O'Keeffe v Hayes Knight GTO Pty Ltd

Federal Court of Australia|2005-04-08|Before: Nicholson J

REASONS FOR JUDGMENT 1 These reasons concern entitlement to costs of a trustee and of the applicants in the following circumstances. By an amended application filed on 13 September 2004 the applicants applied in reliance on s 283AE of the Corporations Act 2001 (Cth) ('the Act') to terminate the appointment of the respondent as trustee to the holders of debenture stock issued by Performance Finance Ltd ('Performance') and to seek appointment of Highstoke Pty Ltd ('Highstoke') as trustee. The respondent conceded the application at the hearing on 13 September 2004. The respondent then submitted that it was entitled to costs. In oral submissions the applicants argued that the respondent should not have its costs where, as trustee, it had resisted its removal in circumstances where it was committing an offence under s 283AC(3) of the Act. 2 Section 283AE of the Act provides that the Court may terminate the existing trustee's appointment and appoint a person who may be a trustee under s 283AC as trustee in the existing trustee's place on the application of the borrower, the existing trustee, a debenture holder or ASIC if the existing trustee fails or refuses to act. 3 In their supporting points of claim to the amended application the applicants stated the following. They said they were holders of debenture stock issued by Performance. The respondent was the trustee for all holders of such debenture stock pursuant to a trust deed between the respondent and Performance dated 10 June 1993 and supplemental amending deeds ('the Trust Deed'). It is claimed that pursuant to the terms of the Trust Deed, the Corporations Law/Act and the common law the respondent owed various duties to the beneficiaries. In those circumstances it was claimed the respondent was in receipt of information from which it knew, or ought to have known, that there was a real possibility that the property of the borrower (Performance) was or may become insufficient to repay the debentures as and when they became due. Such information, it was claimed, was received by the respondent in its capacity as trustee and for the benefit of the beneficiaries including the applicants. It is alleged that in breach of the respondent's duties, no information as to the financial position of Performance was provided to the beneficiaries. In any event, it was alleged that if the respondent had exercised reasonable diligence it would have ascertained that as at July 1999, July 2000, July 2001 and/or July 2002 the property of Performance may not have been sufficient to pay the debentures as and when they fell due. Alternatively, it was claimed the trustee ought to have at least applied to the Court for directions in the circumstances. The applicants' claim that the debenture holders had lost a significant portion of their investment and that unless litigation was commenced they were unlikely to recover more than 40c in the dollar. It is claimed that the beneficiaries suffered loss and damage due to the respondent's breach. Therefore it was claimed that the trustee was in a position where its interest to avoid being sued in relation to the breach and its duties to the beneficiaries were in conflict. Pursuant to s 283AC(2) of the Act it was claimed that the respondent could not continue to act as trustee. It was said that the trustee's self-evident conflict had material effects on its performance and on the interests of the beneficiaries. It was therefore intended that the application be brought for the Court to exercise its power pursuant to s 283AE(2)(b) to determine the trustee's appointment and appoint a trustee in its place. 4 In the supporting outline of submission the applicants asserted that the respondent was in a position of conflict in duty because it was unable to act impartially in considering debenture holders' claims against itself; it was unable to consider impartially the merits of debenture holders' claims against persons other than the trustee; it failed to comply with duties as trustee in an endeavour to protect its own interests; it used its office as trustee in an endeavour to persuade debenture holders not to make claims against it; and it had made untenable contentions as to its powers and duties in an endeavour to protect its position.

Trustee's entitlement to indemnity in respect of costs

respondent's submissions 5 In written submissions made available on 13 September 2004 in court, the respondent submitted as follows. It is said that the general rule is that the trustee is entitled to its costs from the estate on a solicitor-client basis: Miller v Cameron (1936) 54 CLR 572 at 578; Hunter v Hunter [1938] NZLR 520 at 538; and Jacobs' Law of Trusts in Australia (5th edn, 1985, Butterworths) at 2109. Against this, it is submitted, a trustee may be deprived of its costs only where it has been guilty of misconduct. In Miller,it is accepted that the trustee had been asked by every person interested in the trust to resign in circumstances where the breaches of trust had been proved. In Hunter,it is accepted by the respondent that four causes of action were pursued against the trustee and the trustee was removed following findings of misconduct. 6 Here, however, it is submitted that misconduct has not been proved. Rather, misconduct is merely alleged in 'somewhat vague terms' and no formal allegations have been put to which the respondent should respond. Here, the application is said to have been based solely on the conflict of interest provisions of the Act. Also, this is not a case where the machinery in the Trust Deed has been invoked for removal of the trustee. 7 Reference was made to Guazzini v Pateson (1918) 18 SR (NSW) 275 at 293 and McKenna v Lowe (1878) 1 SCR (NSW) EQ 10. 8 The respondent also makes a number of submissions in further support of its position. It states it was entitled and bound to properly investigate the allegations of conflict by one beneficiary before abandoning its role as trustee. The notification of support of other beneficiaries was said to be late in coming. Further it conceded shortly before the hearing (on 13 September 2004) that it should resign so that this is not a case of its defence being abandoned on the day of the hearing.

Applicants' submissions 9 The applicants submit that the trustee's entitlement to indemnity out of the trust estate in respect of costs paid or incurred exists under the general law if the expenses are prudently and reasonably incurred in the discharge of the trustee's duties: Adsett v Berlouis (1992) 37 FCR 201 at 212. In particular, it is said, this approved the views expressed by Bowen LJ in Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562: see Adsett at 211. 10 The applicants submit that the authorities of Hunter and Guazzini do not support the respondent's argument and are contrary to the principles expressed in Adsett. It is submitted that in Hunter at 538.29-539.05 Myers CJ said, consistently with Adsett, that where a trustee's defence to a proceeding to secure its removal fails, it may be deprived of its costs and ordered to pay the plaintiff's costs depending on the circumstances of the case. In Guazzini, it is submitted, the plaintiff's suit to remove the trustee failed and she was ordered to pay the costs (at 295). 11 In the present proceeding it is said to be relevant that before the proceeding was instituted the respondent's position of conflict was pointed out to it. From 2 July 2004 (the date of an affidavit by Mr McLernon) it was confirmed that many debenture holders sought the respondent's removal. Also, it was not necessary for the applicants to show that the respondent had breached its duty but only that there was a reasonable case or apprehension that it had. It was not until the day of the hearing that the respondent abandoned its defence, having filed no submissions. The Court is asked to accept that the respondent finally conceded that it could not continue to act as trustee. The applicants submit that the respondent, in defending the action for its removal prior to that time, supported its own interests and not those of the trust estate. This is because the interests of the respondent did not coincide with the trust estate as soon as it became aware that even one of the beneficiaries proposed to make a claim against it arising from an alleged breach of its duties as trustee on the grounds stated above. 12 Therefore, the applicants submit that the rule which gives a trustee the prime facie entitlement to be indemnified for its costs out of the trust fund relates only to the costs incurred in the administration and distribution of the trust: Miller at 578-579. The applicants therefore disagree with the respondent's submission concerning the affect of Miller and state that it is a case in which the pleadings did not allege misconduct on the part of the trustee and misconduct was not proven, although evidence tending to establish misconduct was admitted at the trial. 13 The respondent provided a written outline of argument in reply raising issues which will be addressed in the reasoning which follows.

reasoning 14 In this Court the starting point for consideration of this issue must be the decision of the Full Court in Adsett. There it is made clear at 212 that where an expense is one 'prudently and reasonably incurred in the discharge of the trustee's proper duties' there is a right under the general law for the trustee to be indemnified out of the trust estate. However, if the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not 'properly incurred'. As the Full Court said at 213, for a trustee to involve the estate in litigation about his or her past performance, especially when a composition is likely to be approved, is to incur an unnecessary expense. 15 It is in those terms that the principle must be considered. The terms in themselves do not require the existence of an order for removal of a trustee in order to establish this entitlement to costs. It is now common ground that Miller, while being a case in which misconduct on the part of the trustee was not alleged in the pleadings, was a case where evidence tending to establish misconduct was admitted without objection at trial and was held to be properly taken into account. In Miller, Latham CJ at 579 said in relation to the general rule that a trustee is allowed costs out of the trust estate if the trustee's conduct has been honest, even though it may have been mistaken: 'The position is admittedly different to a case of misconduct. In this case there has, however, been no misconduct in the management of the trust estate. In this case the trustee was asked to resign his office by every person interested in the execution of the trust. In my opinion his refusal to resign in all the circumstances of the case has resulted in legal proceedings which ought to have been avoided. The defendant would have acted wisely and properly in resigning as soon as he was asked. In defending the action and in prosecuting this appeal the defendant has been representing and supporting his own interests and not those of the trust estate. He has failed to show that his interests coincide with the interests of the trust estate. In such a case I consider it quite proper that he should pay the plaintiffs' costs of the action and of the appeal to this Court.' That passage makes apparent that it is not just misconduct which removes a trustee's right to indemnity. The respondent's focus on the absence of proven misconduct cannot therefore be decisive. It is to all the circumstances of the case that attention must be directed. 16 I do not consider that the respondent's submissions adequately answer the applicants' submissions that the relevant factors in this case show that the respondent was representing and supporting its own interests and not those of the trust estate. In my view the applicants are correct in submitting that the interests of the respondent did not coincide with the trust estate as soon as the conflict became apparent. The respondent's case leaves unexplained on a satisfactory basis the time lapse between the allegation of conflict and the concession. The obligation on the respondent to remain as trustee until a new trustee could be appointed does not mitigate the central fact of the conflict of the respondent acting in its own interests. 17 For these reasons I agree with the submissions for the applicants that the respondent is not entitled to indemnity for its costs from the trust fund.

Applicants' entitlement to costs from unsuccessful trustee

Funding Agreement 18 The applicants entered into an agreement with Insolvency Litigation Fund Pty Ltd ('ILF') dated 17 February 2004 titled 'Funding and Retainer Agreement'. The Retainer Agreement appeared as Sch 1. The Funding Agreement contains the following provisions of present relevance. The applicants are defined as the 'Appointor' under the Funding Agreement. That agreement is in relation to the 'Claims' and 'Debts'. The former is defined to mean 'all claims the Appointor has against any or all of the Defendants for the recovery of monies arising out of or connected with the Appointor's investment in debenture stock in [Performance]'. The Defendants are defined to include the present respondent and others. 'Debts' is defined to mean 'all debts arising out of the Claims, including any judgment debt'. 19 By cl 2, the Appointor irrevocably appoints ILF as a debt collector to assist in pursuing the Claims and to collect the Debts; and as an inquiry agent to conduct investigations and to gather evidence concerning the Claims and the Debts. In particular, the Appointor appoints ILF to instruct the Solicitors at the direction of the Appointor and as the Appointor's agent in respect of the Proceedings (being 'any legal proceedings commenced by the Appointor in respect of the Claims and the collection of Debts, to which ILF Clients may also be a party or represented, but does not include any appeal from such proceedings'). 20 Clause 3.2 provides that ILF will pay the cost of any assistance which, with the concurrence of the Solicitors, it considers appropriate to pursue the Claims and collect the Debts; all legal costs and disbursements of the Appointor reasonably incurred by the Solicitors (including in respect of counsel) for the purpose of the commencement of, and prosecution of, the Proceedings pursuant to the retainer; and any costs order made against the Appointor in the Proceedings in respect of costs. Clause 3.3 provides that the Solicitors 'will be retained by the Appointor in respect of the Proceedings, but will be paid directly by ILF during the Proceedings upon tax invoices being rendered to ILF by the Solicitors'. Clause 3.5 states that ILF 'will provide any security for costs ordered by the Court in the Proceedings relating to costs incurred during the term of this Agreement'. By cl 3.6 it was agreed that ILF would make arrangements satisfactory to the Solicitors for securing ILF's obligations in cl 3.2(c) and cl 3.5 (costs and security for costs). 21 Clause 4.1 provides that upon Resolution, in consideration for ILF fulfilling ILF's Role and providing the funding as set out clause 3 in this Agreement, the Appointor shall pay to ILF from the Resolution Sum: '(a) an amount equal to the Appointor's share of the money paid by ILF pursuant to clause 3 calculated by reference to the proportion that the Appointor's Gross Recovery bears to the total gross recovery of all ILF Clients;…' 22 Additionally provision is made for payment of a commission and a commission on funded appeals. Resolution is defined as 'being when all or any part of the Resolution Sum' is received. 'Resolution Sum' in turn is defined to mean 'the amount or amounts for which the Claims are settled, or for which judgment is given, in favour of the Appointor, including any interest and including costs recovered pursuant to any order or by agreement'. It should be noted that cl 4.3 provides that the funding set out in cl 3 relates to the applicants' costs paid by ILF. No fees, commissions or other payments will become due or owing by the Appointor to ILF unless and until Resolution and then only to the extent of the Resolution Sum. 23 By cl 5, the Appointor agrees that ILF shall be entitled to receive from the Solicitors a fortnightly report on the progress of any proceedings and of the negotiations; to be advised immediately by the Solicitors of any proposal for settlement; and to have access to the Solicitor's file held in respect of the Proceedings but only for the purposes of the Proceedings. By cl 5.2, the Appointor instructed the Solicitors to observe the rights of ILF under the agreement and acknowledged that the production of the agreement to the Solicitors would constitute sufficient evidence of such instruction. By cl 5.5, all obligations of ILF under the agreement cease on its termination becoming effective save in respect of obligations accrued to that date. By cl 5.6, the accrued obligations include payment of any outstanding costs pursuant to cl 3.2 up to the date of notice of termination and payment of any quantified costs against the Appointor in the Proceedings in respect of assessed or taxed costs up to the same date. 24 Clause 6 contains provisions of the respective rights of the Appointor and of ILF in bringing about a settlement. By cl 12.2, the Appointor agrees that the Solicitors may defend any appeal. 25 By cl 13, the Appointor agrees to enter into a Retainer Agreement with the Solicitors. By cl 13.3, the Appointor irrevocably appoints ILF to exercise any right of the Appointor to dispute any costs of the Solicitors and to have any bill or costs assessed.

Retainer Agreement 26 The Retainer Agreement sets out the terms on which the Solicitors agreed to conduct the Proceedings on behalf of the Appointor and other plaintiffs against the defendants. Clause 2 provides that 'no fees of the Solicitors will be payable by the Appointor except by ILF and in accordance with the Agreement or by a deduction from the Resolution Sum'. Clause 7 records that ILF has agreed to pay to the Solicitors, in respect of the legal work, their professional fees, their charges and out of pocket expenses, third party disbursements and counsel fees. By cl 8, the Solicitors agree to use their best endeavours to agree with ILF on budgets by reference to periods of time or events. By cl 9, it is stated the Solicitors will only be entitled to be paid the Solicitor's professional fees to the limit of each applicable budget. By cl 18, it is stated that 'for the period of time that ILF remains the agent of the Appointor pursuant of cl 2 of the [Funding] Agreement, the Appointor agrees that ILF shall instruct the Solicitors in all matters relating to the Legal Claims and that the powers of ILF are in all respects the powers of the Appointor'. By cl 20, it is stated 'the Solicitors do not act for ILF in its own capacity and will not do so during the course of the Proceedings'. By cl 24, it is stated the Solicitors be entitled to terminate the retainer with the Appointor by giving three days written notice in the event of ILF giving notice of termination of the Funding Agreement under cl 5.3. By cl 24, provision was made that ILF, as the Appointor's agent, may terminate the retainer on seven days notice to the Solicitors on the basis of any misconduct by the Solicitors and replace them with other solicitors on the same terms as the retainer.

Further action 27 From a supplementary affidavit of Mr Kilpatrick of the solicitors for the applicants the following additional fact appears. On 22 December 2004 the debenture stockholders resolved to approve commencement of litigation by the trustee (Highstoke) against the respondent and to authorise the trustee to pay out of any proceeds recovered from the proposed litigation the costs and expenses incurred by the applicants in the present proceeding seeking removal of the former trustee. It is not necessary to set out the basis of which it is said this resolution was passed as it cannot assist the interpretation of the Funding and Retainer Agreements, which must be approached with reference to the terms of those agreements.

applicants' submissions 28 In reliance on Adsett at 210, the applicants submit that ordinarily an unsuccessful trustee will be ordered to pay the costs of the successful party. 29 The applicants further submit that successful parties who have been funded by a third party are generally able to recover their costs: Latoudis v Casey (1990) 170 CLR 534 and Newman v Financial Wisdom Limited [2004] VSC 282. It is submitted that a successful litigant will not be denied its costs save (possibly) in a case where it is established that the litigant would not have had to pay the litigant's solicitor's costs in any circumstances: Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] VSC 212 at [122]-[125].

30 In relation to litigation funding it is submitted by the applicants that it is common in Australia and has become widely recognised as enabling access to justice. These are said to be weighty factors in the exercise of judicial discretion. Reliance is placed on Movitor Pty Ltd (in liq) v Sims (1996) 64 FCR 380 as an example of the Court's preparedness to give express approval to litigation funding agreements by liquidators.

31 Further, it is submitted that this is not a case where it can be said the applicants will not be liable in any circumstances to meet the legal fees incurred in bringing the application. This is because the applicants are clients of the Solicitors and under the Funding Agreement at par 4.1 ILF has the right to recover the legal expenses incurred by it in this proceeding from any funds recovered by the applicants.

32 Additionally, reliance is placed on Dyktynski v BHP Titanium Minerals Pty Ltd (2004) 60 NSWLR 203 at [92] for the proposition that courts have consistently held that even a nominal plaintiff, i.e. one who has not incurred any liability for costs or who has received an express indemnity in respect of costs, is entitled to a costs order (even though the benefit of the costs order inures to a third party with an interest in the litigation).

33 The applicants' submissions also draw attention to what are said to be recent decisions demonstrating contemporary judicial acceptance of litigation funding as enabling access to justice, namely, R (Factortame Ltd) v Secretary of State for the Environment, Transport and the Regions [2003] QB 381; Arkin v Borchard Lines Ltd & Ors [2004] 1 Lloyd's Reports 88; Gulf Azov Shipping Co Ltd v Idisi [2004] All ER (D) 284; Clairs Keeley (a firm) v Treacy (2003) 28 WAR 139 at [189].

respondent's submissions 34 The respondent submits that because the applicants have in place a funding agreement with ILF and while they may be the clients of the solicitors, they at no time have a liability for 'costs' to that firm. Reference is made to cll 3.2, 3.3, 3.5, 3.6, 5.6, 13.1 of the Funding Agreement and the Retainer Agreement in support. It is said the only occasion where there could be a payment to ILF is where there is a 'Resolution', that is, on receipt of any part of a 'Resolution Sum' which includes any costs recovered. The submission is that the obligation does not arise until costs are recovered and costs should not be recovered because there is no liability on the part of the applicants to pay costs. Additionally it is said that in the present case there is no claim to recovery of monies and the issue of costs caused by the conduct of the respondent is not an issue to be determined in these proceedings. It is also submitted that by virtue of cl 29 of the Retainer Agreement, incorporating the terms defined in the Funding Agreement, the applicants can be seen to have no liability to the solicitors in respect of their costs. 35 The respondent also makes specific submissions concerning the effect of the authorities relied upon in the submissions for the applicants.

effect of authorities 36 Again, the starting point may be derived from Adsett at 210, namely, the principle being (as stated by the Full Court there) that 'ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party'. The Full Court said that such an order imposes a personal obligation on the trustee and the question whether or not the trustee has a right to be reimbursed out of the trust estate arises later, not in the litigation. 37 The objection raised by the respondent to an award of costs to the applicants is that they have entered into the funding arrangement with ILF. It is not as a matter of principle the case that successful parties who have been funded by a third party are unable to recover their costs. In Latoudis at 543, Mason CJ referred to the availability of legal aid as a possible reason for refusing to award costs but noted that courts have traditionally made orders without regard to considerations of that kind. 38 In Newman, Mandie J in the Supreme Court of Victoria was satisfied on the evidence that the plaintiffs were liable for the legal costs even though they had entered into a funding agreement with ILF. Newman cannot be relied upon to support the applicants' case without regard to the considerable differences between the agreement found as a matter of fact by Mandie J on evidence before him and the agreement in the present case. In particular cll 3.2(b), 3.3, 4.3 and 7.3 of the present agreement are in a different form. 39 It is apparent from the Funding and Retainer Agreement that the Solicitors were in fact retained by the applicants as Appointor: see Retainer Agreement and Funding Agreement cll 2.4, 5.2 and 6.4. It is also apparent that all legal costs and disbursements of the retainer and any costs order or order for security of costs were to be paid by ILF: see cll 3.2, 3.3, 3.5, 3.6 and 5.6. Only upon Resolution could the applicants as Appointor be liable to pay legal fees, being the legal expenses incurred by ILF, as part of the amount being the Appointor's share of the money paid by ILF pursuant to cl 3, such payment to be from the Resolution Sum. 40 The principle of whether costs should be awarded to a funded party is one on which a number of authorities were cited to the Court. In Johnson Tiles, Gillard J relied on the indemnity principle stated in Gundry v Sainsbury [1910] 1 KB 645 to the effect that if there is an agreement between the client and the solicitor that in no circumstances will the client be liable for costs whatever the outcome of the proceeding, there is no liability to the solicitor by the client and, if successful in the litigation, the unsuccessful party is not obliged to pay any costs: see at [109]. At [123], Gillard J noted that the indemnity principle has not been applied to deny a successful litigant costs in cases where it was not established that the successful litigant would not have to pay costs under any circumstances. Reference was made at [124] to the decision in Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 495 where Banks LJ said at 501 that liability would not be excluded merely because a trade union undertook to pay the plaintiff's costs and that it was necessary to go further and prove that under no circumstances was the plaintiff to be liable for costs. 41 The decision in Movitor accepted that in the case of a company liquidator, having statutory powers like those of a trustee in bankruptcy, the liquidator was able to dispose of a bare right of action to a stranger either for cash or on terms that the stranger would pay the liquidator part of the proceeds of the litigation and that this did not involve maintenance or champerty. The respondent submits this may be distinguished as a special case involving investment with statutory powers with a duty to recover for the general benefit of creditors. 42 I agree with the submission for the respondent that the decision in Hamilton v Al Fayed [2003] QB 1175 is not relevant. 43 Dyktynski dealt with the entitlement of a nominal party to proceedings to recover the costs of those proceedings where the benefit of the costs inures to a third party with a real interest in the proceedings and it was held he was so entitled. In his reasons for judgment Mason P stated that the indemnity principle was well established and had the effect given to it in Gundry. However, at [8] his Honour stated that if a client has the benefit of an indemnity from a third party, there was an entitlement to recovery of costs so long as the client remained under a legal liability to the solicitor, citing Adams; Backhouse v Judd [1925] SASR 395; Angor Pty Ltd v Ilich Motor Co Pty Ltd (1992) 37 FCR 65; and Wilson v Richmond River Shire Council [2000] NSWSC 71. The present case does not involve a nominal plaintiff so that Dyktynski is distinguishable on that ground. However, the reasoning of the Court affirms the approach referred to in the authorities cited above. 44 It is necessary also to turn to the authorities cited by the applicants as examples of recent decisions demonstrating contemporary judicial acceptance of litigation funding as enabling access to justice. In Factortame, the Court of Appeal was concerned with the costs of a proceeding which was funded pursuant to a funding agreement between the claimants and accountants, the latter of whom assisted the former in submitting a claim. I agree with the respondent that the case does not involve an application of the indemnity principle. Arkin, like Hamilton,concerned issues relating to whether litigation funders should pay costs otherwise payable by the unsuccessful funded party and is likewise irrelevant. 45 The decision in Clairs Keeley involved an application by a defendant to stay an action in circumstances where there was a funding agreement between the plaintiff and the third party, and a retainer agreement between the third party and the plaintiff's solicitors. On appeal the court was concerned with whether the discretion to stay the action for abuse of process had been properly exercised. The funder was ILF. Reliance is placed by the applicants on par [189] in the reasons for judgment of Pullin J where he stated '[t]here are many commonplace, and now unobjectionable, circumstances in which modern litigation is funded by those who are not nominal parties to it'. His Honour accepted that the courts have, by increment, created a category of persons who may permissibly maintain litigation, citing insurers and trade unions. However, he said that litigation funders unauthorised by legislation had not yet been admitted to that category and he considered it was relevant to the exercise of the discretion to stay whether the court's process would be affected or threatened by the present arrangement. I agree with the respondent this does not particularly assist the resolution of the present issue. 46 From examination of these authorities it is to me clear that the essential question is whether the applicants have a liability for costs to their solicitors.

effect of agreements 47 The applicants submit that it cannot be found the applicants will not be liable in any circumstances to meet the legal fees incurred in bringing the application. This is because of the provision in the Funding Agreement whereby ILF has the right to recover legal expenses incurred by it in the proceeding from any funds recovered by the applicants. The question is, however, whether the effect of the Funding and Retainer Agreements was that the applicants would not in any circumstances be liable to the Solicitors for their costs; that is, such liability had been extinguished by those Agreements. That this is the applicable principle is confirmed by the decision of French J in Angor Pty Ltd in which the authorities on the application of the indemnity principle are considered at 70 - 74. His Honour held that 'the existence of a liability on the part of a successful party to its solicitors is sufficient to support an order for costs even though the prospect that the solicitors may look to that party for the costs is remote' (at 74). 48 The respondent submits that Funding Agreement must be construed in terms of this proceeding. That is a proceeding to remove the respondent as trustee and so does not involve a claim to recover any sum of money from the respondent. Therefore it is contended there is no basis in this proceeding to invoke the application of cl 4.1(a) so that the effect of the Agreement, in these circumstances, has been to extinguish the liability of the applicants to pay their solicitors' costs. 49 However, the definition of 'Claims' in the Funding Agreement is not restricted to this present action. That definition is in turn picked up by the definition of 'Proceedings'. It expressly refers to all claims the Appointor has against any or all of the Defendants (which term is defined to include the respondent) for the recovery of monies arising out of or connected with the Appointor's investment in Performance. Any monies due on judgment of any such claim will fall into the Resolution Sum to which cl 4.1(a) of the Funding Agreement will apply. The present proceeding is in respect of such a Claim and so part of the Proceedings as defined. 50 The respondent also contends the obligation to make payment to ILF does not arise unless costs are recovered as part of any resolution. However, that submission overlooks the true effect of cl 4.1(a). It is that if any amount is obtained by way of judgment or settlement of the Claims as defined, ILF must be repaid from that sum the costs it has paid on behalf of the applicants. The applicants would share in that liability. 51 Likewise, cl 4.1(a) makes clear by its terms that, provided ILF fulfils its funding obligations (which is not in dispute), there is a present contingent liability on the Appointor to pay to ILF the amounts referred to in cl 4.1(a). Although cl 4 is headed 'Commission', it is apparent cl 4.1(a) is not in expressed terms of a commission as appears in cl 4.1(b) and arguably cl 4.1(c). The contingency is the occurrence of Resolution but the liability is presently created by the Funding Agreement. 52 It follows that, in application of the principle I have accepted as supported by authorities previously considered, I do not regard the applicants' liability to costs as having been extinguished by the Funding and Retainer Agreements. It is preserved by cl 4.1(a). Clause 2 of the Retainer Agreement does not have either alone or in its context the requisite extinguishing effect. 53 For these reasons I conclude the applicants are entitled to recover their costs from the unsuccessful trustee, the respondent.

Indemnity costs 54 The applicants contend that it is appropriate to award indemnity costs whenever it appears that an action has been commenced or continued in circumstances where the unsuccessful party, properly advised, should have known that there was no real chance of success: Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd (1988) 81 ALR 397 at 401. It is said that this present proceeding is precisely that case. Likewise, it is said that the principle applies with equal force to a party who persists in a defence in a case which it knows, or ought to have known if it had competent legal advice, to be hopeless and so causes unnecessary expense and costs to the plaintiff: SDS Corporation Ltd v Pasdonnay Pty Ltd [2004] WASC 26 at [46]-[54]. Therefore it is submitted that the respondent should be ordered to pay all costs incurred by the applicants except insofar as they are of an unreasonable amount or have been unreasonably incurred: Re Bond Corporation Holdings Ltd (1990) 1 WAR 465 at 479. 55 The respondent relies on SDS Corporation Ltd. It submits it cannot be said that the defence and investigation of the present case could be categorised as delinquent; or was hopeless, frivolous, unreasonable or unjustified; or was for some ulterior or extraneous purpose. It is submitted that the case had special and unusual features justifying the careful and considered approach taken by the respondent and therefore satisfies requirements of the authorities referred to in SDS Corporation Ltd. 56 The respondent's submissions rely, in particular, on the following factors: 1. there were the interests of other beneficiaries to consider; 2. the respondent was actively assisting the receiver in her efforts to effect recoveries on behalf of the debenture holders; 3. it was important to properly understand and evaluate what were only allegations of breach so as not to unnecessarily abandon the position of trustee when to do so might not have been in the best interests of the beneficiaries as a whole; 4. no proceedings had been commenced either by these applicants or any other beneficiary for breach of trust so that the allegations could be: 4.1.fleshed out as to the nature of the duty alleged; 4.2.the breach thereof; and 4.3.whether any such breach has led or caused damage to a particular beneficiary; 5. the points of claim in this application were not served until 24 June 2004; 6. there was no sensible suggestion that there was a groundswell of dissatisfaction with the trustee in the absence of the calling of a meeting under the Trust Deed to remove the trustee; 7. there was no approved trustee ready and willing to be appointed to the position; it is significant that the nominated trustee, Hall Chadwick, was never approved nor had signified consent to act and the ultimate appointed trustee was only in the position to be appointed on the day of the hearing; 8. the respondent was bound by the Act to continue to act; 9. as soon as it was satisfied that it ought to concede, the respondent did so (without admission of any liability and subject to a new trustee being available) and did not put the issue to trial; and 10. the applicants never had an exposure to costs which were 'unnecessarily increased' (above in SDS Corporation Ltd at [54]). Therefore the respondent submits that if an order is made against the respondent it should be limited to the usual order for costs on a party/party basis. 57 I have considered the ten factors particularly listed by the respondent as making inappropriate an award of indemnity costs. It does not seem to me that these matters touch the fundamental issue of whether the respondent should have known that it should not maintain litigation and cause unnecessary expense and cost to the applicants. In my view the factors listed by the respondent provide legitimate reasons for the respondent taking time but do not resolve the issue of whether the respondent should have ceased to do so because of its position of conflict. I consider that the criteria referred to in Fountain Meats are therefore met in this case. Accordingly, if the applicants could recover costs against the respondent I consider the respondent should be ordered to pay all the costs incurred by the applicants except insofar as they are of unreasonable amount or have been unreasonably incurred. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholson.

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