[2021] VSC 771; [2022] VSC 357 (McMillan J)

COSTS - Appeal - Trustee of family trust - Costs of proceeding, application for leave to appeal and appeal - Applicants' conduct of proceeding - Indemnity from trust funds.

No appearance - Form 64E filed (Notice of intention not to respond or contest)

1. On 16 March 2023, this Court granted the applicants leave to appeal and allowed the appeal.[1] Consequently, costs orders made by the judge on 24 June 2022[2] will need to be set aside and new orders substituted in their place.
2. These reasons concern the appropriate orders for the costs of the proceeding, the application for leave to appeal and the appeal, including whether the costs of any of the parties should be paid out of the funds of the Trust.
3. These reasons adopt the definitions and background contained in our Principal Reasons and should be read together with them.
4. For present purposes, it is only necessary to restate our concluding remarks:

Consistent with our conclusions that the Trust did not fail upon the loss of the Deed and that a resulting trust did not then arise in favour of Teresa's estate, the loss of the Deed did not, in and of itself, mean that Vanta breached its duties as trustee by continuing to administer the Trust. However, we have not been required to determine whether Vanta committed any other breaches of trust and whether John has any remedies against Vanta - such as an order for the taking of accounts or an order for the removal of Vanta as trustee - if any such breaches can be established in a proceeding where these issues are properly raised. It suffices for us to say that our reasons do not affect the rights and obligations of the parties or the remedies available to them beyond the specific findings we have made and the orders we will make to give effect to them.

...

For the above reasons:

(a) The Trust does not fail for uncertainty. It remains a valid trust that is in urgent need of judicial direction, which should have been sought in the past and is now the subject of a proposed undertaking by the applicants.

(b) Vanta does not hold the Trust property subject to a resulting trust in favour of Teresa's estate. Consequently, there is no basis, at the present time, for the taking of accounts.

(c) Although our decision affirms the continued existence of the Trust, it remains open to John to take whatever steps he deems appropriate in relation to the past or future administration of the Trust.

(d) Subject to the proposed undertaking being given by the applicants, we will make orders granting leave to appeal and allowing the appeal.[3]

1. The appeal was allowed upon the condition that the applicants provide the following undertaking:

The applicants undertake, by their counsel, that within 2 months of the date of this order, the first applicant will commence a proceeding in the Supreme Court of Victoria under r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 and s 63 of the Trustee Act 1958, and on such further bases as it might be advised, in which orders shall be sought for the effective administration of the Mantovani Family Trust, and will prosecute that proceeding until final orders are obtained for the resolution of the proceeding (if such orders are required).

1. The undertaking (previously filed by the applicants) was confirmed by their counsel in court when judgment was delivered.
2. Orders were then made that:
   • (1) The application for leave to appeal is granted.
   • (2) The appeal is allowed.
   • (3) Paragraphs 1 to 5 of the order made on 25 November 2021 by Justice McMillan are set aside, and the following paragraph is substituted for them:
     1. The proceeding is dismissed.
   • (4) By 4:00 pm on 23 March 2023, the parties file written submissions not exceeding 4 pages in relation to the costs of proceeding no. S ECI 2019 00733, and the costs of the application for leave to appeal and the appeal.

... the first respondent (John) should pay the costs of the applicants (respectively, Vanta, Nic, and Rocky, and collectively the Vanta Parties) of and incidental to the application for leave to appeal, and the appeal, on the standard basis. There is no objection to John having a certificate of indemnity under s.4(1) of the Appeals Costs Act 1998 (Vic). The Court should set aside the costs orders of the trial judge made on 24 June 2022. In their place, the Court should order that John pay the costs of the Vanta Parties of and incidental to the proceeding below (or alternatively 75% of those costs). ... No orders should be made to disturb any right of indemnification that Vanta may possess in connection with the costs orders above.[4]

1. The applicants argued that costs should follow the event. They were entirely successful on the appeal. It follows, so they said, that the costs of both the trial and the appeal should be paid by John on the standard basis.
2. They asserted (contrary to John's submissions) that there was no basis on which to disallow any of their costs because of their conduct.[5] John had obtained two costs orders in his favour (adverse to the applicants) in earlier hearings which were not the subject of any appeal. The abandonment of the reconstitution argument immediately prior to the trial was insignificant in the scheme of the conduct of the proceeding and trial. It was also said that there was no point in Vanta applying at an earlier time for orders regarding the administration of the Trust, given that John was arguing that the Trust had failed for uncertainty.
3. John sought orders to the following effect:

(a) John's costs below, including reserved costs, be paid in the first instance from the Trust on an indemnity basis. > > (b) John's cost of and incidental to this appeal be paid from the Trust on an indemnity basis. > > (c) Vanta, Nic and Rocky jointly and severally indemnify the Trust as to John's costs below thrown away by the abandonment of the primary defence and objection to the production of documents. > > (d) Vanta, Nic and Rocky jointly bear the costs of and incidental to the hearing below personally and without indemnity from the Trust. > > (e) Vanta, Nic and Rocky's costs of and incidental to this appeal be paid from the Trust on an indemnity basis. > > (f) Carmine's costs (in [his] representative capacity) below, including reserved costs, together with the costs of the appeal be paid from the Trust on an indemnity basis.[6]

4. John contended that the primary defence to his claim was that of the termination and reconstitution of the Trust which was abandoned at the door of the court. He argued that the usual order in those circumstances should be that his costs be paid from the Trust assets. The fact that Vanta belatedly indicated to the Court that it would make an application to seek the advice of the Court demonstrated that it was necessary to have the matter brought to court.
5. He argued that a prudent trustee would have brought the case to court early in the piece and that this would have averted the need for his proceeding. Vanta did not undertake to produce the documents he sought in the claim until the last moment. Vanta did not seek a Beddoe order.[7] Finally, he argued that Vanta should not be indemnified from the Trust assets as, other than in the appeal, it would be unlikely to establish that its costs 'were not improperly incurred in significant part'.

1. These submissions raise two discrete but intertwined issues. First, whether any party should be ordered to pay any other party's costs of the trial, the application for leave to appeal and the appeal. Second, whether any portion of the parties' costs should be the subject of indemnity from the Trust fund.
2. The principles involved in determining whether to make an award of costs to a successful (or unsuccessful) party - whether at trial or on appeal - are well known and apart from reference to a couple of relevant matters do not necessitate repetition.
3. The rationale for an order for costs is that 'it is just and reasonable that the party who has caused the other party to incur costs of litigation should reimburse that party for the liability incurred'.[8]
4. The standard rule is that, in the absence of special circumstances, a successful party is entitled to an award of costs.[9]
5. The rule is not absolute and there are exceptions which commonly arise where the conduct of a party may affect its entitlement to costs. However, the making of a costs order is subject to the Court's discretion which must be exercised judicially and not punitively.[10]
6. Where there are competing considerations as to the question of the entitlement to costs, the disposition of the application requires a 'broad evaluative judgement of what justice requires'.[11]
7. In disputes involving the conduct of a trustee and/or beneficiaries, additional considerations arise as to the payment of costs out of the Trust fund, particularly where the contest relates to the administration of the Trust.[12] We will address those considerations separately.
8. Returning to the facts of this case, we regard the following four factors as relevant to the exercise of the Court's discretion as to whether any party should be ordered to pay any other party's costs of both the trial and the appeal.
9. First, the applicants have, as they contend, been totally successful on the appeal and the orders that should have been made at first instance would have resulted in a dismissal of the proceeding and a referral of the question of the proper administration of the Trust to the Court pursuant to the provisions of the Trustee Act 1958 ('Trustee Act') and the Supreme Court Act 1986.
10. Second, Vanta's conduct as trustee was unsatisfactory for the reasons set out in our Principal Reasons. Once John, as a beneficiary, raised questions concerning the existence of the Deed and the basis for the distributions, Vanta should have proactively endeavoured to locate the Deed and, once satisfied it could not be located, sought the advice of the Court as it now (belatedly) seeks to do. John's actions in issuing this proceeding were the product of stonewalling by Vanta. Whilst it would have been open to John to bring a proceeding under the Trustee Act, the onus rested squarely with Vanta as the trustee to approach the Court and seek its advice and directions in relation to the future administration of the Trust. By failing to do so, it effectively invited John to issue this proceeding. Its argument that it could not do so once the proceeding was issued is otiose, as it should never have been necessary for John to come to court.
11. Third, and this is a corollary of the second point, the relief sought by John in the proceeding was misguided notwithstanding the unsatisfactory conduct of Vanta.
12. Fourth, and contrary to the applicants' submissions, they maintained up until the last moment two completely untenable positions, particularly so given Vanta's role as a trustee. Notwithstanding years of requests by John, Vanta failed to provide all relevant documents in relation to the Trust and its administration - only capitulating at the door of the court. Similarly, the applicants maintained until the eve of the trial that the Trust had been reconstituted at some earlier point of time. Although this allegation may not have rated a significant mention in the witness statements, it was nevertheless a position from which the applicants did not resile until the eve of the trial and which was unsubstantiated. The trial itself, once these arguments were abandoned, essentially turned on the documents and agreed facts and took less than a day.

The party/party costs of the applicants and John of the proceeding (including the trial)

1. We consider that there should be no order requiring any party to pay any other party's costs of the proceeding. Vanta's conduct disentitles it to an order for costs. John, now the unsuccessful party (as it turns out), should not have an order for his costs as against the applicants.
2. The observations in [26] above do not apply to costs orders the judge made in favour of John prior to 24 June 2022, which the applicants do not seek [13] disturb.13

The costs of the applicants and John of the application for leave to appeal and the appeal

1. The appropriate order for the costs of the application for leave to appeal and the appeal is more difficult to determine. The applicants were entitled to seek to review the judge's decision and have demonstrated error. However, if they had sought the advice of the Court at the outset, in response to John's reasonable requests, then neither John's proceeding nor the appeal would have occurred. After careful consideration, we have decided that there should be no order requiring any party to pay any other party's costs of the application for leave to appeal or the appeal.

Whether the costs of any of the parties should be paid out of the Trust fund

1. The remaining issue is whether any part of the costs of the parties should be paid out of the Trust fund. In Sons of Gwalia Ltd (Subject to a Deed of Company Arrangement) v Margaretic,[14] Finkelstein J set out what his Honour described as 'some basic rules' in relation to the principles upon which costs are awarded in cases involving trustees:

The best place to begin is with some basic rules. Re Buckton; [1907] UKLawRpCh 98; [1907] 2 Ch 406 contains a classic statement of the principles upon which costs are awarded in cases involving trustees. There Kekewich J (who was a master of Chancery procedure) said that, broadly speaking, there are three kinds of disputes involving trustees. The first is an action brought by trustees relating to the construction of the trust instrument or some other question arising in the course of an administration. In Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220, 1223, [1995] 1 All ER 431 at 434 (Alsop Wilkinson) Lightman J broadened this category by including within it '[every] dispute as to the trusts upon which [the trustees] hold the subject matter of the settlement.' For convenience he labelled these cases as 'trust disputes'.

When a 'trust dispute' has come about because there is a dispute between two beneficiaries concerning the construction of the trust instrument or their respective rights in the trust estate, the duty of the trustee as the trustee for all beneficiaries is to treat the beneficiaries impartially and remain neutral: Australia and New Zealand Banking Group Limited v National Mutual Life Nominees Limited [1977] HCA 42; (1977) 137 CLR 252, at 264-265, 270; ... Alsop Wilkinson at 1225; Re Patton (1971) 19 DLR (3d) 497; Jones v Heritage Pullman Bank Co, 518 NE 2d 178 (1987) at 182-184; Northern Trust Co v Heuer, 560 NE 2d 961 (1990) at 964. Thus, unless the trust instrument itself provides otherwise, the trustees should bring the dispute into court for resolution but in the proceeding they are not entitled to favour one party over another by advocating a party's cause: Re Hughes' Will, 5 NW 2d 791 (1942); Re James' Estate, 86 NYS 2d 78 (1948) at 89; Re Duke, 702 A 2d 1008 (1995); A W Scott and W F Fratcher, Scott on Trusts 4th ed, Little, Brown, Boston, 1987, s 183; Restatement (Second) of Trusts, American Law Institute, Philadelphia, 1959,s 183. To do otherwise would be a breach of the trustees' duty to deal impartially with all beneficiaries and to protect their interests. Of course, if the case is not properly presented by the beneficiaries the trustees may, indeed probably should, provide the court with their views.

In a trust dispute the costs of all parties are treated as necessarily incurred for the benefit of the estate and are ordered to be paid out of the fund either on a solicitor and client or indemnity basis: E R Daniell, S E Williams and F Guthrie-Smith, Daniell's Chancery Practice 7th ed, Stevens, London, 1901, vol 1, pp 953, 955-7, 987; Re Buckton at 414; McDonald v Horn [1995] 1 All ER 961 at 970-1. One possible exception is the case of a 'timid trustee' who unnecessarily approaches the court for advice when the answer to the problem raised by the dispute is sufficiently clear. Even then the trustee usually gets his (or her) costs. Another exception is where the trustees breach their duty to act impartially, even if the breach is technical in nature, done in good faith, and causes no harm: Alsop Wilkinson at WLR 1225; All ER 435-6; Jones; Northern Trust Co. At best the trustees will be entitled to the costs incurred in submitting to the court's direction. That may include the costs of a defence, discovery and an appearance: Alsop Wilkinson at 1225; All ER 435-6. Interestingly, while it is proper and sometimes obligatory for trustees to bring a trust dispute to court, in the United States it is said that a trustee who is a party to a trust dispute has no standing to appeal from the judgment, except in limited circumstances: Scott 1987 s 183.

The second kind of dispute is a trust dispute in which the application is made by someone other than the trustee (usually a beneficiary) but raises the same kind of issue as in the first class and would have justified an application by the trustees. Here the same rule in relation to costs applies because, as in the first class, the application is for the benefit of the estate.

The third class identified by Kekewich J (which Lightman J refers to as a 'beneficiaries dispute') is where a beneficiary brings a hostile claim against the trustees (for example as to the propriety of any action taken or omitted to be taken) or another beneficiary. As between the parties the costs in this kind of case are treated in the same way as in ordinary litigation, that is, they follow the event. However, if the trustees properly (albeit not necessarily successfully) defend the claim for the benefit of the estate they will be entitled to their costs out of the estate to the extent they are not recovered from the other party.

Lightman J has identified a fourth class, which he labels 'a third party dispute'. This is a dispute between the trustees and persons, otherwise than in their capacity as beneficiaries, in respect of rights and obligations assumed or incurred by the trustees in the course of administering the trust. Examples are actions in contract or tort. Here again as between the parties the costs are borne by the unsuccessful party. The trustees will be entitled to look to the estate for their costs (or any shortfall in their costs) only if the action is 'properly brought or defended for the benefit of the trust estate': Alsop Wilkinson at 1224; All ER 434. Commonly, a cautious trustee will seek a Beddoe order (Re Beddoe; Downes v Cottam [1892] UKLawRpCh 180; [1893] 1 Ch 547) authorising him to bring or defend an action.[15]

1. It is not possible to fit the current proceeding into any one category of the three/four identified by Finkelstein J. Whilst John's proceeding was adversarial, it was still intimately bound up with questions about the proper administration of the Trust and the refusal of Vanta as trustee to cooperate or to seek the advice or direction of the Court. His commencement of the proceeding drew the attention of the Court to the conduct of the Trust and ultimately resulted in the applicants agreeing to seek directions from the Court as to the future administration of the Trust. In those circumstances, we consider that John's costs of both the trial, the application for leave to appeal and the appeal should be paid out of the Trust fund. The rationale is simple: without John's intervention, important questions concerning the proper administration of the Trust would not have received judicial consideration. Further, having secured a judgment in his favour, it was not unreasonable for him to defend the appeal, notwithstanding the ultimate result.
2. Determining whether the costs of the proceeding of Vanta, Rocky and Nic should be paid out of the Trust fund is difficult.
3. In the usual course of events, Vanta as trustee would be entitled to an indemnity from the assets of the Trust. As noted by the Court of Appeal in Di Benedetto v Kilton Grange Pty Ltd, 'the position is more accurately stated as being that the trustee is entitled to indemnity for costs, expenses and liabilities which are not shown to have been improperly incurred'.[16]
4. Rocky and Nic, the two directors of Vanta, were joined by John to the proceeding as a result of their corporate roles with Vanta. The three (Vanta, Rocky and Nic) have been represented by the one firm of solicitors and by the same counsel.
5. On balance - and after considerable thought, and notwithstanding their bellicose approach to John's claim - we think that the applicants' costs of the trial should be paid out of the Trust fund. This is appropriate given that ultimately their defence of the proceeding was validated notwithstanding that their conduct precluded them from obtaining an order for costs against John. It is also relevant that the applicants did not seek to disturb costs orders in favour of John that were made by the judge prior to 24 June 2022, which her Honour held should not be paid out of the Trust fund.[17]
6. For the same reasons, the applicants' costs of the application for leave to appeal and the appeal should be paid out of the Trust fund. Also, if Carmine has incurred any costs in relation to the proceeding, the application for leave to appeal and/or the appeal, then these should be paid out of the Trust fund.

Costs of Rocky and Carmine (in their capacities as the executors of the estate of Teresa) of the proceeding, the application for leave to appeal and the appeal

1. The judge reasoned as follows in relation to Rocky and Carmine's right to be indemnified out of Teresa's estate:

As with a trustee's right of indemnity, an executor is entitled to an indemnity out of the estate for costs of a proceeding, provided such costs are properly incurred in the administration of the estate. The plaintiff's submission that an indemnity from Teresa's estate for the third and fourth defendants (in their capacity as executors) would be unduly burdensome to the plaintiff is not to the point. The relevant consideration is whether the executors' costs have been properly incurred in the administration of Teresa's estate. A consideration of the limited extent to which the third and fourth defendants (in their capacities as executors of Teresa's estate) were involved in the proceeding and their conduct throughout it clearly shows that their costs can properly be characterised as such. Accordingly, the third and fourth defendants, in their capacities as executors of Teresa's estate, will have recourse to an indemnity from Teresa's estate for their costs of the proceeding.[18]

1. That reasoning holds good in relation to both the trial and the appeal. Both Rocky and Carmine, in their capacity as executors of the estate of Teresa, should be indemnified

by that estate for their costs (if any) of the proceeding, the application for leave to appeal and the appeal.

VANTA PTY LTD (ACN 005 190 965) (as trustee of the Mantovani Family Trust)

SALVATORE ROCCO MANTOVANI (personally and as executor of the will of Teresa Mantovani)

CARMINE VINCENZO MANTOVANI (personally and as executor of the will of Teresa Mantovani)

[1] Vanta Pty Ltd v Mantovani [2023] VSCA 53 ('Principal Reasons').

[2] Mantovani v Vanta Pty Ltd (No 3) [2022] VSC 357 ('Costs Ruling'); Orders of McMillan J dated 24 June 2022.

[3] Principal Reasons, [154]-[155] (citations omitted).

[4] Applicants' submissions as to costs filed on 23 March 2023, [2].

[5] See below at [13] and [23].

[6] First respondent's submissions as to costs filed on 23 March 2023, [13].

[7] Re Beddoe [1892] UKLawRpCh 180; [1893] 1 Ch 547.

[8] Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534, 567; [1990] HCA 59 (McHugh J).

[9] Ritter v Godfrey [1920] 2 KB 47, 52 (Lord Sterndale MR); Donald Campbell & Co Ltd v Pollak [1927] AC 732, 809, 811; Swindells v Victoria (No 2) [2016] VSCA 77, [9] (Warren CJ, Tate and Santamaria JJ).

[10] Allplastics Engineering Pty Ltd v Dornoch Ltd [2006] NSWCA 33, [34] (Tobias JA, with Santow JA agreeing at [1]).

[11] Gray v Richards (No 2) (2014) 315 ALR 1, 2 [2]; [2014] HCA 47 (French CJ, Hayne, Bell, Gageler and Keane JJ); Chen v Chan [2009] VSCA 233 [10] (Maxwell P, Redlich JA and J Forrest AJA).

[12] Re Buckton [1907] UKLawRpCh 98; [1907] 2 Ch 406; Sons of Gwalia Ltd (Subject to Deed of Company Arrangement) v Margaretic [2006] FCAFC 92; (2006) 232 ALR 119, 121-122 [5]-[9]; [2006] FCAFC 92 (Finkelstein J).

[13] See [10] above. The order for costs we make will only affect the judge's order for costs dated 24 June 2022.

[14] (2006) 232 ALR 119; [2006] FCAFC 92. This case involved the costs of the administrators of a company pursuant to a deed of company arrangement.

[15] Ibid, [5]-[10] (Finkelstein J) (In-quote citations amended).

[16] (2017) 16 ASTLR 463, 479 [64]; [2017] VSCA 119 (Ferguson, McLeish JJA and Cameron AJA).

[17] See [10] above.