SONNY SHAW v SHAW, CHRISTOPHER MARTIN SHAW AND & ANOR [2003] NZCA 73 (3 April 2003)

IN THE COURT OF APPEAL OF NEW ZEALAND

CA258/01

BETWEEN SONNY SHAW

Appellant

AND LYNNE SHAW, MARC JAMES SHAW, CHRISTOPHER MARTIN SHAW AND LISA NICOLE SHAW

First Respondent

AND JONATHAN TODD SHAW

Second Respondent

Hearing: 27 March 2003

Coram: Anderson J

Baragwanath J

Gendall J

Appearances: Mr Shaw in person

B J Lomas and M D Branch for Respondents and Public Trustee

Judgment: 3 April 2003

JUDGMENT OF THE COURT DELIVERED BY ANDERSON J

[1]	This is an appeal against cost orders made by the High Court in proceedings brought against the appellant, as trustee of a family trust at the suit of his former wife in her capacity as guardian ad litem of the infant beneficiaries, the appellant’s children.The litigation was compromised after some evidence had been given at trial.Consent orders were made appointing the Public Trustee as trustee of the family trust in substitution for the appellant and another named trustee.Costs were reserved.
[2]	Counsel for the guardian subsequently filed a memorandum as to costs indicating disbursements, including agency fees of $6,229.97 and indicating that on a pre-January 2000 cost scale and a post-January 2000 2B category cost basis the total scale costs would amount to $13,975.Counsel pointed out that the plaintiffs in the proceeding were legally aided and submitted that Mr Shaw adopted delaying tactics in relation to the discovery of documents, causing increased costs.It was also submitted that he had failed to comply with directions to produce documents, pursued unnecessary steps and arguments and failed without reasonable justification to accept an offer of settlement involving his removal as a trustee.
[3]	The memorandum submitted that:

Counsel recognises that the defendant as a lay litigant cannot be expected to be conversant with the High Court Rules.However even taking this factor into consideration, the defendant’s conduct throughout the proceeding has been obstructive, particularly in relation to discovery and inspection.

[4]	Notwithstanding the criticisms of the appellant’s conduct, counsel for the respondents ultimately made a submission which focused on the family nature of the dispute.The memorandum noted:

In Counsel’s submission this proceeding is one which it is appropriate to order costs against the defendant personally for all the reasons stated above.However, the question of success of recovery under such order and a desire not to further exacerbate already strained family relationships, would see the better course in counsel’s submission, as ordering costs to be paid out of trust income.

[5]

The Public Trustee, in its capacity as substituted trustee pursuant to the consent orders, filed a memorandum pointing out that unless the trust were insolvent, the effect of an order requiring the trust to pay costs would be a commensurate cost to the trust beneficiaries, most of whom were in their infancy.On the other hand, if the trust were insolvent and Mr Shaw were in fact, as he claimed, a substantial creditor of the trust, then a costs order against the trust would effectively be borne by Mr Shaw because the distributable assets would be reduced accordingly.The Public Trustee, however, made no recommendation concerning costs.

[6]

A memorandum filed by Mr Shaw complained that the proceedings which had been brought against him, and originally his mother as well, contained false and malicious allegations about the misuse of trust assets, but that such allegations were eventually discontinued.He said that prior to trial he had made an offer involving the replacement of him by the Public Trustee, which in fact occurred and that objections taken by the respondents to conditions he had attached to that offer were unreasonable.He said:

The plaintiffs seek costs as if they won the case.Most of their initial allegations were dropped by the time the case went to trial.I was never given a chance in the trial to vigorously defend each and every single remaining allegation which I will do with the Public Trust.The whole case of false allegations against my mother was dropped completely.So are the plaintiffs entitled to receive costs for work involved in my mother’s case and also for work incurred on allegations against myself which they later dropped after settlement conferences proved their allegations false.

He concluded that each side should bear its own costs.

The High Court judgment

[7]	The High Court Judge delivered a written judgment on costs on 18 September 2001.The operative part of the judgment is reproduced below:

At the heart of the plaintiff’s application was a prayer to have the first defendant removed as trustee.This is what occurred.

In my judgment that result was inevitable.Appointment of a new trustee would in large measure have removed the need for the other remedies sought since the factual and legal issues at large are capable of resolution by an independent trustee resourced to carry out the necessary investigation.

I consider that the first defendant unnecessarily protracted this proceeding. He did so in a number of ways.First he failed to seek legal advice at the outset.Had he done so any competent practitioner would have advised him that he was in an impossible conflict situation and needed to stand aside as trustee. Secondly, for the reasons advanced by the plaintiffs in their submissions, he has deliberately breached the timetable orders relating to the listing and production of documents.Those breaches have resulted in unnecessary appearances before Masters at conferences.

In fixing quantum I intend to give some weight to the first defendant’s submission that the plaintiffs themselves were not totally blameless as a cause of procedural complexity.I do not intend to be unduly critical of three amended statements of claim but nonetheless, particularly when faced with a litigant in person, a more relaxed view about pleadings from the Court could safely have been assumed.I also give some slight weight to the first defendant’s submission that his first and only settlement offer could have been taken up earlier.However, given the first defendant’s previous stance and the fact that he was never represented I can understand the reluctance of the first plaintiffs’ solicitors to follow up his proposal with alacrity.

I consider that the first plaintiffs are entitled to costs.Because the removal of the first defendant as trustee and the long overdue arrival on the scene of a professional trustee must ultimately be of benefit to the Trust as a whole I consider that some of those costs should be borne by the Trust itself.I am also of the view, however, that the conduct of the first defendant in his role as trustee has been unwise, unfortunate and at times obdurate and that the first defendant should also be required to contribute to the first plaintiff’s costs in his personal capacity.

I intend to formulate my order in such a way so as to present no difficulties of apportionment on the issue.

Orders

(a)	I order that the first plaintiffs are entitled to an award of costs in the sum of $20,000 inclusive of disbursements.
(b)	Of that figure $7500 is to be paid by the first defendant in his personal capacity and $12,500 in his capacity as former trustee.
(c)	In the event of the first defendant not paying awarded costs within 60 days $7500 is to be set off against any sums owing to him by the Trust.
(d)	Of the $12,500 ordered against the former trustee the sum of $8500 is in any event to be set off against any sum owing by the Trust to the first defendant.

I consider this order to be a just and appropriate order having regard to the clear pattern of dealings involving this Trust, the fact that the corpus of the Trust was deliberately acquired by the first defendant for the purposes of the Trust, despite which there have been no distributions to the beneficiaries during the period of time this proceeding was afoot nor has there been any gifting during that period to reduce the debt.

The Public Trustee is charged with the responsibility of making payment of the appropriate figure to the first plaintiffs but the obligation to pay the first plaintiffs’ costs is suspended until such time as the Trust assets are liquidated and the net asset position of the Trust determined.

Appellant’s arguments on appeal

[8]

Mr Shaw submitted that an award of almost 100 per cent of the 2B scale costs is excessive and took issue with the appearance of second counsel at trial.Next, he submitted that the orders requiring him personally to meet $7,500 and to have $8,500 set off against sums owing by the trust to him mean that he, in effect, is required to pay $16,000 and that this is unjust, particularly because no misconduct by him has been proven.He disputes that he ever received a personal benefit from the trust and says no evidence was adduced that he had.Notwithstanding the absence of evidence, the Judge determined that he had.As to breaches of timetable orders, he says that this happened only once and in any event costs of $450 were awarded against him accordingly at an interlocutory stage.He complains also that costs relate in part to failed proceedings against his mother.He emphasises that he had made an offer of settlement involving the replacement of him by the Public Trustee and that this was the outcome of the proceeding because of the compromise reached.In his submission, the conditions he attached to the offer were not unreasonable and have subsequently been largely accepted by the Public Trustee.He took issue with service of proceedings on him by post when such, as he subsequently learned, may not have conformed with the requirements of the High Court Rules.As to the Judge’s criticism of his not taking legal advice, he submitted that he did at an early stage and was advised he had done nothing wrong and should fight the case.(We are unaware of any evidential basis for that submission.)

Respondent’s submissions

[9]

The Public Trustee abides this Court’s decision on the appeal.The respondents, by counsel, filed full written submissions in support of the Judge’s reasons and orders.But exchanges between counsel and the bench indicated that, as in the High Court, although the respondents believed the costs orders were justifiable, they had a deep concern not to exacerbate the family rift.

Discussion

[10]	The learned High Court Judge was plainly influenced in his approach to costs by a perception that the appellant was very much at fault in not stepping down as a trustee when he had a clear conflict of interest between his duties as a trustee and his interests as a creditor.And further, that he was derelict in relation to timetable orders and thereby caused unnecessary appearances before Masters.
[11]	On the first matter, we note that the original statement of claim alleged misconduct in the operation of the trust by the appellant and his mother who was at that time also a trustee.The allegations included personal use of the principal trust asset, a residential development, and in effect the appropriation of trust income or assets to finance private holidays and a motor vehicle.There was also alleged against Mr Shaw misconduct in the form of failing to provide assistance to the beneficiaries in accordance with the purposes of the trust, refusing to provide accounts, appropriation of assets and income and continuing as a trustee whilst an undischarged bankrupt.Thus, the litigation which began some two years before the compromise alleged serious dishonesty rather than a conflict of interest warranting removal.It is often a feature of cases of this type that allegations of serious misconduct in the administration of a trust encourage trustees to resist when, if the case had been put on a less aggressive basis, such as inappropriate conflict of interest, they might have been more inclined to resign.In any event, the scope of litigation is more likely to be expanded by putting misconduct in issue.In this case, no findings of misconduct have been made nor properly could have been because the trial did not run its course. The position then is that the appellant resisted very serious allegations which have never been proved.The extent to which a failure to obtain legal advice at the outset protracted the litigation is somewhat speculative in the light of the particular allegations he was facing.The learned High Court Judge appears critical of the appellant for not coming to a view about the untenability of his position for reasons other than those alleged against him.
[12]	As to the question of breaches of timetable, we think that Mr Shaw’s argument is cogent in its submission that he has already been dealt with in that respect by the costs order of $450 made against him by a Master on 6 December 1999.There is little basis for a generalised apprehension of deliberate delay.Such delay as occurred in the interlocutory stages of the litigation were really the consequences of the parties not being able to reach a compromise earlier than they did.There were one and a half days of judicially ordered settlement conferences which did not succeed, but apart from those and the application resulting in the costs order of $450, the attendances seem to follow a fairly ordinary course of case management requirements.
[13]	That said, we think the Judge was right to require the appellant to make some personal contribution towards the costs.Whether or not his offer had unreasonable conditions attached, it was made late in the day when significant costs had already been incurred.And whether or not a lawyer might have given the appellant advice which would have prompted such an offer at an earlier stage, he had a duty as a trustee to be aware of and respond to conflicts of interest in his personal and trustee capacity.That observation is made not by way of moral censure for failing to take sound legal advice but in order to emphasise that trustees have serious responsibilities for which they will be called to account by the Court.Where there is a conflict between a trustee’s duties to the beneficiaries in the administration of the trust on the one hand and his interests as a private creditor of the trust on the other, it will be no excuse for the trustee who might have preferred his private interest to say that he was unaware of his responsibilities in that respect.
[14]	We do not accept Mr Shaw’s complaint that the quantum of costs is excessive.The 2B scale was appropriate and no allowance has been made for second counsel, for whom no claim to costs was made.Mr Shaw’s argument that he was wrongly served is misconceived and meritless.
[15]	In the result we take the view that the learned High Court Judge was influenced by a perception of fault on the part of the appellant, which does not entirely withstand scrutiny. Nor was the judgment sufficiently influenced by the conciliatory approach adopted by the respondents.
[16]	The Judge held, at paragraph [5] of his judgment:

Certainly so far as the Trust’s principal asset was concerned, - an apartment block situated at Mairangi Bay – the first defendant received personal benefit.

Whether Mr Shaw has in fact obtained a personal benefit, and further, whether this would be a breach of trust or requires accountability in all the circumstances of the case, is not a matter which should have been declared after a part heard, and therefore incompletely examined, case.

[17]

Although costs are in large measure discretionary, we think that in the case of a family dispute which was ultimately resolved by settlement and where the party to whom costs might be awarded was anxious not to exacerbate the family rift, there was a strong indication for a costs order which would not seem punitive in expression or result.To the extent that the orders made require the appellant in effect to underwrite the trust liabilities we think that objective was not met.

[18]

We accordingly allow the appeal by amending the orders made by deleting paragraphs (c) and (d) of the orders set out earlier in this judgment.The result of this is that the appellant shall have an immediate liability to pay costs of $7,500 to the respondents and the trustee of the Sonny Shaw Family Trust, in that capacity, shall have a suspended liability to pay costs of $12,500, such falling due when the trust assets are liquidated.

Solicitors

Harkness Henry & Co, Hamilton