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[2005] FCA 389
procedural. The respondent’s application for indemnity from the trust fund was refused, and it was ordered to pay the applicants’ costs on an indemnity basis.
The applicants obtained the removal of the respondent as trustee after it conceded the application. The judgment then decided who should bear the costs. The respondent could not charge its own litigation costs to the trust fund because, in the circumstances, its defence supported its own interests rather than the trust's. The applicants' funding agreement did not prevent them from recovering costs: although ILF paid the solicitors during the case, the applicants had a contingent obligation to repay ILF from a recovery. The respondent was ordered to pay the applicants' costs on an indemnity basis.
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Patrick and Patricia O’Keeffe, debenture stockholders in Performance Finance Ltd, applied under s 283AE of the Corporations Act 2001 (Cth) to remove Hayes Knight GTO Pty Ltd as trustee for holders of Performance debenture stock and to appoint Highstoke Pty Ltd in its place. The amended application was filed on 13 September 2004, and the respondent conceded the removal application at the hearing that day. The judgment dated 8 April 2005 addressed the parties’ competing claims for costs, rather than the substantive merits of the removal application ([1]-[2]).
The application’s supporting points of claim alleged that the respondent had information suggesting that Performance’s property might be insufficient to repay debentures as they fell due, but had not provided relevant financial information to beneficiaries. The applicants also alleged that the respondent had failed to meet its duties, had not sought directions, and was in a position of conflict because it had an interest in avoiding claims against itself ([3]-[4]). Those allegations set the context for the costs dispute; the costs reasons did not determine whether the alleged breaches were established.
The respondent sought its costs, including an indemnity from the fund for debenture stockholders. The applicants argued that the respondent should not be indemnified by the trust fund and should pay their costs, including on an indemnity basis. A separate issue arose because the applicants’ legal costs were funded by Insolvency Litigation Fund Pty Ltd (ILF). The Court had to determine whether the funding and retainer agreements left the applicants legally liable for costs, as required by the indemnity principle ([5]-[13], [18]-[26]).
Nicholson J made two orders: the respondent’s application for indemnity from the fund was refused, and the respondent was ordered to pay the applicants’ costs on an indemnity basis. The order specified that unreasonable amounts or costs unreasonably incurred were excluded from the indemnity-costs basis ([57], orders 1-2).
The first question was whether the respondent could indemnify itself from the trust fund for its own costs. The Court treated Adsett v Berlouis as the starting point: a trustee may be reimbursed from trust assets for expenses prudently and reasonably incurred in discharging proper duties, but not for expenses that are unnecessary, unreasonable, or not properly incurred ([14]). The rule did not depend on a formal removal order or a finding of misconduct. The Court considered all relevant circumstances ([15]).
Miller v Cameron was important to the analysis. Nicholson J noted that, although misconduct had not been pleaded in Miller, evidence tending to establish misconduct was considered. More significantly for this case, the passage from Miller discussed by the Court explained that a trustee might have to pay the plaintiffs’ costs where refusing to resign led to proceedings that should have been avoided and the trustee was supporting its own interests rather than the trust estate ([15]). Nicholson J therefore rejected the respondent’s argument that the absence of proven misconduct was decisive.
On the facts relevant to costs, the Court accepted the applicants’ submission that the respondent’s interests did not coincide with the trust estate once the conflict became apparent. It also considered that the respondent had not satisfactorily explained the time between the conflict allegation and its concession. The respondent’s need to remain in office until a replacement was appointed did not answer the central concern that it was acting in its own interests while conflicted ([16]). The result was that the respondent could not charge its own costs to the trust fund ([17]).
The second question was whether the applicants could recover costs even though ILF funded their case. The starting point was that an unsuccessful trustee will ordinarily be ordered to pay the successful party’s costs. That order is a personal obligation of the trustee. Whether the trustee can later recover from the trust estate is a separate matter ([36]). The Court also confirmed that third-party funding does not, as a matter of principle, prevent a successful party from recovering costs ([37]).
The relevant issue was whether the applicants still had a legal liability for costs. The agreements provided that ILF would pay specified legal costs and disbursements during the proceeding, and that the applicants’ solicitors were retained by the applicants ([39]). But the Funding Agreement also provided in cl 4.1(a) for the applicants to pay ILF an amount equal to their share of money ILF had paid, calculated by reference to the applicants’ gross recovery. The definition of Claims extended beyond the removal proceeding to claims for recovery of money connected with the applicants’ investment in Performance. The Court concluded that a recovery on those claims could engage cl 4.1(a), and that the current proceeding formed part of the defined Proceedings ([49]-[50]).
The Court construed cl 4.1(a) as creating a present contingent liability, with payment dependent on a Resolution. It was not simply a commission payable only if costs were first recovered in the removal proceeding. Consequently, the funding and retainer agreements had not extinguished the applicants’ liability for costs, and the indemnity principle did not prevent a costs order in their favour ([51]-[53]).
Finally, the Court considered whether the costs should be assessed on an indemnity basis. The applicants relied on Fountain Selected Meats, which the judgment described as supporting indemnity costs where a party commenced or continued proceedings in circumstances where it should have known there was no real chance of success ([54]). The respondent listed reasons for taking time to consider its position, including the interests of other beneficiaries, the need to examine the allegations, and the absence of an approved replacement trustee until the hearing ([56]). The Court accepted these as legitimate reasons for taking time, but considered that they did not answer whether the respondent should have stopped resisting removal because of its conflict ([57]). Indemnity costs were therefore ordered, subject to the qualification concerning unreasonable amounts or costs unreasonably incurred.
The judgment describes the law as it applied in 2005; it does not set out a complete account of the law before the case or establish how later courts have applied it. Its contribution is best understood as a costs ruling applying existing principles to the particular circumstances and agreements before Nicholson J.
For trustee indemnity, the judgment starts from Adsett: a trustee can seek reimbursement from the trust estate for expenses prudently and reasonably incurred in proper performance of duties. The reasoning adds that the absence of proven misconduct does not by itself establish an entitlement to reimbursement. The Court considered whether, in all the circumstances, the trustee was supporting its own interests rather than those of the trust estate, and whether the litigation expense was properly incurred ([14]-[17]). The judgment does not purport to replace the Adsett test with a separate, exhaustive list of factors.
For costs payable by a trustee, the judgment restates that an unsuccessful trustee will ordinarily be ordered to pay the successful party’s costs, with the order creating a personal obligation. The trustee’s possible right to recoup those costs from the trust estate is a separate question ([36]). The decision illustrates that the two questions must not be conflated: the respondent was ordered to pay the applicants, but was not allowed to indemnify itself from the fund for its own costs ([17], [53], [57]).
For funded litigants, the judgment focuses on the indemnity principle and the particular agreement. It accepts that a legal liability to a solicitor may support a costs order even if the likelihood that the solicitor will seek payment is remote. The decisive matter was whether liability had been extinguished, rather than simply whether a funder was paying the bills during the proceedings ([47]). The Court’s conclusion depended on its construction of cl 4.1(a), the defined Claims and Proceedings, and the relationship between the Funding Agreement and Retainer Agreement ([49]-[52]). It should not be read as deciding that every funded party remains liable, or that every repayment arrangement will satisfy the indemnity principle.
For indemnity costs, the Court applied the approach it identified in Fountain Selected Meats and considered the respondent’s knowledge and conduct in the circumstances. It concluded that the respondent’s reasons for delay did not resolve whether it should have ceased resisting removal because of its conflict ([54]-[57]). The judgment does not establish that every unsuccessful trustee, or every party that concedes an application before trial, must pay indemnity costs.
Trustee indemnity: “prudently and reasonably incurred” ([14]). The Court said a trustee may recover from the trust fund for proper expenses incurred in performing its duties. An expense that is unnecessary or not properly incurred may not qualify. In this case, the Court assessed the respondent’s litigation costs in light of the conflict and the course of the proceedings.
Misconduct is not the only consideration ([15]). The Court said the respondent’s emphasis on the absence of proven misconduct did not decide the issue. A trustee’s conduct may still mean it cannot recover expenses from the fund if, in the circumstances, it was supporting its own interests rather than the trust’s.
A funded party’s liability ([46]-[47]). The Court identified the central question as whether the applicants had a liability for costs. The existence of a funder did not automatically answer that question. The agreements had to be read to determine whether the applicants’ liability had actually been extinguished.
The agreement created a contingent liability ([51]). Nicholson J treated the applicants’ obligation under cl 4.1(a) as created by the agreement, although payment depended on a future Resolution. In plain terms, the obligation did not disappear merely because payment would only become due if a defined recovery occurred.
Indemnity costs ([57]). The respondent’s reasons for taking time were considered legitimate, but they did not answer whether continuing to resist removal was justified while the respondent was conflicted. The resulting order was for indemnity costs, not an unrestricted recovery of every amount claimed: unreasonable amounts and costs unreasonably incurred were excluded.
The reasoning is most relevant to costs disputes involving a trustee that resists removal and then seeks reimbursement for its own litigation expenses from trust assets. The decision indicates that the analysis may require more than asking whether misconduct was formally pleaded or proven. A court may examine whether the trustee’s interests diverged from the trust estate, whether the trustee was acting to protect itself, and whether the expense of continuing the litigation was properly incurred ([14]-[17]).
It is also relevant where a successful party’s litigation was funded by a third party. The decision shows the importance of examining the full funding and retainer agreements, including definitions, payment provisions, repayment or recovery terms, and whether the client’s liability is conditional or has been extinguished ([39], [47]-[52]). The outcome turned on the specific terms of the O’Keeffes’ agreement, including cl 4.1(a), and the Court’s conclusion that the defined Claims included monetary claims connected with their Performance investment ([49]-[52]).
The indemnity-costs reasoning may be relevant where a party continues a case or defence despite circumstances suggesting that it should not be maintained, and that continuation causes unnecessary expense. The judgment’s application depended on the respondent’s conflict and the Court’s view that the respondent’s explanations did not address whether it should have stopped resisting removal ([54]-[57]). The decision does not state that delay or a late concession alone is enough.
The case is less directly applicable where a trustee’s costs arise from ordinary administration of a trust without a relevant conflict, where the trust documents or legislation materially differ, or where a funding agreement contains different provisions about client liability. The judgment itself repeatedly relies on the particular circumstances and the precise terms of the agreements.
The supplied judgment contains no decisions after 8 April 2005 and therefore does not establish how later courts have treated O’Keeffe v Hayes Knight GTO Pty Ltd. No claim about its later adoption, limitation, or rejection can be made from the judgment text alone.
Within its own reasoning, Nicholson J considered earlier authorities for distinct purposes. Adsett supplied the trustee-indemnity starting point; Miller informed the circumstances in which a trustee might lose an indemnity and be liable for the plaintiffs’ costs; and Angor was relied on for the proposition that a continuing liability to a solicitor can support a costs order even if enforcement is remote ([14]-[15], [47]). The Court distinguished Newman because the funding agreement there differed from the agreement before it, and distinguished Dyktynski because that case concerned a nominal party ([38], [43]).
The judgment also considered decisions about funding and maintenance, but treated several as not deciding the indemnity-principle question before it. It said Factortame did not involve application of the indemnity principle, treated Arkin and Hamilton as irrelevant to the issue, and concluded that Clairs Keeley did not particularly assist with the costs question ([42], [44]-[45]). These are the judge’s characterisations of those authorities in this case, not a summary of their later treatment.
The judgment does not determine the precise scope of trustee indemnity in circumstances materially different from those before it. It states the general test and applies it to a trustee whose interests had, in the Court’s view, diverged from those of the trust estate. It does not provide a comprehensive checklist for deciding when a trustee’s resistance to removal is a proper trust expense ([14]-[17]).
Nor does it decide how different funding arrangements would be treated. The conclusion depended on the defined claims and the contingent repayment obligation in cl 4.1(a). The judgment does not decide the position where a funder pays all costs without any repayment obligation, where repayment is limited to costs recovered, or where the client’s liability to the solicitor is expressly excluded in all circumstances ([47]-[52]).
The judgment also does not specify how the amount of indemnity costs should be quantified in any assessment. It gives the order’s qualification: costs of an unreasonable amount or costs unreasonably incurred are excluded. It does not resolve any later assessment or taxation issue ([57], order 2).
Finally, the reasons do not determine the underlying allegations of breach of trust or the merits of any later claim by debenture holders against the former trustee. The 22 December 2004 resolution concerning proposed litigation by Highstoke was noted, but the judge said it could not assist in interpreting the Funding and Retainer Agreements ([27]). The decision is therefore a costs judgment arising from a conceded removal application, not a final determination of the alleged substantive breaches.
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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.
O'Keeffe
Hayes Knight GTO Pty Ltd
[2003] VSC 212
[2004] VSC 282
[2004] WASC 26
(1992) 37 FCR 201
(1992) 37 FCR 65
(1990) 1 WAR 465
(2003) 28 WAR 139
(2004) 60 NSWLR 203
(1988) 81 ALR 397
(1990) 170 CLR 534
(1936) 54 CLR 572
(1996) 64 FCR 380
The respondent’s application for indemnity from the trust fund was refused, and it was ordered to pay the applicants’ costs on an indemnity basis.