Watson v Watson

• 11 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4120/98 DAVID WILKIE WATSON v STUART WILKIE WATSON & ORS JUDGMENT

General Outline 1 The question for decision is whether a gift of personalty under a will, subject to a condition which has not been fulfilled, results in that personalty going to the donee free of the condition, to the persons entitled to residue, or to those persons entitled under a gift over on non-fulfilment of the condition. Facts 2 Harold Douglas Watson died on 16 October 1997, leaving a will dated 21 August 1997, probate of which was granted to two of his sons, David Wilkie Watson (David), the plaintiff, and Stuart Wilkie Watson (Stuart), the first defendant, on 9 February 1998. While the liabilities in the estate are not known the estimated value of the assets shown in the inventory of property was in excess of $3.2 million. Included in the assets are 17550 shares in Wilkie Watson Publications Pty. Limited (Wilkie Watson) with an estimated value of $1 614 600. 3 At the date of death of the deceased there were 35,050 issued shares in Wilkie Watson. 17,500 of these were and are held by David, the balance being held by the deceased. The Watson family has been engaged in the newspaper publication business for three generations. Wilkie Watson was formed by the deceased in about 1966. It published the Tumut & Adelong Times and the Tumbarumba Times. The deceased, his wife and his four sons had been shareholders over the years. Over a time three of the sons left the business and ceased to be directors. Stuart ceased to be a shareholder in 1975 when he purchased another newspaper 'The Junee Southern Cross'. Later he established an additional business known as 'Tumut Office Supplies'. It seems that it was always his father's wish to have him back in his business, but there were problems between David and Stuart. There were negotiations in 1994 as to the terms on which Stuart might come back in to Wilkie Watson, bringing his two businesses in with him, but that did not come to fruition. 4 The shareholdings between the deceased and David were equal from 1 July 1997 to 15 September 1997, on which later date the deceased allotted to himself 50 additional shares. David was not told this. The deceased was governing director of the company and had the total control of it vested in him in his lifetime. 5 The will of the deceased, so far as is relevant for the determination of the questions here, was as follows except for the insertion by me of the capital letters in square brackets, which are relevant to questions raised in the summons: THIS IS THE LAST WILL of me HAROLD DOUGLAS WATSON of 106 Dalhunty Street, Tumut in the State of New South Wales, Publisher. 1. I HEREBY REVOKE all former Wills made by me and declare this to be my last Will. 2. I HEREBY APPOINT my sons STUART WILKIE WATSON and DAVID WILKIE WATSON (hereinafter called "my Trustees") Executors and Trustees of this my Will AND I DECLARE that all trusts and powers herein vested in my Trustees may be exercised by the survivor of them or other the Trustee or Trustees for the time being of this my Will. 3. [A] I GIVE AND BEQUEATH my shares in WILKIE WATSON PUBLICATIONS PTY. LTD. to my son STUART WILKIE WATSON SUBJECT TO and conditional upon the following: [B] (a) That the business of TUMUT OFFICE SUPPLIES and the JUNEE SOUTHERN CROSS presently operated by STUART WILKIE WATSON be incorporated into and form part of WILKIE WATSON PUBLICATIONS PTY. LTD. at the valuation figure or as agreed between STUART WILKIE WATSON and WILKIE WATSON PUBLICATIONS PTY. LTD. [C] Should this condition not be fulfilled then Clause 6 hereof shall apply and the shares referred to in this clause shall form part of the residue of my estate and be dealt with in accordance with Clause 6 of this my Will.

[D] I DIRECT THAT STUART WILKIE WATSON be appointed a Director of WILKIE WATSON PUBLICATIONS PTY. LTD. /with David Wilkie Watson as Chairman of Directors/ and further that STUART WILKIE WATSON and DAVID WILKIE WATSON be employed by and work within WILKIE WATSON PUBLICATIONS PTY. LTD . [E] AND I EXPRESS the wish that no further shareholders be admitted to WILKIE WATSON PUBLICATIONS PTY. LTD. without the consent and agreement of all shareholders and that no shares be sold outside the family unless by consent and agreement of all shareholders. 4. I FORGIVE any loan owing by DAVID WILKIE WATSON to me at the date of my death and I FORGIVE any loan owing by STUART WILKIE WATSON to me at the date of my death. 5. I GIVE DEVISE AND BEQUEATH unto my Trustees all my rest and residue of my Estate UPON TRUST to pay thereout all my just debts funeral and testamentary expenses and all duties associated with the administration of my Estate and to hold the balance then remaining for my sons GREGORY ROY WILKIE WATSON and MARK WILKIE WATSON in equal shares absolutely PROVIDED THAT in the event of any such son or sons predeceasing me leaving a child or children who survive me such grandchild shall take and if more than one in equal shares the share that my own son would have taken had he survived me. 6. [F] I DIRECT that if the beneficiary of the shares referred to in Clause 3 hereof is unable to work with DAVID WILKIE WATSON or if there should be complete disagreement in relation to the operation of the Company WILKIE WATSON PUBLICATIONS PTY. LTD. within three (3) months of the date of my death and should the businesses of TUMUT OFFICE SUPPLIES and JUNEE SOUTHERN CROSS have been incorporated into WILKIE WATSON PUBLICATIONS PTY. LTD. such businesses shall be transferred back to STUART WILKIE WATSON at the same value at which they were incorporated into WILKIE WATSON PUBLICATIONS PTY. LTD. and then [G] the shares referred to in Clause 3 are to be offered for sale at a price no less than the price set or approved by the Accountant/Auditor of the Company AND I EXPRESS the wish that the shares be first offered for sale to a shareholder or member of the family at the price set or approved by the Accountant/Auditor. Should no shareholder or member of the family wish to purchase the shares, the shares shall be offered for sale on the market by open tender. The proceeds of sale are to be distributed amongst my sons GREGORY ROY WILKIE WATSON , STUART WILKIE WATSON , DAVID WILKIE WATSON and MARK WILKIE WATSON in equal shares absolutely PROVIDED THAT in the event of any son or sons predeceasing me leaving a child or children who survive me such grandchild shall take and if more than one in equal shares the share that my own son would have taken had he survived me. 6 After the death of the testator, David was left the sole director, but he appointed his wife as an additional director on 25 November 1997. 7 The businesses of Tumut Office Supplies and Junee Southern Cross have not been incorporated into Wilkie Watson. Stuart wrote to David on 16 December 1997 saying that he was in a position to transfer his two businesses and suggested a value of $140 000 for Junee Southern Cross and $5000 plus stock at valuation for Tumut Office Supplies. David responded asking for a full set of financial figures for a period of five years. That drew a response from Stuart which was later confirmed, indicating that he did not expect payment and thought that valuations were needed for accounting purposes only. David has given evidence that he does not consider there is any advantage to Wilkie Watson acquiring the two businesses, whether for consideration or no consideration, as in his view they do not fit well together. He is in effective control of the company at the present time so that unless Stuart is entitled to immediate transfer of the 17050 shares of the deceased the condition as to incorporation of his businesses into Wilkie Watson will not be fulfilled. Questions for determination 8. The summons has identified various parts of Clauses 3 and 6 the will by the letters [A] to [G]. These have been included in the copy of the relevant provisions of the will which I have set out. In brief the questions for determination are: A. Whether the gift of shares to Stuart is dependent upon the performance of [B] alone or [B] together with either or both of [D] and [E].

B. Whether the gift is subject to a condition and if so whether it is a condition precedent or a condition subsequent.

D. Whether the gift is valid but subject to failure if it is not performed within a certain time, or if agreement is not reached for a transfer of business.

E. Whether the will imposes any obligations on Wilkie Watson in relation to deciding about the acquisition of the businesses owned by Stuart.

F. If the condition is void or fails to be performed, what is the result. 9 It is necessary to deal with these matters in turn and then to answer the specific questions in the summons. Whether the gift is dependent on the performance of a condition and if so what? 10 It is, I consider, clear that the gift is subject to a condition. The wording of the will makes it quite clear. It is, I think, equally clear that the condition is that incorporated in [B] namely the condition as to incorporation of Tumut Office Supplies and Junee Southern Cross into Wilkie Watson and that alone. The words immediately thereafter "should this condition not be fulfilled" make this apparent. The directions that Stuart be appointed a director of Wilkie Watson and that he and David both work within that company and that no further shareholders be admitted without the consent of all shareholders and no shares be sold outside the family, are not given in terms appropriate to a conditional gift. Is the condition as to incorporation of businesses a condition precedent or a condition subsequent? 11 The classic texts all include discussion on whether a condition is subsequent or precedent. See Theobald on Wills 14th Ed 623; Jarman on Wills 8th Ed 1458; Williams on Wills 7th Ed. 325. The law of course favours early vesting, but nevertheless all writers agree that it is necessary to establish the intention of the testator as indicated by the words in the will: Egerton v Earl Brownlow (1853) 4 HLC 1 at 157. 12 There are some matters which would indicate the condition as being a condition precedent; some that it is a condition subsequent. If there is no basis for decision, then a presumption in favour of early vesting applies: Hickling v Fair [1899] AC 15; Sifton v Sifton [1938] AC 656 at 676. 13 Those factors which point towards the condition being precedent include: a. The layout of that part of Clause 3 of the will within [A] [B] and [C].

b. The words "SUBJECT TO" and the words in [C] are indicative of a pre-condition: Re Emson; Grain v Grain (1905) 93 LT 104.

c. The property, namely shares, can be enjoyed without immediate performance of the condition.

d. The requirement for incorporation of the two businesses into Wilkie Watson, is somewhat akin to a requirement of consideration on the part of Stuart, albeit perhaps consideration on the part of Wilkie Watson, as well. The giving of consideration for a gift points to a condition being precedent: Acherley v Vernon (1739) 1 Willes 153.

e. No period of delay is involved before entitlement to an interest in possession is acquired as opposed to a deferred interest in possession in realty, after various life estates, conditional upon a name and arms clause: see for example In Re Greenwood, Goodhart v Woodhead [1903] 1 Ch 749. 14 Factors which might point to the condition being subsequent are: a. That the condition could not be fulfilled by act of the donee alone.

b. The condition could not be fulfilled without some lapse of time. 15 The words in [D] together with Clause 6 could be thought to point either way, but on balance I think they favour a condition precedent finding. That is because the words in [F] presuppose fulfilment and thus entitlement being vested subject to divesting in the events set out in [F], the provisions in [G] then applying. The words "and then" are significant in this regard. Perhaps more significant is the fact that the only words in Clause 6 which could be acted upon in accordance with the words in [C] are the words in [G]. 16 After consideration of all these matters and reading the will many times I have come to the conclusion that the condition is a condition precedent. There is more in the will to support that than to support a finding of a condition subsequent, and I consider that a normal reading of paragraph 3 as a whole points to that being the proper interpretation. In fact I consider that any non-lawyer reading Clause 3 would be amazed at a suggestion that Stuart was entitled to transfer of the shares before fulfilment of the condition. Is the condition void for uncertainty? 17 The grounds on which it is said that the condition might be void are first that there is no time fixed for its performance, and second that there is no appropriate provision made as to the method of valuation of the shares because the words "at the valuation figure" do not in themselves establish a figure or establish a method of valuation. 18 So far as the time factor is concerned, if there is no time fixed for fulfilment of the condition, then it seems it must be fulfilled within a reasonable time. That seems to have been decided in the interesting case of Davies v Lowndes 1835 1 Bing NC 597 at 618, and more recently in Miller v Miller (1995) 16 ACSR 73 at 79 and see Jarman on Wills 8th Ed 1466. It would not be a sensible reading of paragraph [C] to allow Stuart his whole life to fulfil the condition as he also takes under the gift over. Here also, as the concurrence of Wilkie Wilson is needed, a reasonable time to obtain this would be implied for performance. I would have thought that one year after the death of the testator or at most one year after the grant of probate would be a reasonable time and that time has now passed. So far as the second point is concerned, while the words "at the valuation figure" may be uncertain, there is no doubt that there could have been agreement between Stuart and the company as to the figure at which the businesses would be incorporated into the company, and if that were done there would be no uncertainty and the condition could have been fulfilled. In other words, if there were agreement then there would be certainty, provided incorporation took place within a reasonable time. The gift is therefore not void for uncertainty, although I accept it might have been had the condition been subsequent. Does the gift fail through non-fulfilment of the condition? 19 As the condition has not been fulfilled because incorporation has not taken place within a reasonable time, and because there has been no agreement as to the value at which the business is to be incorporated, or for that matter whether or not it will be incorporated at all, the gift must fail. In other words the gift is subject to a condition precedent which has failed through non-performance. The will cannot impose any obligation on Wilkie Wilson so far as the compliance or reasonable behaviour is concerned. What is the result of the failure? 20 Non-fulfilment of the condition brings the words in [C] and Clause 6 of the will into operation. The result of this will be that the four sons of the deceased will, upon sale of the shares in accordance with the provisions of that clause, take the proceeds of sale in equal shares. Costs 21 Having regard to the particular contest between the trustees, namely the plaintiff and the first defendant, it is not appropriate for any party to have costs on an indemnity basis. Subject to that the costs of all parties should be paid out of the estate. Orders 22 It follows that the questions in paragraph 1 of the summons should be answered as follows: 1. (1) (a) Yes (2) (a) Yes (b) (i) A condition precedent (ii) No (iii) (I) A reasonable time which has passed. (II) Yes (III) No (iv) Does not apply (v) (I) Yes (II) No (III) No

Order the costs of the plaintiff and the defendants be paid out of the estate of the deceased. I certify that paragraphs 1 to 22 are a true copy of the Reasons for Judgment given by Mr Justice Windeyer in matter 4120/98 Watson v Watson.

Laurel Laurent Associate to Mr. Justice Windeyer 14th April 1999.

• 3 -

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4120/98 - DAVID WILKIE WATSON v STUART WILKIE WATSON - ESTATE OF HAROLD DOUGLAS WATSON & 2 ORS

1 HIS HONOUR: The final question to be decided in this action is the question of costs. In my judgment delivered on 14 April 1999, I indicated that the costs should be paid out of the estate. I was asked not to make that order to enable there to be further argument on this question which has taken place this morning. 2 In ordinary circumstances, irrespective of the provisions of section 93(3) of the Trustee Act 1925, the costs which are incurred in the estate as a result of doubt or ambiguity arising under the wording of a will would be payable out of residue unless there were some clause in the will setting up a particular fund out of which testamentary expenses were to be paid. In this estate, under the clear wording of the will, the testamentary expenses are to be paid out of residue. Clause 5 of the will so provides. It is after those expenses have been paid that the balance of residue is to be distributed between the two residuary beneficiaries. 3 Counsel for the plaintiff, the plaintiff being one of the trustees, says, first, that the costs should be paid on an indemnity basis and that, as I understand it, extends of the costs of all parties. Second, that the costs should be borne, as I understood it, rateably between the fund and the residue, but in any event, not entirely borne by residue or by the fund, because that would throw an unfair burden either way. 4 Counsel for the first defendant, who is also a trustee, accepts that if the ordinary rule were followed that might bring about an unfair result, in this case particularly, because to some extent it could not be said that it was not adversary litigation among the parties. 5 Counsel for the residuary beneficiaries, while pressing for an order that the costs should be borne by the fund, in the alternative says that the costs should be borne by the parties rateably in accordance with their shares in the estate, or in the alternative that each party should pay his own costs. 6 There can be no doubt that this litigation was brought about by the most unfortunate drafting of the will of the deceased. None of the parties is responsible for that and to that extent the litigation, while to some extent adverse, is not brought about by them. In those circumstances, I do not think it would be appropriate to make an order that would have the result of the parties paying their own costs. Neither do I think it would be appropriate to make any order under which any of the parties receive costs on an indemnity basis out of the estate. In ordinary circumstances the residuary beneficiaries would not be entitled to such an order and in view of the separate interests being contended for by the trustees, in this litigation, I do not think they should be entitled to such an order. As the common fund basis no longer exists and there is little distinction between that and the costs which will be allowed under the Legal Profession Act, in my view, no order as to indemnity costs should be made. 7 Both trustees accept that it would produce an unfair result to cast the total burden of the costs on the residuary beneficiaries. Thus, while I have no doubt that if it were not for s93(3) of the Trustee Act, the law would require that order to be made. I think it would be appropriate to make a special order in this case so that the parties will bear the costs rateably in proportion to their interests in the estate. It would seem, therefore, that the appropriate order be that the costs be paid out of the estate but borne out of the beneficiaries rateably in accordance with their interests. That would enable the costs to be payable now, but adjusted later. 8 I should add that I have also been asked to make an order that further consideration be reserved in case there is any difficulty arising or question arising on the sale of the shares and I am prepared to make that order. 9 Finally, I should say that in my view questions of costs ought to be argued at the trial because it would have taken very little time to have had this argument while the construction proceedings were on foot and that could have saved the additional expense which has now been incurred. ORDER 10 The cost of the parties to be paid out of the estate, but borne by the parties rateably in proportion to their shares in the estate. The rateable allocation should take place on the actual value of the benefits received by each beneficiary. Those proportionate benefits to be calculated before the costs of these proceedings are deducted from the funds of the estate.

Last Modified: 22/04/99 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.