Unkovich v Clapham [2020] NZHC 952

“Love all”

Lara is a top student. In fact, she’s in the top 5% of students in her year academically at Mosman High School, Sydney where she gained admission through a selective programme targeting bright students. She received the principal’s award in July 2018. Lara is also a 5-foot-5-inch right-hander from Sydney, Australia. That’s important because, at just 15 years old, her tennis game was probably better than yours. Statistics don’t lie – Lara is ranked 192nd out of all ranked female tennis players in Australia in 2017. Her career high ranking was 152nd, and she won the NSW High School Sports Blues Award four times - the highest sporting honour in New South Wales.

Lara has a bright future ahead of her. Lara’s parents were very keen to support that future. They connected Lara with Study and Play USA, Australia’s leading expert in US college sport scholarships. Lara was aiming for a scholarship to a US college worth about half a million Australian dollars.

The path to a professional tennis career and a US college scholarship is an expensive one. There are inevitable costs – including the specialists at Study and Play USA, tennis coaches and academic support. To alleviate this costs burden, Lara requested that the $65,000 inheritance left her by her grandfather be paid out, in full, prior to reaching 21 years of age. By 21, Lara intended to have a US college degree under her belt and a tennis career to boot. She couldn’t wait.

When her grandfather passed, he left his estate to be split equally between:

  1. Lara;
  2. Her mother, Adrienne;
  3. Her aunt, Margaret;
  4. Her uncle, Peter;
  5. Her cousin, Daniele; and
  6. Her cousin, Morgan.

Lara was the only one of the six who was not yet of age. Therefore, Lara’s share was held in trust and managed by Margaret. Margaret was empowered by the will to make a distribution from the inheritance to Lara for her maintenance, education, advancement or benefit. Margaret tried to exercise that discretionary power as a trustee in the proper way. Unfortunately, those efforts were slightly misguided, but the resultant cost to Margaret was unexpectedly high for a trustee acting properly.

In tennis, a foot fault occurs when a server’s foot touches any part of the baseline, it is therefore an incredibly easy fault to make. Even in professional tennis, 95% of foot faults go uncalled, and when they are called it can be controversial. Margaret’s breach of duty was the foot fault of trustee missteps. She barely touched the line, but once it was crossed her decisions were at risk of review and sanction. Unfortunately for Margaret, her foot fault was one of the 5% called, in no small measure, it seems, because of what the Judge described as Lara’s parents' (her father was her litigation guardian) sense of entitlement to her trust fund and their consequent ill-feeling towards Margaret, apparent to the Judge from the correspondence between them. Whatever the background to it, Margaret’s breach of duty offers some pertinent reminders for trustees, especially in light of the incoming Trusts Act 2019 and the duties it imposes.

By comparison, if the High Court’s decision on Margaret’s application to be indemnified for litigation costs should stand, then a trustee’s personal risk for breach could be likened to the foot fault that cost Serena Williams the 2009 US Open semi-final. With due respect to the learned Justice, his decision on indemnity is plainly wrong.

Edited match highlights

Lara and her parents requested that Lara’s entire inheritance be paid to her parents to support her bid for the US scholarship as a tennis player. Suffice it to say that there was a lot of back and forth. Between October 2016 and March 2019, countless letters and emails and discussions occurred. However, following our tennis buzz, here’s the highlight reel:

  • Margaret relied upon incorrect advice that the inheritance was contingent on Lara attaining 21 years;
  • Adrienne explained that the money was for Lara to pursue the scholarship, but refused to supply a detailed breakdown of Lara’s costs;
  • Margaret accused Adrienne of being financially imprudent on the basis of anecdotal evidence from their brother, but she could not evidence this;
  • Lara’s father was appointed as her litigation guardian. He brought a claim on the following grounds:
    • The will was invalid for want of testamentary capacity;
    • Margaret’s refusal to advance was unreasonable; and
    • Margaret should be removed as trustee.
  • Margaret’s husband died from a serious illness. She offered to fully distribute the trust fund to Lara’s parents if she was indemnified for her legal costs;
  • Lara, through her parents, repeatedly refused to indemnify Margaret for her costs and demanded that she pay their costs on a 2B basis; and
  • Margaret offered to pay the trust fund out to Lara’s parents, including $5,000 of her own money, resulting in $63,000 in clear funds to Lara. She offered to wear her own costs and refused to pay Lara’s costs. This was also rejected.

A line ball

That brings us to the final set: Justice Whata’s judgment in Unkovich v Clapham. He was tasked to answer three questions:

  1. Did Margaret breach her duty to the Trust?
  2. Is Margaret entitled to be indemnified from Lara’s Trust fund?
  3. What is Margaret’s liability for the litigation costs, if any?

The Judge observed that a trustee’s discretionary powers are not entirely unfettered. A trustee’s decision might be set aside for improper motive, if the trustee considered a wrong question, misinterpreted the deed, failed to consider relevant considerations, or if the decision was perverse or capricious.

Justice Whata adopted the approach taken in Pitt v Holt [2013] 2 AC (UKSC). That case held there were three ways in a which a trustee might err:

  1. Acting outside their powers;
  2. Failing to give proper consideration to relevant matters; and
  3. Exercising a power for an improper purpose.

For Margaret, the second might apply. To establish this a two-fold test was applied – firstly, was there a material error, and secondly did the error amount to a breach of duty? The Judge decided that Margaret had erred in treating Lara’s interest as being contingent rather than vested – however this was on the basis of incorrect legal advice received. According to Pitt, Margaret has no duty to act only on correct advice. She had no way of second guessing the legal advice she sought.

A further error concerned the purpose for which Lara and her parents sought distribution of her fund. Justice Whata held Margaret had mis-characterised the objective for which funds were sought as the pursuit of a career in tennis. He held that tennis was merely a means to the end of obtaining a university scholarship. The core purpose for which the distribution was sought was educational. The Judge also noted that Margaret’s concern that Lara’s parents were financially imprudent was unsubstantiated - based upon Peter’s suggestion to her and nothing more.

Justice Whata concluded that a trustee who had not made these errors ‘would or might have been disposed to advance the entirety of the fund’. He did not consider it a clear case of breach, but it was a breach nonetheless as Margaret had not used all proper care and diligence in obtaining all relevant information. While Margaret was not required to be right – she was required to make a proper inquiry and to make a ‘fair consideration of subject’.

Trustees should take Justice Whata’s observations seriously. A trustee cannot rely on anecdotal, unsubstantiated evidence when considering a discretion. Further, trustees must take care to characterise the relevant issue correctly – Margaret initially mistook this request as a fanciful pursuit of a highly elusive professional tennis career. That was an incorrect approach to whether the trust fund should be used to support Lara’s educational goals and opportunities, even if they could be collateral with developing tennis prowess.

A contentious call

Justice Whata then turned to the question of indemnity, because Margaret had incurred legal expenses of $73,000 or so, largely related to the proceedings and, not surprisingly, wanted those to be paid from the trust fund.

Because a breach of trust had occurred, Justice Whata decided that full indemnity was inappropriate. It is unclear what authority he relied upon to reach this conclusion.

The common law test for indemnity is that the trustee must have acted ‘properly’. There are two aspects to that: acting both reasonably and honestly, an approach affirmed in the decision of the Court of Appeal in Sunde v Sunde [2019] NZCA 552. Justice Whata refers to Sunde and mirrors the language for the test in Spencer v Spencer [2013] NZCA 449, which was applied in Sunde. The relevant excerpt from Spencer is as follows:

[I]n New Zealand, the assessment of a trustee’s honesty comprises both subjective and objective elements. A critical first step is to establish what the trustee actually knew about the terms of the trust relevant to the breach alleged and whether the trustee knew that the impugned conduct amounted to a breach of trust. The trustee’s knowledge might include constructive knowledge arising from wilful blindness in the sense described in Westpac although we do not need to determine that in this case. The second step requires an assessment of whether, in the light of what the trustee knew, he or she acted in the way an honest person would in the circumstances. This is to be assessed on an objective basis. A trustee who believes his or her actions or omissions were in the best interests of the beneficiaries will not necessarily be entitled to protection.

So, to miss out on indemnity, Margaret had to have known that she was in breach of trust, and then not to have acted in the manner that an honest person would in the circumstances.

With these important factors in mind, Justice Whata noted that this was not a case of ‘bright-line error’. In other words, the breach was not made knowingly, and it was not obvious. He also stated that ‘there is nothing in the evidence to suggest that Margaret was acting dishonestly’, and also noted that Margaret was prudent in seeking legal advice on which she acted. At this point, I expected that the Judge would render his ruling in Margaret’s favour.

However, he turned instead to consider the ‘just way’ that the indemnity should apply. He gave Margaret only part of what she sought. His Honour appears to rely upon the language of s 38(2) of the Trustee Act 1956, which grants an indemnity when a trust instrument lacks an express clause:

A trustee may reimburse himself or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers; but, except as provided in this Act or any other Act or as agreed by the persons beneficially interested under the trust, no trustee shall be allowed the costs of any professional services performed by him in the execution of the trusts or powers unless the contrary is expressly declared by the instrument creating the trust: provided that the court may on the application of the trustee allow such costs as in the circumstances seem just.

Margaret sought to be reimbursed for costs incurred in her execution of the trust, which relates to the first part of s 38. A plain reading of the implied indemnity in s 38 makes it clear that the test of what is just only comes into play when a Trustee’s charge for professional services rendered to the Trust is in question. Notably, Sunde relied upon s 38 as the relevant trust had no express indemnity clause – the Court of Appeal did not consider the ‘just’ result.

Justice Whata’s divination of what is just comes out of the blue. To award costs on a ‘just’ basis is a misapplication both of the common law test as set forth by the Court of appeal – which Justice Whata notes clearly does not apply to Margaret – and of the statutory indemnity in s 38 of the Trustees Act 1956. The Court may allow costs for professional services rendered to a trust by a trustee when to do so would be just. Parliament did not add the same qualification to the indemnity for a trustee’s outlaid costs. To read the test of what is just into the first part of s 38, with no common law basis, is an error of law.

In fact, the two-part test set out in Spencer and affirmed by Sunde should satisfy the Court that an indemnity is the just decision. That is why that test has been relied upon by the Court of Appeal without reference to the test of what is just.

In tennis, a player who calls a ball out shall reverse the call if the player becomes uncertain or realizes that the ball was good. In law, that reversal is in the hands of the same Court that decided Spencer and Sunde. With that in mind, I will be very interested to see if Margaret has the energy and the resources to play one more set.

As for Lara? She recently accepted a placement at Louisiana Tech, stating that she was drawn to the strength of their degree selection, its vibrant and welcoming student atmosphere and the tenacity and ambition of LA Tech's tennis program. Consistent with the argument that had succeeded before the Judge, she then added that Louisiana Tech presented an exciting opportunity for her to pursue tennis at a collegiate level while completing her chosen degree.

© G D Clews, 2020


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