Wareham v Marsella [No 2] [2020] VSCA 118

1 On 20 April 2020, this Court granted leave to appeal but dismissed an appeal brought by the appellants contesting their removal as trustees of a self-managed superannuation fund.[1] The appellants also failed in challenging the trial judge's finding that they had not given real and genuine consideration to the exercise of a discretion as to the beneficiary of the death benefit, when they exercised that discretion in favour of the first appellant.

2 The respondent submits that the appellants ought to pay the costs of the appeal and of the trial personally, without the right to be indemnified from the trust fund. He makes this submission on the basis that the appellants defended the proceeding at trial and pursued the appeal for the personal benefit of the first appellant and not for the benefit of the trust. He submits that the appellants' conduct as trustees, which gave rise to the litigation, involved a conscious, deliberate and wrongful breach of their duties as trustees, with a view to delivering themselves a financial benefit.

3 The appellants concede that orders for costs should be made against them, both at trial and on appeal, but submit that they have a right to full indemnity from the trust fund.

4 We do not propose to make any order as to the costs of the trial. New trustees are yet to be appointed. The proceeding is therefore not complete, and the trial judge has made no orders as to the costs of the trial to date. The question of those costs is properly a matter for the trial judge.

5 The appellants rely on cl 11 of the trust deed for the fund, which relevantly provides as follows:

11.1 Limitation of Liability - General

Subject to clause 11.2 the Trustee shall not be liable for or in respect of any claim, liability, cost, loss, damage or expense whatsoever or howsoever incurred or arising out of any act or omission in connection with this Deed or the Fund or the exercise or performance of the Trustee's powers, discretions and duties.

11.2 Liability for Certain Conduct

Clause 11.1 shall not exempt the Trustee from, and the Trustee shall be liable for, any claim, liability, cost, loss, damage or expense which is a result of an act or omission by the Trustee involving:

(a) the Trustee failing to act honestly in any matter concerning the Fund;

(b) the Trustee intentionally or recklessly failing to exercise, in relation to any matter affecting the Fund, the degree of care and diligence that the Trustee was required to exercise; or

(c) the Trustee incurring liability for a monetary penalty under a civil penalty order.

11.3 Indemnity of Trustee

(a) The Trustee shall be indemnified out of the Fund for and in respect of all liabilities whatsoever or howsoever arising incurred by the Trustee in the exercise or purported exercise or attempted exercise of the trusts, powers, authorities and discretions vested in the Trustee pursuant to this Deed or by the Act.

(b) This indemnity shall not extend to any liability of the Trustee arising in circumstances described in clause 11.2.

6 Clause 11 has two relevant operative provisions. Clause 11.1 addresses liabilities of the trustee and limits those liabilities to the extent specified. Clause 11.3 provides a positive right of indemnity in respect of liabilities actually incurred by the trustee. These provisions have different operations and are not mere mirror images of each other. The first denies the existence of certain liabilities. The second provides an affirmative right of recovery in respect of liabilities that do exist. Not only are their subject matters different, but their scope differs. Clause 11.1 is concerned with claims etc howsoever incurred or arising out of any act in connection with the deed or the fund or the exercise of the trustee's powers. Clause 11.3 addresses liabilities howsoever arising incurred by the trustee in the exercise of the trustee's powers. It does not use the broader language of 'connection' found in cl 11.1.

7 The making of an order for costs sits aside these provisions. It creates a liability of its own force, being an independent payment obligation.[2] Clause 11.1 does not purport to foreclose this possibility, and we doubt whether it could have that operation in any event. The question that then presents itself is whether such an order gives rise to a right of indemnity under cl 11.3. As mentioned further below, the scope of the Court's power to order inconsistently with such a provision need not be decided in this case. For present purposes, what matters is that the question whether the appellants should be indemnified by the trust in respect of the costs of the appeal falls to be determined having regard to cl 11.3 rather than cl 11.1.

8 The appellants also rely on s 56 of the Superannuation Industry (Supervision) Act 1993 (Cth), which relevantly states:

56 Indemnification of trustee from assets of entity

(1) Subject to subsections (2) and (2A), a provision in the governing rules of a superannuation entity is void if:

(a) it purports to preclude a trustee of the entity from being indemnified out of the assets of the entity in respect of any liability incurred while acting as trustee of the entity; or

(2) A provision in the governing rules of a superannuation entity is void in so far as it would have the effect of exempting a trustee of the entity from, or indemnifying a trustee of the entity against:

(i) fails to act honestly in a matter concerning the entity; or

(ii) intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the trustee was required to exercise; or

(b) liability for a monetary penalty under a civil penalty order; or

(c) the payment of any amount payable under an infringement notice; or

(d) liability for the costs of undertaking a course of education in compliance with an education direction; or

(e) liability for an administrative penalty imposed by section 166.

9 This provision has limited, if any, significance to the present matter. No party submits that any part of cl 11 is void by reason of s 56.

10 The appellants submit that cl 11 applies to the present case because they were not found to have failed to act honestly, or to have intentionally or recklessly failed to exercise their discretion to appoint a beneficiary in respect of the death benefit.

11 It is correct to say that neither the trial judge nor this Court has found that the appellants failed to act honestly. The trial judge did find that the first appellant had acted 'insolently' in regard to her duties and that there were grounds for saying that her conduct went beyond mere carelessness. However, there has been no finding that the failure to give real and genuine consideration to the exercise of the discretion was intentional or reckless. Such a conclusion would sit uncomfortably with the findings that the appellants acted upon legal advice, albeit not specialist advice, which has been found to have been incorrect.

12 If cl 11 were to govern the costs of the appeal, we would therefore not conclude that the case fell within the exceptions in cl 11.2.

13 However, in our opinion cl 11 does not govern the question who should ultimately bear the costs of the appeal. In the first place, it is doubtful whether parties to litigation can contractually displace the discretion of the Court as to costs.[3] This need not be decided, although we observe that, in accepting their liability to a costs order (albeit subject to a claim for indemnity), the appellants have implicitly, and properly, accepted that cl 11.1 does not deny the Court's power to make an order that they pay the respondent's costs. Assuming the Court's costs discretion is unimpeded, however, it cannot be doubted that the contract in question would at least play a significant role in its exercise.

14 Secondly, and in any event, the threshold question is whether the indemnity in cl 11.3 extends to the present case. The question is whether costs incurred as a result of unsuccessfully pursuing the present appeal were incurred 'in the exercise or purported exercise or attempted exercise' of the trust. In our opinion, they were not. We proceed to explain why that is so.

15 Leaving the terms of the indemnity to one side for the moment, it is well established that a trustee who acts in his or her own personal interests rather than those of the trust may be denied the right to recover his or her costs out of the trust estate. That would extend beyond costs ordered by the court to the trustee's own costs.[4]

16 In Miller v Cameron,[5] the High Court upheld an order of the Supreme Court of Tasmania removing a trustee. In relation to costs, Latham CJ said:

Certainly, as a rule, a trustee is allowed his costs out of the trust estate if his conduct has been honest, even though it may have been mistaken. ...

In this case the trustee was asked to resign his office by every person interested in the execution of the trust. In my opinion his refusal to resign in all the circumstances of the case has resulted in legal proceedings which ought to have been avoided. The defendant would have acted wisely and properly in resigning as soon as he was asked. In defending this action and in prosecuting this appeal the defendant has been representing and supporting his own interests and not those of the trust estate. He has failed to show that his interests coincide with the interests of the trust estate. In such a case I consider it quite proper that he should pay the plaintiffs' costs of the action and of the appeal to this Court.[6]

17 Similarly, in Pope v Pope,[7] the Full Court of the Supreme Court of South Australia held that a corporate trustee had acted unreasonably in defending an action seeking its removal and could only be seen as having acted in its own self-interest and therefore not in execution of the trust at all. As such, the provision in the trust deed confining the trustee's liability had no operation and it would have been appropriate to order the trustee to pay costs personally without recourse to trust assets. (The order that was upheld ordered those costs to be borne by a director of the trustee.)

18 It has long been the case that trustees who are in breach of trust can be ordered to pay the costs of proceedings to remove them.[8] As with every costs discretion, each case depends on its particular circumstances. However, it will always be relevant, and often critical, to decide whether the litigation in which removal is sought is in substance adversarial or whether it raises a question as a matter of administration of the trust in question.[9] This is an instance of the larger principle that a trustee can only be indemnified out of the trust against costs and expenses properly incurred for the benefit of the trust.[10] The onus is on the trustee in that regard.[11]

19 In approaching such questions, an appellate court that has dismissed a trustee's appeal may be less sympathetic to the payment of costs from a trust estate than a court at first instance.[12]

20 In the present case, the conclusion is inescapable that, in pursuing the appeal, the appellants acted in their own self-interest rather than in the execution of the trust. No question arose as to the proper interpretation of the trust deed or the nature of the trustees' duties under the deed. The only issue was whether the exercise of the discretion to pay the death benefit in favour of the first appellant had miscarried and, if so, whether the trustees should be removed. Success in the appeal would have restored the death benefit to the first appellant, or at least have enabled the appellants to remain in place as trustees. There was no advantage to the trust in either of those outcomes. At best, its interest in the appeal was neutral. The only relevant interest of the trust was in having the death benefit properly administered, and that was facilitated by the trial judge's judgment. In seeking to displace that judgment, the appellants undertook adversarial litigation for their own purposes.

21 It would be surprising if a trust deed were to be construed as affording an indemnity for a trustee's costs of so acting. That is borne out by cl 11.3, which speaks to costs incurred in the exercise or purported or attempted exercise of the trusts, powers, authorities and discretions of the trustee. The undertaking of litigation in the trustee's personal interest does not meet this description.

22 For these reasons, there will be an order that the appellants pay the respondent's costs of and incidental to the appeal on the standard basis, without entitlement to indemnity from the trust assets in respect of those costs or their own costs of the appeal.

[1] Wareham v Marsella [2020] VSCA 92.

[2] Maher v Network Finance Ltd (1986) 4 NSWLR 694, 697-8 (McHugh JA, Kirby P and Priestley JA agreeing at 698 and 699).

[3] See Elders Trustee & Executor Company Ltd v E G Reeves Pty Ltd (1988) 20 FCR 164, 174 (Sheppard and Foster JJ).

[4] See, eg, Hancock v Rinehart [2016] NSWSC 11, [17], [34] (Brereton J).

[5] [1936] HCA 13; (1936) 54 CLR 572 ('Miller').

[7] [2001] SASC 26, [33]-[34] (Bleby J, Doyle CJ and Duggan J agreeing at [1] and [2]).

[8] Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66, 116 [151] (Gummow ACJ, Kirby, Hayne and Heydon JJ), citing Attorney-General v Murdoch [1856] EngR 502; (1856) 2 K & J 571; 69 ER 910 and Palairet v Carew [1863] EngR 300; (1863) 32 Beav 564; 55 ER 222.

[9] Miller [1936] HCA 13; (1936) 54 CLR 572, 578-9 (Latham CJ); In re Buckton; Buckton v Buckton [1907] 2 Ch 406, 414-15 (Kekewich J); Garrett v Yiasemedis [2004] NSWSC 828, [31]-[32] (Campbell J).

[10] In re Beddoe; Downes v Cottam [1893] 1 Ch 547, 562 (Bowen LJ).

[11] Rouse v IOOF Australia Trustees Ltd [No 3] [1999] SASC 208, [43]-[45] (Lander J); see also Re Lonnex Pty Ltd; Ex parte McDermott and Potts [No 2] [2019] VSCA 62; (2019) 57 VR 238, 247 [32]-[33] (Whelan, McLeish and Hargrave JJA).

[12] Murdocca v Murdocca [No 2] [2002] NSWSC 505, [78] (Campbell J); Watson v Ralph [1982] HCA 35; (1982) 148 CLR 646, 654 (Gibbs CJ); see also Australian Incentive Plan Pty Ltd v Attorney-General (Vic) [No 2] (2012) 44 VR 661, 693 [4] (Nettle JA, Tate JA and Davies AJA agreeing at 694 [12]-[13]).