Plaintiff v First Defendant

2 Giuseppe De Pasquale and his wife Elena De Pasquale had three daughters: Eleonora Tamburini, Pia De Pasquale, and Norina Hodge. Elena died on 16 July 1999, and on 22 May 2000 Giuseppe married his second wife, Rosa Veri. Giuseppe died on 31 August 2012, and was survived by his three daughters and his second wife. This dispute concerns the last will of Giuseppe, executed on 24 May 2012.

3 Probate of the last will of Giuseppe was granted to Rosa on 23 October 2012. The inventory of assets and liabilities filed in that application valued the estate at $4,564,220.36. That amount did not include the value of Giuseppe and Rosa's matrimonial home at Unit 2, 37-43 Victoria Street, Doncaster, which passed to Rosa as the surviving joint proprietor. The estate was divided as follows:

(a) Rosa received a property at 2741 Nepean Highway, Rye, initially valued at $250,000 but later valued at $750-$850,000.

(b) Eleonora received a property at 112 Normanby Avenue, Thornbury, valued at $1,520,000.

(c) Pia received a block of flats at 1 Murray Street, Thornbury, valued at $2,150,000. However, this gift was conditional on Pia paying into the estate the proceeds of sale of her half-share in the property at 3/384 Orrong Road, Caulfield North. The other half-share in that property was owned by the estate. Pia had previously received from Giuseppe an inter vivos gift of $687,000, being the proceeds of sale of Giuseppe's former home at 7 Albert Street, Templestowe.

(d) Norina received a lump sum payment of $500,000 or such lesser amount as remained once the estate expenses had been paid. If the sum remaining exceeded $500,000, the amount by which it exceeded that amount was to be divided equally between Rosa, Eleonora, Pia and Norina.

The Part IV claim

4 On 3 April 2013, Pia filed an originating motion in this Court seeking further provision under Part IV of the Act.

5 By e-mail dated 10 April 2013, Rosa's solicitors notified Norina that Pia had filed a claim seeking further provision from the estate of Giuseppe. In that e-mail, they advised Norina that they would be assisting Rosa in her capacity as executor and trustee to deal with the claim. They also informed Norina that:

Whilst you are not a party to the Supreme Court proceedings issued by [Pia], your entitlement under the will may be affected and you may wish to obtain independent legal advice. You and your legal representation are invited to attend the mediation. If you propose to be represented at the mediation would you please let me know by no later than Friday, 26 April 2013 of your intention to take part. Whilst we are unable to provide you with legal advice in relation to your rights and/or entitlements under the estate (such advice which should be sought from an independent legal advisor) if you have any queries of a general nature you are welcome to contact ... this office.

6 Norina responded to that e-mail the following day, and informed the solicitors that if her share of the estate should fall below $500,000, she would require all documents that affected that amount.

7 As no supporting affidavit or summons was filed by Pia in her Part IV proceeding, on 29 May 2013 Rosa, as the executor of the estate, filed a summons seeking directions in the proceeding. On return of that summons on 11 June 2013, Efthim AsJ directed the parties to attend a mediation. On the same day, by e-mail, Rosa's solicitors informed Norina that Rosa's role in the proceedings, as executor of the estate, was to uphold the terms of Giuseppe's will.

8 The mediation of Pia's Part IV claim took place on 7 October 2013. In attendance were Rosa, Eleonora and Pia, each of whom was legally represented. As a result of that mediation, terms of settlement were agreed, under which Pia was to be paid a further $250,000, an amount that was expressed to be inclusive of her legal costs and interest. The terms did not specify from which part of the estate the sum would be paid.[1]

9 Counsel of the estate signed a memorandum of advice concerning the settlement the following day. In that memorandum, he expressed the view that Pia's claim for further provision was weak, but that it was possible a judge may provide her with some further provision, together with an order for costs from the estate. He estimated the costs to be in the vicinity of $125,000. In that advice, he further opined:

Having regard to the way the Will is fashioned the further provision essentially comes out of the share of the residuary beneficiary being, Norina Hodge. Under cl 12 of the Will, the deceased's daughters in America receives $500,000 if there is sufficient funds to pay this bequest. It appears that the deceased doing the best he could, having regard to the moral obligation to make provision for his second wife and his children, the deceased must have considered that his daughter in America was best placed to suffer any financial burden to which his estate was exposed.

I am mindful of the executor's obligation to uphold the Will, but I believe that there was a risk that if the matter was not settled the estate could have been exposed to a much greater liability which may have eliminated completely any funds available for Norina Hodge.

...

I believe it was in the interests of the estate for the matter to be settled and I believe that the settlement is reasonable in all the circumstances.

10 In respect of her decision to settle, Rosa deposed:

At the mediation I was informed by my legal advisors that [Pia]'s case was likely to be unusually complex.

...

I am not a lawyer and have no prior experience in claims of further provision under Part IV of the Administration and Probate Act. I am an aged pensioner and English is my second language. I was reliant on legal advice that I received during the course of the mediation in coming to a decision to resolve the matter. [Norina] was not a party to the proceedings and whilst she had been informed of the date of the mediation and invited to attend, she did not. As the plaintiff did not attend it was my responsibility as the executor of the estate to uphold the terms of the will. Given that the second defendant had instituted the proceedings seeking further provision I acted on the legal advice which I obtained and resolved the claim for further provision on what I believed to be reasonable terms.

...

I believe that in entering into the terms of settlement ... I acted in good faith and in the interests of the estate.

Norina disputes the Part IV settlement

11 On 10 October 2013, two days after the mediation, Rosa's solicitors informed Norina that Pia's Part IV proceeding had settled at mediation, and explained the terms of settlement. Norina responded on 13 October 2013, seeking clarification as to whether Pia's further provision was to come from her share of the inheritance, and not be distributed across the other beneficiaries. In reply, Rosa's solicitors informed Norina that, as her bequest was dependent on funds being available, she was therefore the residuary beneficiary and would have to bear the cost of the settlement.

12 After a further exchange of correspondence, on 17 October 2013 Rosa's solicitors informed Norina that:

Rosa in her capacity as executor was represented at the mediation by counsel and the settlement reached which you were advised of by e-mail on 10 October 2013 was on the advice of counsel. Clause 12 of the will dated 24 May 2012 is the residue clause and it is evident in the wording of that clause that your father contemplated there may be insufficient funds to pay you the sum of $500,000. The bequest of $500,00 was a maximum amount if there were sufficient funds. You were advised that your entitlement under the will may be affected by Pia's claim (e-mails dated 10 April 13 and dated 12 April 13) and had further been advised on more than one occasion that if you had concerns you should seek your own independent legal advice. You were invited to assist with defending Pia's claim by providing comments as to the inaccuracies in her affidavit ... which you declined. You were provided with a copy of all material filed with the court in this proceeding. Further, you were invited to attend the mediation or engage a legal representative to attend on your behalf and the date of the mediation was confirmed to you on 23/9/13 and 4/10/13. You have been kept informed about the progress of the claim including the settlement of the matter.

13 By letter dated 24 October 2013, Norina's solicitors responded:

As our client's entitlement under the will may be affected by the terms of settlement that were reached at mediation on 7 October 2013 we request your undertaking that no further funds be distributed from the estate without our further advice.

Could you kindly confirm your undertaking not to distribute any further funds and kindly provide details of all distributions made and the remaining funds held in trust at your earliest.

14 Rosa's solicitors responded that same day, advising that they could not give such an undertaking as to do so would place the executor in breach of the terms of settlement. However, on 28 October 2013, Pia's solicitors wrote to Rosa's solicitors, asking why the first instalment of $100,000, due the previous day, had not been paid. Rosa's solicitors responded by providing copies of the correspondence from Norina's solicitors, including the request that no further funds be distributed, and advising that they were seeking the advice of counsel.

15 By letter dated 28 October 2013, Norina's solicitors advised Rosa's solicitors that:

[Norina] has never been a party to the terms of settlement and never consented or authorised any reduction in her entitlement. Further she has not signed the terms of settlement.

We cannot believe that the executor would give away a significant share of our client's entitlement without her consent.

We request that the terms of settlement are not implemented and no steps are taken in any way that would deplete our client's share under the will and we seek an undertaking by close of business today to such effect failing which we will apply for an injunction.

16 Rosa's solicitors then responded on 30 October 2013 as follows:

[Norina] is not a party to the proceeding and her consent to the settlement was not necessary. At all times [Norina] has been informed as to the Part IV claim, the financial details of the estate and her entitlement under the will of the deceased. [Norina] was invited to attend the mediation as were the other children of the deceased. [Eleonora], although not a party to the proceeding, was present and represented by a solicitor during the mediation. [Norina] would have been welcome to attend the mediation either alone or legally represented. She chose to do neither.

It is our view that the executor was entitled to settle this claim upon reasonable legal advice and the executor received such advice and settle [Pia's] claim for a modest sum. The amount that was agreed to was significantly less than was originally sought by the plaintiff. It is our view that the liability to provide further provision when arrived at by settlement is a liability of the estate to be paid out in accordance with the payment schedule specified in s 39 of the Administration and Probate Act. Had the matter not settled and had it gone to trial any order for further provision of the court would have been governed by s 97 of the Administration and Probate Act. However it is our view that s 97 only relates to orders for further provision made by the Court and not to settlements reached by way of out of court settlements.

...

As [Norina] is essentially the residuary devisee under the will of the deceased her share of the estate bore the responsibility for paying any liabilities of the estate including the liability to make further provision in the manner which has been agreed to under the terms of settlement.

17 That day, Pia's solicitors also wrote to Rosa's solicitors, threatening legal action unless the first sum was paid by 8 November 2013.

18 Two payments were then made by the estate to Pia pursuant to the terms of settlement: the sum of $100,000 paid on 8 November 2013 and the remaining sum of $150,000 on 25 November 2013.[2] As noted, the 8 November 2013 payment was overdue, having been payable under the terms on 27 October 2013. In the covering letter enclosing that payment, Rosa's solicitors stated:

We put you on notice that Norina is disputing the distribution under the will of the deceased and the terms of settlement. The executrix wishes to inform you that she has a right to be indemnified out of the assets of the estate for any liabilities she incurs in that capacity from estate assets, including this distribution. We wish to inform you that your client should refrain from dealing with this distribution as if it were her own until the claim Norina is asserting becomes clear or is finalised.

19 On 13 December 2013, Zammit AsJ made orders by consent on the papers, dismissing the proceeding without adjudication on the merits.

20 On 9 January 2014, Norina filed an originating motion seeking that the terms of settlement be set aside and Pia repay to the estate the sums received pursuant to those terms, or in the alternative that Rosa pay to Norina her full entitlement under the will on the ground that the terms were executed in breach of her duties as trustee. A summons filed on 13 January 2014 was heard by Williams J in the Probate List on 14 February 2014, and set down for trial.

21 There are three questions to be determined in this case:

(a) Whether the compromise of the Part IV claim and the payment of the settlement sum were made in excess of the executor's power or in breach of the executor's duties;

(b) Whether the second defendant is liable to repay the settlement sum to the estate; and

(c) If not, whether the first defendant is entitled to be indemnified from the trust.

The powers and duties of the executor to compromise the claim

22 The source of the power to enter the settlement was identified by Rosa as being s 19(1)(f) of the Trustee Act 1958 ('the Trustee Act'), which provides:

(1) A personal representative, or two or more trustees acting together, or, subject to the restrictions imposed in regard to receipts by a sole trustee, not being a trustee company, a sole acting trustee where by the instrument (if any) creating the trust, or by statute a sole trustee is authorized to execute the trusts and powers reposed in him, may, if and as he or they think fit -

...

(f) compromise, compound, abandon, submit to arbitration, or otherwise settle any debt, account, claim, or thing whatever relating to the testator's or intestate's estate or to the trust; or

and for any of those purposes may enter into, give, execute, and do such agreements, instruments of composition or arrangement, releases, and other things as to him or them seem expedient, without being responsible for any loss occasioned by any act or thing so done by him or them in good faith.

23 After the hearing on 21 July 2014, I considered that, for reasons that will become apparent, this case raised two questions that had not been adequately addressed at trial:

(a) Does s 19 of the Trustee Act provide an executor/trustee with the power to give effect to a compromise by making further provision from the estate for the proper maintenance and support of a person to whom the deceased had a responsibility to provide?

(b) If not, what is the source of the trustee's power to make such provision?

24 I invited the parties to make either further written submissions or, if necessary, further oral submissions, on these questions. The parties agreed to provide further written submissions by 8 August 2014. In my discussion of the parties' submissions, I have incorporated both the submissions made at trial as well as my queries with those submissions, and the subsequent written submissions provided.

25 Norina submitted that Rosa's duty, as executor, in the context of a claim under Part IV of the Act is to uphold the will. The rule, as Norina put it, is that the executor must not agree to the payment of further provision under Part IV, or the payment of the provision from a particular part of the estate (and especially a payment which imposed the burden of the same on a particular beneficiary's share) without the consent of the beneficiary affected.

26 Norina relied on a decision in this Court in Coffey v Bennett.[3] In that case, Sholl J noted that:

The respondent opposed the application, no doubt considering that course to be in accordance with his duty to the beneficiaries under the will whose interests would be affected by any order which might be made in favour of the applicant. In that he showed a better appreciation of his duty than some executors, who, from time to time in this Court, either consent to an extension of time without consulting the beneficiaries, or offer but a token opposition.[4]

27 However, the duty of the executors to uphold the will was not at issue in that case.

28 Norina also relied on the decision of the New South Wales Supreme Court sitting en banc in Re SJ Hall, deceased.[5] In that case McClelland CJ in Eq, Owen and Walsh JJ reversed the decision of Myers J at first instance to allow the executors only half of their costs out of the estate on the basis that they had unreasonably opposed the application for further provision. The trial judge had found that:

As far as costs are concerned there has been, as I have said, a considerable waste of expense due entirely, in my opinion, to the fault of the executors.[6]

29 The particular concern of the trial judge was that the executors had decided to lead wholly irrelevant evidence that a beneficiary who opposed the application insisted on being led. The Court did not consider, on the evidence, that the conduct of the executors was improper.[7] They reaffirmed the principle that it is the duty of the executors either to compromise the claim or to contest it and seek to uphold the provisions of the will.[8] Their Honours quoted from the judgment of Williams J in Re Lanfear,[9] where his Honour said:

If the executors take up an attitude, which compels beneficiaries to seek separate representation to protect their gifts, they run a grave risk of the Court holding that they have acted improperly, and, in a case where the Court considers that only one set of costs should be allowed between the respondents, the result may follow that the Court will order that set of costs to be applied in the first instance on behalf of the beneficiaries who have been forced to intervene, and only the residue to be applied on behalf of the executors.[10]

30 Neither the decision in Re Lanfear,[11] nor the decision in Re SJ Hall,[12] establishes anything resembling a duty on the executor to oppose an application. At most, they establish that an executor who chooses to oppose an application for further provision will ordinarily have the protection of a costs order in their favour.

31 Norina's position in oral submissions on this point was that the course taken by Rosa was contrary to the established practice in Victoria. The practice in this state, it was said, is that an executor will either obtain the consent of any beneficiary affected prior to settling the matter, or else will make the terms of settlement conditional on obtaining the consent of affected beneficiaries. In cases where the beneficiary does not, or cannot, consent, the executor must then go to Court and seek the approval of the Court. Although not pressed on the question, Norina did not point to any authority establishing that this practice was mandatory, rather than merely preferable.

32 In supplementary written submissions, Norina submitted that an executor or trustee does not have power, either under s 19 of the Trustee Act or otherwise, to give effect to the compromise of a Part IV claim without the consent of any beneficiary whose interest under the will is affected by the compromise, unless the approval of the Court is obtained.

33 Norina relied on the decision of the English Court of Appeal in the case of In re Earl of Strafford, dec'd ('Earl of Strafford'),[13] considering the equivalent English provision. In that case, the third and fourth defendants were entitled to one category of chattels absolutely, and another category only as to a life interest, and a dispute arose as to which chattels fell, as a matter of fact, into each category. The executor compromised the claim on terms that the third and fourth defendants would surrender any claim to a life or other interest in four fifths of the chattels, and the executor would abandon claims as to those chattels sold or given away, and also to the remaining one fifth of the chattels. The first defendant, a beneficiary under the will, challenged the power of the executor to make such a settlement. He argued that the power conferred by this section was a merely administrative power, and that the settlement reached constituted a rearrangement of the beneficial interests of the trust that was beyond the power conferred by the section.

34 In his decision at first instance, Megarry VC noted:

I hardly need say that there is here no suggestion that section 15 is being used as a device to effect the variation of beneficial interests.[14]

35 The Court of Appeal, on a preliminary hearing only as to the point of law, determined that the section should not be read as narrowly as the first defendant put forward. After observing that it was 'indisputable' that a judge of the Chancery Division has no inherent jurisdiction to sanction a rearrangement of trusts, or to rearrange the beneficial interests under a trust instrument, Buckley LJ explained the process of compromise as follows:

In my judgment the surrender of a limited interest under a settlement does not of itself have the effect of varying the trusts of that settlement. It eliminates a pre-existing interest under the settlement, but leaves the trusts intact. A trustee cannot control or prohibit dealings by competent beneficiaries with their interests under the settlement. His obligation is to protect the interests which from time to time subsist under the trusts of the settlement. If the owner of a limited interest proposed to put an end to it by surrendering it, the trustees cannot prevent him from doing so and are only concerned to see that the rights which arise or are advanced in consequence of the surrender are given proper effect.

If the assets of a trust include a claim against some person, be he a stranger to the trust or a beneficiary under the trust, that claim is an asset of the trust. The trustees may enforce the claim, sell it, compromise it or compound it, or (if it be worthless) abandon it. In any case but the last the fruit of enforcing, selling or compromising the claim will replace the claim as an asset of the trust. None of these transactions involves any variation of the trusts or of the beneficial interests under them; there is merely a change in the composition of the trust fund. If the trustees compromise the claim at an unduly low level, they may be liable for breach of trust, but no variation of the trusts is involved. The trust fund will thenceforth comprise, in addition to other assets, the fruit of the compromise plus a claim against the culpable trustees. Maybe it would be possible in certain circumstances to get the compromise set aside, but otherwise the beneficiary's only remedy would be against the trustees personally.[15]

36 Lawton LJ treated the question of whether the settlement effected a variation of the trust as determinative,[16] and Goff LJ concurred, rejecting the argument of the first defendant that the settlement amounted to a variation of the interests of the beneficiaries.[17]

37 Norina submitted that the effect of the decision in Earl of Strafford is that the power conferred by s 19 does not extend to permitting executors to effect a variation of the beneficial interest without the consent of any beneficiary affected. This must mean, it was said, that an executor cannot compromise a claim under Part IV without the agreement of the beneficiary affected, or with the approval of the Court, as the essence of a Part IV claim is to effect an alteration of the trusts or beneficial interest created by the will.

38 Norina distinguished a claim by a creditor being settled, as the settlement of this type of claim is inherent in the role of a trustee, but that it would be a very different thing to permit a trustee to give effect to a Part IV settlement, that would involve rewriting the will to include new beneficiaries or increase the share of an existing beneficiary by reducing the existing entitlements. The effect of permitting a trustee to do so would be drastic, meaning a person beneficially entitled under a will could lose their rights as a result of Part IV proceedings being brought and settled not by the determination of a Court but by the determination of a trustee. This would oust the jurisdiction of the Court, a position Norina submitted cannot be correct.

39 Norina noted that in Re Irismay Holdings Pty Ltd ('Re Irismay'),[18] Lee J of the Supreme Court of Queensland, considering the equivalent provision in Queensland, chose not to follow Earl of Strafford. In that case, a proceeding for the removal of a trustee was settled as between the trustee and the beneficiary who had applied for removal. Two other beneficiaries sought a declaration that the trustee had power to enter that compromise, while the beneficiary who had settled his claim sought that the compromise be approved by the Court, as a further beneficiary was under a legal disability and was unable to consent. The trust deed contained a power for the trustee to settle claims 'as fully and absolutely as the trustee could if it were the absolute owner thereof and without being answerable for any loss which may be occasioned thereby', a power that seems on its face to extend beyond the statutory power, although Lee J considered there to be no reason for distinguishing between that power and the statutory power.

40 Of Buckley LJ's observation that a compromise cannot bring about a rearrangement of the trusts, Lee J said:

I do not consider that proposition to be borne out by authority particularly in so far as it purports to derive support from what was said in Chapman. In particular, it disregards the logic involved in the statement of Lord Morton of Henryton, agreed in by the other members of their Lordships' House, in Chapman:

Where rights are in dispute, and the court approves a compromise, it is not altering the trusts, for the trusts are, ex hypothesi, still in doubt and unascertained.

In my opinion the importance of the passage quoted is to bring home the absurdity of a construction of s 44(f) which would result in the existence of the trustee's power to compromise being made to depend on the resolution of the very question which is sought to be compromised. Such a conclusion would defeat the manifest purpose of the provision. Where the very subject matter of the dispute concerns the nature of a beneficiary's interest under the trust then it would seem eminently sensible to confer on the trustee power to settle that dispute provided that the compromise is entered into bona fide and for the benefit of the trust as a whole, an expression which no doubt encompasses the notion that the compromise is reached for the genuine purpose of settling the dispute and not merely as an expedient means of achieving some ulterior or extraneous agenda. In other words the mere fact that a dispute has arisen and an agreement has been entered into is not enough; the agreement must relate to the resolution of the dispute before it can come within the power.[19]

41 His Honour considered that the limited interpretation proposed by the respondents were not supported by the plain words of the section and would be impractical.[20] His Honour also noted, as had been noted in Earl of Strafford, that any potential abuse of the section would be prevented by the need for the power to be exercised bona fide.[21] The actual declaration granted in that case was that the trustee 'has power to enter into the compromise' but says nothing as to whether the trustee may give effect to the compromise.[22]

42 Norina submitted that this Court should follow the decision of the English Court of Appeal in preference to this decision, at least insofar as this decision purports to permit a trustee to give effect to the settlement of a dispute by varying the beneficial interests under the trust. More specifically, Norina submitted that this decision should not be seen as authority for the proposition that a trustee can settle a claim under Part IV.

43 Finally, Norina relied on the decision of this Court in Dowling v St Vincent De Paul Society Victoria Inc ('Dowling'),[23] where Nettle J considered the limits of the power to compromise in the context of a contested probate application. His Honour said:

Whatever be the reach of s 19(1)(f), it does not authorise the alteration of beneficial interests without the consent of all interested beneficiaries. It is unlikely that the section is concerned with internecine disputes between beneficiaries, for as Sir Robert Megarry VC said in Earl of Strafford 'it is in this latter territory that the learning associated with Chapman v Chapman is particularly concerned'. The history of s 19 of the Trustee Act also lends support to the conclusion that s 19(1)(f) does not authorise trustees to alter beneficial interests without the consent of all beneficiaries or court approval. I am conscious that Lee J said otherwise in Re Irismay, and his Honour's views on the subject are of course to be accorded considerable respect. But given the principles which are essayed in Chapman and the history of the legislation, I take leave to disagree.[24]

44 His Honour noted that, while there was in effect no limit to what the parties could agree, the Court retained certain powers, including the power to determine the validity of a will.[25] Thus, while parties may execute a binding agreement, and be bound by that agreement, to distribute an estate in a certain manner, a Court will only admit to probate the last valid will of the deceased. His Honour went on:

In contrast to the position in England, where the High Court has been given statutory power to impose a compromise on non-consenting beneficiaries, this court has no power to bind absent beneficiaries to a compromise and thus if a compromise is reached it is necessary in order that it be binding upon them to make all affected beneficiaries party to the proceeding either as such or by way of representative order. So far as I can see it has not been suggested in any of the cases or texts that the same result can be achieved under s 19(1)(f) of the Trustee Act. Given that s 19(1)(f) has existed in one form or another for more than one hundred years, I regard that as very significant.[26]

45 On this point, Rosa submitted that although it is correct to say that the primary duty of the executor is to uphold the will, that duty is not unqualified. Instead, and especially in small estates, the executor should compromise the claim where it is of no commercial benefit to anyone, and regard should be had to the event to which upholding the will would benefit beneficiaries. Rosa relied on the principles set out by Hallen AsJ in Morrison v Abbott[27] and Keep v Packham,[28]and the authorities that his Honour cites therein.

46 Rosa also quoted from a paper delivered extra-judicially by Bergin CJ in Eq entitled 'Executive Trustees and Mandatory Mediations',[29] in which her Honour said:

Any family provision claim whether under the Family Provision Act or the Succession Act will be governed by the provisions of the Civil Procedure Act 2005. The executor is under a duty to assit the court to 'further the overriding purpose' to facilitate the just, quick and cheap resolution of the real issues in the proceeding. The executor is under a duty to participate in the process of the court which includes mediation. Section 56 requires the court to achieve a just, quick and cheap resolution of the real issues in dispute consistently with the dictates of justice.

...

Compromise is not a new concept for executors or trustees. The well recognised role of the executor upholding the will is not incongrouous with a decision to compromise a claim on the estate. The Trustee Act 1925, which applies equally to executors, provides that if the trustee 'thinks fit' a claim on the estate may be compromised or otherwise settled.[30]

47 As Rosa correctly identified, the Civil Procedure Act 2010 contains similar or equivalent provisions in Victoria, including ss 14, 19 and 22. Although not referred to by counsel for Rosa, in the same paper, her Honour went on point out that executors will ordinarily consult closely with beneficiaries in the course of a mediation, and may need to adjourn a mediation to seek a legal opinion or even the advice of the Court.

48 Rosa initially submitted that Norina's submissions were premised on a fallacy that the proceedings could only be determined by the Court or by agreement of any beneficiary affected. Instead, it was said, a proceeding between an executor and a Part IV claimant could be settled, and could have been (but did not need to be) approved by the Court under r 54.02 of the Supreme Court (General Civil Procedure) Rules 2005, provided that the decision to agree to the compromise was within power, there was no impropriety in the executor's decision, the trustee exercised its discretion in good faith, and the executor gave fair consideration to the relevant issues.

49 I accept that the authorities cited by Rosa establish that in those circumstances the Court will approve the decision to enter a compromise. That proposition is not of great assistance in this case. Rosa as executor did not seek, and does not seek, that the compromise be approved. Pia, distinguishing the decision of Almond J in Re Centro Real Estate Australia Ltd,[31] also noted in submissions that there is no power retrospectively to approve a settlement, a proposition that was equally unhelpful, as that is not what is sought in this proceeding.

50 However, it is noteworthy that one of the questions a Court need be satisfied of, in order to approve a compromise, is that the trustee has the power to enter the compromise sought to be approved. That statement of principle is drawn from a series of cases cited by Habersberger J in Exxonmobil Superannuation Plan Pty Ltd v Esso Australia Pty Ltd,[32] all bar one of which were decided after the general power to compromise was legislated.[33] Rosa's submissions note that this requirement was 'clearly satisfied' because the executor entered into the compromise as a result of a court ordered mediation process. To my mind, the fact that a mediation is court ordered would not provide the executor with powers not already in her possession.

51 On the proper interpretation of this section, Rosa initially referred to the decision of the High Court in National Trustees Executors & Agency Company of Australasia Ltd v Dwyer ('Dwyer').[34] That case concerned the right of the estate to seek the balance of purchase money under a contract of sale of land. The executors extended the time for payment of the balance, conditional on interest being paid, and did not exercise a contractual power to rescind the sale on the basis that owing to the economic conditions at the time, the land would be unsaleable. Legislation brought in as a result of the Great Depression enabled the purchaser to prevent the executors from seeking payment of the balance, and they were ultimately awarded compensation from the Farmers' Debts Adjustment Board, although well short of the sale price. The beneficiaries brought an action alleging that the executors had breached their duty in failing to rescind the contract.

52 Considering the scope of what was then s 15 of the Trustee Act 1928, Starke J noted:

The words 'any debt' in these subsections cannot be construed technically: they cover all pecuniary liabilities which the personal representative of the deceased has a right to collect.[35]

53 Dixon J considered that the executors had not breached their duty independently of s 15. After noting that the money owed was not a debt in the common law meaning of the word, his Honour went on:

But on the whole I think that word should be given a very wide application and should not be restricted to sums certain immediately recoverable by action.[36]

54 In supplementary submissions, Rosa sought to rely on the decision of Nettle J in Dowling,[37] where immediately above the passage referred to by Norina his Honour noted that the word 'claim' should be interpreted broadly:

The word 'claim' is capable in some contexts of including almost any sort of demand. Equally, according to context, the conception of things which relate to an estate may include a very broad range of possible subject matters. But it requires no recitation of authority to establish that the words of a statutory provision are to be read in context and according to the apparent purpose of the provision. And in their context and according to what I perceive to the purpose of the s 19 of the Trustee Act, 'claims relating to... the estate' appear as limited to claims upon or against the estate. With respect, I think the observations of Sir Robert Megarry VC in Earl of Strafford to be persuasive. The section is concerned with claims against the estate - be they from the outside world or as between the beneficiaries - not proceedings to determine the title of the executor or trustee.[38]

55 However, despite noting the breadth of claims to which the section could apply, his Honour in that case ultimately determined that it did not apply to a contested probate proceeding.

56 Rosa also relied on Nettle J's general discussion of the authorities,[39] including the decisions of Earl of Strafford and Re Irismay. The effect of this passage, Rosa said, was that trustees have a wide discretion to compromise any claim, and have wide powers to give effect to such a compromise, provided those powers are exercised in good faith. Pia, also relying on this decision, argued it was distinguishable as the compromise of a probate proceeding does not relate to a claim against the estate, but a claim for a grant of probate.

57 In respect of Earl of Strafford, Pia submitted that, contrary to the submissions of Norina, the decision of Megarry VC at first instance, and of the Court of Appeal, supported the submission that a compromise of a Part IV claim may be given effect to under s 19. In particular, it was said that this decision stands for the proposition that the power granted by the section should be interpreted broadly, and any restrictions on the power lie in how it is exercised:

It is in the mode of exercising the powers, and not in the existence of the powers themselves, that any restrictions are to be found; and this suffices to prevent any misuse of the section. I think that Mr Horsfield, who appeared for the bank, and Mr Walker, who appeared for the third and fourth defendants, were right in the essentials of their contentions. These were, first, that the powers conferred by s 15 are not limited or restricted in any way by reference to the consideration to be given as part of the compromise. The only question on jurisdiction is whether what is done falls fairly within the words of the section, such as the term ' compromise . . . any . . . claim.' Second, in exercising the power, the only criterion is whether the compromise is desirable and fair as regards all the beneficiaries. It is in the exercise of the power, and not in its existence, that any disparity of benefit between the beneficiaries must be considered.[40]

58 Rosa submitted that if the trustee was not empowered by s 19 to give effect to a settlement, then s 39 of the Act (concerning how the assets of an estate should be administered) was sufficient to give that power, because when a settlement is entered into the agreement to pay certain sums of money become debts of the estate. No authority was cited for that proposition.

Conclusions in respect of power and duty to compromise the claim

59 The statutory power of compromise contained in s 19 was first enacted in the United Kingdom in 1860 and in Victoria in 1864, and has been modified only slightly since first enacted.[41] It supplanted a power 'invariably inserted in well-drawn wills'.[42] The enactment of the provisions empowering trustees to compromise claims predated the introduction of the testator's family maintenance legislation, which was first enacted in New Zealand in 1900,[43] and in Victoria in 1906.[44] The words of the section seem, on their face, applicable to the compromise of a claim under that regime.

60 Certainly, executors act under a duty to compromise claims in certain circumstances. For the most part, I would accept the submissions of Rosa on this point. As Slattery J noted in Cooper v McCormack:[45]

The duty of an executor in a small estate when confronted with claims of this sort was long ago identified by Nicholas CJ in Eq and Williams J in Re Lanfear (dec'd), cited with approval by Hutley JA in Vasiljev v Public Trustee. The duty is stated in the following terms:

In an ordinary case, especially where the estate is a small one, it is the duty of the executors either to compromise the claim, or to contest it and seek to uphold the provisions of the will. For that purpose they should place all the relevant evidence before the Court relating, not only to the case generally, but to any particular circumstances which the Court should take into consideration relating to any particular gift in the will.

The duty both to uphold the will, and compromise the claims has been constantly reaffirmed in the cases of Application of Ferdinando Scali per Brereton J; McMahon v McMahon; and Bartlett v Coomber.[46]

61 However, as both that decision, and the cases referred to by Slattery J in the quoted passage make clear, a compromise in the context of the ordinary practice in New South Wales requires the parties to satisfy the Court that orders should be made. In the paper delivered by Bergin J that counsel for Rosa referred to in his submissions on the responsibility of an executor to compromise proceedings, her Honour noted that:

It is important to remember that a compromise is not always the end of the matter. Depending upon the nature of the settlement, the Court may still have to be satisfied that the applicant is an eligible person and that the quantum agreed upon is reasonable in the circumstances.[47]

62 Her Honour then quoted from the decision of the New South Wales Court of Appeal in Bartlett v Coomber,[48] where Hodgson JA said:

Agreements to compromise are possible and indeed are to be encouraged. Such an agreement may be made by the parties to the proceeding, and the court will generally give effect to it. However, the court will need to be satisfied that the precondition in s 9(2) of the Act is fulfilled, and that the order agreed on is one which ought to be made in terms of s 7 of the Act. Because of the agreement, the court will generally be satisfied of these things without the need for any investigation of the evidence.[49]

63 In that case, an agreement had been made for further provision, and the executor sought to withdraw from that agreement. The claimant sought to have the agreement specifically enforced, and sought an order for further provision. The Court of Appeal upheld the decision of Macready AsJ at first instance to enforce the agreement and make the orders sought. As is clear from the judgment of Bryson AJA, the provision given was made pursuant to the power of the court under the Family Provision Act 1982 (NSW), and not by the force of the agreement:

The agreement could only be given effect by an order made by the Court, and the Court could only act in exercise of the power in s 7 of the Family Provision Act 1982. If claimants and executors agree to settle a Family Provision claim their agreement cannot have effect unless the Court exercises its power under s 7 and orders provision in accordance with the agreement. Whatever their agreement says, obtaining an order of the Court is impliedly a condition of its effectiveness.[50]

64 It is uncontroversial that family provision orders cannot be made by consent, as explained by Windeyer J in Hore v Perpetual Trustee Company Ltd:[51]

As the power to make orders is governed by s 9(2) and s 7, the court cannot by consent, assume a wider jurisdiction. Parties cannot by consent, confer power upon the court to make orders which the court lacks power to make.[52]

65 As his Honour helpfully went on to explain, the ordinary procedure of the Court facilitates the settlement of Part IV claims, without acting as a rubber stamp:

Settlements of claims under the Family Provision Act are of course, very common. It is obviously in the interests of the parties and the court, to encourage settlement and in any week the Masters in the Equity Division may be asked to make a number of orders agreed between the parties in such actions. It such matters in my experience, the court looks quickly at the evidence, and is informed of the relevant facts by counsel or solicitor, and if the matter appears to be reasonable makes the orders. No detailed consideration of jurisdiction takes place as long as the plaintiff appears to have a proper basis for his or her claim. In cases where the interests of infants or unascertained classes of persons may be affected by the orders, then the proposed orders are considered in more detail, not usually on the jurisdictional question, but more often on relevant terms of the orders themselves, and the extent of the benefit provided by them. On occasions the court refuses to make the orders proposed, but this is unusual. At one stage it used to be thought that the reason why the court considered the proposed orders was to see whether or not they were being made purely for the purpose of the avoiding stamp duty on a conveyance pursuant to a deed of family arrangement, but really the question is one as to whether or not the court has jurisdiction.

In the three years during which I was a Master, I would have approved well over 100 such settlements, and I remember only two cases in which I refused to approve the proposed orders.[53]

66 That practice is equally familiar to practitioners in Victoria.

67 If the case advanced by Rosa in this case is correct, that entire procedure is obsolete. Where an executor and a claimant reach agreement on how a Part IV claim is to be resolved, they could execute terms of settlement under the power conferred by s 19(1)(f), dismiss the proceeding, and distribute the estate in accordance with the settlement.

68 In a very different context in Daniels v Hall (No 2),[54] considering the appropriate orders as to costs in a Part IV dispute, EM Heenan J recently made a number of remarks I consider apposite. His Honour noted that:

Unlike claims arising from commercial disputes, contracts, torts or property disputes, the power of the court to make or withhold an award to an applicant under this legislation does not depend on the ascertainment and enforcement of any pre-existing legal or equitable rights but, rather, upon a consideration of whether or not, under the statutory formula, the deceased has failed to make adequate provision for the proper maintenance and welfare of an applicant within a particular class of eligible family members.[55]

69 A claim for further provision is not a claim that the estate owes the claimant some debt or liability. The effect of an order under Part IV is not to recognise a debt or liability, it is in the form of a further legacy, normally a pecuniary legacy. It alters the beneficial entitlements under the trust. Legacies similarly are not debts or expenses of the estate. Beneficiaries cannot bring an action in debt to recover a legacy, but instead must bring an administration suit or the modern form thereof.

70 There is clear authority that, at common law, a trustee may not unilaterally vary or re-arrange the terms of a trust, and that a Court may do so only in certain very limited circumstances. As is noted in Jacobs;

It is the duty - perhaps the most important duty - of a trustee to adhere rigidly to the terms of the trust. A trustee undertakes a certain trust, that is, he or she undertakes to carry out the wishes of the settlor as expressed in a deed or a will, and having undertaken to do this, is bound by the undertaking.[56]

71 The Court's power to sanction a modification of the trust deed, in circumstances where not all beneficiaries are sui juris and able to consent, were considered by the House of Lords in Chapman v Chapman,[57] a case noted in Norina's submissions but not referred to in any detail. There, Lord Simonds LC held:

It is the function of the court to execute a trust, to see that the trustees do their duty and to protect them if they do it, to direct them if they are in doubt and, if they do wrong, to penalize them. It is not the function of the court to alter the trust because alteration is thought to be advantageous to an infant beneficiary. It was, I thought, significant that counsel was driven to the admission that since the benefit of the infant was the test, the court had the power, though in its discretion it might not use it, to override the wishes of a living and expostulating settlor, if it assumed to know better than he what was beneficial for the infant. This would appear to me a strange way for a court of conscience to execute a trust. If, then, the court has not, as I hold it has not, power to alter or rearrange the trusts of a trust instrument, except within the limits which I have defined, I am unable to see how that jurisdiction can be conferred by pleading that the alteration is but a little one.[58]

72 In Earl of Strafford, the discussion of Megarry VC at first instance, and each of the judges in the English Court of Appeal, begins from the premise that the trustees cannot alter the beneficial interests. As Rosa correctly pointed out, in that case a narrow reading of the provision was rejected. It is authority for the proposition that the statutory power conferred should be read broadly, as Nettle J identified in Dowling,[59] and as Buckley LJ made clear:

In my judgment this argument, ingenious as it is, proceeds upon too narrow an interpretation of s 15 and a misapplication of the principles enunciated in Chapman v Chapman. The language of s 15 is, it appears to me, very wide. It would, I think, be undesirable to seek to restrict its operation in any way unless legal principles required this, for it seems to me to be advantageous that trustees should enjoy wide and flexible powers of compromising and settling disputes, always bearing in mind that such a power, however wide, must be exercised with due regard for the interests of those whose interests it is the duty of the trustees to protect. I see nothing in the language of the section to restrict the scope of the power.[60]

73 But the Court of Appeal adopted that wide interpretation beginning from the assumption that no matter how broad the power conferred, there could be no intention in the statute to grant a power upon trustees to vary the beneficial interests under the trust without the consent of the beneficiaries affected. The power of settlement in that case was ultimately upheld for the very reason that the settlement did not vary the beneficial interests of the beneficiaries who wished to contest the settlement.

74 Re Irismay seems, to my mind, to be limited in relevance. The underlying issue in that case, as best as can be ascertained from the published reasons for decision, appeared to be the entitlement of the initial claimant beneficiary to a certain share in the beneficial estate, a dispute that was resolved in the compromise. The dispute did not concern a claim to vary the existing beneficial interests in the estate, although it appears it did concern uncertainty about the existing beneficial interests. Specifically, it is distinct from the settlement of a claim under Part IV. The learned trial judge, in rejecting Earl of Strafford, unnecessarily considered the application of that case in Australia. Further, the declaration granted was that the trustee had the power to enter into the compromise, not that the trustee had power to give effect to the compromise. Nevertheless, to the extent that Re Irismay rejected the restrictions on the power laid down in Earl of Strafford, I would not follow that decision, and would instead follow the decision of Nettle J in Dowling, where his Honour took 'leave to disagree' with Lee J.[61]

75 The rule that neither a trustee nor a court may vary the beneficial interests under a trust except in certain specific circumstances has been modified by statute, including, in Victoria, s 63A of the Trustee Act and most obviously, in relation to will trusts, by Part IV of the Act, but the obligations of a trustee remain the same. Those sections confer a right on persons including the executor or trustee to seek a variation of the trust, a variation that can only be made by Court order.

76 The question asked in this case is, if a beneficiary under a trust brought a claim for further provision under s 91, is that a claim that a trustee can settle pursuant to s 19? That question, in my opinion, has an answer as follows: partly yes, and partly no.

77 Section 19 is expressed in the broadest possible terms, allowing trustees to compromise any claim, and for the purpose of doing so, enter into any arrangement that they think expedient. Critically, however, it does not confer power on a trustee to alter the terms of the trust to give effect to an agreement under s 19. In other words, the trustee may settle a claim under Part IV, but they must then seek orders of the Court giving effect to that settlement under the relevant provision. Of course, if all of the beneficiaries consent to the terms of settlement, then they may vary the trust without Court order, because they retain that power. Without their consent, a trustee does not have that power, and cannot give effect to an agreement to do so.

78 I am reinforced in that conclusion by the knowledge that, when s 19(1)(f) was first enacted, there was no statutory power to vary the terms of the trust. As Nettle J helpfully essayed in Dowling:[62]

Some of the history of the section appears in the report of counsel's argument in Earl of Strafford. Section 30 of the Powers of Trustees, Mortgagees, etc. Act 1860 (Lord Cranworth's Act) was directed to getting in the estate and did not contemplate any dealing with the beneficiary's interest in the estate once got in. Section 37 of the Conveyancing Act 1881 was said to have the same limited objective. Section 15 of the Trustee Act 1925 was derived from those earlier provisions. The purpose of the earlier enactments seems to have been to give trustees administrative powers of a kind that were commonly conferred by well-drawn settlements before 1860; not to confer power on trustees and personal representatives to compromise claims concerning the validity of wills. There is nothing to show that s 15 of the 1925 Act was intended to achieve any more. Another view of the matter is that the common law in the sense that includes equity gave executors very large powers of compromise in respect of external claims and that, while s 19 to some extent codified those existing powers, it added nothing new.[63]

79 The legislature, in enabling claims to be settled, was concerned with claims made against the assets of the estate, or claims made by the estate to certain assets. It was not concerned with claims that the trust itself ought be varied in some way. The purpose of the legislation is served by allowing trustees to compromise and agree to seek orders by consent, but it is exceeded by reading into the provision a power to alter the terms of the trust by agreement with a third party.

80 I consider the effect of the first and second defendant's submissions on this issue, if correct, would have the remarkable result of granting the power to make further provision under Part IV to trustees, a power expressly reserved by the legislature to a court, and that any such decision to make further provision would be unappealable provided the trustee acted bona fide. That cannot be the case. Even this Court is subject to appeal in ordering further provision.

81 I would note that on the interpretation of s 19 that is in my view the correct interpretation, the efficient administration of justice and the obligations on parties to seek to resolve disputes expeditiously remain paramount. A trustee who, in good faith, believes an applicant for further provision has a strong claim or a claim that it would be cheaper to settle than to contest, may still settle the claim and may seek orders giving effect to that settlement by consent, or else by seeking the approval of all beneficiaries who are affected. Beneficiaries who wish to contest such a claim are entitled to be notified and appear, but as litigants are under the same obligations to promote the efficient administration of justice.

82 I would also reject Rosa's submission that merely by agreeing to compromise a Part IV claim, an executor may transform the agreed settlement sum into an expense, debt or liability of the estate which would then be payable under s 39 of the Act. Quite apart from the fact that s 39 does not convey any powers on the trustee, this submission misrepresents the effect of the settlement of a Part IV claim. That settlement is not a settlement which recognises or acknowledges the liability of the estate to pay a debt, it is a settlement that purports to acknowledge that the beneficial interests in the estate should be distributed in a manner other than that which is provided in the will.

83 In the result, I consider that Rosa had the power to agree to compromise the proceeding, but did not have the power to make further provision for Pia without an order from the Court. The money paid out of the estate by the executor to Pia was therefore paid out in breach of trust, and that leaves two questions: whether Pia should be liable to repay the money back into the estate, and if not, whether the executor should be indemnified pursuant to either s 19 or s 67 of the Trustee Act.

84 Norina submitted that Pia should be liable to pay the settlement sum back into the estate on two grounds. First, Norina submitted that Pia must have been aware that Norina was not in attendance at the mediation and could not have consented to the agreement. The submission of Norina appeared to be on the ground of knowing receipt of trust funds.

85 Secondly, Norina submitted that, even if Pia were not aware, the authorities make it clear that the mere fact that a beneficiary has received something to which she is not entitled is enough to justify repayment. In support of that submission, Norina relied on the decision of the House of Lords in Ministry of Health v Simpson,[64] affirming the English Court of Appeal in Re Diplock,[65] referred to in Jacobs.[66] That case establishes that 'a beneficiary in a deceased estate has a personal right of action to recover from an overpaid beneficiary or a stranger volunteer'. The difficulty with this submission is that Pia received the settlement sum not in her capacity as a beneficiary, and not as a volunteer, but rather as consideration for agreeing to settle her claim under Part IV.

86 Norina also relied on the decision of Dixon A-J in Haywood v Roadknight.[67] In that case Haywood instructed his solicitor, Purnell, in relation to the sale of land, and engaged Roadknight to sell the land. On Roadknight's behalf, Purnell, who was a friend of Roadknight, made an offer to Haywood for the land, after explaining to him that if Ford Motor Company determined to build a factory in the area, as was rumoured, the value of the land would rise considerably. Haywood sold the land to Roadknight. Dixon A-J determined that as Purnell was Haywood's solicitor, the onus was on him to prove that the transaction was proper, and that as he could not, Roadknight was required to account to Haywood for the benefit received.[68] Dixon A-J's decision was affirmed on appeal, and his explanation of the relevant legal principles endorsed.[69] The difficulty with that case for Norina is that Roadknight received any excess benefit both with knowledge, and as a volunteer, and so falls squarely within the established principles for seeking trust funds against a third party, quite apart from the fact that Roadknight was in any case Haywood's agent for the sale of the property. It does not appear from the report of the decision that it was even argued that Roadknight could escape liability, if Purnell had acted in breach of his fiduciary duties.

87 Pia submitted that even if the compromise was set aside, she had a right to retain the further provision. That right was said to be premised on two propositions.

88 The first proposition was that the claim was settled without Pia's knowledge that there was any issue or likely to be any issue with the terms of settlement. It was submitted that there was no evidence that could support a finding that Pia knew or even ought to have known that there might be some challenge to the payment pursuant to the terms of settlement. Pia relied on the ostensible authority of Rosa, as executor, to settle the matter on behalf of the estate. It was also submitted, along similar lines, that there was no basis on which Pia could or should have known that the payment would come from Norina's entitlement. From Pia's perspective, either Rosa or Eleonora could have taken out a mortgage to pay the settlement sum, amongst other options. There was no indication in the terms of settlement as to where that payment would come from.

89 The second proposition was premised on the silence of Norina, in the knowledge that the mediation was proceeding. Norina had been informed of the mediation, and was given the opportunity to attend and be represented, as her sister Eleonora chose to do. On this basis, Pia submitted that the silence of Norina should be taken as acquiescence of the bargain reached between the defendants.

90 Pia referred to and sought to distinguish the decision of Scott J in Pittorino v Meynert,[70] where a mediation agreement in a Part IV was challenged on the basis that a party to the agreement was suffering from a disability at the mediation and hence it would be unconscionable for the other parties to rely on the agreement reached. His Honour rejected the application in part because the defendants could not be fixed with either actual or constructive knowledge of the disability.[71] Counsel for Pia submitted that in this case, as Norina was not even present at the mediation, Pia could not possibly be fixed with knowledge of her lack of consent. Given Norina was not a party to the agreement, I did not find this case to be of great assistance, but I note the point made.

91 Pia further submitted that it was incumbent on Norina to warn Pia if she suspected that Rosa, as her agent, was acting outside her authority. Counsel did not rely on any authority for this proposition.

92 The evidence before the Court does not, and cannot, support a finding that Pia was on notice of Norina's lack of consent prior to or at the conclusion of the mediation. I accept, as Pia submitted, that she could not have known and did not know Norina's position on the settlement at the time of mediation. To the extent that the submissions of Norina asserted that, I would reject those submissions.

93 I would also reject the submission that Pia is liable to repay the settlement sum to the estate as 'an overpaid beneficiary or a volunteer'. Pia was not a volunteer in the settlement, but rather exchanged her right to seek further provision from the estate for the settlement sum. Pia did not receive that sum in her capacity as a beneficiary of the estate, but as a third party claimant. By agreeing, under the terms of settlement, to release and discharge any action, suit, claim and demand against the estate of the deceased, Pia gave valuable consideration for the sum received, and cannot be treated as a volunteer for the purpose of recovery of trust funds.

94 I would note, in passing, that the evidence led in this case suggested that Pia may have been on notice in respect of the contest by Norina that the payment ought not be made prior to receiving the settlement sum. However, the originating motion does not seek relief against Pia for knowing receipt of trust funds in those terms, and as no such case was argued at trial, I do not propose to consider that issue further.

95 I therefore consider that Norina has no claim against Pia for recovery of the settlement sum, either personally or on behalf of the estate.

96 As I have determined that the decision to give effect to the compromise was beyond the powers conferred by s 19, it is my view that the protection provided to trustees in that section cannot apply to the trustee in this case. The very words of the section - that the trustee may do such things 'without being responsible for any loss occasioned by any act or thing so done by him or them in good faith' - prevent the application of that protection.

97 However, I shall consider whether Rosa acted in good faith in the event that I am wrong in determining that the good faith protection does not extend to acts that do not fall within the section. It is also convenient at this point to consider whether Rosa should be excused from liability pursuant to s 67, as the same issues are relevant.

Whether Rosa is entitled to be indemnified under s 19

98 Rosa submitted that a trustee who acts with 'an honest mind and an honest purpose' is acting in good faith for the purposes of s 19, and that as Rosa acted on reasonable advice and in good faith, the claim must fail. Rosa summarised the case put against her as being an allegation that by failing to obtain Norina's consent, Rosa had acted in bad faith in settling the proceeding.

99 Rosa relied on Dwyer,[72] where Starke J said:

Jessel MR said in Re Owens that the section might have a revolutionary effect on this branch of the law and that it looked as if the only question would be whether the executor had acted in good faith or not. But in Re Greenwood, Eve J intimated that good faith involved the exercise of active discretion on the part of executors and that loss arising from supineness or carelessness was altogether outside the section. The power conferred upon executors by the Trustee Act 1928 are fiduciary powers and must be exercised for the benefit of their beneficiaries and for them alone. The view expressed by Eve J appears to me to be in accordance with the principle and to be a right interpretation of the section.

...

The considered opinion of the learned Chief Justice is entitled to great weight, but the Trustee Act confers upon executors a power to act as they think fit or expedient. Mistakes executors may make, but if they are not inactive but fairly and conscientiously investigate the facts and come to an honest judgment about the facts so ascertained that time should be allowed for the payment of the debt or liability of the estate and in my opinion the Act relieves them from the responsibility for any loss occasioned by their act.[73]

In Re Greenwood, Eve J confined the protection to cases where the executors did more than remain passive or supine; where they exercised an active discretion. The conduct of the executors in the present case responds, in my opinion, to this test.[74]

101 As Starke J noted, the honesty of the executors in that case in granting the extensions of time was not in fact challenged, and the decision of Mann CJ below was on the basis of their reasonableness.[75]

102 Rosa also relied upon the decision of Dickman v Holley,[76] adopting earlier decisions interpreting 'good faith', in a statutory context, to mean acting with an honest mind and an honest purpose. In that decision, White J rejected that the executor had acted in good faith, because the onus was on the executor to prove good faith and no evidence was led in support of the executor's state of mind.[77]

103 Rosa also cited the decision of the New Zealand Court of Appeal in Guardian Trust and Executors Company New Zealand v Public Trustee of New Zealand.[78] In that case, a decision upheld by the Privy Council,[79] it was held that the common law position is that an executor with notice that estate funds may be claimed by a third party would be liable if the executor deals with the funds in disregard of that notice, even if acting honestly.[80] Significantly, the statutory provision in question in that case excused trustees from liability if they acted in good faith and without notice of the existence of a later will.

104 In delivering the advice of the Privy Council to his Majesty to dismiss the appeal, Romer LJ noted:

The action was nevertheless dismissed by Northcroft J because he was satisfied that the appellants at all material times believed that Miss Smith had testamentary capacity, and that they had acted throughout with perfect honesty. But with all respect to the learned judge the question is not whether the appellants acted honestly in disregarding the information that they had received. A trustee who has received information of a charge upon the interest of his cestui que trust in favour of a third party is not entitled to disregard it merely because he honestly believes the charge to be invalid. Nor can an executor who has information of the existence of a later will act in disregard of such information merely because he honestly believes that his testator was not at the time of making it of testamentary capacity. In all such cases, as in the present one, the question is whether the person acting in a fiduciary capacity has had notice of the claim and not whether he formed a favourable or unfavourable view as to the prospect of the claim succeeding. In their Lordships' opinion the appellants had ample notice of the claims of the next of kin in the present case before they paid the legacies and it follows that in their opinion the Court of Appeal were right in reversing the order of Northcroft J. In the course of his judgment in that Court, after a review of the facts of the case, Myers CJ said that he could come to no other conclusion than that the payments to the legatees were made with knowledge and notice on the part of the respondents of facts and circumstances which should have made it plain to any ordinary reasonable and prudent man of business that the payments should not have been made.[81]

105 Neither case considered the interpretation of the expression 'good faith' in either s 19 or an equivalent provision.

106 In the supplementary written submissions, without seeking leave to address the issue, Rosa submitted that it was not open for the Court to find that she had not acted in good faith because:

(a) The residue was the only source of cash to draw upon to settle the claim;

(b) It was clear from the terms of the will that Norina was not entitled absolutely to $500,000, but only what was left after the estate was administered, up to that amount;

(c) Rosa acted on legal advice;

(d) Rosa kept Norina informed of the proceeding;

(e) Rosa asked Norina for assistance in providing information relevant to the Part IV claim;

(f) Rosa informed Norina that her entitlement might be affected;

(g) Rosa invited Norina to attend the mediation; and

(h) Norina failed to inform Rosa that she would be in Melbourne during the mediation.

107 It is far from clear that these factors prevent a finding that Rosa did not act in good faith. Although the residue was the only cash reserve, other assets could have been sold or mortgaged to settle the claim. The will, although prioritising the payment of the estate's debts over Norina's inheritance, does not prioritise the payment of a further legacy to Pia before paying Norina's inheritance. Rosa kept Norina informed of the proceeding, but did not inform her that she intended to settle the proceeding at Norina's expense. Rosa asked Norina for assistance, but acknowledged that it was her duty as executor to uphold the will, not that of the beneficiaries. Norina's presence in Melbourne during the mediation does not seem relevant to the question of Rosa's good faith or otherwise.

108 Finally, I would be wary of the emphasis placed by counsel for Rosa on the receipt of legal advice. While it is important and desirable that trustees do act on legal advice, the mere fact that they have so acted is not determinative of whether they have acted in good faith. Trustees who are poorly advised may always seek to be recompensed by their advisers, but beneficiaries whose claims are defeated by trustees acting on that advice would be left without recourse. Advice should be considered in the context in which it is given.

Whether Rosa is entitled to be indemnified under section 67

109 Rosa sought in the alternative that the Court relieve her from liability pursuant to s 67 of the Trustee Act, which provides:

If it appears to the Court that a trustee, whether appointed by the Court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the Court in the matter in which he committed such breach, then the Court may relieve him either wholly or partly from personal liability for the same.

110 Although no submissions were made by Rosa other than that she had acted honestly and reasonably, I consider that the submissions made by Rosa in support of the application for relief under s 19 to be relevant to that question.

111 Norina similarly did not distinguish between s 19 and s 67 in submissions, and it is convenient to deal with both submissions together. Norina made two main submissions on this point.

112 First, Norina submitted that Rosa knew prior to the mediation that Norina was opposed to Pia's claim, and knew or ought to have known that Rosa would not consent to the proposed compromise. All the correspondence sent by Rosa's solicitors to Norina prior to the mediation indicated that her role would be to uphold the estate, and no suggestion was made that the matter would be settled. As the settlement exclusively reduced Norina's interest in the estate, and did not reduce either Rosa or Eleonora's interest, Rosa must have known that Norina would most likely not have agreed to the settlement. The decision by Rosa to settle, with that knowledge, could not be described as being in good faith.

113 Secondly, Norina submitted that Rosa acted with a conflict of interest in agreeing to settle the claim without Norina's consent, and that a trustee who acts with a conflict of interest cannot be acting in good faith even where they act honestly. The conflict of interest identified by Norina was that, had the Part IV proceeding continued to trial, Rosa in her capacity as a beneficiary would have been exposed to having her entitlement affected, whether because the Court ordered further provision exceeding $500,000, because the Court order the further provision be spread across the remaining beneficiaries, or because the cost of the proceeding had to be borne by the estate. Thus, Rosa had a clear incentive to settle the proceeding for a sum less than $500,000 and to pay that sum out of the cash remaining in the estate.

114 In supplementary submissions, and also without leave, Norina further relied on the principles set out in Earl of Strafford[82] and Re Irismay[83] in respect of what constitutes a bona fide exercise of the power of compromise. As neither proceeding concerned whether the power was exercised bona fide, but rather whether the power to compromise extended to the settlement reached, it is unnecessary to set out the statements referred to in any detail.

115 Section 19 gives a trustee a right of indemnity against 'any loss occasioned by any act or thing done by him or them in good faith'.

116 Broadly speaking, 'good faith' can have two different meanings.[84] The first refers to a subjective state of mind, without regard to the circumstances in which that state of mind was obtained. The second imports an objective standard of prudence. In construing which interpretation was intended in a legislative context, the interpretation will depend on ordinary principles of statutory interpretation.

117 In this context, there are two considerations of note. First, the purpose of the section is to enable trustees to settle disputes in relation to the trust, without fear that in so doing they will be held personally liable. That consideration tends to support a permissive construction of good faith, whereby mere honesty is sufficient. On the other hand, s 19 confers a power on trustees that should be understood in the context of the existing duties placed upon trustees, including the duty not to act in a position of conflict, and the duty not to profit. That consideration weights against a subjective construction of good faith that allows a trustee to escape liability for breaching those duties merely by acting honestly.

118 Nothing in the material placed before the Court suggests that Rosa acted anything other than honestly in her decision to compromise the proceeding, and her decision to give effect to that compromise. As she deposed, she is a pensioner, whose English is poor, and acted at all times on legal advice. However, I am not satisfied that the expression 'good faith' referred to in s 19 is satisfied by a trustee acting only with bare honesty.

119 Rosa knew that Norina received the smallest, and last-ranking interest under the estate. Rosa instructed her solicitors, presumably on advice, to keep Norina informed of the progress in the administration of the estate, including Pia's Part IV claim. Rosa knew, and was advised, that the settlement, if given effect to, would substantially reduce Norina's entitlements under the estate without affecting Rosa's own share of the estate, or Eleonora's. Only in the sense that Rosa acted honestly could Rosa in any sense be considered to have acted in good faith.

120 I am further reinforced in this conclusion by the fact that Rosa acted in a clear position of conflict in settling the claim. The duty not to conflict is a fundamental duty of any trustee, and a duty that is not abrogated lightly. In enacting a statutory power indemnifying trustees for the settlement of claims against the estate, the legislature could not have intended to protect trustees from acting in a position of conflict, even if they did so honestly. I would not read 'good faith' so broadly.

121 I would not go so far as to say that only where trustees conduct themselves at an objectively prudent standard would good faith be satisfied. But in my view, it would be absurd if trustees were protected in circumstances where a beneficiary's entitlement is substantially reduced, and the trustee failed to make proper enquiries of beneficiaries at least to satisfy themselves that the compromise is in interest of the trust as a whole. This is consistent with the statement in Re Greenwood,[85] repeated in the High Court in Dwyer,[86] requiring trustees to exercise an active rather than a passive discretion. Rosa did not turn her mind to Norina's attitude to the terms of settlement.

122 The practical course of action, and the course advocated by counsel for Norina, would have been for Rosa to agree to terms of settlement conditional on obtaining either an order of the Court or the consent of Norina as the only beneficiary affected by the settlement and the only beneficiary unrepresented at the mediation. As well as being in line with the ordinary practice in these matters, it is also the common sense approach for dealing with such settlements.

123 For the same reasons, I consider that I should not exercise the discretion granted to this Court to excuse a trustee for liability where they have acted honestly and reasonably. Rosa acted in a position of conflict, and without properly considering Norina's interests as a beneficiary of the trust, in entering and giving effect to the compromise. It would not be appropriate for this Court to excuse a trustee in those circumstances.

124 Finally, in oral submissions in reply, Rosa raised for the first time a submission that if the Court was of the view that equitable compensation was payable, the amount of compensation should be reduced on the basis that, had the claim not been settled, the estate would have been put to the expense of defending the claim. Rosa again relied on Dwyer,[87] for the principle that the Court has to make an assessment as to what loss has been suffered by reason of the breach of duty. In fact, what is said by Latham CJ in the passage referred to is:

A breach of duty by the executors being thus established, the plaintiffs were not bound to show that if the executors had performed their duty they would have secured payment of the outstanding balance or part of it. The onus was on the executors to show that the estate had not suffered loss by reason of their breach of duty.[88]

125 In this case, Pia's claim was acknowledged to be a weak claim, which, although costly to defend, would most likely have resulted in Pia failing to establish a case for further provision and, if costs were to follow the event, an order that she pay the estate's costs. It is for Rosa to establish that the amount payable for breach should in some manner be reduced, and as I am not satisfied that the estate would have had to bear the costs of the defending the claim, I do not consider that the amount should be so reduced.

126 For the above reasons, I consider that Rosa acted beyond her power as executor and trustee in paying the sum of $250,000 to Pia pursuant to the terms of settlement; that Pia is not liable to repay that sum to the estate; and that Rosa is personally liable to reimburse the estate for that sum, and is not entitled to be indemnified from the trust for that sum.

127 I shall hear the parties as to the form of orders and as to costs.

[1] The terms also dealt with a further dispute between Pia and the estate concerning the entitlement to rental income from the Thornbury property. Those terms are not relevant to this dispute.

[2] There were in fact two other payments made to Pia from the estate pursuant to the terms, but those payments relate to the settlement of the claim for rent mentioned above, and are not relevant to the present dispute.

[3] [1961] VicRp 41; [1961] VR 264.

[9] (1940) 57 WN (NSW) 181.

[11] (1940) 57 WN (NSW) 181.

[13] [1980] 1 Ch 28.

[23] [2003] VSC 454 (20 November 2003).

[27] [2012] NSWSC 320 (5 April 2012).

[28] [2012] NSWSC 782 (13 July 2012).

[29] Chief Justice in Equity Bergin, 'Executors/Trustees and Mandatory Mediations' (Speech delivered at the proceedings of the Society of Trust and Estate Practitioners in the Banco Court of the Supreme Court of New South Wales, 25 November 2009).

[32] [2010] VSC 357; (2010) 29 VR 356.

[33] Ibid 375, citing Re Beloved Wilkes's Charity [1851] EngR 375; (1851) 3 Mac & G 440, 448 ; [1851] EngR 375; 42 ER 330, 333; Gisborne v Gisborne (1877) 2 App Cas 300, 307; Re Allen-Meyrick's Will Trusts; Mangnall v Allen-Meyrick [1966] 1 WLR 499, 503; Re Green, deceased [1972] VicRp 98; [1972] VR 848, 850 (Crockett J); McKinnon v Samuels [2000] VSC 393 (21 September 2000) [14] (Eames J); Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd [2004] FCA 130; (2004) 49 ACSR 1, 13-4, 17-8 (Goldberg J).

[34] [1940] HCA 5; (1940) 63 CLR 1.

[37] [2003] VSC 454 (20 November 2003).

[40] [1980] 1 Ch 28, 35 (Megarry VC).

[41] Trustees and Mortgagees Act 1861, 23 & 24 Vict c 145 s 30; Statute of Trusts 1864 s 76; _Trusts Act 189_0 s 73; Trusts Act 1915 s 25(2); Trustee Act 1928 s 15(1)(f); Trustee Act 1953 s 19(f); Trustee Act 1958 s 19(f). The original English enactment did not include 'good faith' requirement. That part of the provision was included in the Conveyancing Act 1881, although not incorporated in Victoria until the Trusts Act 1915.

[42] Lord Cranworth's Trustees and Mortgagees Act, 10 Law Magazine and Law Review, or Quarterly Journal of Jurisprudence 1 (1860-1861) 118, 124-5.

[43] Testator's Family Maintenance Act 1900 (NZ).

[44] Widows and Young Children Maintenance Act 1906.

[45] [2013] NSWSC 1207 (28 August 2013).

[46] Ibid [11]-[12] (citations omitted).

[47] Chief Justice in Equity Bergin, 'Executors/Trustees and Mandatory Mediations' (Speech delivered at the proceedings of the Society of Trust and Estate Practitioners in the Banco Court of the Supreme Court of New South Wales, 25 November 2009) [53].

[48] [2008] NSWCA 100 (23 May 2008).

[49] Ibid [72] (Hodgson JA); see also Mason P at [54]-[55], Bryson AJA at [84].

[51] (Unreported, Supreme Court of New South Wales, Windeyer J, 8 June 1995).

[54] [2014] WASC 272 (29 July 2014).

[56] J D Heydon and M J Leeming (eds), Jacobs' Law of Trusts in Australia (Butterworths, 7th ed, 2006) [1704].

[57] [1954] UKHL 1; [1954] AC 429.

[59] [2003] VSC 454 (20 November 2003).

[60] [1980] 1 Ch 28, 47.

[61] [2003] VSC 454 (20 November 2003) [31].

[64] [1951] AC 251.

[65] [1948] Ch 465.

[66] J D Heydon and M J Leeming (eds), Jacobs' Law of Trusts in Australia (Butterworths, 7th ed, 2006) [1737].

[67] [1927] VicLawRp 74; [1927] VLR 512.

[69] In fact, the Full Court noted that 'the law enunciated by the trial Judge applies. The proposition stated by him, based upon Hesse v Briant, is sound law, and finds support not only in what is said in that case but also in Imeson v Lister.

[70] [2002] WASC 76 (12 April 2002).

[72] [1940] HCA 5; (1940) 63 CLR 1.

[76] [2013] NSWSC 18 (31 January 2013).

[78] [1939] NZLR 613.

[79] [1942] UKPC 1; [1942] AC 115.

[82] [1980] 1 Ch 28, 32, 45-7.

[84] Cannane v J Cannane Pty Ltd (in liq) [1998] HCA 26; (1998) 192 CLR 557, 596-7 (Kirby J).

[85] (1911) 105 LT 509.

[86] [1940] HCA 5; (1940) 63 CLR 1.

[87] [1940] HCA 5; (1940) 63 CLR 1.