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High Court of New Zealand Decisions |
Last Updated: 22 September 2014
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2013-412-000469 [2014] NZHC 2160
BETWEEN
|
BRONWYN ELIZABETH PENSON
Plaintiff
|
AND
|
LYNLEA ELLEN FORBES and
EDWARD JOHN JACK First Defendant
|
AND
|
WEBB FARRY TRUSTEE SERVICES LIMITED
Second Defendant
|
Hearing:
|
8 September 2014
|
Appearances:
|
L A Andersen for First Defendants/First Applicants M E Parker for Second
Defendant/Second Applicant D J More for Plaintiff/Respondent
|
Judgment:
|
8 September 2014
|
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
on Strike Out Application
[1] The plaintiff (Ms Penson) is the daughter, and one of five
children, of the late
Sylvia Jack (Mrs Jack) who died in October 2012.
[2] Mrs Jack in December 2006 had established the S I Jack Family Trust
(the Trust). The discretionary beneficiaries of
the Trust included Mrs
Jack’s five children.
[3] The trustees of the Trust were Mrs Jack and the second defendant (the corporate trustee). In August 2012, Mrs Jack and the corporate trustee by deed
varied the Trust so as to exclude as beneficiaries Ms Penson and a
deceased brother.
PENSON v FORBES [2014] NZHC 2160 [8 September 2014]
At the time she was excluded, Ms Penson had no vested interest. As a
discretionary beneficiary she also had no contingent interest.
She had a mere
expectation.1
[4] On the same day as she signed the deed of variation, Mrs Jack made
her last will. By that will she directed the trustees
of her estate to
transfer the residuary estate to the trustees of the Trust. She also directed
the trustees of her estate to divide
the residuary estate equally between such
of her three children (being the three who were named beneficiaries of the
Trust) as survived
her. By her will she also exercised her power of appointment
to appoint two of her children (the first defendants) as trustees of
the Trust
in her place.
[5] On the same day, she forgave the debt which the Trust owed her on
the
Trust’s 2006 purchase of Mrs Jack’s house property.
[6] Mrs Jack subsequently died (in 2012).
[7] The Trust sold the house property and made distributions for the benefit
of the three children-beneficiaries and for grandchildren.
[8] Ms Penson sues the current trustees.
[9] This judgment relates to the trustees’ application to strike
out Ms Penson’s
claim.
Ms Penson’s four causes of action
[10] I summarise Ms Penson’s four causes of action in her Amended
Statement of
Claim (the Statement of Claim):
(1) Breach of trust
Ms Penson alleges that Mrs Jack and the corporate trustee had a fiduciary
duty which required them in relation to the power to exclude
a beneficiary
to:
• act honestly;
1 Foreman v Kingstone [2004] 1 NZLR 841 (HC) per Potter J at [48].
• act in good faith;
• not act capriciously;
• not act irrationally; and
• act even-handedly as between beneficiaries.
Ms Penson alleges that the decision to exclude her as beneficiary was made
because of Mrs Jack’s personal dislike of Ms Penson
and was in breach of
fiduciary obligation. In the same cause of action but as what is effectively an
alternative, Ms Penson says
that the trustees had obligations not to put the
interests of Mrs Jack as a trustee ahead of the interests of Ms Penson as
beneficiary
and to avoid any conflict of personal interest with a duty to Ms
Penson as beneficiary. Ms Penson alleges that the trustees’
decision to
exclude Ms Penson because of Mrs Jack’s personal dislike of her meant that
the trustees put Mrs Jack’s interest
as trustee ahead of Ms Penson’s
interest as beneficiary.
(2) Fraud on the power
Ms Penson alleges that the decision to exclude her as a beneficiary was a
fraud on the power to exclude because:
• there was no lawful justification for the decision; and
• the decision was made for an improper purpose. (3) Breach of trust
Ms Penson alleges that when the trustees made the decision to make
distributions after Mrs Jack’s death the decision was in
breach of trust
because:
• the trustees failed to act even-handedly between all beneficiaries.
(4) Against the corporate trustee
The paragraphs referred to in the statement of claim as comprising the fourth
cause of action are in fact in the nature of a prayer
for damages against the
corporate trustee, relying upon the same alleged breaches as pleaded earlier.
Correctly analysed, there
is not a separate fourth cause of action.
The issues for determination
[11] Ms Penson cannot successfully oppose this strike out application
unless there is a tenable basis for her allegations as to
breaches of duty or
fraud on the power on the part of the defendants.
[12] The causes of action which call for some detailed consideration are
the first and second causes of action. Mr More accepted
in his oral
submissions that the remaining causes of action fall away if the Court strikes
out the first and second causes. As I
have recorded, the so-called fourth cause
of action is truly a prayer for damages and stands or falls with the earlier
causes of
action.
[13] The third cause of action (relating to the distributions made after
Mrs Jack’s death) would become relevant only if
the Court were to make an
order which had the effect of restoring Ms Penson as a beneficiary. As matters
stand at present, a failure
by the trustees for the time-being to distribute to
Ms Penson while she was not a beneficiary cannot constitute a breach of trust.
To the contrary, a distribution to her would have amounted to a breach of trust.
The critical causes of action to consider in this
case are therefore those
identified by Ms Penson as her first and second causes of action. I now examine
the allegations in those
causes of action.
Striking out a claim – the principles
[14] High Court Rule 15.1 makes provision for orders striking out all or part of a pleading. In this case the defendants/applicants invoke r 15.1(1)(a) (no reasonably arguable cause of action).
[15] I adopt the following as principles applicable to the consideration
of this application:
(a) The Court is to assume that the facts pleaded are true (unless they
are entirely speculative and without foundation).
(b) Before the Court may strike out proceedings the cause of action
must be clearly untenable in the sense that the Court can
be certain that it
cannot succeed.
(c) The jurisdiction is to be exercised sparingly and only in clear
cases.
(d) The jurisdiction is not excluded by the need to decide
difficult questions of law, even if requiring extensive
argument.
(e) The Court should be slow to rule on novel categories of duty of
care at the strike out stage.2
The trustees’ powers
[16] By the trust deed, the trustees were given powers to add to and vary
the Deed and to revoke trusts, powers or other provisions,
discretions,
alterations and variations. The express powers of amendment included the power
to declare new beneficiaries and new
classes of beneficiary.
[17] Clause 15 of the Deed expressly provided for the exclusion of a
beneficiary. It provides:
15.1 The Trustees may, by a declaration in writing, declare that
any person or class of people is/are to be excluded
as a Beneficiary or a class
of Beneficiaries for such period as the Trustees determine. A declaration under
this clause can be made
without prejudice to the accrued beneficial settlement
(if any) of that person or persons at the date of such declaration.
15.2 ...
2 See Attorney-General v Prince [1998] 1 NZLR 262 (CA).
15.3 As from the date of such declaration the rights of that person must be
modified accordingly.
[18] It is pleaded and common ground that the trustees in August 2012
excluded Ms Penson and her deceased brother as beneficiaries
in reliance upon
clause 15.1 of the Deed of Trust.
Rationality
[19] Although counsel did not expressly address me on the distinction
between fiduciary and non-fiduciary powers, there clearly
is such a
distinction.3 As the power in this case has been given to the
trustees, I treat it as a fiduciary power which accordingly has constraints of
exercise
which go beyond fraud on the power.
[20] In Equity and Trusts in New Zealand,4 Dr Andrew
Butler uses a number of descriptions which may be given to what I will call the
duty to act rationally. He says:5
A trustee must not exercise the trustee’s discretions in a manner which
is irrational, perverse, arbitrary or capricious. An
exercise of a discretion
in this way will be void.
And he adds:
Often these flaws in the exercise of trustee discretions are dealt with under
the head of bad faith. But it is better to deal with them separately
because it is possible for a well meaning and honest trustee to act in these
ways.
[21] One of the classic authorities in this area is the judgment of
Templeman J (as he then was) in Re Manisty’s Settlement, Manisty v
Manisty,6 in which his Lordship observed:7
The court may ... be persuaded to intervene if the trustees act
“capriciously,” that is to say, act for reasons which
I apprehend
could be said to be irrational, perverse or irrelevant to any sensible
expectation of the settlor; for example, if they
chose a beneficiary by height
or complexion or by the irrelevant fact that he was a resident of Greater
London.
4 Equity and Trusts in New Zealand (2nd ed Thompson Lawyers, 2009) at 179-182 and 185.
5 At 179.
6 Re Manisty’s Settlement, Manisty v Manisty [1974] 1 Ch 17.
7 At 26.
[22] I adopt, as conveying accurately the relevant concept of
“caprice”, the Oxford
English Dictionary definition8 of “unaccountable change of
mind”.
[23] Because Ms Penson initially filed an unparticularised statement of
claim, she was subsequently required to particularise
her allegations. She
provided in the amended statement of claim the following particulars of the
alleged breach in this regard:
(a) For some time prior to 3 August 2012 the deceased had taken a
dislike to the plaintiff. The plaintiff gave no cause to
the deceased for her
dislike of the plaintiff.
(b) The deceased’s dislike of the plaintiff was without justification
and
irrational.
(c) The decision to exclude the plaintiff as a beneficiary was made as
a result of the deceased’s personal dislike of
the plaintiff. It was
therefore in breach of the trustees’ obligation not to put the interests
of the deceased, as a trustee,
ahead of the interests of the plaintiff as a
beneficiary.
(d) The decision to exclude the plaintiff as a beneficiary was
made without good cause and was therefore capricious
and/or
irrational.
(e) The decision to exclude the plaintiff as a beneficiary was
made because of the deceased’s personal dislike
of the plaintiff and was
made in bad faith.
[24] In his submissions for Ms Penson, Mr More dealt with the
concepts of irrationality and good faith largely on a
combined basis. To the
extent that Mr More made submissions specifically towards irrationality or
caprice, he stated:
The plaintiff was a discretionary beneficiary, and before deciding to remove
her, the trustees were under an obligation to consider
that decision.
They
8 The New Zealand Oxford Dictionary (2005, Oxford University Press, Oxford) at 164.
were not entitled to act capriciously. They were not entitled to take into
account irrelevant considerations, such as the deceased’s
dislike of the
plaintiff. The deceased put her own personal interests ahead of her
obligation as a trustee. The trustees
were required to consider the
plaintiff’s personal situation including her financial circumstances.
There is no evidence
that the trustees gave any consideration to the
plaintiff’s circumstances. See Turner v Turner [1984] 1 Ch
100.
[25] In relation to irrationality or caprice, Ms Penson’s claim is
therefore put upon the basis that the trustees in exercising
their power to
remove Ms Penson as a beneficiary acted in breach of trust because the decision
was taken as a result of Mrs Jack’s
dislike of Ms Penson.
[26] Given that Ms Penson’s assertion of breach of trust is in this
regard put in that
way, it is not tenable.
[27] To adopt Lord Templeman’s terminology in Re
Manisty’s Settlement, the “sensible expectations of the
settlor” plainly include expectations that those who remain in her
affections may
remain in the class of discretionary beneficiaries and that those
who fall from her affections may be removed from that class. The
power to
remove in this case is express and is not limited in its terms. There is no
reason to read down the power in such a way
as would exclude from the
consideration of the settlor her intervening disaffection for her daughter. To
again adopt the observations
in Re Manisty’s Settlement, the
trustees’ decision to exclude Ms Penson was not based on a capricious or
irrational concept such as height or complexion.
Rather, it was on Ms
Penson’s pleading based on the reason (or rationale) that one of the
discretionary beneficiaries, who
may have benefitted from this family trust, was
no longer in the affection of her mother, the settlor of the family
trust.
[28] The inability of the Court to invalidate the trustees’ decision in the present circumstances is reinforced by the observation that the Court is not an appellate body for trustees’ decisions.9 While particular Judges might have reached a different view if exercising the same discretion, that is insufficient. A Judge’s view cannot be
substituted for that of the trustees in whom the settlor imposed her
trust.
9 Wong v Burt [2003] 3 NZLR 526 (HC), per Ronald Young J at [18]; appeal allowed in Wong v Burt [2004] NZCA 174; [2005] 1 NZLR 91 (CA) on the facts but without discussion of the quoted High Court observation.
[29] Towards the conclusion of the paragraph which I quoted from Mr More’s submissions,10 he submitted that the trustees were in breach of trust by failing to consider Ms Penson’s financial circumstances. Such a breach has not been separately pleaded but I will consider it under the heading of “irrationality” as presented. It takes Ms Penson’s case no further. The decision-making of the trustees in relation to the class of beneficiaries is not alleged to have been taking place in the
context of financial need. Rather, it is alleged to have been taking place
because of disaffection. The financial circumstances
of particular
beneficiaries would have become a relevant consideration when distributions were
made. The trustees were not at that
point in August 2012.
[30] Ms Penson’s allegation that the trustees, in making the
decision to exclude Ms Penson as a beneficiary, acted in breach
of their duty of
good faith rested on the same five particulars as the irrationality pleading.
Put in the negative, it is an allegation
of bad faith.
[31] I adopt the description of that concept by O’Regan J in
Gailey v Gordon11
where his Honour said:
Bad faith in this context has been recognised as including a decision for an
ulterior motive, taking into account of irrelevant considerations,
and refusal
to take into account relevant considerations and acting
capriciously.
[32] The close relationship between bad faith and caprice
understandably led counsel to rely on the same particulars
for both
pleadings.
[33] For similar reasons to those I have given in relation to
the irrationality pleading, the bad faith pleading is
untenable.
[34] Mr More addressed submissions to the bad faith pleading in this
way:
The deceased had taken a dislike to her daughter, and that was the reason for
excluding the plaintiff as a beneficiary. It is quite
clear from the trust
deed, that Mrs Jack’s intention was, that following her own death, the
trust assets would be held for
the benefit of her children and remoter issue.
The exclusion of the plaintiff as a beneficiary was contrary to the purpose of
the
10 Above at [24].
11 Gailey v Gordon [2003] 2 NZLR 192 at [89].
trust. Whilst as a mother, the late Mrs Jack might consider herself entitled
to prefer her other children over the plaintiff, as
a trustee she was not
so entitled, without cause.
[35] There are at least two difficulties with Mr More’s
submission. First, it misstates or incorrectly assumes
the intention of the
settlor as expressed through the trust deed. The classes of beneficiary
identified upon the establishment of
the trust deed were simply the
beneficiaries or the classes of beneficiary for the time-being. They cannot be
read without reference
to the right reserved to the trustees to add to, or
exclude from, those beneficiaries or those classes. It is thus incorrect to
suggest that the trust assets would be held for the benefit of Mrs Jack’s
children and remoter issue. The assets were to be
held for the benefit of the
beneficiaries as constituted from time to time.
[36] Secondly, the implicit assumption within Mr More’s
submissions that an exclusion of Ms Penson occurred “without
cause”
is not justified by Ms Penson’s own pleading. The pleaded cause of
exclusion was Mrs Jack’s
dislike of the plaintiff. Ms
Penson’s underlying pleading that she had given Mrs Jack no cause for
dislike is directed to
a different level of analysis and cannot alter the fact
that Ms Penson’s allegation of irrational decision-making is
untenable.
The duty of even-handedness between beneficiaries
[37] In his written submissions, Mr More did not direct specific
submissions to the concept of even-handedness. He accepted in
his oral
submissions that the concept of even-handedness could not assist his client on
the first and second causes of action. I
therefore deal with it only
briefly.
[38] This is a discretionary trust. I respectfully adopt what the Court
of Appeal said of this type of trust in Kain v Hutton12 where
Glazebrook J, delivering the judgment of that Court, said:13
... under a discretionary trust, there is no right to distributions but only
a right to be considered – see Gartside at 295 and Hunt v Muollo
at [111]. Any duty of impartiality must be viewed against the
limited rights of
12 Kain v Hutton [2007] NZCA 199, [2007] 3 NZLR 349 affirmed on this point on appeal Kain v
Hutton [2008] NZSC 61; [2008] 3 NZLR 589.
13 At [243].
discretionary beneficiaries. The duty of impartiality does not preclude a
trustee from making a discretionary decision that benefits
one beneficiary and
disadvantages other beneficiaries – see Dal Pont and Chalmers at
[23.135] and Butler at [5.2.1(3)].
[39] The beneficiary’s right to be considered for distributions is
not in play in this case. There must be limited scope,
if any, for the
application of a requirement of even-handedness in relation to the exercise
of the trustees’ power to
add to or exclude beneficiaries. The
earlier duties which I have considered provide those within existing classes
with protections
against irrationality and bad faith. To impose on the
trustees a concept of even-handedness when the power they have been
expressly
given, if exercised, will inherently discriminate against those who would cease
to be beneficiaries would limit the scope
of the power. Nothing in the trust
deed indicates that the settlor intended that the scope of the power be so
limited. It is not
for this Court to limit a power beyond the limits recognised
in the line of authority to which Re Manisty’s Settlement
belongs.
Conflict of interest
[40] Mr More, in his written synopsis filed before the hearing, dealt
with the first cause of action by reference only to what
I will call the
irrationality and bad faith grounds. He did not deal with that part of the
pleading asserting breach of duty through
conflict of interest. However in his
oral submissions he sought to uphold the pleading in the statement of claim on
that basis also.
[41] The pleadings of a conflict of duty is contained in the first cause
of action
(breach of trust) and alleges that:
(a) Mrs Jack and the corporate trustee owed fiduciary obligations to the
plaintiff including:
(i) a duty not to put the interests of the deceased, as a trustee, ahead of the interests of the plaintiff as a beneficiary; and
(ii) a duty to avoid any conflict between the personal interests of the
deceased as a trustee, and their duty to the plaintiff
as a
beneficiary.
(b) The decision to exclude Ms Penson was as a result of Mrs
Jack’s personal dislike of Ms Penson and was therefore in
breach of the
trustees’ obligation not to put the interests of the deceased, as
a trustee, ahead of the interests
of the plaintiff as a beneficiary.
[42] Mr More accepted that Ms Penson does not rest her allegations on any suggestion of a conflict of interest whereby the pecuniary interest of Mrs Jack was in conflict with that of Ms Penson. Rather, said Mr More, the allegation flowing from the pleading as to Mrs Jack’s personal dislike of Ms Penson is that Mrs Jack put her emotional interests ahead of Ms Penson’s interests. Mr More did not refer to authority to support the proposition that consideration of a trustee’s regard for his or her emotional interest, meaning their personal preferences or dislikes of individuals, has been dealt with as involving a relevant conflict of interest. The cases which deal with trustees’ conflict are sometimes gathered under the headings of the self-dealing
rule unauthorised profits or conflict of interest.14 The duty not
to self-deal is directed
to precluding a trustee without authority through the trust instrument from trafficking with trust property and making a profit. There is no suggestion in Ms Penson’s pleading of Mrs Jack’s having made a profit. The pleading refers to Mrs Jack’s forgiving the debt owed to her personally by the trust and thereby avoiding obligations under the Family Protection Act. But, as Mr More conceded orally, the
decision and steps which Mrs Jack took in relation to her personal
property including
14 See for instance John Mowbray QC & Ors Lewin on Trusts (18th ed, 2008, Thomson Sweet & Maxwell, 2008) ch 20. A classic statement of the principles involved was by Lord Herschell in Bray v Ford [1896] AC 44 (HL), at 51: “It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondent’s, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than duty, and thus prejudicing those whom he was bound to protect. It has, therefore been deemed expedient to lay down this positive rule.”
Andrew Butler (in Equity and Trusts in New Zealand) above n 4, at 5.3(1)(6), refers to the “duty to act gratuitously” and explains it: “The rationale for the rule is that, first, a trustee is not allowed to derive a benefit from the trust property, and, secondly, the interest and the duty of the trustee must not conflict”, citing Bray v Ford.
the debt owed by the Trust involved no exercise of her powers and discretions
qua
trustee.
[43] The proposition which Mr More was left with – that the
decision to exclude was unlawful by reason of Mrs Jack’s
conduct in the
face of a conflict of interest – is also unsustainable. First, the
trust deed expressly in clause
22 provided for “Personal
Involvement of Trustee”:
22(1) Any Trustee shall be entitled to act under this Deed and exercise all
of the powers conferred upon the Trustee even though the
Trustee is or may
become associated in any capacity with any third party with which the
Trustees are dealing. The Trustee
shall be entitled to act and exercise all of
the powers of this Deed even though as a result of any other capacity the
Trustee’s
interest or duty in any particular matter or matters may
conflict with the Trustee’s duty to the Trust Fund in any way.
[44] By clause 22 Mrs Jack was entitled to take a step which enriched her
or others “in any capacity”, notwithstanding
that step’s
impact on the trust fund. Mrs Jack’s interest in the various
financial decisions in August 2012
for either her personal position or the
position of family members other than Ms Penson did not disqualify her from
involvement
as a trustee in one of those decisions.
[45] Secondly, the permissive nature of clause 22 recognises that the
focus of the conflict of interest rules is upon the advancing
of the
trustee’s financial interest. Other rules exist which may preclude purely
personal or emotional considerations but such
considerations cannot be
shoe-horned to fit into a duty that debars unauthorised profit. Among the other
rules are those I have
already considered in relation to rationality, bad
faith and even-handedness (or impartiality). For the reasons I have
given, a breach of those duties on the plaintiff’s pleadings is
untenable. Equally so is a pleading of conflict
of interest or breach of the
self- dealing rule.
Fraud on the power
[46] To support the pleading in the second cause of action, Mr More
invoked observations of the Court of Appeal in Kain v
Hutton.15
15 Above n 12.
[47] In Kain v Hutton, the various Courts dealt with an
appointment of trust land to one beneficiary (to the exclusion of others, being
the parties referred
to in that case as “the Kain
children”).
[48] Mr More relied upon a passage in the judgment of Glazebrook J in
which the concept of fraud on the power was discussed.
Her Honour delivering
the judgment of the Court of Appeal stated:
[35] The Kain children allege that the appointment was tainted by improper
motives and thus that there was a fraud on the power
of appointment. There are
two basic elements in a fraudulent exercise of a power – see Thomas
Powers (1998) at [9-02]:
(a) a disposition beyond the scope of the power by the donee, whose
position is referable to the terms, express or implied, of
the instrument
creating the power; and
(b) a deliberate breach of the implied obligation not to exercise that
power for an ulterior purpose (this is what distinguishes
a fraudulent
use of a power from an excessive use).
[36] There are three main grounds upon which an exercise of a power may be
held to be fraudulent – see Thomas Powers at [9-20]:
(a) where the appointment is made pursuant to an
antecedent agreement between the donee and the object whereby
a non-object is to
benefit;
(b) where the appointment is made for a corrupt purpose; or
(c) where the appointment is made for purposes foreign to the
power.
[49] In the event, the Court of Appeal upheld the High Court judgment
which in turn had upheld the exercise of the power of appointment.
[50] On further appeal, the Supreme Court upheld the judgments as to the
fraud on the power in the courts below.16
[51] Mr More, for the principles in relation to the concept of fraud on the power, relied on the classic judgment of Lord Westbury LC in Duke of Portland v Lady
Topham,17 in which his Lordship
stated:18
16 Above n 12.
17 Duke of Portland v Lady Topham [1864] EngR 339; [1864] 11 HL Cas 32, 54; [1864] EngR 339; 11 ER 1242, 1251.
18 At [54].
... the settled principles of the law upon this subject ... namely, that the
donee, the appointor under the power, shall, at the time
of the exercise of that
power, and for any purpose for which it is used, act with good faith and
sincerity, and with an entire and
single view to the real purpose and object of
the power, and not for the purpose of accomplishing or carrying into effect any
bye
or sinister object (I mean sinister in the sense of its being beyond the
purpose and intent of the power) which he may desire
to effect in
the exercise of the power.
[52] Blanchard J, in delivering the judgment of the majority of the
Supreme Court in Kain v Hutton,19 adopted Lord
Westbury’s statement of principle.20 This was immediately
after citing the famous remark of Lord Parker of Waddington in Vatcher v
Paull,21 that the term “fraud” does not in this
context denote any conduct on the part of the appointor amounting to fraud in
the
common sense of the term or conduct which could properly be termed
dishonest or immoral. Lord Parker further observed:
It merely means that the power has been exercised for a purpose, or with an
intention, beyond the scope of or not justified by the
instrument creating the
power. Perhaps the most common instance of this is where the exercise is due to
some bargain between the
appointor and appointee, whereby the appointor, or
some other person not an object of the power, is to derive a benefit. But such
a bargain is not essential. It is enough that the appointor’s purpose and
intention is to secure a benefit for himself, or
some other person not an object
of the power. In such a case the appointment is invalid, unless the Court can
clearly distinguish
between the quantum of the benefit bona fide intended to be
conferred on the appointee and the quantum of the benefit intended to
be derived
by the appointor or to be conferred on a stranger ...
[53] As these passages indicate, and as occurred in Kain v Hutton
itself, the discussion and application of the concept of a fraud on the
power has arisen in relation to certain types of power of
appointment.22
One of the classic examples of a fraud on the power of appointment arises
when the appointor with power to appoint trust property
to the appointee
exercises the power other than for the purpose and intention of benefitting the
appointee.
[54] In Kain v Hutton Tipping J put the matter succinctly in his
additional reasons for judgment:23
19 Kain v Hutton, above n 12.
20 At 599.
21 Vatcher v Paull [1915] AC 372 (PC) at 378.
22 Examples are given in Snell’s Equity, above n 3, at [9.13].
23 Kain v Hutton, above n 12, at [46].
The expression fraud on a power is historical language for when a power is
misused in an ultra vires manner.
[55] His Honour went on to explain:24
The species of excessive execution known as a fraud on the power normally
comes about when the appointment is in form to an object
but in substance to a
non-object.
[56] Mr More did not refer me to any case in which the concept of a fraud
on the power has been discussed let alone applied in
relation to a power in the
trust instrument to exclude beneficiaries. As there is no appointment of
property in that situation,
the “ultra vires” purposes
discussed in cases such as Kain v Hutton logically are unlikely to
arise.
[57] The exercise of the power to exclude is conceptually aligned to a
general power of appointment, identified by Tipping J in
Kain v Hutton,
which entitles the appointor to appoint to anyone at all. As Tipping J
observed:25
There cannot therefore be excessive execution of, or a fraud on, such a power
because it is logically impossible for the donee/appointor
to exceed the
donor’s mandate.
[58] I therefore doubt that the concept of a fraud on a power as applied
in power of appointment cases lends itself to a power
of exclusion. But I do
not need to decide that point for the purposes of this application.
[59] The way in which Ms Penson’s second cause of action is pleaded is that the alleged fraud on a power is said to have occurred because the decision to remove Ms Penson was made for an improper purpose. This implicitly is a reference back to the particulars given in relation to bad faith and irrationality. But what the trustees did in exercising their power of exclusion in this case was precisely what they intended to do, namely to exclude Ms Penson. It is not suggested that the real outcome of that decision was intended to be some outcome other than simply the exclusion of that beneficiary. It is the intended outcome of the exercise of the power
that matters. In that regard both the form and the substance of the
exercise of the
24 At [47].
25 At [47].
power are the same, namely the exclusion of the beneficiary. The trustees
set out with one purpose, namely to exclude Ms Penson and
her deceased brother,
and in August 2012 they did so.
[60] The allegation that there has been a fraud on the power is
untenable.
Third and fourth causes of action
[61] The third and fourth causes of action fall away once the first and
second causes of action are found to be untenable.
Outcome
[62] The defendants have established that all causes of action in Ms
Penson’s
statement of claim are untenable in the sense that I am certain they cannot
succeed.
Costs
[63] Costs would normally follow the event on a 2B basis. The plaintiff
is legally aided. Costs may not be awarded against the
plaintiff unless the
court is satisfied that there are exceptional circumstances.26
There are no exceptional circumstances. It is appropriate, pursuant to s
45(5) Legal Services Act 2011, to specify the order for costs
which would have
been made but for s 45 of the Act, and I do so in the order which
follows.
Order
[64] I order:
(a) The plaintiff’s first amended statement of claim is struck out;
(b) I specify that but for the plaintiff ’s being legally aided, I
would have ordered that the plaintiff pay the costs of the
first defendants and
the
26 Legal Services Act 2011, s 45(2).
second defendant on a 2B basis together with disbursements to be
fixed by the Registrar.
Solicitors:
A D Paterson, Solicitors, Dunedin (Counsel: L A Andersen, Barrister)
Parker Cowan, Queenstown (Counsel: M E Parker) Solomons, Dunedin (Counsel: D J More)
Associate Judge Osborne
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URL: http://www.nzlii.org/nz/cases/NZHC/2014/2160.html