Woodward v Smith [2014] NZHC 407; [2014] 3 NZLR 525; (2014) 3 NZTR 24-009 (7 March 2014)

Last Updated: 30 January 2018

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IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2013-441-381 [2014] NZHC 407

BETWEEN ASHLEY ERIC WOODWARD Plaintiff

AND JON PHILIP SMITH First Defendant

JON PHILIP SMITH, SHELLEY-LOU SMITH AND JON BOWER DANIEL SMITH as trustees of the APLJ SMITH FAMILY TRUST

Second Defendants

Hearing: 10 February 2014

At Wellington

Counsel: J L Bates for Plaintiff

J O Upton QC for Defendants

Judgment: 7 March 2014

JUDGMENT OF THE HON JUSTICE KÓS (Prospective costs application)

[1] A plaintiff challenges actions of the trustees of two family trusts. The plaintiff is a discretionary beneficiary of both trusts. The basis of challenge is alleged breach of the rules against self dealing and unfair dealing by trustees. Trial is to occur at the end of April.

[2] Now the plaintiff asks the Court to make an order, known as a “prospective costs order” (PCO), that should his claims fail at trial, he should not be liable to pay

_{costs to the defendants.}¹ _{He cites the “chilling spectre of bankruptcy” should he}

¹ These orders are also known as “pre-emptive costs orders” or “protective costs orders”. The letter “p” dominates the field for some reason. I shall follow the form adopted by Mowbray et al Lewin on Trusts (18th ed, Sweet & Maxwell, London, 2008) at [21–119].

WOODWARD v SMITH [2014] NZHC 407 [7 March 2014]

have to pay costs. Costs incurred in challenging actions, he says, which the trustees

should have sought the Court’s approval of in the first place.

[3] Should the Court grant a PCO here?

Background

[4] Litigation involving these parties has now entered its second decade. A

family tree will assist explaining the background:

Arthur Percy Lionel Jon Smith = Coral Elaine Smith

Elaine Coral Smith = Gordon Woodward Jon Philip Smith = Shelley-Lou Smith

(Jon Sr)

Ashley Woodward = Sharni Woodward Jon B D Smith Philip S Smith Elizabeth A Smith

(Jon Jr)

Petra Charlotte Ethan

[5] Arthur and Coral Smith emigrated from England in 1965. Arthur Smith had been at sea. Later he became a London policeman. Then he went into business, and prospered. The family owned property in London, and in New Zealand. Two children were born to the couple. The elder child, Elaine Woodward, is the plaintiff Ashley Woodward’s mother. She was at one stage a co-plaintiff in this proceeding. The younger child, Jon Smith Sr, is the principal defendant in the various proceedings, which currently number three.

[6] In November 1980 Arthur Smith’s mother settled the APLJ Smith Family Trust. The following summary draws on the judgment of Mallon J in an earlier unsuccessful summary judgment application brought by Mr Woodward:²

(a) The APLJ Smith Family Trust was established in November 1980.

_{(b) The settlor was Grace Elgram, Arthur Smith’s mother.}

² Woodward v Smith [2013] NZHC 1226.

(c) The initial trustees were Arthur and Coral Smith (both now deceased).

(d) The present trustees are Jon Smith Sr, his wife Shelley-Lou Smith, and their son Jon Smith Jr.

(e) Discretionary beneficiaries in respect of net annual income are Coral Smith (now deceased), the children (Elaine and Jon Smith Sr), the grandchildren (Ashley Woodward, Jon Smith Jr, Phillip Smith and Elizabeth Smith) and the wife or widow of any of the children of Arthur Smith (Shelley-Lou Smith).

(f) The date of distribution of capital is 2030. The capital is to be divided equally between Jon Smith Sr, Jon Smith Sr’s three children, Elaine Woodward and Ashley Woodward. In short the Woodward side gets one-third, and the Smith side two-thirds.

[7] In July 1989 Arthur and Coral Smith signed a note expressing the wish that after their death the trustees of the “Smith family trust” be their children Jon Smith Sr and Elaine Woodward. They also expressed the wish that Ashley Woodward and Jon Smith Jr be made trustees of the Smith family trust when legally possible. Three months after his mother’s death, Jon Smith Sr (as sole executor and trustee of his father’s will, with the resultant power to appoint additional trustees of this trust) appointed his son Jon Smith Jr as trustee. In 2010 he appointed his wife Shelley-Lou as an additional trustee. Neither Elaine Woodward nor Ashley Woodward have been appointed trustees.

[8] The capital assets of the APLJ Smith Family Trust are said to be worth about

$5.6m. It owns two properties, but more importantly has various percentage interests in a series of property owning partnerships.

[9] Two further family trusts were established after the APLJ Smith Family Trust. The Hawkhurst Trust need not detain us, other than to note that the beneficiaries are the Smith branch of the family. The other, the Wanstead Trust, is

for the Woodward side. The following summary draws on the judgment of Mallon J

at [21]:

(a) The Wanstead Trust was settled in August 1985. (b) Arthur Smith was the settlor.

(c) The trustees were Arthur and Coral Smith (now deceased) and their two children Elaine Woodward and Jon Smith Jr.

(d) Following the death of Arthur and Coral Smith, the trustees are now

Elaine Woodward and Jon Smith Sr.

(e) The trust deed requires the trustees to act unanimously.

(f) The discretionary beneficiaries in respect of income, capital and advances on capital are Ashley Woodward and his children (Petra, Charlotte and Ethan) and grandchildren (presently none).

[10] The Wanstead Trust assets are three minority percentage interests in three property owning partnerships. They are each partnerships in which the APLJ Smith Family Trust has percentage interests as well. The capital assets of the Wanstead Trust are said to be worth approximately $1.5 m, together with $500,000 “income reserved” at the time of Mallon J’s judgment.

[11] In 1998 Arthur Smith suffered a serious stroke. It left him partly paralysed. He suffered some cognitive impairment. Three years later he executed a will appointing Jon Smith Sr sole executor of his estate. Shortly afterwards he executed a Deed of Appointment appointing Jon Smith Sr as an additional trustee of the APLJ Smith Family Trust (as we have seen already). Arthur Smith died in November

2001. Coral Smith died just over a year later.

[12] In 2004 Elaine Woodward brought proceedings in the High Court contending that her father Arthur lacked testamentary capacity when making the will, and that the Deed of Appointment was obtained by undue influence. That proceeding was

heard at the end of December 2007. In February 2008 Simon France J issued a judgment dismissing those claims.³ Mr Smith was found to have had capacity at the time he executed his will. The Judge also found that Elaine Woodward had failed to make out her allegations of undue influence “by a very significant extent”.

Trust-related proceedings

[13] Putting the 2004-2008 will proceeding to one side, there are now three extant trust-related proceedings hanging over this family.

(1) Wanstead Trust proceeding

[14] In 2011, the plaintiff Mr Woodward issued two proceedings. The first (proceeding 812) concerns the affairs of the Wanstead Trust. The claim is essentially that the Smith family trustees are shifting wealth from the Wanstead Trust to the Smith family, albeit the Smith family are not beneficiaries under the Wanstead Trust. In particular, complaint is made about an interest free advance of $335,520 from the Wanstead Trust to the Smith Trust Partnership in March 2010, and an interest to be advanced of $304,940 at the same time from the Wanstead Trust to the Emerson Street Properties Partnership, and further interest free advances from the Emerson Street Properties Partnership to other partnerships or entities with which the Smiths are associated (but the Woodwards are not). These actions are said to be in breach of trust and of fiduciary duty by engaging in trustee self-dealing and by breaching the requirement that trustees invest prudently and act in good faith. Also, that Jon Smith Sr has acted in breach of the trust requirement that trustees act unanimously. As Mr Bates put it in his submissions for Mr Woodward, the case is about whether the trust deed allows Mr Smith Sr to lend himself the Wanstead Trustees’ share of tax-paid partnership income on interest-free, unsecured terms. Mr Smith replies that all this is permitted by cl 10.4 of the trust deed, on the basis that he is a “de fact settlor”. Mr

_{Bates ripostes that that is simplistic, and wrong.}

³ Woodward v Smith HC Napier CIV-2004-441-706, 8 February 2008.

(2) APLJ Smith Trust proceeding

[15] The second proceeding (proceeding 813) was issued at the same time as the first. It concerns the APLJ Smith Family Trust. It involves similar claims to proceeding 813, but also involves claims of unfair dealing. Transactions of particular concern involve alleged drawings in favour of the Smith trustees and their children totalling $1,211,246 (including income allocation of $8,025). Mr Woodward alleges at the same time he received no income allocations, but received reimbursement of $13,248 in education expenses. In addition challenge was made to loans from the Smith Trust Partnership to the APLJ Smith Family Trust. It will be remembered that one of the challenged transactions in relation to the Wanstead Trust involved an advance from that trust to the Smith Trust Partnership of

$335,520, on an interest-free basis. There is no equivalent to cl 10.4 in this deed. Mr Smith will seek rectification at trial.

(3) Former Beddoe proceeding

[16] The present application is brought in the context of a third proceeding, commenced in 2013 (proceeding 381). Initially it was a Beddoe application⁴ brought by Mrs Woodward, when she was a plaintiff.⁵ But she no longer is. On 2 December

2013 she discontinued her claims in proceeding 381. Allowing for some changes as a result of Mrs Woodward’s departure, and the abandoning of the Beddoe order application, the following relief now is sought:

(a) [Abandoned].

(b) The costs and disbursements of and incidental to this application be paid out of the respective trusts (two-thirds APLJ Smith Family Trust and one-third Wanstead Trust).

(c) Independent expert Graeme Edwards engaged jointly by the parties be paid by the trustees his outstanding accounts, and for his continued

⁴ _{Re Beddoe [1893] 1 Ch 547 (CA).}

⁵ See the discussion of such proceedings at [27] below.

services as an expert witness (the agreement reached by the trustees was for his account to be paid 50 per cent by each trust).

(d) Richard Fowler QC (of whom, more shortly) be paid his account for providing an independent opinion out of the assets of the respective trusts, two-thirds APLJ Smith Family Trust and one-third Wanstead Trust.

(e) An order that the plaintiff will not personally be at risk for any potential adverse costs orders arising out of the proceedings.

(f) The defendant trustees bear the costs of these proceedings personally.

(g) Leave be granted to refer to the affidavit evidence filed in proceedings

CIV-2011-441-812 and CIV 2011-441-813.

[17] Of course, the main focus of the present application was (e) above: the PCO

application.

[18] In support of the present application for a PCO Mr Woodward has obtained and produced an opinion from senior counsel, Mr Richard Fowler QC. The following conclusions may be drawn from that opinion:

(a) Mr Fowler concludes that “it seems indisputable that self-dealing has

occurred” in relation to the Wanstead Trust.

(b) Mr Fowler considers whether the trust deed permits such self-dealing, and in particular cl 10.4 of the deed. He concludes that if that clause permits self-dealing, it is only to a trustee who is either the settlor or a beneficiary. Mr Smith Sr is neither. Mr Fowler considers and dismisses an allegation that Mr Smith Sr might be treated as a “de facto settlor”.

(c) He concludes: “I am firmly of the view that neither cross-examination

nor argument over the substantive hearing will change [Mallon J’s]

preliminary view that there has been self-dealing by Jon Smith Sr as a trustee of the Wanstead trust that is not permitted by cl 10.4 of the deed or any other provision”.

(d) In relation to the APLJ Smith Family Trust, after noting the differing level of drawings, Mr Fowler observes that given a pattern of distribution so extreme in disfavouring Mr Woodward and so lopsided in favouring the Smith family, “a Court may not need a great deal persuasion that the trustees could not have been acting in good faith”.

(e) Mr Fowler considers whether the APLJ Smith Family Trust might be rectified to permit a greater degree of self-dealing. Mr Fowler concludes that “there is very little prospect that rectification will be upheld unless some new facts emerge”.

(f) Given his conclusions as to unauthorised self-dealing and the striking disparity in dealing between the two sides of the family, more extreme than that in Kain v Hutton,⁶ removal of the trustees (I take it of both trusts) is likely to be ordered.

(g) Finally, Mr Fowler considers that s 73 of the Trustee Act 1956 cannot apply.

[19] In conclusion, Mr Fowler says:

I consider Mr Woodward’s claims in respect of each trust proceeding to be

well founded and to have strong prospect of success.

Further information was sent to Mr Fowler in November 2013, principally affidavits from a Ms Kelly, Mr Smith Sr and a Mr Edwards. Ms Kelly and Mr Edwards are accountants. Considering the material, Mr Fowler stated there was nothing in that

_{material which would cause him to amend the views he expressed.}

⁶ Kain v Hutton HC Christchurch M198/00, 3 December 2004.

[20] At the hearing before me, Mr Upton QC (for the defendant) firmly but courteously criticised various aspects of Mr Fowler’s opinion. Now is not the time for close analysis of that submission. I make just two points here. None of the points raised by Mr Upton were in themselves conclusive. Rather, they were calculated to offer an alternative perspective which the trial Judge might (but might not) adopt in the forthcoming trial. Secondly, for present purposes I do not think it is appropriate on a PCO application to go beyond the considered advice of senior counsel (in this case Mr Fowler QC) that Mr Woodward’s claims are well founded and have strong prospects of success. Mr Upton, entirely responsibly, accepted that Mr Woodward has real prospects of success. He simply submits that they are not as strong as Mr Fowler would suggest. As Browne-Wilkinson V-C said in Re Westdock

Realisations Ltd,⁷ this is not the occasion for a mini-trial on complex issues of law or

fact.

Costs in trusts-related litigation

[21] The conventional costs principle is that costs follow the event. The winner receives costs; the loser pays them. As Voltaire once put it, “I was never ruined but twice – once when I gained a law suit, and once when I lost one.” That costs follow the event is a principle of ancient application. It reaches back to Roman law: in expensarum causa victus victori condemnandus est. It has been part of the Court’s Equity jurisdiction from about its outset. Its adoption at common law came later,

initially through the application of statutes.⁸ It now ubiquitous, although in this

country (in contrast to the English model) costs paid to the victor are no more than a reasonable contribution. In common, however, with England, the conventional costs principle is subject to the Court’s overall discretion. In New Zealand, that discretion is expressed in High Court Rule 14.1.

[22] Special costs rules have been devised in the Equity jurisdiction to guide parties to trusts-related litigation. Costs in such cases remain at the discretion of the Court. But subject to that overriding discretion, the cases provide litigants with

_{some guidance as to how that discretion is likely to be exercised, all other things}

⁷ _{Re Westdock Realisations Ltd [1988] BCLC 354 (Ch) at 362.}

⁸ Holdsworth A History of English Law (Methuen, London, 1924) vol 4 at 536; Goodhart “Costs”

(1929) 38 Yale LJ 849 at 854.

being equal. The “classic statement” is that of Kekewich J in Re Buckton⁹ – so described by Hoffman LJ in McDonald v Horn.¹⁰

[23] In Re Buckton, Kekewich J divided trust litigation into three broad categories: (a) The first category involves proceedings brought by trustees to obtain

the Court’s guidance on the construction of the trust deed or some aspect of the trust’s administration. In such cases, the costs of all parties necessarily participating are treated as incurred for the benefit of the estate and ordered to be paid out of the trust fund.

(b) The second category involves a similar application, but by someone other than a trustee (such as a beneficiary). However, it is a case which would have justified application by a trustee. The same approach is taken to costs in the second category as to the first.

(c) The third category, however, is where a beneficiary is making a “hostile claim” against the trustees, or another beneficiary. The claim may still involve a point of construction, or administration. It will often involve a claim to a beneficial interest or entitlement to a part of the trust fund.¹¹ In the third category, involving a hostile claim against trustees or another beneficiary, the usual principles as to costs apply. Ordinarily they will follow the event.

[24] As Kekewich J in Buckton, and Hoffman LJ in McDonald, noted, these categories can often overlap. Kekewich J noted that it can be difficult to

_{discriminate between the second and third categories, but said:}¹²

⁹ _{Re Buckton [1907] 2 Ch 406 (Ch) at 413–417.}

¹⁰ _{McDonald v Horn [1995] 1 All ER 961 (CA) at 970.}

¹¹ As noted in Mowbray et al Lewin on Trusts (18th ed, Sweet & Maxwell, London, 2008) at [21–

79(3)], a case falling clearly within the third category is where the whole of the trust fund has been distributed to a supposed beneficiary in reliance on construction of the deed, and another person claiming to be an entitled beneficiary brings proceedings against the recipient or the trustee in reliance on a rival construction.

¹² Re Buckton [1907] 2 Ch 406 (Ch) at 415.

... when once convinced that I am determining rights between adverse litigants I apply the rule which ought, I think, to be rigidly enforced in adverse litigation, and order the unsuccessful party to pay the costs.

[25] Hoffman LJ in McDonald noted that it can be difficult to discriminate between the first and third categories also. An example is given in Lewin on Trusts:¹³

Suppose the trust fund consists of assets such as land incapable of payment into court under section 63 of the Trustee Act 1925 and a beneficiary who has become absolutely entitled to the trust fund under the original trusts has purportedly assigned his interest to some assignee who has given notice of the purported assignment to the trustees. Following a dispute between the beneficiary and the purported assignee as to whether the assignment was as a matter of law a valid one, but neither of them taking any proceedings to resolve the matter as between themselves, the trustee, being advised that there are real doubts as to the true beneficial ownership of the trust fund, commences proceedings to determine which of the rival claimants is the true beneficial owner from whom he might obtain a good discharge.

As the editors of Lewin note, although the form of such proceedings would come within the first category in Buckton, in substance they fall within the third category. They suggest in such a case the costs of the rival claimant should be governed by the usual rules concerning hostile litigation. Difficult questions of dominant purpose, and apportionment of costs, may arise in such cases.

Prospective costs orders in trusts-related litigation

[26] In order to make the unpredictable certain, PCOs may be made by the Court, in any case, regardless of category. This is different to the Beddoe order procedure, although it has some common features.

[27] The Beddoe order, part of equitable procedure for 120 years now, involves a separate application by a trustee for pre-emptive directions as to whether to bring or defend proceedings.¹⁴ Full disclosure of the strengths and the weakness of a case (normally by the mechanism of a fully informed counsel’s opinion provided to the Court) is required. The order will normally provide that the trustee may recover

_{costs and expenses incurred in accordance with counsel’s advice from the trust itself.}

¹³ _{At [21–80].}

¹⁴ Re Beddoe [1893] 1 Ch 547 (CA) at 557.

But it will not usually deal with costs the trustees are ordered to pay to other parties.¹⁵

[28] PCOs may be sought by beneficiaries drawn into a category 1 or category 2 case. Typically there are two aspects to such applications:

(a) That the beneficiaries’ own costs are paid out of the trust fund on an indemnity basis in any event. Such an order may include directions effectively limiting the extent to which such costs may be compiled.¹⁶ (These might usefully be called “indemnity” or “own costs” orders.)

(b) That the beneficiaries are not liable to pay costs to any other party. (These might usefully be called “immunity” or “other party costs” orders.)

In this case Mr Woodward has sought only the latter form of order.

[29] When then, might a prospective costs application be made in favour of a plaintiff beneficiary in hostile proceedings – substantially, or at least partially, within Buckton category 3? The answer suggested by the authorities is extremely rarely. As Lewin puts it:¹⁷

A prospective costs order will be made if the Judge is satisfied there should be a departure from the usual practice of dealing with costs after rather than before trial in the light of the outcome of the trial, having regard to (i) the strength of the parties’ case; (ii) the likely order as to costs at the trial; (iii) the justice of the application; and (iv) any special circumstances.

Lewin goes on to say that the second element indicated has been “tightened up”.¹⁸

As a general rule, it is only where the Judge hearing the application is satisfied that the Judge at trial could properly exercise his or her discretion only by making an order in accordance with the proposed prospective cost orders that the order will be

_{made. It follows that only where there are very special circumstances will a PCO be}

¹⁵ _{Mowbray et al Lewin on Trusts (18th ed, Sweet & Maxwell, London, 2008) at [21–118].}

¹⁶ _{At [21–83].}

¹⁷ _{At [21–120].}

¹⁸ Mobray et al Lewin on Trusts (18th ed, Sweet & Maxwell, London, 2008) at [21–120]. The

passage reflects the terms of Lightman J’s judgment in Alsop Wilkinson v Neary [1996] 1 WLR

1220 (Ch), discussed at [31] below.

made in a Buckton category 3 case.

[30] The question of where special circumstances might arise can be teased out further. In Re Westdock Realisations Ltd Browne-Wilkinson V-C was dealing with the following situation.¹⁹ Two companies had gone into receivership. After discharging the secured lending, the receiver held approximately £1.1m surplus assets. An argument arose over entitlement to those funds. On the one hand were the liquidators (the companies having since been placed in liquidation). On the other

a government agency which had given guarantees of the companies’ indebtedness. The receiver sought directions as to whom the funds should be paid. The liquidators lacked sufficient funds to contest the case. They sought an order that their costs be paid out of the surplus funds: an indemnity order in the terms described above at [28](a).

[31] Although the case did not concern trusts, Browne-Wilkinson VC followed the same approach that Kekewich J had in Re Buckton. Thus he started with a finding that the case was essentially a hostile claim between parties in dispute as to the ownership of moneys.²⁰ The fact that the liquidators were in a sense acting in a representative capacity for unsecured creditors, and the fact that they lacked funding (without assistance from those creditors) to contest the stance taken by the

government agency, did not justify the making of a PCO. But Browne-Wilkinson VC found a special factor taking the case outside of the general rule. The agency’s claim to a right of subrogation arose in other cases too. The claim should be tested, rather than being determined by default. The receivers could not be expected to present the competing arguments. In the event, Browne-Wilkinson VC made orders granting the liquidators a PCO, but limited to the completion of pleading and discovery. At that point they were to produce a “proper and full opinion from counsel” so the Court could determine that there was indeed a real issue to be

_{determined in which the liquidators had a “substantial chance of success”.}²¹

¹⁹ Re Westdock Realisations Ltd [1988] BCLC 354 (Ch) at 359.

[32] In McDonald v Horn the plaintiffs were members of a company pension scheme established by two Lancashire paper mills.²² In 1992 the plaintiffs issued proceedings against their employers, the fund trustees and others concerning the administration of the scheme. The claim alleged breaches of trust and of fiduciary duty. The plaintiffs (and the other scheme members) were paper mill workers. They could not afford to pay for litigation. At first their part in the proceeding was

supported by their union. But after paying £250,000 on legal costs, and getting no further than discovery, the union pulled out. The plaintiffs then made a prospective costs application. It encompassed both indemnity and immunity orders – in the sense described at [28]. These orders were made by Vinelott J in the Chancery Division. The defendants appealed. But the appeal failed. The Court of Appeal approved the tripartite analysis of Kekewich J in Re Buckton. Hoffmann LJ (with

whom the other members of the Court agreed) said:²³

I think that before granting a pre-emptive application in ordinary trust litigation or proceedings concerning the ownership of a fund held by a trustee or other fiduciary, the Judge must be satisfied that the Judge at the trial could properly exercise his discretion only by ordering the applicant’s costs be paid out of the fund.

[33] The Court of Appeal did not see the case as falling within category 2 of Buckton. It might have done so if questions of construction stood alone. But the overriding character of the proceeding was a hostile one: “this is hostile litigation if ever there was”.²⁴ Although the consequence of that conclusion was that a PCO would not normally be made, the Court of Appeal crafted an exception for actions by members of large pension funds to compel trustees (or recipients of trustee property) to account. That, the Court of Appeal said, was analogous to a derivative action by a minority shareholder. The granting of a PCO to a minority shareholder in a derivative action was orthodox. As Hoffmann LJ put it:²⁵

Pension funds are such a special form of trust and the analogy between them and companies with shareholders is so much stronger than in the case of ordinary trusts that, in my judgment, it would do no violence to established authority if we were to apply to them the Wallersteiner v Moir (No 2) procedure.

²² _{McDonald v Horn [1995] 1 All ER 961 (CA).}

²³ At 971–972.

[34] The distinctive aspect of a derivative proceeding for these purposes is economic: the limited interest of the beneficiary in the whole pension fund, the fact that he or she had given consideration via the making of pension contributions, and the commercial nature of the fund.²⁶

[35] In Alsop Wilkinson v Neary Lightman J followed the decisions in Buckton and McDonald v Horn in what might be described as a standard trust case.²⁷ In that case the application for a PCO was made by trustees of a family trust alleged to have received funds as a result of defalcations by other defendants. The application was for indemnity only, rather than immunity. Lightman J said:²⁸

I would only add that since the decision of the Court of Appeal in McDonald v Horn ... the second requirement [the likely order as to costs at the trial] has been tightened up and (save the presently recognised exceptions namely derivative actions and actions relating to pension funds) it must appear that the Judge at the trial could properly exercise his discretion only by ordering that the applicant costs be paid out of the trust estate.

The PCO sought in that case was refused.

[36] In Finlayson v Young Williams J was considering a prospective costs application in a case where three discretionary beneficiaries claimed that decisions made by trustees unfairly favoured another beneficiary.²⁹ Eight causes of actions were mounted challenging the legality of the trustee’s decisions in the propriety of their actions. An application was made by the plaintiffs for funding from the trust for their litigation. Without it, their counsel said, the proceedings would end. This

was, therefore, an indemnity application only. In his judgment Williams J contrasted public interest litigation (such as Berkett v Cave)³⁰ with private trusts litigation (of which Buckton and McDonald v Horn were examples). Williams J followed the tripartite analysis in Buckton and McDonald v Horn. The litigation he was confronting was plainly hostile litigation “both among beneficiaries and between certain beneficiaries and the trustees”. Williams J accepted that the plaintiff’s case

_{was at least arguable, and that the conduct was reasonable. But because it was}

²⁶ _{At 972–973.}

²⁷ _{Alsop Wilkinson v Neary [1996] 1 WLR 1220 (Ch).}

²⁸ _{At 1226.}

²⁹ Finlayson v Young HC Wellington CIV-2009-485-717, 10 July 2009.

private, hostile litigation, it was not appropriate to pre-empt the trial Judge’s decision

as to costs. The application was, therefore, denied.

[37] The foregoing appear to me to be the leading cases on PCOs in trusts litigation. Mr Bates urged me to follow a decision of the Royal Court of Jersey, Re X (Trust).³¹ This involved an action brought by beneficiaries of a discretionary trust against, principally, the sole trustee of that trust. Trust distributions had funded the applicants’ costs to date. But then the respondent trustee stopped making distributions. Ostensibly on the basis that the litigation was damaging the trust’s assets. The applicants sought directions as to the continued conduct to the proceedings, together with PCOs governing both continued funding of the

proceedings (indemnity) and protection from adverse costs orders (immunity). Those orders were granted.

[38] There are, however, several difficulties with this decision. The first is that the primary focus of the decision is almost wholly on the question of directions and indemnity funding. There is little discussion of the immunity aspect of the orders. Secondly, and more fundamentally, it omits any attempt at a Buckton-based classification in the terms suggested by all the principal authorities cited earlier. Thirdly, the decision is founded on the proposition that the beneficiary applicants were in effect acting on a derivative basis, such that the case fell within the scope of the decision in McDonald v Horn. While some evidential basis for that reasoning is set out in the judgment, it was not strongly contended by Mr Bates that this was the case here. Rather his focus was on persuading me that the case really fell within Buckton category 2. Fourthly, a fundamental feature of the case was that but for the making of at least the indemnity orders, the case could not proceed. There is no separate analysis of whether immunity orders might be made absent indemnity. And finally, the case is special inasmuch as it appeared to involve deliberate tactical behaviour by the defendants to stifle the proceedings. A consideration which might

_{create a special case for the making of a PCO.}

³¹ Re X (Trust) [2012] JRC 171.

Summary

[39] A summary of the legal principles governing PCOs in favour of beneficiaries in trust-related litigation may be attempted. First, such applications may involve either or both indemnity and immunity.³² The former addressing the applicant’s own costs; the latter any liability to meet costs of other parties. Secondly, such orders may routinely be made in cases falling generally into categories 1 and 2 of Buckton.³³ Thirdly, they may also routinely be granted in cases that would fall within category 3 of Buckton, but which involve substantial pension funds, where the plaintiff’s participation may be characterised as truly of a derivative nature. Fourthly, however, in any other case within Buckton category 3, the making of such a PCO will be quite exceptional. In such cases the norm is to allow costs to be resolved by the trial Judge. Only in very exceptional cases, after having regard to the strength of the party’s case, the likely costs order at trial, the justice of the

application and any special circumstances, will a PCO be made. Care is needed in considering each potential aspect of such an order: the indemnity aspect (essentially funding the plaintiff ’s own costs) and the immunity aspect (protecting the applicant for liability for other party’s costs). Some cases may justify one or the other, and, very exceptionally, both. It may well be the case, for instance, that the granting of pre-emptive indemnity orders will be sufficient in itself to meet the justice of the case.

Should a prospective costs order be made in this case?

[40] I will first consider the appropriate categorisation of proceedings 812 and

813, in terms of Buckton. If I conclude that these are Buckton category 3 proceedings, then I will go on to consider the strength of the plaintiff’s case, the likely costs order at trial, the justice of the application and any special circumstances,

_{in accordance with the authorities discussed above.}

³² _{See discussion at [28].}

³³ See discussion at [23].

Buckton categorisation

[41] Mr Bates contended that the substantive proceedings are in essence “construction proceedings”, and therefore belong in category 2 of Buckton. He sought to rely on the decision of Dobson J in Martin v Morgan.³⁴ But that is a very different sort of case, involving concerns as to the governance of an iwi authority.

[42] Mr Smith, and his co-trustees in the case of the APLJ Smith Family Trust, are said to have acted in bad faith and told lies. The relief sought includes their removal as trustees. The relief sought includes also, an inquiry into loss and damage suffered as a result of the trustees alleged breaches of trust, and orders that they pay equitable compensation following that inquiry. As Mr bates said, mutual hostility and antipathy between the two family camps has existed for some time.

[43] On a broad divide between “friendly” (or “consultative”) trusts-related litigation, and hostile trust-related litigation, this case clearly falls within the latter. Of course there are profound questions of construction involved. In particular, cl

10.4 of the Wanstead Trust deed. But that will be so in much trust-related litigation, where the question is whether trustees have acted in breach of trust. Were the case run differently, with construction issues severed for prior determination, it might be possible to look at that part of the case as a Buckton category 2 case. But merged altogether, it is not. The claim is a plainly hostile one. In reaching that conclusion, I follow the approach of Hoffmann LJ in McDonald v Horn. Issues of construction here could not displace the essential character of the litigation.

Strength of the plaintiff ’s case

[44] I repeat the observations made at [20] above. I accept the indicative advice of Mr Fowler QC that Mr Woodward’s claims are well-founded and have strong prospects of success. Despite Mr Upton’s elegant efforts to effect erosion, I am not prepared to go beyond that on an application of this kind. Of course, if Mr Woodward’s case is as strong as Mr Bates maintains it is, endorsed by Mr Fowler QC, then the prospects of him paying costs is, as a matter of pure prediction, very

_low.

³⁴ Martin v Morgan HC Hamilton CIV 2010-419-1628, 10 June 2011.

Likely order as to costs at trial

[45] Precisely what the trial Judge will order by way of costs remains to be seen. If the plaintiff is successful, as he confidently expects to be, he is almost certain to receive costs from the defendants. The defendants have not sought Beddoe orders in this case, so they are exposed personally. But the fact remains that despite my observation that Mr Woodward’s claims appear well founded and to have strong prospects of success, they are not absolutely certain of success. Were they certain of success, this application would not have been made. I cannot, therefore, be satisfied that the trial Judge could only properly exercise his discretion by making costs orders in favour of Mr Woodward.

[46] On the other hand, it is not inevitable that a properly brought, but ultimately unsuccessful, claim by discretionary beneficiaries against trustees will sound in costs against the plaintiff beneficiaries. An example is the decision of Allan J in Morris v Sumpter.³⁵ That was a case in which plaintiff beneficiaries were unsuccessful in obtaining orders for the removal of the defendant trustees. In that case it was plain that the trusts had not been well managed by the trustees, but Allan J declined to remove them. But he also declined to order costs against the plaintiff beneficiaries personally. Rather, their costs were to be paid out of the assets of the trust. He noted

that the case involved a bona fide application by parties entitled to seek the Court’s assistance in regularising the affairs of a trust “which was plainly in need of the Court’s intervention”.³⁶ I am not saying that such a conclusion would necessarily be made by the trial Judge in this case, if the plaintiff is unsuccessful. But it plainly is not beyond the bounds of possibility.

Justice of the application

[47] Early in the course of Mr Bates’ oral submissions to me, I asked him what would happen in this case if no PCO was made. There was no evidence on that from Mr Woodward. Mr Bates’ answer was that the case would still proceed. In other words, the “chilling spectre of bankruptcy” feared by Mr Woodward will not freeze

_{him into a state of complete inaction. The stifling altogether of a proceeding with}

³⁵ _{Morris v Sumpter HC Auckland CIV-2004-404-3060, 20 July 2005.}

³⁶ At [9].

strong prospects of success might, in some circumstances, favour the granting of a PCO. Either indemnity, immunity or perhaps both, depending on the particular facts. But here that consideration does not arise. Its absence, on the other hand, may be a telling factor against the grant of a PCO. In this case, I consider it is. There is no reason to disturb the usual application of costs rules in this Buckton category 3 case.

[48] I note that Mr Upton, at the end of his oral submissions, said that he was authorised by Mr Smith Sr to give an undertaking in the case of proceeding 812 (concerning the Wanstead Trust) that he would not enforce costs against Mr Woodward to the point of bankruptcy. I do not, however, regard that undertaking as of any relevant utility in this case. First, it is not an undertaking not to seek costs at all. Nor is it an undertaking not to enforce them by means other than bankruptcy. And no undertaking is given in relation to proceeding 813 (concerning the APLJ Smith Family Trust). So I put that to one side. As a veiled threat, it is counterproductive, if anything.

Any special circumstances

[49] This is hostile litigation, and it has been conducted robustly. But Mr Bates did not point to any substantial abuse of the litigation process by the defendants in this case. There appear to have been some defaults by the defendants, but not of such an order as to have seriously disadvantaged the plaintiff in the fair conduct of his case. Such misconduct might well justify a Court, in its equitable jurisdiction, taking pre-emptive steps in relation to costs. This is not, for instance, a case like Re X (Trust) in the Royal Court of Jersey, where the defendants had turned off the tap of distributions to the plaintiff beneficiaries. Ostensibly to protect trust assets, but unquestionably also for tactical reasons to discourage continuation of the litigation.

Conclusion

[50] This is a clear Buckton category 3 case. The exceptional circumstances necessary to justify a PCO (immunity) have simply not been made out. It follows that the application for such orders will be dismissed.

Other relief sought

[51] At [16] I set out the range of relief sought in this proceeding. This judgment will be determinative of relief in this limited purpose proceeding.

[52] The plaintiff seeks that the costs and disbursements of and incidental to this application be paid out of the respective trusts (two-thirds APLJ Smith Family Trust and one-third Wanstead Trust). I decline to so order. Costs associated with this present, unsuccessful application will be determined by the trial Judge in due course, when its merits or otherwise can be assessed in the context of costs as a whole.

[53] The plaintiff also seeks orders that the costs of accounting and legal experts retained be paid now. There is dispute as to liability to pay. Again I decline to grant that application. Those matters will be dealt with by the trial Judge also.

[54] The plaintiff seeks an order that the defendant trustees bear the costs of these proceedings personally. I take that to be a reference to proceedings 812 and 813, rather than proceeding 381. In any case, for the same reasons as already given, those are matters for determination by the trial Judge in due course.

[55] Finally, leave was sought to refer to affidavit evidence filed in proceedings

812 and 813. I did not understand that application to be opposed, and it is granted.

Result

[56] Application for prospective costs order dismissed.

[57] Costs in respect of this application are to be dealt with by the trial Judge, in proceedings 812 and 813, in due course.

Stephen Kós J

Solicitors:

Gresson Grayson, Hastings for Plaintiff

Napier Law, Napier for Defendants