Thynne v Sheringham

Legal principles

1. The leading authority in Australia dealing with agreements by which a beneficiary under a will might be bound as to a later disposition of the property is the 1937 decision of the High Court in Birmingham v Renfrew. [4] It and subsequent authorities have been reviewed recently by single judges in Victoria and Queensland. In a 2015 Victorian decision, Flocas v Carlson, [5] McMillan J addressed the issues in circumstances involving a brother and sister who, it was alleged, had entered into an agreement that half of a jointly owned property would ultimately be left by the survivor to the brother's daughter: It will be appropriate to return to the critical finding made by McMillan J after considering Birmingham. The principles identified by McMillan J were referred to without dissent by the Queensland Court of Appeal in Masci v Masci. [6]
2. In 2022, in the Queensland decision of Forster v Forster, [7] Ryan J gave detailed consideration to the growing list of authorities dealing with mutual will agreements, from which she deduced a number of relevant principles.
3. Given these recent reviews, which need not be replicated, it is sufficient to turn to the critical statements relied on in submissions in this case, commencing with Birmingham and, in particular, two passages in the judgment of Dixon J which have been the subject of subsequent analysis and consideration.
4. It may be noted that the applicant sought to distinguish Birmingham on the basis that the mutual wills in Birmingham conferred unqualified authority on the surviving spouse to deal with the property during his or her lifetime, but to dispose of it in accordance with the agreement upon death. In the present case, the applicant contended, there was no unqualified authority to deal with the Darling Point property, the subject of the agreement; rather, the respondent was subject to constraints on the uses to which she could put the property. Secondly, the applicant submitted that, even if not distinguishable, Birmingham was authority for the proposition that equity imposed a trust on the Darling Point property immediately upon the death of the testator.
5. The first passage in the judgment of Dixon J was as follows: [8] "I think the legal result was a contract between husband and wife. The contract bound him, I think, during her lifetime not to revoke his will without notice to her. If she died without altering her will, then he was bound after her death not to revoke his will at all. She on her part afforded the consideration for his promise by making her will. His obligation not to revoke his will during her life without notice to her is to be implied. … It is true that he cannot be compelled to make and leave unrevoked a testamentary document and if he dies leaving a last will containing provisions inconsistent with his agreement it is nevertheless valid as a testamentary act. But the doctrines of equity attach the obligation to the property. The effect is, I think, that the survivor becomes a constructive trustee and the terms of the trust are those of the will which he undertook would be his last will. … [T]he equitable obligation to fulfil the contract attaches to the property the subject of the contract and converts the party into a trustee for the objects to be benefited. … That consideration consists in the death of one of the parties leaving a will in the form agreed. The result is a disposition of property made upon the faith of the survivor's carrying out the obligations of his contract. It is an element which brings such a case under the equitable jurisdiction for the prevention of fraud."
6. That reasoning was expressed with the benefit of hindsight, namely that the husband had in fact changed his will so as to disentitle the members of the wife's family who were to take under the agreement. As will be seen, commentators have understood that passage to create a trust at the date of death of the first to die, after which it is not open to the survivor to renege on the agreement. [9] However, a later passage in Birmingham read as follows: [10] "The purpose of an arrangement for corresponding wills must often be, as in this case, to enable the survivor during his life to deal as absolute owner with the property passing under the will of the party first dying. That is to say, the object of the transaction is to put the survivor in a position to enjoy for his own benefit the full ownership so that, for instance, he may convert it and expend the proceeds if he choose. But when he dies he is to bequeath what is left in the manner agreed upon. It is only by the special doctrines of equity that such a floating obligation, suspended, so to speak, during the lifetime of the survivor can descend upon the assets at his death and crystallize into a trust."
7. The proposition that the equitable obligation crystallises as a trust only at the date of death of the survivor was inimical to the applicant's case, that he was, from his father's death, a beneficiary under an existing trust, imposed by equity to give effect to the constraints on the survivor's right to dispose of the property as she thought fit. However, the applicant relied upon a passage in Jacobs' Law of Trusts in Australia. [11] After setting out the first passage from Dixon J, the authors commented: "The preferred construction of Dixon J's words, applying them to the facts of Birmingham v Renfrew, is that the trust arises automatically on the death of the first to die because she made her will in reliance upon the promise of the survivor and by her death that will has become irrevocable. … … It follows from the establishment of the constructive trust with the death of the first testator to die that the interest of a beneficiary designated under the arrangement to take on the death of the survivor, is vested from that time and throughout the life of the survivor and will not lapse if the beneficiary predeceases the survivor but will pass to the beneficiary's personal representatives as part of the beneficiary's estate. [12] "
8. It is not entirely clear what was meant by applying the principles to the facts in Birmingham. The facts in Birmingham involved the wife predeceasing her husband, at which point the husband's will accorded with the agreement. The date at which the husband changed his will is unclear, but it was described by Latham CJ as occurring after the wife's death. [13] Before the wife's death, there had been no fraud so that the occasion for intervention by equity appeared not to have arisen. Further, inconsistently with the commentary in Jacobs', Dixon J addressed the temporal element in the later passage set out above, which expressly stated that there was a "floating obligation" during his lifetime which crystallised into a trust, not on the death of his wife, but on his death as the survivor.
9. Further, the first sentence of the extract from the current edition of Jacobs' set out at [36] above concludes with a footnote referring to Barns v Barns. [14] The critical passage in Barns is found in the judgment of Gummow and Hayne JJ (footnotes omitted): "85 … That outcome in Birmingham does not support the proposition for which the first respondent contends on this appeal. The contention (rejected in most academic writing on the subject) is that, in these cases, a beneficial interest of the survivor in the assets of the first testator to die arises before the death of the first testator and the due administration of that first estate; the consequence is the withdrawal of the subject-matter from that estate. What is particularly significant for present purposes are the points emphasised in Birmingham and in other decisions. The propositions are: (i) it is the disposition of the property by the first party under a will in the agreed form and upon the faith of the survivor carrying out the obligation of the contract which attracts the intervention of equity in favour of the survivor; (ii) that intervention is by the imposition of a trust of a particular character; (iii) the subject-matter is 'the property passing [to the survivor] under the will of the party first dying'; (iv) that which passes to the survivor is identified after due administration by the legal personal representative whereupon 'the dispositions of the will become operative'; (v) there is 'a floating obligation' over that property which has passed to the survivor; it is suspended during the lifetime of the survivor and 'crystallises' into a trust upon the assets of the survivor at death."
10. The applicant sought support in proposition (iii) for the submission that the trust must arise when the property passes to the survivor, but that must depend on the terms on which the property passes. Furthermore, it is difficult to read the explicit temporal proposition (v) as consistent with that submission. Subsequently, the same section of Jacobs' set out the later passage of Dixon J's judgment at 689, describing the trust as crystallising at the death of the survivor, but without comment and without revisiting the earlier commentary relied upon by the applicant.
11. The first edition of Jacobs', published in 1958, made but brief reference to Birmingham in discussing constructive trusts: [15] "There may be included in this class 'secret trusts' because, in that type of case, equity, on the grounds of fraud, refuses to recognise the strict legal effect of words used by a settlor or testator. So also, where two persons execute mutual wills in pursuance of any arrangement as to their property, if the survivor takes the benefit under the will of the person first dying but does not leave his property in accordance with the arrangements, his executors or administrators will hold his property on a constructive trust to carry out the terms of that arrangement." [16]
12. On that view, the constructive trust fixed on the estate after the death of the survivor. That understanding may have derived from the "floating charge" passage, but no page reference was identified in the footnote. The current commentary first appeared in the fourth edition published in 1977.

Nature of the "floating obligation"

1. In Ford and Lee, Principles of the Law of Trusts, published in 1990, the authors distinguished two situations but expressed some doubts arising from the "floating obligation" reasoning in Birmingham: [17] "Where the surviving party is given, by the terms of the contract, no more than a life interest in the property passing to her or him, the third-party beneficiary will be entitled in remainder and can be regarded as having an interest from the death of the first contracting party to die. Accordingly, if the third-party beneficiary dies before the surviving contracting party, her or his personal representative will take when the surviving contracting party dies later. [18] Where, as in Birmingham v Renfrew, the survivor has powers of disposition over the capital it is possible to equate the third-party beneficiary to a taker in default of appointment so as to be regarded as having, from the date of the first contracting party to die, an interest which is vested but liable to be divested and to which a personal representative could succeed if the third-party beneficiary dies before the surviving contracting party. Some doubt as to whether that is the correct view arises from dicta of Dixon J in Birmingham v Renfrew referring to the survivor's obligation as being 'a floating obligation, suspended, so to speak, during the lifetime of the survivor' [which] 'can descend upon the assets at his death and crystallise into a trust'."
2. In the current looseleaf edition of Ford and Lee, the passage seeking to equate the third-party beneficiary with a taker in default of appointment is retained, but there is an additional paragraph, suggesting an analogy with a trustee under an express trust who has the power to sell or exchange the trust property. The commentary continues: [19] "The analogy with the trustee of an express trust should not, however be pressed too far. The survivor is beneficial owner of the property included in the agreement, which will often include the survivor's own property, as well as property received under the will of the deceased party. The duties to which the survivor is subject when the trust is passing through its 'floating' phase depend on the terms, express and implied, of the agreement. In Forster v Forster … at [201] Ryan J was of the opinion, following an extensive review of the authorities, that, in the absence of fraud, the property subject to a mutual wills agreement was not held on trust during the survivor's lifetime, trusteeship being inconsistent with the survivor's beneficial ownership. The imposition of the constructive trust is therefore a remedial response to any dealing with the property that is, or is likely to be, inconsistent with the terms of the agreement."
3. In Barns, although in dissent as to the outcome, Callinan J compared the floating obligation envisaged by Dixon J in Birmingham to a floating charge: [20] "152 The reference by Dixon J to a floating obligation which crystallises invites comparison with a floating charge. It is well established that effect can readily be given to the latter. Until the occurrence of certain defined events the owner of [the charged] assets may deploy them generally as it deems fit, subject to the covenants in the instrument of charge, and not deliberately in such a way as to destroy or diminish the value or utility of the rights and interests of the person in whose favour the charge is created. In the same way, a 'floating obligation' or a 'constructive trust' of the kind contemplated by Dixon J may, and should be given concrete effect by crystallisation to, and for the benefit of the promisees under the agreement for the mutual wills on the death of the surviving mutual contractor. The fact that the surviving contracting party, who is the beneficiary under the will of the first of the two to die, may use, and indeed even ultimately use up in their entirety the assets passing under the first will, provides a reminder that in human affairs, even in legal affairs, perfection, and the complete effectuation of intention are sometimes not possible. That is not a reason for a court not to give as much effect as possible to the intentions of the parties. What the second testator may not do, as Dixon J points out, is diminish or devalue the first testator's estate by acts calculated to produce that result."
4. The possible difficulties inherent in this aspect of Birmingham were adverted to by McMillan J in Flocas in the following terms: [21] "192 Finally, there is to my mind an aspect of this doctrine that remains unsatisfactorily unsettled, but need not be resolved for the purposes of this case. It concerns the 'floating obligation' suggested by Dixon J that is said to crystallise on the death of the survivor. It is plain that the property the subject of the promise is not held on trust during the survivor's lifetime, and the survivor is entitled to retain the income and dispose of the capital if they so choose. The extent, and nature of an obligation not to dispose of the property inter vivos by a gift 'calculated to defeat the intention of the compact' seems to me to be difficult to articulate. Although it may be readily ascertainable in circumstances where the survivor deliberately disposes of the property in their lifetime in order to avoid the terms of the agreement, it may be more difficult where the disposition is outside the survivor's control due to bankruptcy or mental incapacity. The only comment I would venture is that such an obligation is more readily accommodated if, as I consider, the mutual wills agreement is a contract, and the floating obligation is an obligation that must be determined by reference to the express and implied terms of that contract. A court can confidently apply established principles concerning the incorporation, implication and interpretation of contractual terms in deciding the extent of that floating obligation and whether it has been breached in the circumstances of the case. If, on the other hand, the mutual wills agreement is a unique equitable beast, the nature of Dixon J's floating obligation will be far more difficult to discern."
5. This passage assumes that the trust would not crystallise in circumstances where there was an inter vivos disposition by the survivor inconsistent with his or her equitable obligations. Indeed, that the trust does not crystallise in such circumstances may be inferred from the fact that Dixon J raised the possibility of such a breach of an equitable obligation not to act inconsistently with the agreement only after identifying the time at which a constructive trust would crystallise. Further, Dixon J did not suggest that the trust crystallised at the moment the husband altered his will inconsistently with the agreement, as had in fact occurred in Birmingham. [22]

The predeceasing beneficiary - Re Hagger

1. One way of testing the applicant's contention is to ask what the position would be if the applicant predeceased the respondent. If the applicant had a vested interest during the respondent's lifetime, that interest would vest in those entitled to his estate. That was the result accepted in Re Hagger, [23] a case decided seven years before Birmingham and referred to by Dixon J in the paragraph next following his reference to a "floating obligation". [24] Clearly no inconsistency was perceived: the reason is apparent when the facts of Re Hagger are identified, which distinguish it from the present case.
2. Hagger involved a "joint will" of husband and wife by which they recorded "that they had agreed to dispose of [their joint property] by their joint will, which they declared should not be altered or revoked save by their mutual agreement, they gave everything they possessed at the time of the death of such one of them as should first die to their trustees to pay their debts, funeral and testamentary expenses and certain legacies, and to pay the income of the whole of their estate to the survivor of them during his or her life, and… as to their freehold and leasehold properties at Wandsworth upon trust after the death of the survivor to sell the same, and, after payment of expenses, to pay and divide the net proceeds as follows…".
3. One of the proposed beneficiaries of the sale of the properties, Ms E Palmer, predeceased Mr Hagger. Clauson J stated: [25] "As a matter of construction it is clear that at the moment this document came into operation its effect was to confer a life interest on the survivor of the husband and wife and a vested interest in remainder, as to one-sixth of the Wandsworth property, on Eleanor Palmer."
4. Clauson J referred to the earlier authority of Dufour v Pereira [26] relied on in Birmingham, and concluded: "The effect of the will was that the husband and wife agreed that the property should on the death of the first of them to die pass to trustees to hold on trusts inconsistent with the right of survivorship, and therefore the will effected a severance of the joint interests of the husband and wife. By the will they made a provision which was inconsistent with the survivor taking by survivorship. Therefore the property at the moment when, on the wife's death, it came within the ambit of the will ceased to be held by the two jointly, and the husband had no title to the wife's interest on her dying in his lifetime, save in so far as he took a life interest under the joint will. From the moment of the wife's death, the Wandsworth property was held on trust for the husband for life with a vested interest in remainder as to one-sixth in E Palmer. So far as the husband's interest in the property is concerned the will operated as a trust from the date of the wife's death."
5. Ford and Lee, in the passage set out at [42] above, recognised that Re Hagger was different. The current looseleaf addition notes that the duties of the survivor "when the trust is passing through its 'floating' phase depend on the terms, express and implied, of the agreement": see at [43] above.
6. That conclusion may be accepted, but it appears English texts are less flexible. Glister and Lee, in Hanbury & Martin, rely on Re Hagger for the proposition that "where a beneficiary died between the date of the death of the first to die and the survivor, the estate of that beneficiary was able to claim its share on the ground that the interest was vested and there was no lapse". [27] However, the uncontroversial nature of the reasoning in Re Hagger does not support this broad and unqualified statement of principle. The answer will turn on the terms of the particular agreement.

Distinguishing Birmingham

1. Before leaving Birmingham, it is convenient to deal with the applicant's attempt to distinguish it. The applicant's proposition was that, because the mutual wills in that case left each party with an unfettered right to absolute ownership of the property during the lifetime of the survivor, there was no occasion for the trust to crystallise before the death of the survivor. By contrast, it was submitted, the agreement between the testator and the respondent involved constraints on her use of the Darling Point property she inherited from her husband, which could be enforced during her lifetime.
2. The assumption that the "full ownership" referred to in Birmingham at 689 was unqualified did not fully reflect the reasoning of Dixon J who, after the later passage set out above, continued: "No doubt gifts and settlements, inter vivos, if calculated to defeat the intention of the compact, could not be made by the survivor and his right of disposition, inter vivos, is, therefore, not unqualified."
3. This passage recognises that there may be an implied qualification, and therefore accommodates the possibility of an express qualification. The point of distinction relies upon the fact that where the right of full ownership is qualified in some way, Birmingham simply did not address the consequence of the need to enforce the qualification during the life of the survivor. That submission should not be accepted.
4. For the purposes of this discussion it is assumed that there has been no breach of the respondent's obligations with respect to the Darling Point property; certainly none was relied on for the purposes of the present application. The possibility that the applicant had a reasonably arguable case that the respondent was in breach of those obligations by mortgaging the property, or by using it as security for the raising of funds which in turn were expended in breach of the constraints imposed by the agreement, will be addressed later.

Application of principles

1. There are a number of features of par 5 of the agreement which are significant for present purposes. First, the intention was not that the family home be preserved and passed on to the testator's two sons in equal shares, but rather that it, or any other property bought to replace it, or the proceeds of sale of any such property be passed on in equal shares. Secondly, that which was to be passed on in equal shares was identified as the property or proceeds of sale of "at the time of [the respondent's] death". The identification of an obligation as arising at the date of the wife's death is at least suggestive of the absence of any interest in the ultimate beneficiaries in the property in the meantime. Thirdly, the testator expected that his wife may need to use the proceeds of sale or rental of the Darling Point property for her own maintenance and upkeep, and for that of their son Patrick, and the maintenance of the two properties which he owned. In keeping with the comment of Callinan J in Barns, the testator recognised the possibility that the value of the Darling Point property might be exhausted in its commitment to those purposes.
2. If it were open to the Court to have regard to the terms of the testator's will, in order to know what precisely was meant by the statement, "I have left the family home… and its contents to Victoria", cl 6 would reinforce the proposition that the obligation imposed by the agreement was to take effect by a disposition to be made in her will. Further, cl 6 confirmed that it was not the Darling Point property itself which was to be passed on, if it had in the meantime been sold, and that the proceeds of sale were not necessarily to be preserved, as they might be expended for any of the nominated purposes, including the wife's own maintenance and upkeep, which would continue until the time of her death. In particular, neither the agreement nor the will imposed any constraint on sale of the Darling Point property. Accordingly, the applicant had no power to prevent the sale of the property. Subject to the argument that power of sale did not extend to the power to grant a lesser interest such as a mortgage, it followed that the applicant had no caveatable interest in the Darling Point property.
3. This conclusion is consistent with that set out by the trial judge at [31]-[38].

Power to grant mortgage

1. In the pending proceedings in the Equity Division, the applicant contends for two breaches of fiduciary obligation on the part the respondent. One asserts that the power of sale acknowledged in the agreement does not extend to a power to use the Darling Point property as security for a loan: execution of the current bank mortgage was, on that view, a breach of the respondent's fiduciary obligations. The second breach asserts that if the Darling Point property is sold, the uses of the proceeds of sale permitted by the agreement do not extend to investment in the farming business at Valla. (As the property has not been sold, any breach must depend on use of moneys secured by the mortgage for that purpose.) The applicant did not seek to prove in this Court that such breaches of the agreement had been established but rather that he had a reasonably arguable case and that a caveat should be available on an interlocutory basis to protect the property pending resolution of his claims.
2. The primary judge dealt with these submissions in three stages. The first, discussed above, was the rejection of the proposition that the applicant had any trust interest at the present time. [28] The second was a finding that there was "no suggestion" (that is, it was no part of the applicant's pending proceedings) that the respondent was acting in a manner "calculated to defeat the intention of the compact", to adopt the language of Dixon J in Birmingham at 689.
3. Thirdly, the judge held that, on the basis that the corpus of the trust cannot be ascertained until the respondent dies, the trust does not crystallise until the corpus of the property (if any) is capable of identification, so that the proposed caveat cannot be supported. While the applicant might have a basis for injunctive relief against a breach of fiduciary obligations, merely by establishing a breach of those obligations he did not acquire a proprietary interest in the Darling Point property. It was therefore unnecessary to determine the further issues. [29]
4. The judge nevertheless rejected the basis of the further claims. The rejections were stated succinctly. With respect to the submission that the respondent could sell the Darling Point property, but not mortgage it, he reasoned that as the agreement expressly recognised a right to dispose of the property by sale, it must, at least by implication, have recognised a right to a lesser disposition than selling. [30]
5. With respect to use of the funds for maintenance of the farm, the judge said that the distinction sought to be drawn "between the land and the business operations on it, is artificial". [31] The distinction thus rejected relied on reading the opening sentence of par 3 of the agreement, expressing the testator's wish for the respondent to assume the sole management of the testator's farming business conducted at a particular address, and described as "the Farm", so that the defined term referred only to the address and not to the farming business. However, par 3 of the agreement also stated: "I wish for Victoria to use her reasonable endeavours to ensure that the Farm is operated on a financially stable and profitable basis from year to year and not to sell the farm unless financially obliged to do so." That "wish" is clearly not a constraint, nor a specific grant of power to a person otherwise unable to use her financial resources for such a purpose. The contention that the testator intended that the land, as opposed to the farming business, was to be operated on a financially stable and profitable basis, verges on incoherence. Thus, to read "the Farm" as limited to the land is barely tenable, when considered in context.
6. Whether upon full argument a different view may emerge need not be determined. At the interlocutory stage, the judge's observations were entirely plausible. They fed into a further contingent finding that, if otherwise of the view that a caveat was available, the balance of convenience supported its lapsing. That reasoning should be accepted.

Conclusions

1. Given the different views amongst text writers as to the proper understanding of Dixon J's judgment in Birmingham, it is appropriate to grant leave to appeal. Nevertheless, the weight of judicial authority in this country supports the legal principle articulated by the primary judge. For the reasons set out above, and the joint reasons of Ward ACJ and Kirk JA, that approach should be accepted. The appeal should therefore be dismissed.
2. The Court should make the following orders: 1. Grant the applicant leave to appeal from the judgment in the Equity Division of 22 December 2022. 2. Direct that the applicant file within seven days a notice of appeal in the terms of the draft notice contained in the white folder and dispense with service. 3. Dismiss the appeal. 4. Order that the appellant pay the respondent's costs in this Court.

Endnotes

1. Harry Bernard Thynne v Jevny Pty Ltd [2022] NSWSC 1774.
2. Respondents Supplementary Response, 19 June 2023, par 7.
3. Applicant's written submissions, 29 May 2023, par 33.
4. (1937) 57 CLR 666; [1937] HCA 52.
5. [2015] VSC 221.
6. [2015] QCA 245 at [32] (Gotterson JA, Morrison and Philippides JJA agreeing).
7. [2022] QSC 30.
8. Birmingham at 682-683, 687-688.
9. The Wills Act 2007 (NZ), s 30, addresses the issue, but seems only to apply where there are actually mutual wills, and not merely an agreement.
10. Birmingham at 689-690.
11. JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia (8th ed, LexisNexis, 2016) at [13-42].
12. Re Hagger [1930] 2 Ch 190.
13. Birmingham at 674.5.
14. (2003) 214 CLR 169; [2003] HCA 9 at [85]-[86].
15. KS Jacobs, The Law of Trusts in New South Wales (Butterworths, 1958) at 174; footnote (22) at p 14 merely identified it as a contract case where a trust was found in favour of third parties.
16. The passage was unchanged in the 2nd edition: RP Meagher and PF Trevorah, Jacobs' Law of Trusts in New South Wales (2nd ed, Butterworths, 1967) at 329; and p 116, footnote (24).
17. HAJ Ford and WA Lee, Principles of the Law of Trusts, (2nd ed, Law Book Co, 1990), at [2232].
18. Referring to Re Hagger.
19. Ford and Lee at [22A.290].
20. See also Ford and Lee (2nd ed) at [2232], p1043, not included in the current service.
21. Footnotes omitted: see also Ford and Lee at [22A.260].
22. Birmingham at 681.
23. (1930) 2 Ch 190 (Clauson J).
24. Birmingham at 690.
25. Hagger, p 194.
26. (1769) 1 Dick 419; 21 ER 332.
27. J Glister and J Lee, Hanbury & Martin - Modern Equity (21st ed, 2018, Thomson Reuters) at 12-015.
28. Judgment at [38].
29. Judgment at [39]-[42].
30. Judgment at [42].
31. Judgment at [41]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 August 2023