Warton v Yeo

[This Headnote is not to be read as part of the judgment] This appeal relates to a dispute as to the proper construction of a deceased's will. Under the relevant clause (cl 6(b)), a 25% share of the deceased's residuary estate was left to his sister, Ailsa, with a gift over in terms that "if she should die before me then to such one of her children as shall survive me and if more than one in equal shares." Ailsa predeceased her brother. Her share of the residuary estate included a portion of the estate that had been left to another sister, Patricia, who had predeceased both Ailsa and the testator. The issue was as to the proper construction of the word "children" in cl 6(b); in particular as to whether it included step-children. Ailsa had one natural child and four step-children. She had married a widower with four children. It was not disputed that she had raised her husband's children from his first marriage as her own children. The testator was close to his sister and was aware of her family circumstances, including that the four step-children had been brought up as part of Ailsa's family unit for more than 30 years. At the time the testator made his will there was no prospect, due to Ailsa's then age, that Ailsa would have any more natural children. Two of the step-children (the appellants) commenced proceedings in the Equity Division seeking declaratory and other relief in relation to the will. Their claim was also made on behalf of the other two step-children. Ailsa's one natural child (the second respondent in these proceedings) was joined as a defendant to the Equity Division proceedings and filed a submitting appearance. The executor of the will, who had been the testator's solicitor and had drafted the will, took an active role in propounding a contrary construction of the will to that for which the step-children contended. The primary judge declared that, upon the proper construction of cl 6(b), the whole of Ailsa's share of the deceased's residuary estate passed to her only natural child. On the appeal by the two step-children from that decision, Ailsa's natural child again filed a submitting appearance. The executor again adopted an active role in the proceedings, seeking to uphold the primary judge's construction of the word "children" in cl 6(b) of the will. At the conclusion of the hearing of the appeal, leave was granted for submissions to be filed as to the costs orders that should be made if the appeal were to be successful. The executor maintained that he should recover his costs on an indemnity basis out of the residuary estate irrespective of the outcome of the appeal. The appellants contended that in the event the appeal were to be successful there should be no disturbance of the costs orders made in relation to the hearing at first instance but that the executor's costs on appeal should be limited to his costs of filing a submitting appearance. Held allowing the appeal: (1) when construing the will as a whole in light of the matters of which the testator was aware, including Ailsa's family circumstances, the use of the plural "children" and the fact that the testator did not limit the gift over to (or specifically name) Ailsa's one natural child indicated an intention by the testator to include all of Ailsa's children (be they natural children or step children) as might be living at his death in the residuary gift over (Ward JA at [56]; Basten JA agreeing at [1], Emmett JA agreeing at [86]); (2) in the absence of evidence that at any relevant time the deceased knew of the terms of Ailsa's will, her will could not inform the proper construction of the deceased's will (Ward JA at [59], Basten JA agreeing at [1], Emmett JA agreeing at [86]); (3) the first respondent acted unreasonably, for the purposes of Uniform Civil Procedure Rules 2005 r 42.25(2), in adopting an adversarial stance and incurring costs in this Court (Basten JA at [15], Ward JA agreeing at [72], Emmett JA agreeing at [86]); Uniform Civil Procedure Rules 2005 (NSW) r 42.25 (4) the first respondent's application for an indemnity from the estate with respect to his costs of the appeal proceedings is rejected and his costs on appeal should be limited to the costs of a submitting appearance (Basten JA at [16]; Ward JA agreeing at [72], Emmett JA agreeing at [86]); (5) the costs of the will construction dispute are testamentary expenses that in the ordinary course would be paid out of residue prior to determining the balance to be distributed to the residuary beneficiaries in the proportions specified in cl 6 and, where the estate has been partially distributed, the appropriate course is for the parties' costs of the appeal, to the extent indicated, to be paid out of the proceeds of sale of the testator's retirement village unit (Ward JA at [75]-[76], [82]; Emmett JA agreeing at [86]); and (6) (Basten JA dissenting at [19]) the costs of the will construction dispute should be borne out of the portion of the estate to be distributed pursuant to cl 6(b) of the will.

Judgment

1. BASTEN JA: The substantive issue in these proceedings was whether the gift over in the testator's will, in the event that his sister Ailsa Lamond predeceased him, providing that her share should go to her "children" referred only to her biological child or to both her biological child and her four step-children. For the reasons given by Ward JA, I agree that the latter (broader) construction is correct.
2. The remaining question concerns the proper order as to the costs of the appeal. There are, in substance, two issues to be resolved: 1. whether the executor and trustee, being the active respondent, should have his costs out of the estate, and 2. whether such of the costs as are to be paid out of the estate should be paid out of the undistributed and available assets of the estate, or from that proportion of the estate as constituted by Ailsa's share.

Legal principles relating to payment of costs of trustee out of estate

1. Perhaps surprisingly, the law to be applied in resolving the first question, which cannot be unusual, is by no means straightforward. There are various sources which, so far as possible, should be read coherently.
2. First, there is the general law principle that a trustee is entitled to an indemnity (or, where costs have been paid, reimbursement) from the estate for expenses incurred in the execution of the will and in the administration of any trusts. That principle now has statutory form in the Trustee Act 1925 (NSW), s 59(4) of which reads: 59 Implied indemnity … (4) A trustee may reimburse himself or herself, or pay or discharge out of the trust property all expenses incurred in or about execution of the trustee's trusts or powers.
3. Substantially similar provisions are commonplace in Australia. They apply to trustees who are legal representatives, being executors or administrators of a deceased estate. [1] As was noted by Starke J in National Trustees Executors and Agency Company of Australasia Ltd v Barnes [2] in relation to the equivalent Victorian provision, "this enactment is but statutory recognition of the rule acted upon by the Court of Chancery that an executor or trustee is entitled as of right to be recouped everything that he has expended properly in his character as executor or trustee". As further explained in the course of that judgment, the concept of proper expenditure excludes conduct demonstrating want of prudence or diligence.
4. In the same case, Williams J said that where the trustee succeeds in litigation, there is a clear entitlement to the indemnity whereas, where the trustee fails, "he may be allowed his costs out of the estate", [3] implying a discretion in the latter situation. Williams J also noted that "the indemnity must be given effect to in such a way as to make the burden fall upon the beneficiaries equitably having regard to the circumstances under which the costs, charges and expenses were incurred."
5. Neither general law principles nor s 59 of the Trustee Act necessarily provides definitive guidance in the present case, although they both identify the underlying principle reflecting the role of a trustee of a private trust. The Trustee Act further provides specifically with respect to litigation costs. 93 Costs … (2) The Court may order the costs charges and expenses of and incident to any application or any order under this Act to be paid or to be raised by sale or mortgage out of the property in respect whereof the same is made or out of the income thereof, or to be borne and paid in such manner and by such persons as to the Court may seem just. (3) In any proceedings with respect to the management or administration of any property subject to a trust or forming part of the estate of a testator or intestate, or with respect to the interpretation of the trust instrument, the Court may, if it thinks fit, order any costs to be paid out of such part of the property as in the opinion of the Court is the real subject matter of the proceedings.
6. The operation of these provisions in the context of general powers to make orders as to the costs of litigation under the Civil Procedure Act 2005 (NSW), s 98, and the Uniform Civil Procedure Rules 2005 (NSW) (the UCPR), Pt 42, were considered, but not resolved, by this Court in His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand v The Macedonian Orthodox Community Church St Petka Inc (No 2) ("Macedonian Orthodox Church"). [4] That was a case involving an application for judicial advice brought pursuant to s 63 of the Trustee Act: that being an application "under this Act", s 93(2) was clearly engaged. The present case was not in the same category and s 93(2) may well not be engaged. (The parties did not rely upon that provision.) On the other hand, given the broad definition of "trust", as including duties "incident to the office of legal representative of a deceased person", the will may properly be regarded as a "trust instrument" and the proceedings were "with respect to the interpretation of" the will. Accordingly, s 93(3) was engaged.
7. There is a third source of discretionary power with respect to the costs of such litigation, namely UCPR r 42.25. 42.25 Costs of trustee or mortgagee (1) Subject to subrule (2), a person who is or has been a party to any proceedings in the capacity of trustee or mortgagee is entitled to be paid his or her costs in the proceedings, in so far as they are not paid by any other person, out of the fund held by the trustee or out of the mortgaged property, as the case may be. (2) The court may order that the person's costs not be so paid if: (a) the trustee or mortgagee has acted unreasonably, or (b) in the case of a trustee, the trustee has in substance acted for his or her own benefit rather than for the benefit of the fund.
8. That rule clearly operates by way of an exception to r 42.1, pursuant to which costs follow the event, but which is subject to other provisions in Pt 42. Further, r 42.25 appears to extend the general law entitlement (as articulated by Williams J in National Trustees v Barnes [5] ) to apply even where the trustee has been unsuccessful, so long as the trustee has not "acted unreasonably".
9. In Macedonian Orthodox Church, Giles JA referred to ss 93(2) and (3) and r 42.25 as "relevant." [6] It appears that he accepted that the broad discretions under the Trustee Act were subject to the UCPR. Ipp JA took a different view: [7] "There are difficulties attendant upon the application of Pt 42 r 25. On its face, it limits the power conferred by ss 93(2) and (3). Neither party addressed the question how the subordinate legislation constituted by Pt 42 r 25 could vary these sections. Complicating this question is the fact that, while s 104(1) of the Trustee Act provides that rules of court may be made under the Supreme Court Act 1970 (NSW) 'for better carrying the provisions and objects of this Act into effect', Pt 42 r 25 was made under the Civil Procedure Act 2005 (NSW) and not the Supreme Court Act. I would add that s 98(1)(a) of the Civil Procedure Act provides that costs are in the discretion of the Court, subject to 'this or any other Act'. Prima facie, it seems that Pt 42 r 25 cannot detract from ss 93(2) and (3). As this issue was not properly ventilated in the parties' written submissions, I would prefer not to express any final opinion in regard to it."
10. Ipp JA assumed (without deciding) that r 42.25 was applicable, [8] but also accepted that the general discretion should be subject to the approach adopted by Bowen LJ in In Re Beddoe: Downes v Cottam [9] that "trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness." Ipp JA noted that a similar approach had been adopted by the Full Court of the Federal Court in Adsett v Berlouis, [10] identifying as the critical question "whether or not the conduct which gave rise to the burden of costs - whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation - was proper in the sense explained in Beddoe; that is, whether the expenditure was reasonably, as well as honestly, incurred." [11]
11. While it is true that s 104 of the Trustee Act allows for Rules of Court to be made under the Supreme Court Act 1970 (NSW) "for better carrying the provisions and objects of this Act into effect", there is no reason to suppose that the power so conferred is exclusive. Rules with respect to matters arising under the Trustee Act are now to be found in Pt 55 of the UCPR; they largely replicate former Pt 70 of the Supreme Court Rules, as in force prior to 2005. Because s 93(2) is not engaged in the present case, the difficulty perceived in Macedonian Orthodox Church does not arise. There is no inconsistency between s 93(3), which empowers the Court to order costs be paid out of such part of the property as is the real subject matter of the proceedings, and the general power to order costs. In the present case, r 42.25 is applicable.
12. There is a fourth set of provisions which are relevant in the present proceedings: they are to be found in Pt 6, Div 1 of the Civil Procedure Act identifying "guiding principles" with respect to civil proceedings generally. Section 56(1) provides that the "overriding purpose of this Act and of rules of court, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in the proceedings." The court is to give effect to that purpose when exercising any power under the Civil Procedure Act and the UCPR and when interpreting any provision of the Act or the rules. [12] Furthermore, a party to civil proceedings is under a duty to assist the court to further the overriding purpose, [13] and, if there has been a breach of that duty, the court may take the breach into account in exercising a discretion with respect to costs. [14]
13. Once it became apparent that the second respondent (being the biological son of the testator's sister) did not seek to oppose the proceedings in this Court, for the trustee to come in and play an active role in opposing the orders sought was to manufacture a dispute between the only parties interested in the outcome of the proceedings; his only legitimate role was raised by the entirely subsidiary question as to whether the costs of the proceedings should be borne by the part of the estate to be given to the relevant child or children of Ailsa, or more by the undistributed assets of the estate. Given the overriding purpose, the trustee acted unreasonably, for the purposes of r 42.25(2), in adopting an adversarial stance and incurring costs in this Court. That substantial costs have now been incurred may raise an issue justifying the trustee's intervention to address how they should be allocated, but the proper order as to his costs must take into account the fact that he was the cause of the substantial costs being incurred.
14. In the circumstances further described by Ward JA the appropriate order is to reject the trustee's application for an indemnity from the estate with respect to his costs of the proceedings in this Court. As he was properly joined he would have been entitled to an indemnity with respect to the costs of a submitting appearance; although, because he did not take that step and did not incur costs on that account, the question of such costs is purely hypothetical, such an order is proposed by both parties and should be made.

Costs of appellants

1. So far, specific bequests under clause 5 of the will have been distributed, as, it appears, have some 10 charitable bequests of the residue. Of the remaining three parts of the residue, one, payable to a sister who predeceased the testator, has been added, proportionately, to the share of the other deceased sister, Ailsa Lamond, and the testator's sister-in-law, Maureen Callaghan, who survived him. The question is whether, to the extent that the estate should bear any part of the costs of the present appeal, those costs should be borne by the portion of the estate which represents the gift over to Ailsa's children, being the subject of the appeal, or the whole of the undistributed residue, part of which has not been in dispute.
2. It may be that the only reason why the portion of the residue payable to Maureen Callaghan has not been distributed is against the possibility that it might bear costs. Otherwise, there being no dispute as to that part of the estate, it could well have been paid out already, in common with the minor bequests. As neither its quantum nor its entitlement has ever been in doubt, there is no reason why it should bear the costs of the present litigation. Accordingly, pursuant to s 93(3) of the Trustee Act, any award of costs should be payable from that portion of the estate which has been the subject of the proceedings.
3. That portion is now to be distributed between five beneficiaries. The second respondent cannot complain if the appellants obtain payment of their costs from that portion of the estate as, although he did not actively oppose the proceedings, he could at any stage have consented to the orders sought. Although only two of the other four beneficiaries were actively involved in the litigation (in a representative capacity) it is appropriate that the portion of the estate which they are to share should be reduced on account of their costs before that distribution takes place.
4. The successful beneficiaries have thus litigated at their own expense. The only way of avoiding that result would be to order that the trustee pay some or all of their costs personally. No such order was sought and, accordingly, it need not be considered further.
5. In my view, the appropriate order for the costs of the appeal is: (5) Order that the costs in this Court of - (a) the appellants, assessed on an indemnity basis; (b) the first respondent, assessed on the basis of a submitting party, and (c) the second respondent, assessed on the basis of a submitting party, be paid out of the portion of the estate to be distributed pursuant to clause 6(b) of the will.
6. WARD JA: This appeal relates to a dispute as to the construction of the will dated 25 August 1994 of the late Justin Huntley Augustine Callaghan. The first respondent is the solicitor who prepared the deceased's will and who was appointed under that will as the sole executor and trustee of the deceased's estate.
7. The deceased was one of four children. He never married and he had no children. After various legacies (provided for in cl 5 of the will), the deceased left his residuary estate to be held on trust and distributed amongst a number of beneficiaries (cl 6 of his will). Relevantly, the deceased left a third share of his residuary estate to his sister Patricia Callaghan, 25% to his sister Ailsa Lamond, and 10% to his sister-in-law Maureen Callaghan.
8. Patricia pre-deceased the testator. She had never married and had no children. There was no gift over in respect of her share of the residuary estate. Ailsa also pre-deceased the testator. Maureen survived him. Unlike the bequest in favour of Patricia, the bequests in favour of each of Ailsa (cl 6(b)) and Maureen (cl 6(c)) included a gift over in terms that "if she should die before me then to such one of her children as shall survive me and if more than one in equal shares".
9. Ailsa was 71 years of age at the time the deceased made his last will. It was an agreed fact at trial that there was no prospect at that date that Ailsa would have any more children.
10. The sole issue for determination in the Equity Division proceedings, and on this appeal, was as to the meaning in cl 6(b) of the will of the word "children". The significance of this was that, at the age of 39, Ailsa had married a widower with four young children (two of whom being the appellants, Veronica Warton and Gregory Lamond). It was an agreed fact that Ailsa had brought up those four children as her own children. Ailsa and her husband had one child of their marriage, he being the second respondent David Lamond. David Lamond filed a submitting appearance in the proceedings and in this appeal. By consent, the primary judge ordered pursuant to r 7.6(1)(b) of the Uniform Civil Procedure Rules 2005 (NSW), that the plaintiffs in the proceedings before him (the appellants in these proceedings) represent the class of persons who are Ailsa's step-children for the purpose of determining the proper construction of cl 6(b) of the deceased's will.
11. The issue was whether cl 6(b) of the will was to be construed such that the word "children", in the gift over, included step-children, in which case Ailsa's share of the residuary estate would be shared equally among Ailsa's four step-children and her one natural child, or whether it meant natural or biological children, in which case David would be the only child of Ailsa for the purposes of the clause and would be entitled to the whole of Ailsa's share of the residuary estate.
12. The first respondent deposed by affidavit sworn 7 April 2014 that the legacies payable under cl 5 of the will were distributed in 2012 and that of the residue of $300,000, a sum of $125,010 had been distributed under cl 6 leaving the amount of $174,990, together with any interest accrued thereon, as the amount retained and invested pending the determination of these proceedings ([21]-[22]). In a more recent affidavit sworn 10 March 2015, after judgment on the appeal was reserved, the first respondent deposes in effect that there remains an asset of the estate to be sold, that being the deceased's interest in a retirement village unit. Ailsa's share of the residuary estate, taking into account her share of the bequest to Patricia, is 48.81%. The significance of part of the residuary estate having already been distributed is that the costs of the will construction proceedings and this appeal, if paid out of the estate, will be borne (or disproportionately borne) by only some of the residuary beneficiaries.
13. There is a further matter to note by way of introduction. That is the circumstance that the executor (the first respondent) has taken an active role in propounding a construction of the will adverse to the appellants' interests, although the will itself has not been impugned and the second respondent, by filing a submitting appearance, has chosen not to be heard on the question of the proper construction of the will.
14. The first respondent submits that this was an appropriate course to be followed. Prior to the commencement of the proceedings by the appellants, the first respondent had sought advice from senior counsel as to the construction of the will, following which he sought more detailed information from the appellants as to the deceased's relationship with Ailsa and her son and step-children. He had foreshadowed to the appellants that if there still remained any doubt after the provision of that information he would seek a determination of the court by way of summons for construction or judicial advice under s 63 of the Trustee Act 1925 (NSW). The appellants then proceeded to file their summons seeking a declaration as to the proper construction of the will. The first respondent has deposed that, once the appellants had filed their summons, he considered that those proceedings were an appropriate vehicle to resolve the construction issue ([9]). In oral submissions, the first respondent noted that he had avoided the cost of filing a cross-summons seeking judicial advice as to the proper construction of the will by proceeding as he had done.
15. The first respondent also points to the fact that the appellants had sought in their summons and amended summons (and in the orders sought on this appeal) an order that he, as trustee and executor of the estate, account to each of them for a 9.76% equal share of the residue of the estate. The first respondent deposes that compliance with an order to account would ordinarily increase the estate's costs and that he did not wish to submit to such an order ([10]). It is submitted that, given the nature of the order to account sought against him, it was proper for the first respondent to file an unconditional appearance and to defend the matter at first instance, and similarly for him to participate in the appeal.
16. In relation to that last submission, neither the summons nor the amended summons in the proceedings in the Equity Division sought an order for the taking of statutory accounts (i.e., an order pursuant to s 85(1) of the Probate and Administration Act 1898 (NSW)) or an account in equity, both of which processes would be expected to cause the executor to incur increased costs in the administration of the estate. The accounting principles carried out under the statutory processes of the probate court are the same as with other accounts (Northey v Juul [2005] NSWSC 933, at [18] and see PW Young, C Croft, and ML Smith, On Equity (Lawbook Co, 2009) at [16.1320]; see also the explanation of the accounting process when accounts are ordered to be taken in equity given by Austin J in Glazier v Australian Men's Health (No 2) [2001] NSWSC 6).
17. Nor does it appear that the primary judge was asked to make any order for a formal accounting process to be undertaken (which would involve the filing and passing of accounts). Rather, the relief sought by the appellants was, in effect, that the first respondent pay to them their share of the residuary estate determined in accordance with the proper construction of the will. It is by no means apparent that the accounting process required in determining the amount to which the appellants are entitled under the will would lead to any significant increase in the costs of the administration of the estate at all.
18. The first respondent's role in the proceedings has gone beyond that of simply putting the alternative arguments and evidence before the Court as would be expected if he had commenced a construction suit or brought an application for judicial advice. The first respondent actively propounded a construction that favours one beneficiary and is to the disadvantage of others, Ailsa's step-children. He now seeks actively to uphold the construction found by the primary judge. The implications for this in relation to the costs orders to be made if the appellants' appeal were to succeed were the subject of separate submissions filed after the conclusion of the hearing of the appeal. An opportunity was given to the second respondent to make further submissions on that issue if he so chose. He has not done so.
19. Finally, I note that there was no dispute between the parties as to the principles to be applied in construing the will. To summarise those principles: the object of will construction is to ascertain the intention of the deceased as expressed in the will when it is read as a whole; extrinsic evidence is admissible, pursuant to s 32 of the Succession Act 2006 (NSW), to assist in the interpretation of the language used in the will if the language makes the will or any part of it meaningless or ambiguous either on the face of the will or in the light of the surrounding circumstances (though evidence of the testator's intention is not admissible to establish any of those surrounding circumstances); and the "armchair principle" is to be applied such that the court is to put itself in the position of the testator and to consider all material facts and circumstances known to the testator with reference to how he is to be taken to have used the words in the will (Allgood v Blake (1873) LR 8 Ex 160 at 162).

Primary judgment

1. The primary judge noted what was said by Kirby P (as his Honour then was) in Harris v Ashdown (1985) 3 NSWLR 193 when considering whether gifts in a will to the "children" and "grandchildren" of a testator included a child adopted by a daughter of the testator after his death. Kirby P there considered that the parties had properly conceded that in ordinary speech the words 'child' and 'children' can be used interchangeably to mean a natural child, a legitimate or illegitimate child, or an adopted child.
2. The primary judge noted that in cl 5 of the will, instructions for which had been provided to the first respondent in the testator's own handwriting, the testator had specifically identified the children of his respective siblings as either his "niece" or "step-niece" or "nephew" or "step-nephew", as the case may be.
3. The primary judge also had regard to the Macquarie Dictionary definition of step-child and to a provision in the Queensland succession legislation (s 40A of the Succession Act 1981 (Qld)), which has no equivalent in the New South Wales legislation, which distinguishes between a child of the deceased person and a child of the spouse of the deceased person.
4. The appellants had placed weight on the use of the plural "children" in cll 6(b) and 6(c), the submission being that if the testator had intended only to include a natural child of Ailsa there was no need for a reference to "such one of her children" and the testator could simply have named the second respondent. His Honour concluded that, despite the reference to "such one of her children" in cll 6(b) and 6(c), the deceased did not intend the step-children of Ailsa to be included within the meaning of the word "children" in cl 6(b) and that, had he wanted her step-children to share in the residuary bequest, the testator would have identified them as such. His Honour considered that the fact that each of the step-children was identified as such in cl 5 of the will suggested that the deceased had differentiated between the natural children of each of his siblings and Ailsa's step-children.
5. His Honour rejected the submission that Ailsa's will, made on 18 February 1997, was relevant to the construction of the deceased's will. His Honour accepted that Ailsa's will might demonstrate her intention to include each of her step-children as her children but said that that did not enable him to conclude that the deceased had held the same intention. His Honour noted that there was no evidence the deceased knew about the terms of Ailsa's will, or how she had described her step-children therein, and that her will was not prepared by the first respondent. (Pausing there, even if the first respondent had prepared both wills he would have owed duties of confidentiality in relation to the contents of those wills and hence it could not be assumed that each testator was aware of the content of the other's will.)
6. His Honour also did not think that the fact that the continuing relationship between the step-children and Ailsa during Ailsa's lifetime was of great significance, being of the view that what mattered was not the continuing contact between the relevant parties (Ailsa and her step-children) but the subsistence of the relationship that created the step-relationship (i.e., the marriage between Ailsa and her husband), there apparently having regard to the Queensland legislation.
7. His Honour declared that upon the proper construction of cl 6(b) of the will the whole of Ailsa's share of the residuary estate passed absolutely to the second respondent, he being the only natural child of the deceased's sister, Ailsa. The parties agreed that the costs of each party calculated on the indemnity basis should be paid out of the estate that had been retained and his Honour so ordered.

Appeal

1. The appellants' grounds of appeal raise, in summary, only two issues.
2. First, they contend that the primary judge erred in holding that Ailsa's will was not relevant to the construction of cl 6(b) of the deceased's will (Ground 1) and that his Honour should have held that Ailsa's will was evidence of the fact that Ailsa at all material times regarded her four step-children and the second respondent as her children. They contend that that fact was relevant to the construction of the words "such one of her children as shall survive me or if more than one in equal shares" in cl 6(b) of the deceased's will (Ground 2). The appellants contend that it is improbable that the deceased had a different view from that of his sister about the members of the class of persons who met the description "her children".
3. Second, they contend that the primary judge's construction of cl 6(b) was incorrect (Ground 3) and the primary judge should have held that upon the proper construction of the deceased's will each of the four step-children and the second respondent was entitled to an equal share of the estate their mother would have taken had she not predeceased the testator (Ground 4). Those grounds simply restate the alternative outcomes on the construction issue.

Appellants' submissions

1. On the appeal, the appellants again place weight on the use of the plural "children" in cl 6(b) and the absence of any distinction in that clause between Ailsa's step-children and her one natural child. They point to the fact that this was a gift to the testator's 71 year old sister, who was known by the testator to have a family consisting of four step-children and one natural child; and that the plural in cl 6(b) makes no sense unless the testator was looking at a plurality and setting out a method of selection between a number of persons for the purpose of receiving a share of his estate.
2. In that regard, the appellants contend that the gifts to Patricia and Maureen inform the proper construction of cl 6(b). In particular, they draw attention to the fact that there is no gift over in cl 6(a), where the testator was aware that Patricia had no children; whereas in cl 6(c), a gift over was included (in the same terms as that in cl 6(b)) where the testator was aware that Maureen did have children. It is submitted that the fact that the deceased treated the bequest to Patricia in a manner different from that in which he had treated the bequests to Ailsa and Maureen, on the basis that Ailsa and Maureen had children whereas Patricia did not, points objectively to an intention only to discriminate between the residuary beneficiaries on the basis of survivorship, and not on the basis of consanguinity and affinity.
3. The appellants submit that the fact that the deceased used the word "children", not "step-children", in cl 6(b) supports their construction of the will because cl 5 makes clear that the deceased was fully cognisant of the difference between natural or biological children and step-children and chose not to take up that difference in cl 6(b) (which he could have done by making the gift of residue solely to his nephew, the second respondent).
4. The appellants maintain that there is no difference in point of principle between a case (such as that which was dealt with in Harris v Ashdown) in which the words "child" or "children" fall to be considered in a will where the deceased is talking about his own child or children and one where the deceased is talking about the child or children of someone else.
5. The appellants further maintain that the definition of "step-child" in the Queensland legislation has no relevant application and is apt to mislead because the question is whether the four step-children were "children" of Ailsa within the meaning of the deceased's will, not whether they ceased to be step-children of Ailsa upon her husband's death.
6. Reliance is placed on Estate of Jack Alexander Warren [2001] NSWSC 104 where the Court distinguished between the position of two step-sons on the basis that one had been brought up as one of the deceased's children and was fully a part of the family unit whereas the other had left home at an early age and did not form part of the family unit.
7. The appellants submit that if, to the knowledge of the deceased, Ailsa's four step-children were in fact brought up as her children and were fully part of the sister's family unit, in effect being de facto adopted children, that is a powerful contextual factor which supports a finding that the word "children" in cl 6(b) was intended to embrace such a child. Reliance is placed on Ailsa's will in that context to show that Ailsa regarded her four step-children as her children since she named all five and described them in her will as "my children". Reliance is also placed on the agreed facts as to the testator's knowledge of his sister's family unit.
8. The appellants seek an order that the first respondent as trustee and executor of the estate account to each of the four step-children for an equal 9.76% share of the residue of that estate. In their notice of appeal they also sought an order that the costs of all parties, assessed on an indemnity basis, be paid by the estate but in oral submissions they ultimately contended for a different costs outcome, namely that the costs of the appellants be bourne out of the estate on an indemnity basis and that there be no other order as to costs.
9. The first respondent relies on his submissions below and places emphasis on the fact that the relationship of the children as "child" or "step-child" was recognised in cl 5. He submitted that, had the deceased wanted Ailsa's step-children to share in the cl 6(b) bequest, he would have identified them as step-children and included that term in cl 6(b) of the will.
10. On the application of the armchair principle, the first respondent maintains that the evidence does not establish that the testator regarded the four step-children as his sister's "children".

Consideration

1. When construing the will in light of the matters of which the testator was aware - namely that his sister Ailsa had four step-children and one natural child; that she had brought her step-children up as part of the family unit, of which they had been part for 31 years prior to the preparation of the testator's will; and that, at 71 years of age, there was no prospect that Ailsa was going to have any more natural children - the use of the plural in cl 6(b) provides, as the appellants submit, a strong textual indication that the testator had intended to include the step-children in the residuary gift over.
2. True it is that in cl 5 the testator adopted the specific description of "step-niece" or "step-nephew", when that would not have been necessary to identify the legatees since each was also identified by name. However, that textual indicator is equivocal in the sense that though it might suggest that the testator was careful to distinguish between the natural child of his sibling and her step-children (and hence might be thought likely to have made specific reference to "step-children" in cl 6(b) if they were intended to be included in the residuary gift over), on the other hand, it leaves unexplained why the testator did not show similar care in using the singular "child" in cl 6(b) rather than "children", when he knew that Ailsa would not have more than one natural child at her death. Significantly, in cl 5 the testator was describing his relationship with the beneficiaries; in cl 6 he was describing their relationship to Ailsa, namely as "her children" (my emphasis). If he knew she treated them as "her children", the description was entirely apt to include the step-children.
3. In my opinion, the strongest indication in the text of the will is the reference to "her children" in cl 6(b), particularly in circumstances where it is clear that the inclusion of residuary gifts over to the children of the residuary beneficiaries in cll 6(b) and (c) was made where the testator knew that there was more than one child in each of the respective family units and where he included no gift over in the bequest to Patricia who had no child (natural or otherwise). The phrase "such one of her children" is predicated on the existence of more than one child.
4. As to grounds 1 and 2, I do not accept that the primary judge erred in holding that Ailsa's will was not relevant in determining the testator's intention when making his will. Ailsa's will was not made until some two and a half years after the deceased's will. In the absence of evidence that at any relevant time the testator knew of the terms of Ailsa's will it cannot inform the proper construction of his own will.
5. Nevertheless, the submissions in this court also put the matter on a more limited basis. It can be accepted that the description of the five children in Ailsa's will as "my children" does support the existence of a continuing relationship between Ailsa and her step-children during her life and that she regarded them as part of the family unit. This was a relevant consideration in circumstances where it was agreed that the testator had a close relationship with his sister; he was in contact with all five of the children "as members of his extended family" throughout his life; and that over two decades, he shared Sunday dinners with Ailsa's family and he also attended important family events involving the five children. It should be inferred that the testator was aware of the manner in which Ailsa had brought up and treated her step-children as her own children over a period of 31 years. There was no evidence to suggest that the testator had discriminated in his treatment of the step-children and Ailsa's natural child during his lifetime and nothing could be drawn from the monetary difference in the pecuniary legacies in that regard.
6. Taking into account the knowledge the testator must have had of Ailsa's family circumstances, the fact that the testator did not limit the gift over to her one natural child, and did not name him specifically in cl 6(b), indicates an intention by the testator to include all of Ailsa's children (be they natural children or step-children) as might be living at his death in the residuary gift over. The care with which he distinguished between blood relatives and those who were not blood relatives in cl 5 indicates that his use of the plural in cl 6(b) cannot have been unintentional; as does the fact that no similar gift over was included in the case of the bequest to Patricia.
7. That leads me to reach a different conclusion from that of the primary judge. I would allow the appeal and, leaving aside for the moment the question of costs, make the following orders: 1. The appeal is allowed. 2. Set aside the declaration made on 29 April 2014. 3. In lieu thereof, declare that, upon the proper construction of cl 6(b) of the Will of Justin Huntley Augustine Callaghan dated 25 August 1994, Mark Alexander Lamond, Gregory Charles Lamond, Vincent James Lamond, Veronica Ann Warton and David John Lamond are the "children" of the said Ailsa Josephine Lamond and entitled to an equal share of the estate referred to therein. 4. Order that the first respondent as trustee and executor of the estate of the late Justin Huntley Augustine Callaghan account to each of Mark Alexander Lamond, Gregory Charles Lamond, Vincent James Lamond, Veronica Ann Warton and David John Lamond for equal 9.76% shares of the residue of the said estate.

Costs

1. The appellants do not seek to disturb the costs orders made below. That is an appropriate stance for them to take in circumstances where they accept that the orders fairly reflect the fact that the proceedings were effectively disposed of on the papers other than for a brief appearance on the hearing date at the request of the primary judge.
2. However, the appellants' position as to the costs of the appeal has varied. In their notice of appeal the appellants sought an order that the costs of each party, calculated on the indemnity basis, be paid out of the estate that has been retained. In the course of oral submissions on the appeal, the appellants submitted that, if they were successful on the appeal, there should be an order that the costs of the appellants and the second respondent, assessed on an indemnity basis, be paid by the estate. In submissions filed by leave after judgment was reserved, they now submit that the appropriate orders are that: 1. the costs of the appellants of the appeal be paid by the estate on an indemnity basis; 2. the costs of each of the first and second respondents of the appeal be paid by the estate on an indemnity basis limited in each case to the cost of a submitting appearance; and that the orders for costs in the court below should not be disturbed.
3. The first respondent, on the other hand, submits that the orders for costs, in the event that the appeal is allowed on the construction issue, should be as follows: 1. the appellants to have their costs out of the retained fund on the indemnity basis; 2. the first respondent to have his costs out of the retained fund on the indemnity basis; and 3. the second respondent to have his costs as a submitting appearance out of the retained fund. (my emphasis).
4. Apart from the question whether the first respondent should have more than the costs of a submitting appearance, the difference in the proposed orders is that the effect of the orders sought by the first respondent is that the costs of the will construction suit will be borne out of the existing retained fund (of $174,990 plus interest) plus 48.81% (Ailsa's share of the residue) of the net proceeds of sale of the retirement village unit (see [17] of the submissions), not out of the whole of the remaining residue as enhanced by the proceeds of sale of the unit.
5. There is no reason advanced as to why the costs of the will construction proceedings should be paid only out of that fund rather than out of the whole of the balance of the residuary estate (which, after the sale of the retirement village unit, would include the whole of the net proceeds of that sale), other than that the appellants had accepted at first instance that the costs orders be made from the retained estate.
6. The residue of the estate is that which remains after the payment of the costs and expenses of the administration of the estate and the payment of specific legacies or bequests. To the extent that the costs incurred by the executor in defending the appeal (and, for that matter, the will construction proceedings at first instance) are costs properly incurred in the administration of the deceased's estate, those costs should be reimbursable out of the estate as a whole, not simply Ailsa's share of the estate. That is recognised to be an exception to the general rule that costs follow the event (see Drummond v Drummond [1999] NSWSC 923; Uniform Civil Procedure Rules 2005 (NSW) r 42.25; Trustee Act 1925 (NSW) s 59(4); and J R Martyn and N Caddick, Williams, Mortimer and Sunnucks on Executors Administration and Probate (19th ed, 2008), p 1016)
7. There is no basis put forward for the proposition, implicit in the first respondent's submissions, that there should be a notional distribution of 51.19% of the net proceeds of sale of the retirement village unit to the remaining residuary beneficiaries and that any costs awarded in respect of the will construction proceedings be taken out of Ailsa's 48.81% share remaining after such a distribution. True it is that the contest was as to who was entitled to the 48.81% share of the residuary estate but the dispute was contested by the executor who presumably considered it to be for the benefit of the estate that this issue be determined. Therefore any costs orders now made should not be limited to payment out of the retained fund but should be ordered out of the residuary estate (including the whole of the net proceeds of sale of the retirement village unit).
8. The first respondent has explained the basis on which he chose not to proceed at first instance with a cross-summons for judicial advice as to the proper construction of the appeal. He performed the function of a contradictor at first instance (in circumstances where the second respondent had simply filed a submitting appearance). However, the first respondent then actively sought to uphold the primary judgment and thus adopted in effect a partisan role where the real contest, if any, was between the parties claiming an interest under the will in respect of Ailsa's share of the residuary estate (her four step-children and her one natural child). I say "if any" because the second respondent chose not to enter that dispute by filing a submitting appearance.
9. The fact that the appellants sought an order for the first respondent to account to them for what they (correctly) maintain is their share of the gift over in respect of Ailsa's share of the residuary estate does not warrant the course adopted on the appeal by the first respondent - no order for a formal account has ever been sought by the appellants and hence the concern that an order of that kind would lead to the estate incurring further costs was misconceived. The accounting exercise of calculating how much of the residuary estate each is entitled to, on the proper construction of cl 6(b) is one of mere arithmetic.
10. Although there is no suggestion that the costs were incurred by the executor was in the furtherance in a personal interest or that there was impropriety (as to which see Miller v Cameron (1936) 54 CLR 572 at 578; Re Jones; Christmas v Jones [1897] 2 Ch 190 at 197), there was unreasonableness on the part of the executor in taking the partisan stance that he did. I refer in this regard to the authorities cited by Basten JA at [12] above. In those circumstances I agree with Basten JA that appropriate order in relation to the first respondent's costs is that they be limited to the cost of a submitting appearance.
11. Where I differ from Basten JA is as to the fund out of which the appeal costs of the appellants and the second respondent should be borne. The appellants at first sought orders that these be paid on an indemnity basis out of the retained fund. The amount that had been retained represented what was calculated to be Ailsa's share of the estate (not including any share of whatever may be the net sale proceeds of the retirement village unit).
12. Clause 6 of the will provides for the trustee to pay all just debts, funeral and testamentary expenses out of the residue. The balance is then to be distributed to the residuary beneficiaries in the specified shares. Expenses properly incurred in the construction of a will, that is, expenses that need to be incurred to enable the proper administration of the estate, are testamentary expenses (see, eg, Murdocca v Murdocca (No 2) [2002] NSWSC 505 at [40]-[42] and the authorities cited therein). Generally, that is so whether or not they are incurred by the executor or by other parties, such as beneficiaries.
13. Although the construction dispute in issue concerned only the entitlements of the appellants and the second respondent, and not those of the other beneficiaries, the executor needed to have the dispute resolved before he could complete the distribution of the residuary estate. Accordingly, the costs of the first and second respondents (limited to the costs of a submitting appearance), and the costs incurred by the appellants, in determining the proper construction of the will, are testamentary expenses and, in the ordinary course, would be paid out of the residue prior to determining the balance to be distributed to the residuary beneficiaries in the proportions specified in cl 6.
14. While there has apparently been a preliminary distribution to most of the residuary beneficiaries, the estate is not yet fully administered and, in particular, property consisting of the deceased's unit in a retirement village has not yet been realised. The appropriate course, therefore, would be for the costs of the appeal, to the extent indicated, to be paid from the proceeds of the sale of the retirement village unit, since those proceeds will be part of the residue.
15. The consequence of that will be that all residuary beneficiaries will have borne their appropriate share of the costs. The balance of the proceeds of the sale of the retirement village unit would then be distributed to the various residuary beneficiaries in their respective proportions. That would leave the share attributable to Ailsa to be distributed amongst the beneficiaries who are entitled to that share, untouched except to the extent of its proportionate share of the costs. Since all of the residuary beneficiaries would ordinarily have borne the costs of the construction issue before distribution took place, payment of the costs from the proceeds of sale will ensure a fair result.
16. There are circumstances in which the costs of litigation concerning the administration of estates should be borne by the parties personally (In re Buckton; Buckton v Buckton [1907] 2 Ch 406). Three classes of case can be identified (see Buckton at 414-415). In the first, the applicants are trustees of a will who ask the court to construe the will for their guidance, in order to ascertain the interests of the beneficiaries. In the second class, the application is made not by the trustees (who are respondents) but by some of the beneficiaries because, for whatever reason, that course has been deemed more convenient. In the third class of case, the application is made by a beneficiary who makes a claim adverse to other beneficiaries, and as such, the proceedings are properly characterised as adversary litigation. In the first two classes of case, the costs of all parties are borne by the estate; in the third class, the costs are borne by the parties themselves.
17. If litigation seeking to construe a will falls within the first or second class of case, then the court is in substance carrying out the same task (with respect to costs) as it would have carried out had it been administering the estate itself (Murdocca at [76]). On the other hand, if such litigation falls into the third class of case, the court is concerned only with who, out of the parties before it, should pay the costs of any other of the parties before it (that is, it applies the usual rule as to costs), and does not need to be concerned about indemnification from the estate (Murdocca at [77]). Although the abovementioned principles apply to first instance proceedings, an appellate court will generally be less sympathetic to payment of costs from the estate (Murdocca at [78]).
18. On one view, since the executor has actively propounded a construction that favours one beneficiary and is to the disadvantage of others (see above at [34]), it is he who should personally pay the costs of the appeal. Although there was in effect nothing adverse as between the appellants and the second respondent, since the second respondent filed a submitting appearance before both the primary judge and in this Court, the nature of the proceedings became adversary by the involvement of the first respondent. In that way, the proceedings may be likened to the third class of case identified above. Nevertheless, the appellants did not seek an order that the first respondent pay their costs personally.
19. While the residuary beneficiaries other than the appellants and the second respondent have not had an opportunity to make submissions about whether such an order should in fact be sought, as an alternative to an order that their own shares of the residue be diminished (albeit in the proper proportions) by the costs of this appeal, such a course would involve yet further costs, which it is desirable to avoid.
20. In all of the circumstances, the preferable course is to order that the costs of the appeal, to the extent indicated, be paid from the proceeds of the sale of the retirement village unit, with the balance of the proceeds to be distributed to the residuary beneficiaries in the proportions to which they are respectively entitled. It has not been suggested that the costs would exceed the proceeds of the sale of the retirement village unit. If they did, the appellants may have to make a further application.
21. I therefore propose the following orders additional to those set out at [62] above:
22. The appeal costs of the appellants, assessed on an indemnity basis, be paid out of the proceeds of sale of the deceased's retirement village unit.
23. The appeal costs of each of the first and second respondents be paid out of the proceeds of sale of the deceased's retirement village unit, assessed on an indemnity basis but limited to the cost of filing a submitting appearance in each case.
24. There be no variation of the costs orders made by the primary judge in respect of the costs of the proceedings at first instance.
25. EMMETT JA: The question in this appeal is the appropriate construction to be given to a clause of the last will of Justin Callaghan (the Testator), which is dated 25 August 1994 (the Will). The Testator died on 30 December 2011 and probate of the Will was granted to the first respondent on 22 May 2012.
26. By cl 6(b) of the Will, the Testator gave 25 per cent of his residuary estate to his sister, Ailsa Lamond (née Callaghan), subject to the proviso that, should she die before him, the 25 per cent share was to be given "to such one of her children as shall survive" the Testator. Ailsa predeceased the Testator and was survived by her only natural child, David Lamond, who is the second respondent. Ailsa had been married to James Lamond, who was David's father. At the time of the marriage of James Lamond and Ailsa Callaghan, James Lamond had four children by his first marriage, his first wife having died. It was common ground that Ailsa raised James Lamond's four children as her step-children and, to the knowledge of the Testator, treated them as her own children.
27. I have had the advantage of reading, in draft form, the proposed reasons of each of Basten JA and Ward JA. I agree with Ward JA, for the reasons proposed by her Honour, that the reference in cl 6(b) of the Will to "such one of her children as shall survive me" should be construed as a reference to the four step-children of Ailsa Lamond, notwithstanding that, at the date of the death of the Testator, James Lamond had died, so that, strictly speaking, there was no legal relationship between Ailsa and the four children described in the Will as the step-niece and step-nephews of the Testator. The appeal should therefore be allowed. I agree with their Honours' conclusions concerning the costs of the trustee. I agree with Ward JA that the costs of the appeal should, to the extent indicated, be paid from the proceeds of sale of the Testator's retirement village unit.

Endnotes

1. Trustee Act, s 5, definitions - legal representative, trust and trustee.
2. (1941) 64 CLR 268 at 274.
3. Ibid at 279.
4. [2007] NSWCA 287 (Ipp JA, Hodgson JA agreeing; Giles JA dissenting).
5. See at [5] above.
6. At [7].
7. At [30].
8. Ibid at [31].
9. [1893] 1 Ch 547 at 562.
10. (1992) 37 FCR 201 at 211 (Northrop, Wilcox and Cooper JJ).
11. See also Hypec Electronics Pty Ltd (In liq) v Mead [2004] NSWSC 731; 61 NSWLR 169 (Campbell J); Mead v Watson [2005] NSWCA 133; 23 ACLC 718 at [14] (Sheller, Ipp and Tobias JJA).
12. Section 56(2).
13. Section 56(3).
14. Section 56(5). 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: 07 May 2015