cross-examination because of the need to deal with spurious allegations of misconduct by Bill against Luke, and other unsatisfactory aspects of Bill's evidence (see for example J2 [132]-[134], [151], [152], [153], [155] and [156]) The evidence of Bill's nephew Peter, who was called as a witness in Bill's case, was also marred by unsustained allegations of misconduct by Luke: see J2 [136] and [152]. The case which succeeded against HPH was made out essentially by the contemporaneous documents and by concessions made by Luke in his affidavits. I also agree that the submissions covered a lot of ground which proved unnecessary.
In saying this, I make no criticism of counsel for Bill. I have no reason to doubt that he was acting on instructions from his client. But Bill's performance under cross-examination left me with the impression that he had lost perspective about the case (J2 [135]). It may also be that, as a result of the grant of legal aid in his favour, Bill's attitude to the conduct of the case was coloured by a perception that he could litigate without cost to himself. But whatever the explanation may be, I think that the conduct of Bill's case was excessive.
In these circumstances, I think the best course is to make an estimate of how long the trial should have lasted if it had been confined to the case which ultimately succeeded. Bill's costs order will be discounted by that proportion of his costs and HPH will receive in its favour an order for payment of the same proportion of its costs.
In the exercise of my judgment, I fix the discount at forty percent. This will apply to the costs of the preparation for, and conduct of, the trial hearing, and will include the costs of the supplementary hearing on 10 March this year.

Costs as between Bill and Luke

Bill's liability for costs: As already mentioned, Bill's claim against Luke personally has failed. In the end, I did not understand counsel for Bill to dispute that some order should be made in Luke's favour. But counsel contended that the order should cover only a small share of the costs of the proceedings.
Counsel submitted that, having regard to the evidentiary overlap to which I have already referred, the joinder of the additional claims against Luke in the proceedings added little, if anything, to the overall cost. The point was that most of the defence costs were common to the claims against both defendants and therefore would have been incurred whether or not Bill had sued Luke personally. Counsel suggested that the award in favour of Luke should be no more than ten percent of the overall costs.
From the point of view of Bill as a successful plaintiff, it is natural to the see the costs as attaching to the successful claim against HPH. But in awarding costs, the court should, generally speaking, look at the position of the successful party, in this case Luke as defendant: Ohn v Walton (1995) 36 NSWLR 77 at 79.
Luke had his own personal interest in the defence of the proceedings. In particular, the claims against him had the potential to damage his professional reputation. In my view, Luke had just as much justification for defending the personal claims against him as HPH had for defending the claims against it. And, owing to the overlap in the factual issues in the case, the common costs of the defence are just as much costs of Luke's defence as they are costs of HPH's.
The "rule of thumb": The submissions touched briefly at a couple of points on the "rule of thumb" which has sometimes been applied in cases involving commonly represented defendants. Neither counsel in the end sought to make anything in particular of the "rule". Nevertheless, I propose to say something about it at this point.
The "rule" has been formulated in various ways. For present purposes, it may be stated in the following form: where a plaintiff sues two defendants who are commonly represented, one successfully and one unsuccessfully, the successful defendant only recovers the costs solely referable to that defendant's defence and a half share of the common defence costs. This formulation of the "rule" accords with those used by Einstein J in the Currabubula case (below) and by Professor Dal Pont in Law of Costs (5th ed, 2021, LexisNexis) at [11.8].
The historical development of the "rule" was summarised by Einstein J in Currabubula Holdings Pty Ltd v State Bank of New South Wales [2000] NSWSC 232 at [90]-[104]. See also the later decisions of Campbell JA, speaking for the Court of Appeal, in Wardle v Agricultural and Rural Finance Pty Ltd (No 2) [2012] NSWCA 388 at [46]-[47], and of McDougall J in James v Royal Bank of Scotland (No 2) [2015] NSWSC 970 at [33]-[56].
An important decision on the "rule" is that of the English Court of Appeal in Korner v H Korner & Co Ltd [1951] 1 Ch 10. The case concerned a claim by a plaintiff seeking specific performance of an alleged agreement to incorporate a private company on particular terms. There were eight defendants. One was the plaintiff's brother, who had allegedly made the agreement. The others were various other entities and persons who were said to be on notice of, and bound by, the alleged agreement.
The plaintiff succeeded against his brother but failed against the other defendants because he was unable to show that they were on notice of the terms of the agreement. An order was made that the unsuccessful defendant, the plaintiff's brother, pay the plaintiff "his costs of the action against such defendant". As against the other defendants, the proceedings were dismissed with costs.
Later, in taxation proceedings, the successful defendants contended that they were entitled, under the "rule of thumb", to seven-eighths of their costs of "instructions for brief" and "counsel's fees". The Taxing Master rejected this claim. The Master observed that, on his understanding of the order, it would entitle the successful defendants to seven-eighths of the general costs of the action (such as directions hearings); costs specific to their defences; and such part of the fees for instructions for brief and counsel's fees as were referable to their individual defences (to be determined by apportionment), but no more.
Six of the seven successful defendants then appealed to a judge of the High Court (Wynn-Parry J). That appeal was unsuccessful, and the defendants appealed again to the English Court of Appeal, constituted by Singleton and Jenkins LJJ. Again, the appeal was dismissed.
Singleton LJ gave the judgment of the Court of Appeal. One of the points taken on appeal was that once the costs orders had been passed and entered (as they had, in the instant case, well before the taxation), the task was confined to interpreting those orders. Singleton LJ acknowledged this, although he expressed the opinion that the limitation was unsatisfactory. He thought that great trouble and expense could be saved if it was made possible to go back to the trial judge, even after the order had been drawn up, to obtain clarification.
Nevertheless, Singleton LJ considered that the order did not entitle the successful defendants to the costs they claimed. In his Lordship's view, the form of the judgment itself made it clear that the unsuccessful defendant was to pay all of the costs in the action brought by the plaintiff against him. The later order dismissing the proceedings against the other defendants "with costs" had to be read in that context.
His Lordship also considered that the "rule of thumb" ought not to be extended. Although it was "convenient to be applied in an ordinary or straightforward case", it should not be applied in the instant case because the plaintiff had succeeded on the main issue in the case and the successful defendants had succeeded on a collateral point.
The analysis by Einstein J in Currabubula shows that "rule of thumb" is based on the proposition that where a solicitor is retained by two defendants to defend proceedings against them, each defendant is liable to the solicitor only for one half of the common costs of the proceedings (plus the individual costs of each defendant). That proposition was apparently established by the decision in Re Colquoun (1854) 5 De G M & G 35; 43 ER 781. In that case the proposition was stated in absolute form, apparently as a rule of law. But in other formulations of the "rule", the proposition has been treated as no more than a presumption, which may be displaced by contrary provision in the retainer: see, for example, the formulation quoted in Currabubula at [100].
In principle, this seems to be the better view (cf Kourakis CJ in Rasch Nominees Pty Ltd v Bartholomaeus (No 3) [2013] SASC 14 at [13]). But it is notable that the ruling by the Taxing Master which was upheld in Korner actually gave the successful defendants seven-eighths of the general costs of the proceedings. That is, the "rule of thumb" was applied to the general costs of the action but not to the costs of the trial. Differential application of the "rule" is difficult to reconcile with the idea that it ultimately depends on the terms of the agreement made between the defendants and their solicitor (unless that agreement provides for differential liability, but there is no sign of that in the report of Korner).
The "rule" has been criticised as anomalous. It has been said that no equivalent rule applies where there are two commonly represented plaintiffs, one is successful and the other is not: in such a case, the successful plaintiff is said to be entitled, prima facie, to an order covering the whole of the common costs (as well as the costs solely referable to that plaintiff's claim): see Currabubula at [100]-[104] and Rasch at [12].
The rule is arguably anomalous in a wider sense. Where a plaintiff succeeds against one separately represented defendant and fails against another, the usual rule is that the whole of the plaintiff's common costs are recoverable from the unsuccessful defendant: see Dimos v Willetts (2000) 2 VR 170 at [45]. The underlying idea seems to be this: the common costs are costs necessarily incurred in advancing the claim against the unsuccessful defendant and therefore should be recoverable; the plaintiff's failure against the successful defendant makes no difference. I do not find it easy to see why, as a matter of principle, a more limited order should be made in favour of a successful defendant, even if that defendant is commonly represented with others.
In considering the application of the "rule", I think it may be helpful to distinguish between the rights and obligations of parties which arise between themselves and their solicitor, on the one hand, and the terms of costs orders which may be made inter partes by the court, on the other. In principle, costs orders made by the court should reflect the merits of the case as between the parties and should not be influenced by the private arrangements about responsibility for costs made between co-plaintiffs or co-defendants. On the other hand, the "costs indemnity rule" remains a fundamental element of the assessment of costs. The court cannot, by its order, provide for the recovery of costs by someone who is not liable to pay them. Indeed, in the usual case, the court does not know when making its costs orders what retainer arrangements have been made by commonly represented parties in the proceedings: that only emerges, if at all, on assessment.
It may be significant that Korner was not a case about the making of a costs order, but a case about the assessment of a previous order. The same was so in the earlier Court of Appeal decision on the "rule" in Ellingsen v Det Skandinaviske Compani [1919] 2 KB 567. At the assessment stage of the proceedings, the costs indemnity rule requires that the entitlement of the party with the benefit of the cost order, be limited to the costs that party has paid, or is liable to pay. Where parties are commonly represented, it is a short step to say that rights of contribution or indemnity, as between them, need to be taken into account for that purpose.
Seen in this light, the "rule of thumb" may be nothing more than a recognition, for the purposes of assessment, that co-defendants who are commonly represented will usually be jointly and severally liable for the common costs and entitled to contribution from each other. They will, therefore, only usually be entitled to recover half of those costs on assessment. But that would of course be subject to any other arrangement between the parties with respect to contribution or indemnity.
Costs are in the court's discretion and the court has power to make an order departing from the usual costs order in favour of a successful party which covers all of the common costs of the claim or defence, as the case may be. In particular, the court may, in a proper case, make an order that the successful co-defendants should receive only a share of the common costs (referred to by Campbell JA in Wardle as a "per defendant" order). But if the "rule of thumb" only comes into play at the time of assessment, it would have no direct bearing on whether the court should make such an order, and caution may be required in doing so. A per-defendant order may operate unfairly where, unknown to the court at the time it makes the order, the defendants have agreed among themselves on an unequal division of the costs of the defence (under this State's system of external assessment of costs, there is no possibility of changing the rules of court, as Singleton LJ suggested in Korner, so as to allow an order once made to be amended so as to clarify or overcome the effect of the "rule").
Even if the "rule of thumb" falls to be applied at the time the court makes costs orders, there is ample authority that it is only to be applied in appropriate circumstances: apart from Korner, see James at [54], [56]; Loureiro v Mac Aus Unit Pty Ltd (No 3) [2022] NSWSC 358 at [22]-[25].
Returning to the present case, there is, in my view, every reason to apply the principle that a costs order in favour of a successful defendant covers the common costs as well as the costs solely referable to that defendant's defence. For reasons I have given, the defence was just as much Luke's as HPH's. But this does not necessarily mean that Luke will ultimately be able to recover all of the common defence costs from Bill. Determining the quantum of Luke's liability for the common costs is likely to require careful consideration of the retainer arrangements, which are not before the Court. That will have to be done by the costs assessor in the course of considering the application of the costs indemnity rule.
Personal liability for costs ordered against HPH: Counsel for Bill contended that the Court should make an order that Luke be personally liable for HPH's costs liability to Bill. Orders of this type have on occasions been made in cases where non-party company directors have unsuccessfully conducted, or controlled the conduct of, litigation on behalf of companies. Although Luke was in fact a party himself in the proceedings, counsel contended that this was not relevant. In counsel's submission, the circumstances justified an order that Luke be liable for HPH's costs even though he is entitled personally to costs from Bill for the unsuccessful claim against him personally.
Counsel relied on the following statement by Basten JA in FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at [210]: It is clear that the categories of case which may attract the exercise of the power [to make a personal costs order against an officer of a corporate litigant] are by no means closed, nor should they be. Nevertheless, the requirements of justice should not be allowed to expand an exception to the general rule, so as to undermine the rule itself. What is significant from a survey of the cases in which orders have been made against non-parties is that they tend to satisfy at least some, if not a majority, of the following criteria: (a) the unsuccessful party to the proceedings was the moving party and not the defendant; (b) the source of funds for the litigation was the non-party or its principal; (c) the conduct of the litigation was unreasonable or improper; (d) the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest, and (e) the unsuccessful party was insolvent or could otherwise be described as a person of straw.
This statement, in its terms, does not purport to be exhaustive. Subsequent decisions have emphasised this: see May v Christodoulou [2011] NSWCA 75 at [111]; Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [80]. But it is convenient to deal with each of the factors identified by Basten JA before returning to consider whether an order would be justified in the present case. I will deal with those factors in a slightly different order from his Honour's.
In the present case, HPH was the defendant to Bill's claim. Factor (a) is therefore not satisfied.
In my view this factor is significant. A defendant facing a claim brought by a company has no choice but to incur the costs of defending the claim. A plaintiff who sues a company knows, or must be taken to know, of the risk that the company will be unable to meet the costs of the proceedings. And usually (as in this case), such a plaintiff will bear the onus and so must expect, at least, to be put to proof of the claim. Factor (a) reflects the circumstance that, generally speaking, a defendant to a claim by a company is vulnerable in a way in which a plaintiff suing a company is not.
As to the requirement that the non-party has an interest in the outcome of the proceedings in which the company is involved (factor (d)), Basten JA went on in FPM to observe (at [214]) that a company officer will often be active in the conduct of litigation and obtain some direct or indirect financial benefit from the company's success. His Honour observed, however, that does not necessarily mean that the officer should be treated as having an interest in the relevant sense. Careful analysis of the nature of the interest, as well as the conduct of the officer, is required.
In Heath, a personal costs order was made against the director of a company who caused the company, unsuccessfully, to defend a claim against it and to bring a cross-claim. The director, through another company, owned a substantial share in the relevant company, but was also a creditor. The Court of Appeal emphasised that the director's conduct was irresponsible and unreasonable. By contrast, merely being a shareholder was not sufficient to justify a personal costs order in FPM.
In the present case, the circumstances are different again. HPH's assets were held for the benefit of the Trust. Accordingly, successful defence of the proceedings would have been of no financial benefit to Luke as shareholder. Instead, it would have been for the benefit of the Trust.
Of course, as counsel for Bill noted, Luke was in effective control of the trustee, HPH, and was thereby able to exercise its discretionary power of appointment over the Trust's income or capital in his own favour. He also, as appointor, was able to perpetuate his control of the Trust by appointing a new trustee if, for any reason, he lost control of HPH. But even so, Luke's powers were fiduciary in nature or at least subject to the doctrine of 'fraud on a power': see Baba v Sheehan [2021] NSWCA 58 at [3]-[6]. They did not amount to outright ownership of the Trust's assets.
The original idea behind the joint endeavour was that if Bill could live at the property rent-free, then over time it would be possible to repay the mortgage debt, thus building up the Trust's equity for the benefit of Bill's family, including Bill himself. Although it was alleged at trial that the transfer of the property out of Bill's name was some type of fraud which was planned by Luke from the beginning, this was one of the unsubstantiated allegations made against Luke which I rejected. I thought that if the joint endeavour had worked, Luke would probably have been quite happy to see the debt repaid and the Trust's equity built up: see J2 [157].
Furthermore, Luke was clearly conscious of his standing as a solicitor and was concerned to ensure that he did not engage in conduct which could damage his professional reputation. While the outcome of this bruising litigation may have coloured Luke's attitude towards Bill, I think that it is more important for present purposes to focus on the circumstances which existed when Luke caused HPH to embark upon, and continue, the defence of the proceedings. I do not think that it can simply be assumed that he did so intending to help himself to the assets of the Trust if the defence was successful.
It is convenient to take insolvency (factor (e)), and provision of the funds by Luke to fund the defence (factor (b)), together. HPH is the registered proprietor of the Maryland property. The outcome of the litigation will be a sale of the property, out of which HPH will receive a recoupment of its contribution to the joint endeavour together with a share of the surplus. On the figures currently available, this can be expected to be several hundred thousand dollars at least. It is far from clear that HPH's share of the proceeds will be insufficient to meet the costs order in favour of Bill (which will be reduced by set-off: see below) and HPH's own costs. At worst, there would be a partial deficit which would fall rateably on HPH and Bill. If HPH's assets prove sufficient, the fact that Luke had lent money to HPH to defend the proceedings owing to its shortage of ready cash would be of no significance.
There is, however, a complication. What I have just said assumes that HPH will be entitled to indemnity out of the assets of the Trust for its costs of defending the proceedings (including its costs liability to Bill). But as counsel for Bill pointed out (see below), HPH did not obtain judicial advice authorising the defence of the proceedings. That is not necessarily fatal to obtaining indemnity, but it may be an obstacle to doing so if the defence has been unsuccessful (Re Beddoe [1893] 1 Ch 547 at 557; Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 at [47]-[48], [74]). Since HPH has no assets to speak of other than the assets of the Trust, its costs liabilities will, to the extent that it is not entitled to indemnity, go unsatisfied, despite the payout which the Trust will receive from the sale of the Maryland property.
Counsel for Bill did not take this point in the context of insolvency. Counsel did submit, in another context, that had advice been obtained, it would have resulted in HPH abandoning the defence of the proceedings. But HPH was successful in obtaining possession of the property, and was also justified in defending the proceedings based on the statement of claim in its original form. Even after the statement of claim was amended, HPH was arguably justified in resisting Bill's claim for so long as he was claiming more than recoupment of his contributions.
With the benefit of hindsight, it is unfortunate that Luke did not take active steps to try to resolve the proceedings on a failed joint endeavour basis. But I can have no confidence that, even if this had been proposed, it would have been acceptable to Bill. In the end, HPH may possibly be found to be disentitled to indemnity from some point after the amendment of the statement of claim. But I do not see how I could be satisfied on the material before me that judicial advice would necessarily have avoided further proceedings.
Finally, there is the question of unreasonable or improper conduct of the proceedings (factor (c)). Counsel for Bill made three main points.
First, as just noted, counsel observed that Luke had failed to obtain judicial advice. But there is no affirmative obligation on a trustee to seek such advice. A trustee who fails to do so simply takes the risk of ultimately being denied indemnity from the trust assets if the defence of the proceedings proves unsuccessful. HPH's failure to obtain advice, of itself, did not increase Bill's costs of prosecuting the proceedings one iota. As I am not satisfied that advice would necessarily have resulted in capitulation by HPH, I think this point is irrelevant for present purposes.
Counsel's second allegation was that Luke knew that HPH would be unable to meet a costs order in Bill's favour. While there was in fact a risk of that for the period after April 2022, due to the failure to obtain judicial advice, I am not sure whether I should necessarily assume that Luke was consciously aware of that risk. In any event, I cannot be satisfied that the risk will come home.
Finally, counsel for Bill pointed to the documentary evidence which played an important role in my decision to uphold Bill's claim. Counsel alleged that Luke had failed to refer to some of the critical documents in his affidavits, with the result that they only emerged when subpoenaed by Bill's solicitors. The suggestion was that Luke had been guilty of lack of candour, at least, when presenting HPH's defence.
This point gives rise to a significant issue of principle in an application such as the present. It was far from clear on the evidence that Luke actually failed to comply with any specific disclosure obligations, or that any such failure had been deliberate. I cannot now recall whether Luke was cross-examined about the point, but for present purposes that does not matter. I was able to decide the case by reference to the contents of the documents themselves, and by reference to concessions made by Luke in his evidence. That made it unnecessary to go into the questions of credit which arose on either side in the litigation.
As McColl JA pointed out in Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300 at [195], the court must be vigilant to ensure applications for costs against legal practitioners should not become an expensive and distracting form of satellite litigation. The same vigilance is required in applications of the present type. The court should resist being drawn, solely for the purpose of deciding whether to make a special costs order, into a renewed factual contest about the rights and wrongs of the conduct of the litigation.
The proceedings took longer than they should have but, as my orders reflect, I consider that Bill bears at least some of the responsibility for that. Whether the breadth of Bill's claims justified the continued defence of the proceedings, and indemnity out of the assets of the Trust, is not for me to say on this application. What I can say is that I am not satisfied that Luke's conduct of HPH's defence was improper or irresponsible.
An order of the type sought in the present case is an extraordinary remedy. It should be reserved for cases involving abuse of process or something similar. The present is far from such a case. I reject the application for an order making Luke personally liable for HPH's costs liability to Bill.

Set-off

As already noted, Bill is legally aided. This means that any costs awarded against him are capped: Legal Aid Commission Act 1979, s 47. I was told that the limit imposed by s 47 is now $15,000. This led counsel for the defendants to raise set-off as an issue. The issue arises in two ways.
First, I have already made orders that Bill pay the possession costs (see [84] above). If that costs order stood alone, the quantum under it would be limited by the cap. The parties, however, agreed that HPH's liability for the general costs of the proceedings should be set off against Bill's liability under that order. It may be unnecessary to make an order to this effect, but there is no harm in doing so. The same applies to the orders I will make in HPH's favour for the amendment costs and for part of the costs of the trial.
The possession costs were awarded in favour of HPH alone and no difficulty arises with setting them off against HPH's liability to Bill. But the amendment costs and the part-trial costs I will award to HPH, are common to the claims against Luke. As I have already noted, HPH may have some entitlement to contribution from Luke for the costs incurred in the defence. If so, HPH might arguably be entitled to a full set-off, on the basis that it would be obliged to account to Luke for his share of the benefit; on the other hand, HPH might only be entitled to set off its share of the costs: see generally Lord v Direct Acceptance Corporation Ltd (1993) 32 NSWLR 362 at 369 (Sheller JA); Goodwin v Duggan (1996) 41 NSWLR 158 at 166-167 (Handley & Beazley JJA), 167-168 (Powell JA). It is not, however, necessary to go into this question for the purposes of the present judgment. For reasons I have given above, in discussing the "rule of thumb", I think it will have to be dealt with at the assessment stage when the full facts are before the assessor.
The second issue concerns the costs order in Luke's favour. Counsel for the defendants pointed to the hardship created by s 47 of the Legal Aid Commission Act in the present case, especially as the proceedings were conducted in a manner which proved to be more costly than was necessary. Counsel submitted that it was open to me to order that Bill's liability for Luke's costs be set off against HPH's costs liability to Bill.
In support of this submission, counsel referred me to the comments of Perram J in Aristocrat Technologies Australia Pty Ltd v Allam [2017] FCA 812 at [14]. His Honour stated that the jurisdiction to set off costs awards "permits, in an appropriate case, set-off between different parties". Counsel also referred me to the decision of Robb J in Ventura v Higgins [2018] NSWSC 909. In that case, his Honour ordered that the enforcement of a costs judgment in favour of the respondents be stayed. The respondents' costs judgment was against the two applicants jointly, but the stay was ordered pending quantification of a costs order made against the respondents in favour of the first applicant alone.
In Aristocrat, Perram J stated only that set-off was permissible "in an appropriate case". His Honour saw the court's power as being "similar to" or "analogous to" the court's power to award costs against a third party. That was founded on a recognition that the court's power to order that costs be set off against other costs, or a judgment, is a discretionary one which derives from the court's inherent jurisdiction over the suitors before it: see at [11].
If A successfully defends litigation brought in the name of B but conducted by or for the benefit of a third party, C, and C is indebted to A for the costs of separate proceedings, an analogy with a third-party costs order is easy to see. But in the present case HPH is not seeking to set its costs liability to Bill off against a costs entitlement it has against some other party involved in the litigation. It is seeking to set that liability off against a costs entitlement of its co-defendant, Luke. There is no apparent analogy with a third-party costs order.
Nor do I think Ventura assists the argument put by counsel. Robb J expressly noted that the application in that case was based on principles applicable to stays and no question of set-off arose (at [41]; see also at [62]).
Although not referred to by counsel for either party, there is some authority on the application of set-off principles in a case where a party is legally aided. The leading decision is that of the English Court of Appeal in Burkett v London Borough of Hammersmith and Fulham [2004] EWCA Civ 1342. The Court in that case qualified, but only in a minor respect, propositions that had been laid down by Scott LJ, speaking for the Court in the earlier case of Lockley v National Blood Transfusion Service [1992] 1 WLR 492. The propositions which were accepted included (Lockley at 496): (1) A direction for the set-off of costs against damages or costs to which a legally aided person has become or becomes entitled in the action may be permissible. (2) The set-off is no different from and no more extensive than the set-off available to or against parties who are not legally aided. The second proposition has also been quoted with apparent approval by the Full Court of the Federal Court in Griffiths v Boral Resources (Qld) Pty Ltd (No 2) (2006) 157 FCR 112 at [32].
Burkett concerned the costs of an interlocutory application which eventually reached the House of Lords and resulted in costs orders in favour of the plaintiff, who was legally aided, against the defendant. But the plaintiff's claim ultimately failed at trial. The Court of Appeal upheld an order permitting the defendant to set its liability under the interlocutory cost orders off against its overall entitlement to the costs of the proceedings. Brooke LJ, giving the judgment of the Court, quoted with approval the following statement of Scott LJ in Lockley ([1992] 1 WLR at 497D-E): A set-off of costs against costs, when all are incurred in the prosecution or defence of the same action, seems so natural and equitable as not to need any special justification. This of course is consistent with the conceded position in the present case, that the interlocutory costs orders in favour of HPH should be set off against the overall order in favour of Bill against HPH.
But while the Court can and should recognise a set-off in favour of HPH for the interlocutory costs in the present case, it should not recognise a more extensive set-off than would be recognised if Bill were not legally aided (see Scott LJ's proposition (2), quoted above). The statutory limitation on the recovery of costs against legally aided person can operate harshly against a successful defendant. But that consequence is one that would have been clearly apparent to the Parliament. The Court should not exercise set-off powers to undermine the statute.
Had legally aided proceedings been brought separately against Luke personally and against HPH, then Luke would have had to accept that the costs ultimately recoverable by him would be limited to the statutory amount. I do not see that the fact that the proceedings have been brought against both parties should make any difference. I therefore do not propose to order that HPH's costs liability to Bill be set off against the costs order obtained by Luke.

Orders

The orders of the Court are: 1. Order that the plaintiff's claim against the first defendant be dismissed. 2. Declare that, on and from the making of these orders, the second defendant holds its legal interest in the land contained in Certificate of Tile Folio Identifier 2066/807968, being the land known as 33 Kyamba Crescent, Maryland, in the State of New South Wales ("the property"), upon trust (after payment of any debts incurred by it in acquiring or improving the property) to repay each of the plaintiff and itself his or its respective contributions to the joint endeavour as defined below, and, as to the residue, for them both in equal shares. For the purposes of this declaration, the contributions shall be the payments or contributions by the parties to: 1. the transfer of the property by the plaintiff to the second defendant (the plaintiff's contribution to include the difference between the amount paid to the plaintiff and the then market value of the property); 2. the construction of a granny flat at the property; 3. the financing of the second defendant's acquisition of the property and its construction of the granny flat by borrowing from a third party financier; 4. allowing the plaintiff to continue to the live at the property, and otherwise renting it out to cover the interest and other holding costs (such as rates and taxes), so that the plaintiff's occupation would be rent-free if possible. And the parties' contributions shall be indexed according to the published All Groups CPI; Australia index, from the dates on which the contributions were made down to the date on which those contributions shall be paid out to the parties. Provided that this declaration shall be conditional upon the plaintiff accepting an obligation to make allowances in favour of the second defendant for: 1. mesne profits in the nature of market rent from 16 March 2020 to 22 March 2022 for that part of the property occupied by him; and 2. any costs or losses incurred by the second defendant as a result from damage the plaintiff may have caused to the property or any interference by the plaintiff in renting to third parties those parts of the property not occupied by him. 1. Grant to the second defendant and the plaintiff liberty to apply with respect to any accounts or enquiries which may be required to quantify the parties' monetary obligations and entitlements under the trust declared in order (2), or with respect to any other directions or orders required in the working out of that order. 2. Order that the plaintiff's claims against the second defendant be otherwise dismissed. 3. Order that the plaintiff pay the first defendant's costs of the proceedings. 4. Order that the plaintiff: (a) pay the second defendant's costs of the plaintiff's notice of motion filed 9 December 2021 and thrown away by reason of the amendment of the plaintiff's statement of claim; (b) pay forty percent of the second defendant's costs of the trial and of the hearing on 10 March 2023. 5. Order that the second defendant: (a) pay sixty percent of the plaintiff's costs of the trial and of the hearing on 10 March 2023; and (b) otherwise pay the plaintiff's costs of the proceedings. 6. Order that the second defendant's costs entitlements under the orders made 8 February 2022, 10 February 2022 and 25 February 2022 and under order 6 above be set off against the second defendant's costs liability to the plaintiff under order 7.

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At a glance

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Judgment (13 paragraphs)

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Cases Cited (32)

Cited By (8)