Mandie v Memart Nominees Pty Ltd [2016] VSCA 4

Court of Appeal (Vic)|2016-02-05|Before: Mr P, Kyrou JA, Ferguson JA, Leish JA

Mandie v Memart Nominees Pty Ltd [2015] VSC 446; Mandie v Memart Nominees Pty Ltd [No 2] [2015] VSC 622 (McMillan J).

PRACTICE AND PROCEDURE - Refusal of application for leave to amend statement of claim - Applicable test - Section 63(1) of the - 'No real prospect of success' - Application for leave to appeal refused.

PRACTICE AND PROCEDURE - Proposed amendments alleged declaration by trustee that certain individuals had no interest in trust was invalid - Individuals had disclaimed their interests - Whether disclaimer deprived children of those individuals from taking share of trust fund on vesting day - Whether disclaimer rendered validity of the declaration moot - Construction of relevant clause - Real prospect of success - Application for leave to appeal granted in respect of proposed amendments - Appeal allowed.

PRACTICE AND PROCEDURE - Proposed amendments alleged conflict of interest by virtue of two directors of trustee being workplace subordinates of beneficiary - Trust deed authorised trustee to exercise powers and discretions notwithstanding that trustee or director had a personal interest in result - Application for leave to appeal refused in respect of proposed amendments.

1 This is an application for leave to appeal against an order made by a judge in the Trial Division refusing leave to the applicants to amend their statement of claim ('substantive order')[1] and a separate costs order.[2]

2 The orders were made in a proceeding brought by the applicants, who claim to be 'General Beneficiaries' under The David Mandie Family Trust ('Trust'), against the respondent who is the trustee of the Trust. The applicants are the spouses and children of Ian Mandie ('Ian') and Stephen Mandie ('Stephen'), who are the sons of David Mandie ('David') and Minnie Mandie ('Minnie').

3 The amendments relate to declarations made by the respondent on 27 May 2014 and 18 September 2014, respectively, regarding the rights of beneficiaries under the Trust. In broad terms, the amendments seek to impugn the declarations on the following grounds:

(a) the 29 May 2014 declaration was made without power and its intended effect was to deprive the children of Ian and Stephen of a conditional right to take a share of the income and capital of the Trust ('Trust Fund') remaining undisposed of as at the vesting day;[3]

(b) both declarations were infected by a conflict of interest by two directors of the respondent.[4]

4 The judge rejected the proposed amendments on the basis that there was no real prospect of the allegations they contained succeeding in the event that they went to trial. The applicants contend that, in doing so, the judge erred, including by applying the wrong test.

5 The applicants' challenge to the judge's costs order is conditional upon the success of the challenge to the substantive order. They contend that the judge erred in ordering that they pay the respondent's costs on an indemnity basis and that the costs be taxed immediately. The applicants have not made any separate submissions in support of this contention but have relied on their submissions relating to the substantive order.

(a) in respect of the proposed amendments that relate to the issues set out at [3(a)] above, leave to appeal should be granted, the appeal should be treated as having been heard immediately and should be allowed;

(b) leave to appeal should be refused in respect of the proposed amendments that relate to the issue set out at [3(b)] above;

(c) the judge's costs order should be set aside; and

(d) the parties should be invited to make further submissions in relation to the costs of the application for leave to appeal and the appeal and in respect of the costs of the application before the judge.

7 Ian, Stephen and Evelyn Danos ('Evelyn') are the three children of David and Minnie. Minnie died on 26 April 1999 and David died on 17 August 2011.

8 At the time of his death, David possessed real and personal assets of significant value, both in his own name and in the Trust, as well as other trusts established for the benefit of himself and Minnie. Most of this wealth was generated by businesses conducted by entities known collectively as the 'James Richardson Group' ('JR Group'). Those businesses include a duty free business.

9 From 19 August 1976 until each of their deaths, David and Minnie were directors of the respondent. Between 13 June 1980 and 18 August 1994, Ian, Stephen and Evelyn were also directors of the respondent. On 4 May 1999, following Minnie's death, Evelyn again became a director and continues in that role. She is also the executive chairman of the JR Group. On 18 August 2011, Milton Lasnitzki, who is the chief executive officer of the JR Group, became a director of the respondent. On 23 May 2014, Garry Stock, who is the duty free chairman of the JR Group, was added as a director of the respondent.

10 There are two issued fully paid ordinary shares in the respondent. The shares were held by David and, upon his death, they vested in the executors of his estate on trust for the beneficiaries of the estate. The executors are Evelyn, Mr Stock and Mark Cerché. Evelyn is the residuary beneficiary of the estate.

11 The Trust was established by a Deed of Settlement dated 24 April 1978 ('Trust Deed') which named the respondent as the trustee. It is a discretionary trust with two classes of beneficiaries, the 'Specified Beneficiaries' and the 'General Beneficiaries'. By virtue of cl 1(1) and the schedule, the Specified Beneficiaries are the children of David and Minnie, that is, Ian, Stephen and Evelyn. Clause 1(2) contains a detailed definition of 'General Beneficiaries' which includes:

(a) the Specified Beneficiaries (cl 1(2)(a)); and

(b) the spouses, children and grandchildren of the Specified Beneficiaries and certain entities in which those spouses, children and grandchildren have a beneficial interest (cl 1(2)(b), (c) and (d)).

12 Clause 1(2) of the Trust Deed contains two provisos, the second of which states that 'the Trustee at any time and from time to time may ... declare in writing that any person shall thereafter be excluded from the class of General Beneficiaries'.

13 Clause 1(3) of the Trust Deed defines 'Beneficiary' to mean 'any of the General Beneficiaries'.

14 Subject to the respondent's power to appoint an earlier vesting day, the schedule to the Trust Deed provides that the vesting day is 24 April 2057.

15 Clause 4(1) of the Trust Deed empowers the respondent to determine the amounts of income, if any, to be distributed to persons who are General Beneficiaries in each year prior to the vesting day. Clause 7(1) empowers the respondent to make payments of capital 'to any beneficiary' prior to the vesting day.

16 Clause 5 of the Trust Deed deals with the vesting of the Trust. It provides as follows:

As from the Vesting Day the Trustee shall stand possessed of the Trust Fund and the income thereof :

(1) in trust for such of the beneficiaries and for such charitable purposes for such interests and in such proportions and for one to the exclusion of the other or others as the Trustee may ... by instrument in writing before the Vesting Date appoint PROVIDED THAT any such appointment shall be revocable by the Trustee ... until the end of the day preceding the Vesting Day when it shall become irrevocable;

(2) insofar as any part of the Trust Fund shall not have been disposed of in accordance with sub-clause (1) of this Clause then the Trustee shall stand possessed of such part and the income thereof in the trust for the Specified Beneficiary absolutely (and if more than one as tenants in common in equal shares) provided always that the children of any Specified Beneficiary who shall have died before the Vesting Day shall take (and if more than one as tenants in common in equal shares) the share which such deceased Specified Beneficiary would have taken had he survived to the Vesting Day and attained a vested interest ...

17 Clause 9 of the Trust Deed confers extensive powers on the respondent, including the power in sub-cl (h) 'to employ any person (including any Trustee hereof) in connection with any trade or business carried on by the Trustee'. Clause 10 provides that a trustee 'may become a Director of or appoint any person (including any person being a Trustee hereunder) to act as a Director on its behalf of any company in which any moneys forming part of the Trust Deed are from time to time invested'.

18 Clause 11 of the Trust Deed authorises the trustee or a director of a corporate trustee to exercise the powers and discretions conferred by the deed notwithstanding a conflict of interest. It provides as follows:

The trustee may exercise or concur in exercising all powers and discretions hereby or by law given notwithstanding that it or any person being a Trustee or any person being a Director or Shareholder of the Trustee has or may have a direct or personal interest in the mode or result of exercising such power or discretion or may benefit either directly or indirectly as a result of the exercise of any such power or discretion and notwithstanding that the Trustee for the time being is the sole Trustee.

19 In the mid-1990's, Ian and Stephen made claims in respect of the assets of companies, trusts and other entities owned or controlled by David and Minnie. On 19 December 1995, David, Minnie, Ian, Stephen, the respondent and others entered into a Settlement Agreement pursuant to which Ian and Stephen received certain financial benefits. Clause 9 of the Settlement Agreement was headed 'Release' and cl 9.2 provided as follows:

9.2 Ian and Stephen acknowledge that on the payments of the amounts referred in Clause 3 and the satisfaction by David and Minnie and other parties controlled by them of the respective obligations imposed on them or any of them under this Agreement that neither Ian nor Stephen have any further rights against David or Minnie or their respective estates or any company in the [JR] Group or any other company trusts or entity owned or controlled by them or any of them and save as set out in this Agreement, Ian and Stephen, for themselves, their legal personal representatives and issue agree to release:

...

(b) the Trustee of the David Mandie Family Trust and any other trustee of a trust which is controlled directly or indirectly by David or Minnie Mandie from any Claim that they or any of them may have against such trustee or the assets of any such trust and agree irrevocably to disclaim any entitlement in relation to any such trust and not to assert any rights as beneficiaries of any such trust ...

20 When the Settlement Agreement was signed, the children of Ian and Stephen were minors.

21 On 27 May 2014, Mr Lasnitzki and Mr Stock, on behalf of the respondent, signed the following declaration ('May 2014 declaration'):

In pursuance of the power vested in the Trustee by the proviso in sub-clause (iv) to Clause 1(2) of the [Trust] Deed ... and of all other powers enabling it so to do, the Trustee declares that lan Mandie and Stephen Mandie, being two of the children of David and Minnie Mandie, are excluded for all purposes from the class of General Beneficiaries from the date of this Declaration and neither Ian Mandie nor Stephen Mandie shall have any interest whether as a General Beneficiary, Specified Beneficiary or otherwise under the [Trust] Deed.

22 On 18 September 2014, Mr Lasnitzki, on behalf of the respondent, signed the following declaration ('September 2014 declaration'):

In pursuance of the power vested in the Trustee by the proviso in sub-clause (iv) to Clause 1(2) of the [Trust] Deed ... and of all other powers enabling it so to do, the Trustee declares that:

(a) the spouses, the children and grandchildren of Ian Mandie and Stephen Mandie, being two of the children of David and Minnie Mandie, and the spouses, widows or widowers of such children and grandchildren; and

(b) any corporation in which any of Ian Mandie, Stephen Mandie or any of the persons specified in paragraph (a) hold more than ten per centum of the issued shares,

are excluded for all purposes from the class of General Beneficiaries and from the date of this Declaration none of them shall have any interest as a General Beneficiary, or otherwise, under the [Trust] Deed.

23 None of the applicants has at any time received any distribution or other benefit from the Trust Fund.

24 On 15 December 2014, the applicants commenced the proceeding below seeking various declarations and an order that the respondent be removed as trustee of the Trust and that a replacement trustee be appointed. In their statement of claim, they allege that:

(a) since at least 2006, the respondent had made distributions from the Trust Fund without a proper exercise of the power and/or discretion to make such distributions and gave no consideration as to whether the applicants ought to receive any distributions from the Trust Fund; and

(b) the September 2014 declaration is invalid because:

(i) it was made by the respondent in bad faith, arbitrarily, capriciously and without any real or genuine consideration;

(ii) Mr Lasnitzki acted at the behest or direction of David and, after his death, Evelyn; and

(iii) Mr Stock acted at the behest or direction of Evelyn.

25 The statement of claim did not allege that the May 2014 declaration was invalid. In fact, it did not refer to that declaration.

26 On 9 June 2015, the applicants filed a solicitor's affidavit which exhibited a further proposed amended statement of claim. In broad terms, the proposed amendments fell into the following categories:

(a) The deletion of paragraphs which concerned the following matters:

(i) the breakdown of the relationship between David and his sons; and

(ii) the allegation that Mr Lasnitzki acted at the behest or direction of David and, after his death, Evelyn, and that Mr Stock acted at the behest or direction of Evelyn.

(i) the May 2014 declaration was made in breach of trust and is invalid because it purported to exclude Ian and Stephen as Specified Beneficiaries in circumstances where the power of exclusion in the second proviso to cl 1(2) of the Trust Deed applied only to General Beneficiaries; and

(ii) the purported exclusion of Ian and Stephen as Specified Beneficiaries was intended to affect those applicants who are the children of Ian and Stephen in that, but for the purported exclusion (if effective) those applicants had an interest in the Trust Fund if the conditions in cl 5(2) of the Trust Deed were satisfied,

(i) alleging that the May and September 2014 declarations are invalid because Mr Lasnitzki and Mr Stock had a conflict between:

(A) their duties as directors of the respondent to act impartially in the administration of the Trust and in the interests of the General Beneficiaries; and

(B) their interests as employees of the JR Group, reporting to Evelyn, to administer the Trust in accordance with her wishes so as to favour her and her family; and

(ii) adding the alleged conflict of interest as a further particular of the existing ground that the September 2014 declaration is invalid because it was made by the respondent in bad faith, arbitrarily, capriciously and without any real or genuine consideration,[5]

27 On 11 June 2015, the respondent filed submissions in which it opposed the proposed amendments in categories (b) and (c) above.

28 On 28 August 2015, the judge made the substantive order, para 1 of which granted leave to the applicants to make the unopposed amendments to the statement of claim that are referred to at [26(a)] above, and para 2 of which otherwise dismissed the application to amend the statement of claim.

29 The judge determined the application for leave to amend the statement of claim by applying the 'no real prospect of success' test in s 63(1) of the Civil Procedure Act 2010 ('CP Act') which deals with the giving of summary judgment. She adopted the interpretation that was given to that phrase by this Court in the following passage from the judgment of Warren CJ and Nettle JA in Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd:[6]

... the test ... should be construed as one of whether the respondent to the application for summary judgment has a 'real' as opposed to a 'fanciful' chance of success; that the 'real chance of success' test is to some degree a more liberal test than the 'hopeless' or 'bound to fail' test; and that, as the law is at present understood, the real chance of success test permits of the possibility that there may be cases, yet to be identified, in which it appears that, although the respondent's case is not 'hopeless' or 'bound to fail', it does not have a real prospect of succeeding.[7]

30 The judge decided that the specified beneficiary allegations did not satisfy the 'real prospect of success' test for the following reasons:

The specified beneficiary allegations are couched in terms that fail to take into account, not only the clear statement in the [Settlement Agreement] that Ian and Stephen disclaim all rights as beneficiaries under the [Trust], with the obvious intent and consequence that they cease to be beneficiaries at all, but also the terms of the 'taking in default' clause of the [Trust Deed] itself. The latter issue has obvious implications for those [General Beneficiaries] whose status as beneficiary was tied to or derived from that of Ian and Stephen as specified beneficiaries. In my view, leave should not be granted to the [applicants] to amend the statement of [claim] in relation to the specified beneficiary allegations as pleaded as it has no real prospect of succeeding, in its current form, if it were to proceed to trial.[8]

31 In relation to the conflict of interest allegations, the judge referred to cl 11 of the Trust Deed and to the New Zealand case of McNulty v McNulty.[9] In that case, Osborne AsJ struck out a claim alleging a conflict of interest on the basis that a clause in a trust deed that was similar to cl 11 rendered such a claim untenable.[10]

32 The judge decided that the conflict of interest allegations did not satisfy the 'real prospect of success' test for the following reasons:

As [the respondent] correctly identifies, the mere fact that Mr Lasnitzki and Mr Stock occupied dual roles in relation to the Mandie family and their business does not of itself, raise any prima facie presumption of a conflict of interest. In the absence of pleadings directed to the existence and content of a specific duty on their part, and of particulars regarding specific allegations of breach, the proposed amendment is too vague to provide the basis for a substantive claim and, therefore, has no real prospect of succeeding, in its current form, if it were to proceed to trial.[11]

33 On 13 November 2015, the judge made the impugned costs order which provided as follows:

The [applicants] pay the costs of the [respondent] of the hearing on 17 April 2015 and of the application filed 1 May 2015, on an indemnity basis, taxed in default of agreement.
The [applicants] pay the costs of the [respondent] thrown away by reason of the amendments to the statement of claim for which leave was granted in accordance with the [Reasons] on an indemnity basis, taxed in default of agreement.

3. The costs the subject of this order be taxed immediately.

34 It is not necessary to set out the judge's reasons for the costs order. This is because the parties will be invited to make further submissions in relation to costs, including the costs below, consequent upon the publication of these reasons.

35 The applicants seek leave to appeal against para 2 of the substantive order and the whole of the costs order on the following grounds:

The learned primary judge erred in failing to identify and apply the correct test for determining whether to grant leave to file and serve an amended pleading where the grant of leave is resisted only on the ground that the proposed claim ought not to succeed.
The learned primary judge erred in holding that the proposed amendments to the applicants' statement of claim to include ... 'the specified beneficiary allegations' have no real prospect of succeeding at trial.
The learned primary judge erred in refusing to grant to the applicants leave to amend their statement of claim to include 'the specified beneficiary allegations' and ordering the applicants to pay the respondent's costs referred to in the [costs order] on an indemnity basis to be taxed immediately.
The learned primary judge erred in holding that the proposed amendments to the applicants' statement of claim to include ... 'the conflict of interest allegations' have no real prospect of succeeding at trial.
The learned primary judge erred in refusing to grant to the applicants leave to amend their statement of claim to include the conflict of interest allegations and ordering the applicants to pay the respondent's costs referred to in the [costs order] on an indemnity basis to be taxed immediately.

Ground 1: Did the judge apply the wrong test?

36 The applicants submitted that the judge had applied the wrong test in refusing the application to amend their statement of claim to include the specified beneficiary allegations and the conflict of interest allegations because she had only considered whether those allegations had a 'real' prospect of success. According to the applicants, the judge should have, but failed to, consider:

(a) whether the proposed amendments were arguable and not fanciful or futile;[12] and

(b) whether it was clear that the proposed amendments gave rise to no real question to be tried.[13]

37 In support of its contention as to the proper test for the grant of leave to amend pleadings, the applicants relied on statements made in three cases which predated the CP Act.

38 The first statement was made by Dawson J in Commonwealth v Verwayen[14] and was as follows:

In granting leave to amend, a court is concerned with the raising of issues and not with their merits. Of course, an amendment which is futile because it is obviously bad in law will not be allowed. But it is no ground for refusing an amendment that it raises a claim or defence which ought not to succeed. That will be an issue upon trial.[15]

39 The second statement was made by McDonald J in Gimson v Victorian Workcover Authority[16] and was as follows:

On an application to amend leave will not be granted if the amendment is so obviously futile or does not disclose a cause of action that it would be struck out if it had appeared in the original pleading.[17]

40 The third statement was made by Winneke P (with whom Callaway JA agreed) in Howarth v Adey[18] and was as follows:

The fundamental principle which ... should guide a trial judge upon an application by a party to amend his pleadings so as to plead a new or alternative claim or defence is that such an application should ordinarily be allowed provided that any injustice arising to the other party from so doing can be compensated by the imposition of terms.[19]

41 We are not satisfied that Ground 1 warrants the granting of leave to appeal. The judge used the correct test when she considered whether the proposed amendments had a real prospect of success.

42 The CP Act has changed the litigation landscape. One of the main purposes of that legislation is to reform practice and procedure in civil proceedings,[20] including by reforming the law relating to summary judgment.[21] More than ever, the focus is now pointedly on efficiency and cost-effectiveness, albeit that they are not the only, nor the predominant, considerations.[22] One consequence is that amendments that might have been permitted previously may no longer be allowed. As such, the older authorities that preceded the CP Act which set out when a pleading amendment will be allowed must be approached with caution.

43 The power conferred on the court by s 63(1) of the CP Act to dispose of claims before a trial facilitates one of the stated purposes of the Act. Subject to limited exceptions,[23] if a claim or defence has no real prospect of success, then summary judgment may be given.[24] It must follow that a proposed pleading amendment raising a claim or defence of that type should not be permitted. To grant leave in that circumstance would be futile as the claim or defence would be susceptible to a summary judgment application.[25] This principle facilitates the administration of justice, as it enables courts to prevent claims or defences being pleaded where they will inevitably fail and thus avoid the cost and inconvenience that would otherwise arise if those claims or defences were permitted to be made only to be the subject of summary judgment subsequently.

44 Since the introduction of the CP Act and the 'no real prospect of success' test, various authorities have used different language to explain what the test means.

45 According to Lysaght: a prospect which is not 'real' is 'fanciful'; although the 'no real prospect of success' test in s 63(1) of the CP Act is more liberal than the common law test of 'hopeless' or 'bound to fail', there may not be much difference between them in practice; and, properly understood, a real question to be tried is one which realistically might result in the respondent to an application for summary judgment succeeding in the proceeding.[26]

46 In Utility Services Corporation Ltd v SPI Electricity Pty Ltd,[27] a set of pleading amendments were refused at first instance. The proposed amendments depended upon a particular construction of the proportionate liability provisions of the Wrongs Act 1958 which the primary judge determined had no reasonable prospect of success. He went on to say that he was satisfied that the proposed amendments were futile.[28] The pleading amendments were allowed on appeal. Dixon AJA, delivering the leading judgment, described the proposed pleading as one which was not 'fanciful or futile.'[29] In reaching this conclusion, he endorsed the 'no real prospect of success' test in s 63(1) of the CP Act.[30] Beach AJA agreed that the appeal should be allowed. He had initially been persuaded that the construction of the legislation preferred at first instance was correct but was later satisfied that an alternative construction was at least as powerful as that preferred by the trial judge.[31] He was satisfied that the proposed amendments were therefore 'arguable' and should be allowed.[32] Bongiorno JA agreed with Beach and Dixon AJJA. In doing so, he took the view that the basis of liability alleged in the proposed pleading was not 'unarguable.'[33] Essentially, the Court allowed the amendments because it could not be said that they had no real prospect of success. The Court was not establishing any different test to that set out in s 63(1) of the CP Act nor was it setting a lower threshold for when pleading amendments will be allowed.

47 The applicants accepted that Ground 1 could not succeed if the judge had refused leave to amend the statement of claim on the basis that the allegations in the impugned amendments were not arguable but fanciful or futile and that it was clear that they gave rise to no real question to be tried. Where the Court is considering an objection to a proposed amendment to a pleading on the basis that it would not survive a summary judgment application, the correct test is whether the amendments raise a claim or defence that has no real prospect of success, in the sense of being fanciful. But even on the applicants' test, the result here is the same. When one considers the substance of what the judge decided rather than the precise language that she used, it is clear that she concluded that, on the basis of the key documents before her, the uncontested facts and the state of the law, the allegations in the impugned amendments were unarguable, fanciful or futile and could not realistically add to the applicants' prospects of obtaining the relief sought by them. Accordingly, even if the applicants' submissions about the correct test to be applied in determining an application to amend a pleading were correct, they have not demonstrated that the judge failed, in substance, to apply that test.

48 It follows that the applicants have not demonstrated that the judge erred in relation to the test that she applied in refusing their application for leave to amend their statement of claim.

Grounds 2 and 3: Prospect of success of specified beneficiary allegations

49 The applicants submitted that the specified beneficiary allegations gave rise to a question as to the proper construction of cl 5(2) of the Trust Deed. According to the applicants, the existence of such a question rendered erroneous the judge's conclusion that the specified beneficiary allegations failed to satisfy the test for granting leave to amend pleadings. In support of this proposition, the applicants relied on the reasons of McHugh J in News Ltd v South Sydney District Rugby League Football Club Ltd,[34] in which he observed that questions of construction were notorious for generating opposing answers, none of which could be said to be either clearly right or clearly wrong.[35]

50 The proper construction of cl 5(2) of the Trust Deed was not clearly identified by the applicants either before the judge or in their written case in support of their application for leave to appeal. It was articulated for the first time on the hearing of that application.

51 According to the applicants, on its proper construction, the rights of the children of a Specified Beneficiary under cl 5(2) of the Trust Deed depend solely on the terms of that clause and cannot be affected by the Settlement Agreement. Clause 5(2), so it was said, specified only two conditions that had to be met for those children to take a share of the undisposed of Trust Fund on the vesting day. Using the children of Ian as an example, they were said to be entitled to take such a share on the vesting day if Ian died prior to that day and had not ceased to be a Specified Beneficiary prior to his death. The applicants submitted that if these two conditions were satisfied, by virtue of cl 5(2), the children were entitled to take the share which Ian would have taken had he survived to the vesting day and attained a vested interest.

52 The applicants contended that the words 'the share which such deceased Specified Beneficiary would have taken' coupled with the words 'and attained a vested interest' in cl 5(2) of the Trust Deed merely describe what the children of a Specified Beneficiary would be entitled to take if the two conditions described at [51] above are met. The latter words were said to refer to the attaining of a vested interest by virtue of satisfying the two conditions rather than to anything that was external to the provisions of the deed. According to the applicants, if Ian and Stephen satisfied the conditions of surviving to the vesting day and having the status of Specified Beneficiaries on that day, they would have attained a vested interest in a share of the undisposed of Trust Fund and, in the event that they did not survive to that day, their children would be entitled to take the share that Ian or Stephen would have taken had they survived. On the applicants' construction of cl 5(2), the disclaimer by Ian and Stephen of their interests under the Trust pursuant to cl 9.2 of the Settlement Agreement would be effective in preventing them from taking any share of the Trust Fund under the clause if they survived to the vesting day but such disclaimer had no bearing on the entitlements of their children under cl 5(2).

53 The applicants submitted that their preferred construction of cl 5(2) gave full effect to all the words in that clause, including the words 'and attained a vested interest' and did not strain the meaning of any of its provisions. They also submitted that their preferred construction was based on the ordinary and natural meaning of the words of the clause unaffected by any assumption that it sought to provide a substitutional gift to the grandchildren of David and Minnie or that the rights of those children were 'derivative' or dependent on the relevant parent retaining his or her rights under the Trust.

54 According to the applicants, their preferred construction of cl 5(2) of the Trust Deed did not result in any absurdity, as it was understandable that the settlor of the Trust would want to ensure that the grandchildren of David and Minnie were capable of receiving a share of the undisposed of Trust Fund if the relevant parent did not survive to the vesting day. On the other hand, so it was said, the construction adopted by the judge could lead to the unfair and anomalous result of a child of David and Minnie who had no realistic prospect of surviving to the vesting day maliciously seeking to deprive his or her children of their entitlements under cl 5(2) by the mechanism of a disclaimer.

55 The respondent submitted that the terms of cl 5(2) of the Trust Deed were plain, providing for a substitutional gift in which the entitlement of the grandchildren of David and Minnie could be no greater than that of the relevant parent.[36] According to the respondent, if Ian and Stephen would not have taken any share of the Trust Fund had they survived to the vesting day due to the Settlement Agreement, then their children would also not take any share of the undisposed of Trust Fund in the event that Ian and Stephen did not survive to that day.

56 The respondent contended that the provisions of cl 5(2) which determined what, if any, share of the undisposed of Trust Fund the grandchildren of David and Minnie would take on the vesting day were 'the share which such deceased Specified Beneficiary would have taken had he survived to the Vesting Day'. The words 'and attained a vested interest' were said to be merely descriptive of the attaining of such interest as the children of David and Minnie would be entitled to take if they survive to the vesting day, and did not impose an additional condition to taking a share of the undisposed of Trust Fund. On this basis, so it was said, cl 5(2) would operate in the same way even if the words 'and attained a vested interest' had been omitted.

57 The respondent submitted that the disclaimer by Ian and Stephen in cl 9.2 of the Settlement Agreement was effective as a matter of law to eradicate any ongoing entitlement by them in the Trust and to swell the entitlement of Evelyn,[37] such that the children of Ian and Stephen also ceased to have any ongoing entitlement. The respondent observed that cl 9.2 was expressed to be on behalf of Ian, Stephen and their 'issue', demonstrating that the consequential effect of cl 9.2 on Ian's and Stephen's children's rights was neither accidental nor unforeseen.

58 The respondent submitted that by differentiating between the interests of Ian and Stephen on the one hand and their children on the other hand, the applicants' preferred construction of cl 5(2) would produce inconsistent and absurd results depending on the state of affairs as at the vesting day. In support of this contention, the respondent referred to the following scenarios that might arise under the applicants' preferred construction:

(a) if Ian, Stephen and Evelyn survive to the vesting day, Evelyn would be entitled to 100 per cent of the undisposed of Trust Fund;

(b) if only Stephen and Evelyn survive to the vesting day, the undisposed of Trust Fund would be divided equally between Evelyn on the one hand and the children of Ian on the other hand;

(c) if Ian, Stephen and Evelyn die before the vesting day, the undisposed of Trust Fund would be divided among their respective children.

59 The respondent argued that, as the children of Ian and Stephen ceased to have any rights under cl 5(2) of the Trust Deed by virtue of the disclaimer in the Settlement Agreement, even if it could be established that the May 2014 declaration is invalid, such invalidity would not have any practical bearing on the rights of those children under that clause. Thus, so it was said, whether the May 2014 declaration invalidly purported to exclude Ian and Stephen as Specified Beneficiaries was a moot question in respect of which the Court would not make a declaration.[38]

60 According to the respondent, the judge correctly concluded that the rights of Ian's and Stephen's children under cl 5(2) of the Trust Deed were 'tied to or derived from' the rights of Ian and Stephen and, accordingly, the disclaimer by Ian and Stephen of their rights had a consequential effect on their children's rights.

61 In our opinion, on the basis of the drafting of the specified beneficiary allegations and the limited and confined submissions that the applicants made before the judge in support of those allegations, it is understandable that she concluded that they had no real prospect of succeeding if they proceeded to trial. The applicants did not explain their preferred construction of cl 5(2) of the Trust Deed or identify how the specified beneficiary allegations exposed that construction as an issue in the proceeding.

62 It is unfortunate, and inconsistent with the approach to the conduct of civil litigation that is now enshrined in the CP Act, that the case that the applicants sought to make in respect of the specified beneficiary allegations was not fully exposed until the hearing of the application for leave to appeal. We defer to another day the cost consequences, if any, of the late articulation of the applicants' preferred construction of cl 5(2) of the Trust Deed.

63 As the submissions of the parties which we have summarised above demonstrate, the construction of cl 5(2) of the Trust Deed is not straightforward. While we were informed that clauses similar to cl 5(2) are in general use, we were not referred to any relevant authorities other than Re Wells; Wells v Begley.[39] However, the clause under consideration in that case did not contain the words 'and attained a vested interest'. In these circumstances, we are satisfied that the applicants' preferred construction of cl 5(2) is not fanciful. As such, the specified beneficiary allegations, as expounded before us, have a real prospect of success.

64 In reaching that conclusion, we have taken account of the respondent's submission that the specified beneficiary allegations, as pleaded, do not expose the issue of construction in cl 5(2) of the Trust Deed and, to the contrary, proceed on the basis that the words 'and attained a vested interest' have no operation. It suffices to say that, while the relevant paragraph of the further proposed amended statement of claim omits those words, we do not think that this precludes reliance on the construction now advanced in support of the allegations as pleaded.

65 We reject the respondent's submission that, even if we were to decide that the specified beneficiary allegations had a real prospect of success, we should refuse leave to appeal on the basis that the judge's decision concerned a matter of practice and procedure and that the applicants would not suffer any substantial injustice because that decision did not preclude them from re-pleading. In our opinion, as we have concluded that the specified beneficiary allegations, as pleaded, have a real prospect of success, they should be considered on their merits at trial. If we were to refuse leave to appeal, it is likely that the applicants would make a fresh application for leave to re-plead the specified beneficiary allegations. This would further delay the progress of the proceeding towards trial and would add to the parties' costs.

66 Further, while the judge described some aspects of the applicants' conduct of the proceeding below as 'unsatisfactory',[40] we are of the view that the conduct is not such as to enliven the Court's discretion to refuse leave to appeal.

67 Accordingly, leave to appeal will be granted in respect of Grounds 2 and 3, the appeal will be treated as having been heard immediately and will be allowed. As Grounds 2 and 3 also deal with the costs order, that order will be set aside.

Grounds 4 and 5: Prospect of success of conflict of interest allegations

68 The applicants submitted that the judge refused their application for leave to amend their statement of claim to include the conflict of interest allegations solely on the basis that those allegations were 'too vague to provide the basis for a substantive claim' and, therefore, had no real prospect of succeeding.[41] The applicants contended that, in reaching this conclusion, the judge failed to consider the conflict of interest allegations in the context of the existing 'bad faith' ground in their statement of claim, that is, the allegation that the September 2014 declaration was made by the respondent in bad faith, arbitrarily, capriciously and without any real or genuine consideration.[42] The applicants noted that, before the judge, the respondent conceded that the existing bad faith ground was properly pleaded. They argued that, having regard to this concession, the fact that, in respect of the September 2014 declaration, the conflict of interest allegations were in the form of additional particulars in support of the bad faith ground meant that the allegations satisfied the test for granting leave to amend pleadings.

69 The applicants contended that cl 11 of the Trust Deed was not applicable to the conflict of interest allegations. This was said to be because that clause merely negated the self-dealing rule pursuant to which a trustee was precluded from gaining a benefit from its exercise of a power or discretion under the relevant trust. According to the applicants, cl 11 did not affect the respondent's fiduciary duties, including the duty to exercise its powers and discretions in good faith and in the interests of the beneficiaries of the Trust.

70 The applicants further contended that the conflict of interest allegations required the determination of disputed issues of fact, including inferences to be drawn from the established facts. On this basis, they argued that the judge erred in refusing them leave to amend the statement of claim to include those allegations.

71 The respondent advanced two reasons as to why, in its submission, the judge had correctly refused the applicants' application for leave to amend their statement of claim to include the conflict of interest allegations.

72 First, the respondent contended that the conflict of interest allegations were entirely answered by cl 11 of the Trust Deed which was effective in accordance with its terms.[43] The respondent characterised the conflict of interest allegations as amounting to an allegation that Mr Lasnitzki and Mr Stock might benefit in their employment with the JR Group, at least indirectly, as a result of the exercise of their power as directors of the respondent in a manner favourable to Evelyn. According to the respondent, such an allegation was properly characterised as a 'personal interest in the ... result of exercising [the Trustee's] power' and thus fell within cl 11.

73 According to the respondent, cl 11 of the Trust Deed rendered 'innocuous' the alleged conflict between the duties of Mr Laznitski and Mr Stock as directors of the respondent and any personal interest arising from their employment with the JR Group reporting to Evelyn. As such, so it was said, the alleged conflict could not assist the applicants to establish that the respondent breached any fiduciary duty in making the May and September 2014 declarations or that the September 2014 declaration was made in bad faith, arbitrarily, capriciously and without any real or genuine consideration. The respondent argued that this meant that the alleged conflict could not be a proper stand-alone ground of invalidity or a proper particular in support of the bad faith ground.

74 Secondly, the respondent observed that the applicants had not alleged that Mr Lasnitzki and Mr Stock had in fact improperly followed Evelyn's wishes and instead relied on the existence of a 'structural conflict' arising from the fact that they were directors of the respondent and employees of the JR Group reporting to Evelyn. The respondent also observed that the applicants had never alleged that Mr Lasnitzki and Mr Stock were under a duty to avoid such a 'structural conflict', nor had they alleged that a failure to do so would render invalid any declaration made by Mr Lasnitzki and Mr Stock.

75 Contrary to the applicants' submission at [70] above, the respondent contended that the conflict of interest allegations did not give rise to disputed issues of fact. According to the respondent, even if the facts sought to be asserted by the applicants in support of the conflict of interest allegations were made out, those allegations still had no real prospect of success.

76 In our opinion, Grounds 4 and 5 do not warrant the granting of leave to appeal.

77 We agree with the submissions of the respondent, as summarised at [74] above, that the conflict of interest allegations, as currently pleaded, are deficient. The dual capacities of Mr Lasnitzki and Mr Stock, without any additional pleaded facts, are not capable of amounting to a breach of fiduciary duty or of assisting in making good the bad faith ground. The dual capacities are contemplated by cls 9(h) and 10 of the T[44]st Deed.44

78 Furthermore, we agree with the respondent that cl 11 of the Trust Deed is an insurmountable obstacle to the dual capacities of Mr Lasnitzki and Mr Stock in and of themselves amounting to a breach of fiduciary duty or of assisting in making good the bad faith ground. The interest that Mr Lasnitzki and Mr Stock are alleged to have as employees of the JR Group reporting to Evelyn is properly to be described as a personal interest in the result of exercising their power under the Trust within the meaning of cl 11 because it is implicitly an interest in the advancement of their careers by pleasing their workplace superior. As cl 11 authorises the respondent to exercise its powers and discretions notwithstanding that its directors have a personal interest in the result of that exercise, it is not possible for such an exercise, without more, to establish a breach of fiduciary duty or to make good an allegation that the respondent acted in bad faith, arbitrarily, capriciously and without any real or genuine consideration merely because of the existence of the personal interest.

79 It follows that the judge correctly decided that the conflict of interest allegations did not have a real prospect of success.

80 The above analysis proceeds on the basis that, while the conflict of interest allegations are relied upon as an independent ground to impugn both the May and September 2014 declarations, that ground is also relied upon as a particular of the existing bad faith ground only in relation to the September 2014 declaration. There is some ambiguity in the further proposed amended statement of claim in that, while the bad faith ground is pleaded in a paragraph that relates solely to the September 2014 declaration, that paragraph is subsequently referred to as one of the paragraphs by reason of whose contents both declarations are said to be invalid. In any event, even if the conflict of interest allegations are intended to be a particular of the bad faith ground in respect of both declarations, for the reasons we have discussed, those allegations do not have a real prospect of success.

81 For the above reasons, we have reached the conclusions set out at [6] above.

[1] Mandie v Memart Nominees Pty Ltd [2015] VSC 446 ('Reasons').

[2] Mandie v Memart Nominees Pty Ltd [No 2] [2015] VSC 622.

[3] The amendments containing this ground, which were described by the judge as the 'specified beneficiary allegations', are summarised at [26(b)] below.

[4] The amendments containing this ground, which were described by the judge as the 'conflict of interest allegations', are summarised at [26(c)] below.

[6] (2013) 42 VR 27 ('Lysaght').

[7] Lysaght (2013) 42 VR 27, 39 [29].

[10] McNulty (2011) 14 ITELR 361, 376 [46], 380 [60]-[61], 395 [138].

[12] The applicants relied on Utility Services Corporation Ltd v SPI Electricity Pty Ltd [2012] VSCA 158; (2012) 35 VR 628, 629 [1], 630 [8], 641 [48] ('Utility Services').

[13] The applicants relied on Lysaght (2013) 42 VR 27, 40 [35(d)].

[14] (1990) 170 CLR 394 ('Verwayen').

[15] Verwayen (1990) 170 CLR 394, 456.

[17] Gimson [1995] VicRp 14; [1995] 1 VR 209, 215 (citations omitted).

[19] Howarth [1996] VICSC 4; [1996] 2 VR 535, 542. See also Etna v Arif [1999] VSCA 99; [1999] 2 VR 353, 367 [35].

[23] CP Act s 64 (where it is not in the interests of justice to dispose of the proceeding summarily or where a full hearing on the merits is appropriate).

[25] There are other bases upon which an application for leave to amend may be refused including where the pleading would be susceptible to being struck out as an abuse of process (Supreme Court (General Civil Procedure) Rules 2015 r 23.02(d)) or where there has been delay such as would warrant the exercise of the discretion to refuse the application.

[26] See [29] above and Lysaght (2013) 42 VR 27, 37 [23]-[24], 38-9 [27]-[29], 40 [35].

[28] Matthews v SPI Electricity Pty Ltd [2012] VSC 70 [102] n 67.

[29] Utility Services [2012] VSCA 158; (2012) 35 VR 628, 641 [48].

[30] Utility Services [2012] VSCA 158; (2012) 35 VR 628, 635 [24] n 9.

[31] Utility Services [2012] VSCA 158; (2012) 35 VR 628, 630 [7].

[32] Utility Services [2012] VSCA 158; (2012) 35 VR 628, [8].

[33] Utility Services [2012] VSCA 158; (2012) 35 VR 628, [1].

[35] News [2003] HCA 45; (2003) 215 CLR 563, 580 [42]. McHugh J added that frequently, there is simply no 'right' answer to a question of construction. See also Utility Services [2012] VSCA 158; (2012) 35 VR 628, 630 [7].

[36] The respondent relied on Re Wells; Wells v Begley [1930] NSWStRp 19; (1930) 30 SR (NSW) 150, 156.

[37] The respondent relied on Commissioner of Taxation (Cth) v Cornell [1946] HCA 32; (1946) 73 CLR 394, 401-2; JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd [1985] VicRp 88; [1985] VR 891, 930-1, 935; Commissioner of Taxation (Cth) v Ramsden [2005] FCAFC 39; (2005) 58 ATR 485, 491 [26].

[38] As to the principle that a court will refuse to make a declaration in respect of a moot question, see Australian Securities Commission v Ampolex Ltd (1995) 38 NSWLR 504, 507-8; Bayston v Scotch College [2002] VSC 516 [24]-[25].

[41] See [32] above.

[43] The respondent relied on Elovalis v Elovalis [2008] WASCA 141 [66]-[70]; McNulty (2011) 14 ITELR 361; Lynton Tucker, Nicholas Le Poidevin and James Brightwell, Lewin on Trusts (Sweet & Maxwell, 19th ed, 2015) 802-3 [20-179]-[20-182].

[44] See [17] above.

Court (General Civil Procedure) Rules 2015

At a glance

Court

Decision date

Before

Source

Judgment (163 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (6)