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High Court of New Zealand Decisions |
Last Updated: 1 August 2018
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV-2015-404-1620
[2018] NZHC 1799 |
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IN THE MATTER
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of the CLEMENT FAMILY TRUST and the Estate of NOLA VALERIE CLEMENT
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BETWEEN
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KEITH TREVOR CLEMENT as beneficiary of the CLEMENT FAMILY TRUST and
Administrator of the Estate of NOLA VALERIE CLEMENT
Plaintiff
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AND
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COLIN JAMES LUCAS AND SAMUEL MICHAEL WILLIAM BASSETT as
Trustees of the CLEMENT FAMILY TRUST First Defendants
Continued next page
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Hearing:
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On the papers
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Appearances:
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G Stringer for Plaintiff
S Robertson QC for First Defendants R Latton for Second Defendant
N Woods for Third Defendant
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Judgment:
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19 July 2018
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COSTS JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 19 July 2018 at 4.00 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date: ...............................
Solicitors: Davenports Harbour Lawyers, North Harbour Inder Lynch, Papakura
Lee Judd Law, Auckland Rice Craig, Papakura
CLEMENT v LUCAS [2018] NZHC 1799 [19 July 2018]
AND BRIAN CAMPBELL CLEMENT as
beneficiary of the CLEMENT FAMILY TRUST and Administrator of the Estate of NOLA VALERIE CLEMENT
Second Defendant
DERENE WENDY CLEMENT as
beneficiary of the CLEMENT FAMILY TRUST and Administrator of the Estate of NOLA VALERIE CLEMENT
Third Defendant
Introduction
[1] The parties apply for costs following my judgment given on 21 December 2017.1
[2] The proceeding began in July 2015 when Keith Clement made an application to appoint himself and a solicitor as trustees of the Clement Family Trust in place of Walter and Nola Clement, the settlors of the Trust, who had died, and the independent trustee, who had retired. Keith’s application also sought approval of his proposed distribution of the Trust assets. Keith’s application was opposed by his siblings, Brian and Derene, the other beneficiaries of the Trust.
[3] The parties consented to the appointment of two different and independent trustees. No decision was taken on Keith’s proposed distribution, which was opposed by Brian and Derene. The proceeding was not discontinued. By Minute dated 19 May 2016 Associate Judge Doogue reserved costs.
[4] In October 2016, the trustees decided to sell the Trust assets and signalled an intention to distribute the assets equally among the three beneficiaries after they had been unable to secure agreement from the three beneficiaries on any other option for the distribution of Trust assets. Keith and Derene supported the trustees’ proposed distribution.
[5] On 7 December 2016, Brian revived the proceeding by bringing a claim against the trustees challenging their decisions to sell the Trust assets and distribute the proceeds equally among the beneficiaries on the basis the trustees had failed to consider the purposes of the Trust and the intentions of the settlors. The trustees, Keith and Derene opposed Brian’s application. All parties took an active part in the hearing in October 2017.
[6] On 21 December 2017, I issued judgment on Brian’s claim. I found that the trustees had not considered that one of the purposes of the Trust and the wishes of the settlors was to “even the ledger” among the beneficiaries and had failed to take into
1 Clement v Lucas [2017] NZHC 3278.
account pre-Trust distributions of family property. The failure of the trustees to take these matters into account constituted a breach of their duty as trustees. I ordered that the trustees’ decisions be set aside and that the trustees reconsider their decision on the disposal of the Trust assets, having regard to the purposes of the Trust and the intentions of the settlors.
[7] I reserved costs and recorded my preliminary view that costs should follow the event on a 2B basis. I invited the parties to submit memoranda if they could not agree. I also invited comment on the submission from Mr Woods that Derene Clement’s costs should be met from the proceeds of the sale of trust assets if such a sale takes place.
[8] The parties, with the exception of Brian, conferred on costs but no agreement was reached. In March 2018, the trustees, Derene and Keith filed memoranda setting out their respective positions on costs. No communication was received from Brian.
[9] On 13 June 2018, the trustees filed a memorandum asking the Court to make an order as to costs on the basis of the memoranda filed to that date.
[10] On 14 June 2018, apparently after instructing new counsel, Brian filed a memorandum in which he outlined his position on costs. Derene and Keith filed supplementary memoranda.
Positions of the parties
[11] Ms Robertson QC for the trustees says that the trustees’ legal costs were reasonably and properly incurred in the execution of the Trust and the trustees are entitled to be indemnified by the trust. Ms Robertson notes that while the trustees had initially proposed to abide the decision of the Court, all the beneficiaries had said the trustees should take an active role in the proceeding and accepted the trustees’ costs should be met from the Trust fund. Ms Robertson also says that, rather than requesting an unequal distribution of the Trust assets, Brian insisted on a subdivision of trust property throughout the hearing, a position that was finally abandoned only in closing submissions. She says that the proceeding may not have been necessary if Brian had taken that stance earlier.
[12] Mr Latton for Brian says that Brian was successful and ought to be indemnified, that Derene’s legal costs should be paid by the Trust on an indemnity basis, and the trustees’ costs should be indemnified by the Trust, subject to a reduction of up to 50 per cent to take into account the finding that the trustees had breached their duties. Mr Latton says Brian should be indemnified because his proceeding sought clarification of a matter relevant to the administration of the trust, namely that the trustees did not take into account the prior actions of the settlor of the Trust when distributing the Trust assets. However, Mr Latton also says Keith should not be indemnified because he was the unsuccessful litigant in hostile litigation adverse to the interests of the other beneficiaries. Accordingly, he submits Keith should contribute costs on a 2B basis to the costs payable by the Trust to Brian and Derene.
[13] Mr Woods for Derene says that Brian’s costs should be paid by the Trust on a 2B basis, that the trustees’ costs should be paid on an indemnity basis from the Trust fund, subject to any reduction the Court should order in light of the finding the Trustees had breached their duties; that Derene’s costs should be paid on an indemnity basis from the Trust fund; and that Keith should bear his own costs and should also bear the costs reserved by Doogue AJ on the initial phase of the proceeding. Mr Woods also says that Derene’s distribution of no less than one-third of the estate should be calculated prior to the diminishment of the estate by the other parties’ legal costs.
[14] Mr Stringer for Keith agrees that the trustees should be indemnified and does not propose any reduction for the breach of trustee duties. He says there is no basis to award Derene indemnity costs from the Trust as she has not satisfied any of the grounds in r 14.6 of the High Court Rules and that to do so would punish Keith. Moreover, Mr Stringer disputes that Brian’s proceedings were an issue of construction or administration of the trust’s affairs and submits that the litigation was hostile in nature given the challenge to the trustees’ decision to implement a proposed distribution. Mr Stringer contends that if the other parties are entitled to costs and Brian receives a costs award in his favour then Keith will effectively be treated as the unsuccessful litigant in the proceeding and will have to bear a significantly disproportionate share of any costs awards that are made. Citing the Court of Appeal
decision in Water Guard NZ Ltd v Midgen Enterprises Ltd,2 Mr Stringer says that because Brian abandoned the subdivision approach only when the other parties had established it was untenable and only then turned the focus to evening the ledger, costs should lie where they fall in relation to Brian and Keith.
Relevant principles
[15] Costs are at the discretion of the Court. That discretion must be exercised within the scheme of Part 14 of the High Court Rules.3 The governing principle is that costs follow the event.4 However, specific principles are relevant to the award of costs in trust proceedings.5
[16] As discussed by Kós J in Woodward v Smith,6 Trust construction proceedings are commonly divided into three broad categories in accordance with the decision of Kekewich J in In Re Buckton:7
(a) Where the trustees seek the Court’s guidance on the construction of the trust deed or some aspect of trust administration;
(b) Where beneficiaries apply for guidance on the construction of the trust deed or an aspect of trust administration which would have justified an application by the trustees;
(c) Where a beneficiary advances a hostile claim against the trustees or other beneficiaries which, while it may still involve a point of construction or administration, is adverse to other beneficiaries.
[17] The standard position is that because the applications in the first two categories are necessary for the administration of the trust, the costs of all parties are incurred for the benefit of the estate regarded as a whole, and should be paid from the estate.
2 Water Guard NZ Ltd v Midgen Enterprises Ltd [2017] NZCA 36.
3 High Court Rules 2016, r 14.1(1).
4 High Court Rules 2016, r 14.2(1)(a).
5 High Court Rules 2016, r 14.6(4)(c).
6 Woodward v Smith [2014] NZHC 407, [2014] 3 NZLR 525 at [22]- [25].
7 Re Buckton [1907] 2 Ch 406 at 414-415.
[18] Kekewich J said of the third category:8
...when once convinced 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.
[19] Under r 14.6(4)(c) of the High Court Rules, the Court may order a party to pay indemnity costs if costs are payable from a fund, the party claiming costs is a necessary party to the proceeding affecting the fund, and the party claiming costs has acted reasonably in the proceeding. Rule 14.6(4)(c) was considered in Waitara Leaseholders Association Inc v New Plymouth District Court where Harrison J observed it “was apparently drafted to recognise the first two categories of cases identified in Re Buckton”.9
[20] Even if r 14.6(4)(c) is satisfied, the Court retains the discretion regarding whether to order payment on an indemnity basis.10 Every application for indemnity costs depends on its own facts and is a matter of discretion for the presiding judicial officer.11 Factors to be weighed include the practice of awarding costs out of the estate on a solicitor-client basis, the circumstances of the estate, and the effect of an award on beneficiaries.12
[21] Where the litigation is hostile litigation between beneficiaries or a beneficiary and the trustees – the third of the Buckton categories – the ordinary rule that the unsuccessful party pays costs will generally apply.13
A point of construction or hostile litigation?
[22] The first question to decide is whether this proceeding relates to a point of construction or administration of the trust or is hostile litigation; that is, whether it
8 At 415.
13 Gough v Strahl [2014] NZHC 1038.
falls within the second or the third of the Buckton categories. As Kekewich J acknowledged in Buckton, it can be difficult to distinguish between the two.
[23] I consider the question of categorisation needs to be considered in relation to the two distinct phases of the proceeding.
[24] In the first phase, Keith sought the appointment of new trustees – a point necessary to the administration of the trust. While Keith’s proposal for appointment of himself and a solicitor and his proposed distribution of the Trust assets were opposed by the other beneficiaries, there was a resolution between the parties on the appointment on new trustees and it was on that matter that costs were reserved. This was a matter that had to be addressed for the effective administration of the Trust. Accordingly, I consider that this phase does fall within the second category of Buckton and that the costs of the parties for this phase should be met from the Trust fund.
[25] The second phase was distinct both in time and in execution, with Brian effectively the plaintiff and Keith and Derene, as well as the trustees, the defendants. At one level, the proceeding as revived by Brian was about the construction of the Trust deed. While the outcome sought by Brian changed over the course of the hearing, his position throughout was that the Trustees were not applying the Trust deed in accordance with the purposes of the Trust and the wishes of the settlors.
[26] However, the claim was framed as a challenge to the Trustees’ decision to sell the Trust assets, a decision reached after extensive consultations with the beneficiaries and against a background of considerable acrimony among the three beneficiaries. Moreover, as recorded in my judgment, the hearing before me was largely a contest between Brian on the one hand, and the trustees, Keith, and Derene on the other. Each of the beneficiaries asserted positions that would benefit themselves and adversely affect the opposing beneficiaries. This demonstrates the beneficiaries did not have a common interest. The proceeding had all the hallmarks, therefore, of hostile litigation and was conducted as such. For these reasons, it would be artificial to see it other than as falling into the third Buckton category.
[27] For completeness, I record that I do not accept Mr Latton’s submission that the second phase of the proceeding can be both in category two of Buckton in respect of Brian’s costs and in category three in respect of Keith’s costs.
Who was successful?
[28] The trustees, Keith and Derene contend that Brian should not be seen having been wholly successful because he had insisted on a subdivision of the family farm in accordance with the settlors’ Memorandum of Wishes prior to the hearing, argued for a modified subdivision at the outset of the hearing and then changed the focus of his case to “evening the ledger” and achievement of a different solution for the farm at the close of the hearing. While that is accurate, the fact is that from the outset Brian had argued that the trustees were not respecting the wishes of the settlors and the purposes of the Trust. Moreover, the relief sought in Brian’s statement of claim was:
(a) That the trustees’ decisions to sell the Trust assets and distribute the proceeds be set aside; and
(b) That the trustees be directed to implement the Memorandum of Wishes or reconsider their decision taking into account only relevant considerations and disregarding irrelevant considerations.
[29] Brian succeeded under both forms of relief, given my orders directing that the trustees’ decision to sell the Trust assets be set aside and that the trustees reconsider their decision having regard to the purposes of the Trust and the intentions of the settlors.
[30] Mr Woods submits that Derene was also a successful party because she would be the beneficiary of any distribution of Trust assets that took account of the Trust’s purpose of evening the ledger among the beneficiaries. That might be so. But that would be the consequence of the trustees’ decisions following the litigation and is not a direct result of this case which set aside the trustees’ decision to sell the Trust assets. While in formal terms Derene did not oppose Brian’s statement of claim, at the hearing her stance was very much in support of upholding the trustees’ decisions; the same
stance taken by Keith. Accordingly, I do not consider Derene can be seen as a successful party for the purposes of costs or as being in a different position from Keith.
[31] It follows that Brian was the successful party and Keith and Derene, as well as the trustees, were the unsuccessful parties.
Who pays Brian’s costs and on what basis?
[32] As I have held the case falls into the third Buckton category, it follows that Brian’s costs should be met by the three unsuccessful parties. I consider below the wider question of the trustees’ liability for costs but for the purposes of calculating the contributions of Keith and Derene to Brian’s costs, they are each personally responsible for one third of those costs.
[33] Given this is adverse litigation and Brian’s costs are payable by Keith and Derene personally, r 14.6(4)(c) does not apply and Brian’s costs should be calculated under normal costs principles in r 14.2 of the High Court Rules. In any event, I am satisfied that there is no basis to award indemnity costs. While I did not see it necessary to my decision of 21 December 2017 to make findings about the behaviour of Brian and Keith leading up to the litigation, I have no doubt that Brian’s behaviour, as well as Keith’s, contributed significantly to the delays and acrimony over resolving the distribution the Trust assets. Moreover, as the other parties have pointed out, Brian’s insistence, albeit outside the formal terms of the prayer for relief, on achieving a subdivision that suited his prescriptions and his evident reluctance to compromise, added significantly to the complexity, length and cost of the proceeding.
[34] In accordance with the indication given in my judgment of 21 December 2017, I award costs in favour of Brian on a 2B Basis.
Trustees’ costs
[35] Keith agrees the trustees’ costs should be paid from the Trust fund. The memoranda of Mr Stringer and Mr Woods also refer to the existence of a Beddoe order14 under which the three beneficiaries agreed to meet the trustees’ costs.
14 Re Beddoe [1893] 1 CH 547 (CA).
Ms Robertson’s memorandum of 19 March 2018 does not assert the existence of a Beddoe order as such but refers to correspondence from the three beneficiaries in which they agreed the trustees should take an active part in the proceeding and accepted the trustees’ costs would be met by the Trust fund. However, as Ms Robertson notes, Brian’s agreement was subject to any decision by the Court.
[36] There is broad consensus by the other parties nonetheless that the trustees’ costs should be met from the Trust fund, subject to any reduction to take account of my finding that the trustees breached their duties by failing to take into account the purposes of the Trust and the settlors’ intentions and thus failing to take pre-Trust distributions into account. Mr Woods suggests and Mr Latton submits that a reduction should be made because the agreement to pay the trustees’ costs was made before the pre-Trust correspondence on the Davenports files had been discovered. Ms Robertson points out, however, that the correspondence had been available to all parties for inspection before the current trustees were appointed. In these circumstances, the later recognition of the significance of this correspondence should not vitiate or lessen the agreement by the beneficiaries to meeting the trustees’ costs from the Trust fund.
[37] Apart from any agreement by the beneficiaries, an unsuccessful trustee may be entitled to claim indemnity from the trust fund if the trustee is found to have acted reasonably in the role they took in the proceedings.15 Weighed against this is the general principle that a trustee is not entitled to expenses arising out of his or her own misconduct or breach of trust. In Re Lomas, Salmon J stated:16
The general rule is that the costs of litigation for the benefit of a trust are paid out of the trust fund. The trustees will be denied their costs out of the fund if they have acted in breach of trust or unreasonably. Where the trustees misconduct has created the necessity for the action and has given rise to the expense then the cost of remedying that situation should not fall upon the beneficiaries of the trust...
(emphasis added)
[38] Ms Robertson submits that it was reasonable for the trustees to participate actively in the proceeding, that their costs were reasonably and properly incurred, and
15 Trustees Act 1956, s 38(2); Re O’Donoghue [1998] 1 NZLR 116 (HC) at 121.
16 Lomas v Lomas HC Auckland CIV 2003-404-2591, 28 November 2003 at [26].
that there is no suggestion the trustees acted other than honestly, diligently and in good faith. I accept those submissions. I also accept that because of the way the proceeding unfolded, it was difficult for the trustees to maintain a position of neutrality as between the three beneficiaries. However, a trustee’s duty of neutrality between the beneficiaries does not require a trustee to take a passive position when their conduct is called into question by one of the beneficiaries and in those circumstances a trustee may mount an active defence of their conduct.17
[39] I also accept the trustees were in a difficult position because of the acrimony among the beneficiaries who were unable to communicate with each other and maintained irreconcilable positions. Moreover, as Ms Bruton – Brian’s then counsel
– observed in the course of argument at the hearing, the breach of trustees’ duties was a breach in the technical sense of the trustees’ duty to take into account the purposes of the Trust. At [103] of the judgment I recorded that Ms Bruton did not pursue in argument the contentions that the trustees’ decisions were perverse, capricious or unreasonable and noted that the evidence would not have supported such conclusions. For these reasons, I do not consider the breach of trustees’ duties should be held against the trustees in awarding costs.
[40] Accordingly, I consider the trustees costs should be met from the Trust fund. I also consider that the trustees’ one-third share of Brian’s 2B costs should be met from the Trust fund as that liability is a natural consequence of the outcome of the proceeding.
Other matters
[41] I do not accept Mr Woods’ submission that the distribution of Trust assets should occur before any indemnification for costs from the Trust fund because of the possible impact on Derene’s share of the assets. There is no principled basis for this approach. The trustees’ costs are a liability of the Trust as a whole and have to be paid before any disbursement of the remaining assets of that trust. The fact that two-thirds of Brian’s costs are to be met personally rather than from the Trust’s assets, however, may ameliorate Derene’s concerns to some extent.
17 Fielden v Christie-Miller [2015] EWHC 2940 (Ch), [2015] WTLR 1689 at [55].
[42] I am unable to respond to the request in Mr Stringer’s memorandum of 27 June 2018 for a direction that the proposed adjustment to the sum to be paid to Keith should take account of increases in the value of Trust properties, as the trustees have not sought any such direction. I note, however, that this point seems to have been addressed in paragraph 7b of the trustees’ letter of 14 May 2018 attached to Mr Stringer’s memorandum.
[43] The trustees have sought a direction from the Court that Brian provide the trustees with certificated copies of his passport or birth certificate and a recent bank statement as proof of address, so that the Trust can obtain financing which complies with anti-money laundering legislative requirements. If Brian does not comply with this request, the trustees have leave to apply for direction with the identified legal basis for such an order. The trustees may withhold payment of their share of Brian’s costs pending resolution of this matter.
Conclusion and result
[44] Accordingly, I make the following costs order:
(a) The costs of the parties for the first phase of the proceeding leading to the appointment of the new trustees are to be met from the Clement Family Trust fund;
(b) With regard to the second phase of the proceeding determined by my judgment of 21 December 2017:
(i) Brian Clement is entitled to costs on a 2B basis against Keith Clement, Derene Clement and the trustees of the Clement Family Trust;
(ii) Keith Clement and Derene Clement are each personally responsible for one-third of Brian Clement’s costs;
(iii) The trustees’ one-third share of Brian Clement’s costs is to be met from the Clement Family Trust fund, subject to paragraph [44];
(iv) The trustees’ legal costs are to be paid on an indemnity basis from the Clement Family Trust fund;
(v) Keith Clement and Derene Clement are to bear their own costs.
G J van Bohemen J
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