Category ArchiveEquity and Trusts



Equity and Trusts &Succession rob on 15 Jul 2011

Gift in Will to “issue” limited to grandchildren

In Simpson v Simpson & Ors [2011] QSC 196 the great-grandson of the deceased unsuccessfully argued the expression “leaving issue” in his great-grandmother’s will means not just children but all other lineal descendants. The deceased’s son had died before her, and that share could not pass to her grandson because he had killed his father. The question then was should that share pass further down to the great-grandchild, or revert to be shared between the deceased’s living children.

The decision is significant because the wording in the will, or similar wording, is commonly used in Queensland.

“(c)  to stand possessed of the rest and residue of my estate UPON TRUST to divide the same equally between such of my children as shall survive me and attain the age of eighteen years PROVIDED ALWAYS that if any such child should die without having attained a vested interest hereunder leaving issue who shall survive to attain the age of eighteen (18) years such issue shall take and if more than one equally between them the share in my estate which his her or their parent would have taken had such parent survived to attain a vested interest hereunder.”

The executor’s position was that the deceased child’s share should revert to his surviving siblings, not to the great-grandchild, because, firstly, a proper reading of the above clause meant the gift over was limited to grandchildren, and secondly, the substitution gift was limited to death and not applicable to a disqualification for reason of criminal homicide. The executor succeeded on their first argument, leaving the second one moot.

In support of the broader, lineal descendant, meaning of the term “issue”, which is often used in Wills, the great-grandchild’s submissions referred to other decisions, the plain dictionary meaning, the meaning of the term as used in the Queensland Succession Act 1981, and that, in the context of the clause in the deceased’s will, the narrower interpretation could have been achieved by reusing the terms “child” and “children” and therefore the introduction of the term “issue” indicated a broader meaning.

Justice Peter Lyons took the approach that the determination must be based on the will-maker’s intention from the language of the will as a whole, rather than a rule of construction, noting the High Court in Matthews v Williams (1941) 65 CLR 639 at 650-651 had earlier accepted the prima facie legal meaning of “issue” is descendants or progeny, and not limited to children. He then analysed the words of the clause.

“The only people for whom provision is made for the attaining of a vested interest under the will, conditional on their survival, other than the issue to take in substitution, are the children of the testatrix; and these are referred to as the “parent” of issue who might take in those circumstances.  It is therefore clear that the language of the proviso contains a disposition only to issue of children of the deceased, who are themselves children of the deceased’s children, and accordingly, grandchildren of the testatrix. There is no other language in the will to lead to a different conclusion.”

On the other hand, the clause might be construed such that the gift to a child (or if predeceased, their children) passes wholly intact so that on the deaths of both child and grandchildren, the gift to the grandchild passes to their child, taking the share their parent, the grandchild, might have taken. If the decision is not surprising, it certainly is another reason to avoid legal forms and jargon and insist that all terminology and expressions used in a will are plain and ordinary. In hindsight, the lawyer for the will-maker might have drafted the gift-over proviso by continuing to use the terms “child” and “children” (rather than “issue”) but with offering the following endings to the proviso as alternatives: “and so on for remoter lineal descendants” or “but without substitution for any remoter lineal descendants”.

Equity and Trusts &Succession rob on 07 Jul 2011

family trust protects assets from spouse

re: FAMILY COURT OF AUSTRALIA decision in Keach & Keach and Ors [2011] FamCA 192 (9 March 2011)

Justice Strickland has excluded from the divisible pool of assets the matrimonial home which was owned by a discretionary family trust established and controlled by the father of a 42 year old man in a contest with his 33 year old wife. The wife alleged the trust was a ‘piece of machinery’ designed to keep the property ‘from the reach of the Family Court’ and the fact that her husband’s siblings were secondary beneficiaries of the trust was ‘camouflage’. In his evidence, the husband’s father admitted that one of his motivating factors in establishing the trust was to keep the property within those trusts as far away from the Family Court as possible. The trust purchased a residential property near the husband’s place of work for $920,000. It was rented out by the trust for nearly 4 years before the husband and wife took up residence there, at a lower rent, and carried out renovations. The husband conducted himself as though he was the owner of their home and the wife harboured that view.

Section 106B(1) of the Family Law Act 1975 provides that:

In proceedings under this Act, the court may set aside or restrain the making of an instrument or disposition by or on behalf of, or by direction or in the interest of, a party, which is made or proposed to be made to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat any such order.

Strickland J’s judgment peruses various judicial descriptions of a sham, most notably that:

“all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating” Snook v London and West Riding Investments Ltd [1967] All ER 518 Diplock LJ at 528

Strickland J noted that there is some uncertainty about whether a sham required, as an element, the deliberate deception of third parties, such as fraud. His analysis continued on the basis that the particular sham alleged was not as pejorative as fraud, “but still apt to deny the critical step in the appellant’s case”. The test for the Court being to compare the evidence of intention in the document against evidence of real intention. For this, Strickland cited Justice Kirby in Raftland Pty Ltd as Trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21; (2008) 246 ALR 406

“The key to a finding of sham is the demonstration, by evidence or available inference, of a disparity between the transaction evidenced in the documentation (and related conduct of the parties) and the reality disclosed elsewhere in the evidence.”

and

“Neither the complexity nor the artificiality of a transaction, nor any circularity evident in it, nor the apparent lack of commercial or economic sense will of themselves, alone or in combination, necessarily warrant a conclusion that a transaction constitutes a sham.”

Strickland J observed that:

“Except in the case of shams, and companies that are mere puppets of a party to the marriage, the Family Court must take the property of a party to the marriage as it finds it. The Family Court cannot ignore the interests of third parties in the property, nor the existence of conditions or covenants that limit the rights of the party who owns it.”

If a requirement for a sham was to find a ‘common intention’ of the parties to the transaction to mislead others, such an finding would be practically ruled out in the typical situation of a family trust because the essential parties are a settlor (often accountant, or a solicitor as in the present case) and the trustee. Strickland J reviewed authorities finding it was possible for a unilateral sham to emerge over time by the transaction masking a departure from the original intent and without involving any party to the marriage. He also noted the narrow operation of the doctrine in New Zealand where the NZ Court of Appeal in Official Assignee in Bankruptcy in the Property of Reynolds v Wilson and Harvey and Anor[2008] NZCA 122 gave safe harbour from sham for any trust valid at its inception, except, possibly, only in relation to a portion of property subsequently transferred into the trust.

From this Strickland J deduced that regardless of the husband’s conduct, for there to be a sham, there must be ‘evidence of an intention on the part of the husband’s father’ to confuse the legal terms of the trust with the ‘actual entitlements of the husband’. Essentially, Strickland found that the wife did not have enough evidence to establish an intention on the part of the husband’s father that would amount to a sham.

This case highlights the enduring strength of family trusts in estate planning to achieve asset protection for a client’s bloodline. The message for family lawyers is that to set aside a properly established and administered family trust, which is not legally controlled by a party to the dispute, requires evidence close to fraud. Just how close, Strickland J did not say.

845 words

Equity and Trusts rob on 02 Aug 2010

DELAFORCE v SIMPSON-COOK [2010] NSWCA 84

A husband and wife divorced and negotiated Family Court consent orders for property division. In the orders, the husband kept a house, informally promising to leave it to his ex-wife in his will. This was noted in the consent orders. The husband did not fulfil his promise.  A solicitor’s letter at the time made it clear so the wife understood she might never receive the house by his will. In cross-examination, she acknowledged he was free to change his mind. At trial the husband’s executor was ordered to transfer the property to the ex-wife. The executor’s appeal on that failed. The NSW Supreme Court of Appeal found that the wife had both reasonably relied on the promise and changed her position by not seeking a binding order from the Family Court to enforce the understanding. The wife’s expectation was reasonable and the promise unambiguous.

HANDLEY AJA
31 Although a will is revocable until death or loss of testamentary capacity, equity enforces a contract not to revoke a will, or to leave property by will, not by restraining or nullifying an inconsistent will, but by fastening a trust on the estate to give effect to the contract: Birmingham v Renfrew [1937] HCA 52, 57 CLR 661, 683. A contract to leave an identified property by will is specifically enforceable against volunteers who claim under a disposition by the promisor in his lifetime: Synge v Synge [1894] 1 QB 466 CA, 470-1, but is subject to the claims of creditors if the estate is insolvent: Schaefer v Schuhmann [1972] AC 572, 586, but compare (1972) 88 LQR at 321-2.

32 A contract not to revoke a will is subject to contingencies. Revocation by operation of law on remarriage is not a breach: Re Marsland [1939] Ch 820 CA. The promisee must survive the promisor to avoid lapse: Re Brookman’s Trust (1869) LR 5 Ch Ap 182; and a contract for a share of residue is subject to the claims of creditors: Jervis v Wolferstan (1874) LR 18 Eq 18, 24; Schaefer v Schuhmann (above) at 586, but compare (1972) 88 LQR AT 321-2.

33 A contract to leave property by will is subject to lapse if the promisee pre-deceases the promisor, but will not be affected by his marriage. The contract will be defeated by a disposition in the promisor’s lifetime to a purchaser for value without notice: Schaefer v Schuhmann (above) at 586.

34 A contract not to revoke a will, or to leave specific property by will could be defeated, if there were eligible dependants, by an order for provision under the Family Provision Act 1982: Barns v Barns [2003] HCA 9, 214 CLR 169, or the designation of the property as notional estate under ss 22(4)(f) and 23(b)(iii) of that Act (since 2008 under corresponding provisions in the Succession Act 2006). If the promisor marries, and his marriage ends in divorce, the Family Court could order a transfer of the subject property to the wife and defeat any contract by the husband to leave it to someone else in his will.

Equity and Trusts rob on 09 Jul 2008

ELOVALIS -v- ELOVALIS [2008] WASCA 141 – If the power goes to your head you can be expediently replaced

If you control a discretionary trust with absolute discretion to favour yourself or someone else to the exclusion of other beneficiaries, you should still always act with propriety, tact and sensitivity in trust matters. Inflammatory or grandiose statements provide the fuel for disappointed beneficiaries to have a new trustee appointed by Court order.  Take for example this judgment delivered on 4 July 2008 in Perth.

The facts in the Elovalis case were that, in 1980, upon the breakdown of a marriage, the husband (Michael) arranged for a family discretionary trust to be established to hold significant property, including the family home, for the primary benefit of his 2 daughters (Helen and Vicki), with a corporate trustee. Michael’s brother (Chris) was invested with the power to change the trustee. Michael became ill and Chris retired early to move in with and care for Michael for 20 years until Michael died in 2002. Chris stayed on in the home. There were no significant distributions in favour of Helen or Vicki. After some cross words, the daughters asked the Supreme Court of Western Australia to appoint a new trustee to wrest control of the trust from Chris and his brother Steve, who was by then acting as trustee.

Given that Uncle Chris was also a beneficiary of the trust (being part of the wider family group of beneficiaries by virtue of being a close relation to the primary beneficiaries) and that no breach of trust or misconduct by Uncle Steve had been shown, the application was dismissed. Master Sanderson commented that the terms of the trust deed gave the trustee such wide and unfettered powers that Steve could ‘effectively do what he likes’ with the trust property or ‘do virtually anything with it’.

The analysis on appeal nicely sets out the two basics for a Court appointed replacement trustee, which is remedial not punitive. One is the Supreme Court’s inherent jurisdiction to protect the welfare of beneficiaries of a trust. Miller v Cameron 1936 54 CLR 572 is cited as the leading decision. See Latham CJ at 575:

It has long been settled that, in determining whether or not it is proper to remove a trustee, the Court will regard the welfare of the beneficiaries as the dominant consideration (Letterstedt v Broers). Perhaps the principal element in the welfare of the beneficiaries is to be found in the safety of the trust estate. Accordingly, even though he has been guilty of no misconduct, if a trustee is in a position so impecunious that he would be subject to a particularly strong temptation to misapply the trust funds, the Court may properly remove him from his office as trustee.

The other is pursuant to statute for reasons of expediency. The equivalent provision in Queensland is section 80, but the applicable provision to the decision was section 77 of the Trustees Act 1962 (WA):

The court may, whenever it is expedient to appoint a new trustee or new trustees and it is inexpedient, difficult or impracticable so to do without the assistance of the court, make an order for the appointment of a new trustee or new trustees either in substitution for, or in addition to, any existing trustee or trustees, or although there is no existing trustee.

In this context ‘expedient’ is taken to mean ‘conducive to advantage in general, or to a definite purpose; fit, proper, or suitable to the circumstances of the case’. Porteous v Rinehart 1998 19 WAR 495 and Re Estate of Roberts (1983) 20 NTR 13 at 17.

In his judgment, Martin CJ thrashes out that, even if the trust deed allows the trustee to act in spite of a conflict of interest and with the broadest, most unrestrained, absolutist, unfettered discretions, while it is nonsense to speak of impartiality when favouring or choosing between beneficiaries, the trustee must nevertheless not take into account irrelevant, irrational or improper factors or make a decision so unreasonable that no trustee, properly directed, could have made.

The Court concluded the allegations made by the daughters could, if substantiated, establish the trustee “had a closed mind with respect to the exercise of the discretionary powers conferred upon him, or misunderstood the nature of those powers and the obligations to which he was personally subject. If those propositions were made out, they could arguably sustain the removal of the trustee on the grounds of expedience.”

Contracts &Equity and Trusts rob on 05 Jun 2008

Phillips & Anor v. Scotdale P/L [2008] QCA 127 – OK to early release of deposit

The Supreme Court of Queensland has affirmed the freedom to contract in a decision favouring a vendor terminating a contract and keeping the deposit when the buyer failed to meet a deadline. The buyer argued there was an instalment contract (within the meaning of section 71 of the Property Law Act 1974 requiring the vendor to give formal notice before terminating because the contract contained a special condition allowing early release of deposit from the selling agent to the seller. The judgment analyses the meanings of deposit and instalment contract. Their definitions in the Property Law Act are as follows.

deposit means a sum–

(a) not exceeding 10% of the purchase price payable under an instalment contract; and

(b) paid or payable in 1 or more amounts; and

(c) liable to be forfeited and retained by the vendor in the event of a breach of contract by the purchaser.

instalment contract means an executory contract for the sale of land in terms of which the purchaser is bound to make a payment or payments (other than a deposit) without becoming entitled to receive a conveyance in exchange for the payment or payments

The early payment to the vendor was less than 10% of the purchase price, but the buyer argued once there was any early release of deposit to the vendor, the deposit was no longer “liable to be forfeited” within the meaning of the definition of deposit, thus converting the contract to an installment contract. However, the Court found the buyer still had a contractual right for return of this money if, say, the vendor breached the contract and therefore was still liable to be forfeited. That the payment would be retained by the vendor in circumstances other than the buyer’s default, for example frustration, does not alter that it was liable to be forfeited on breach of contract by the buyer and thus retained its character as a deposit. At paragraph 27 KEANE JA wrote:

It has long been recognised that the essential characteristic of a deposit in a contract for the sale of land is that it is susceptible to being forfeited by a buyer to a seller upon the buyer’s breach. Its essential character is that of a payment guaranteed to the vendor in the event that the purchaser fails to complete the contract. The possibility that the deposit might be lost to the buyer for other reasons as well is not apt to deny its essential character as a guaranteed payment. The circumstance that the purchaser’s entitlement to recover the payment may be lost by virtue of events other than the breach of contract by the purchaser does not detract from the character of the payment as a guaranteed payment to the vendor. Indeed, the circumstance that a payment made by a buyer may be forfeited to the seller by reason of events additional to the buyer’s breach serves to strengthen the character of the payment by the buyer as a guaranteed payment to the vendor

The decision also comments on the legality of early releases of deposits under section 384 and 385 of the Property Agents & Motor Dealers Act 2000.

384 When payments may be made from trust accounts

(1) An amount paid to a trust account must be kept in the account until it is paid out under this Act.

(2) An amount may be paid from a trust account only in a way permitted under this Act.

385 Permitted drawings from trust accounts

(1) A licensee may draw an amount from the licensee’s trust account to pay the licensee’s transaction fee or transaction expenses in relation to a transaction only if–

(a) the amount is drawn against the transaction fund for the transaction; and

(b) the licensee is authorised to draw the amount under this section.

(2) The licensee is authorised–

(a) to draw an amount from the transaction fund to pay a transaction expense when the expense becomes payable; and

(b) when the transaction is finalised, to draw an amount from the transaction fund that is equal to the difference between–

(i) the balance of the transaction fund; and

(ii) the total of the licensee’s transaction fee and any outstanding transaction expense;

to pay the person entitled to the amount or in accordance with the person’s written direction; and

(c) to draw the licensee’s transaction fee from the transaction fund when the amount, if any, mentioned in paragraph (b) has been paid and when the transaction is finalised.

(3) For subsection (2)(b) or (c), if a dispute about the transaction fund arises, the transaction is not taken to be finalised until the licensee is authorised to pay out the transaction fund under section 388.

(4) The licensee must pay an amount mentioned in subsection (2)(b) to the person entitled to it or in accordance with the person’s written direction–

(a) if the person asks, in writing, for the balance–within 14 days after receiving the request; or

(b) if the person has not asked, in writing, for the balance–within 42 days after the person first had the right to the balance.

(5) In this section–

transaction expenses means the expenses the licensee is authorised to incur in connection with the performance of the licensee’s activities for a transaction.

transaction fee means the fees, charges and commission payable for the performance of the licensee’s activities for a transaction.

transaction fund means the amount held in a licensee’s trust account for the transaction.”

The Court rejected the implication the deposit could only be released on settlement by distinguishing that under section 378(1), money might be received by a licensee, either “for a transaction”, or “with a written direction for its use”. The Court concluded that the prohibition in section 385(2)(b) only relates to money paid to a licensee “for a transaction” and not “with a written direction for their use”. At paragraphs 34 to 36 KEANE JA wrote:

There is no provision in the PAMDA which expressly purports to deny the effect of the written direction for the use of the moneys referred to in s 378(1)(b). Equally, there is no provision in s 384 or s 385 which expressly authorises compliance with such a direction. From these circumstances, I would conclude not that a written direction by all parties entitled to the money is sterilised by implication by the terms of s 384(2) or s 385(2)(b), but that the PAMDA simply assumes that the licensee may comply with such a written direction. That is hardly surprising: the obligation to comply with the directions of the owner or owners of funds arises under the general law of agency outside the PAMDA. The PAMDA does not purport to limit the directions which a principal may lawfully give to an agent with the consent of the other persons with whom the principal is involved in relation to the title to that money. So far as the provisions of s 384(2) of the PAMDA is concerned, while no provision of the Act expressly authorises for the payment by a licensee in accordance with the direction of all those with a claim to the moneys, that does not mean that the Act does not permit such a payment. Section 384(2) must, I think, be understood as recognising that compliance with a written direction as to the use of money expressly referred to in s 378(1)(b) is permitted by the PAMDA. There is nothing in the Act to prohibit compliance with a written direction of the kind contemplated by s 378(1)(b) which, as I have said, takes its legal force from the general law. Compliance by a licensee with a written direction is thus permitted by the Act. Where, as the purchaser argues is the case here, the parties have agreed in writing upon the final and absolute disposition of the moneys which have been paid into the trust account of a licensee, there is no occasion for the trustee to abide the finalisation of the transaction.

The Court thought it would be an odd result if, to achieve early release of deposit, the parties had to nominate a deposit holder who was not a licensee under the PAMDA.

Contracts &Equity and Trusts rob on 22 Mar 2008

Rights of first refusal

Common usage of the expression “right of first refusal” in the marketplace attests to the frequency of commercial arrangements where an owner gives a preference to someone to buy an asset from them in they event it is to be sold. For example, the right might be part of a tenancy agreement or even bequeathed by last will. Much turns on the precise intention of the parties involved and the legal drafting they settle on.

At one end of the scale, the property owner conferring the right might merely be humoring the expectant buyer, intending to meet their obligation by offering it first to them at an unrealistic price and once rejected, selling to another at market price, or even below market to an associate. In that case a disappointed buyer might have some remedy on the basis of misrepresentation or misleading behaviour, but their claim is doubtful if their agreement made it clear and plain that this might happen without any recourse.

On the flipside is an obligation on the owner for any sale to be to the expectant buyer unless someone is willing to pay more. This is colloquially abbreviated by some as a right of first and last refusal. In between these 2 poles are many variations. For example, after the first refusal, the property may be freely sold unless it is on terms materially more favourable than those first offered. Another is that the first offer must be, objectively, at the market price and independent valuers can be enlisted to ensure it. In other words, the legal drafting of these clauses is critical as the right is not a settled legal concept.

Unlike an option, a right of first refusal appears to confined to a personal, contractual interest not capable of amounting to an interest in land which would justify a caveat or a Court order of specific performance. In Octra Nominees Pty Ltd v Chipper [2007] a decision in the Federal Court of Australia, Honourable Justices Tamberlin, Gyles and Gilmour warn against interpreting a right of first refusal as a kind of proprietary interest enforceable against third parties. In that case, a tenant declined to accept an offer to them to purchase the freehold which was then sold to a third party for the same price. The time stipulations in that contract of sale were subsequently varied to the buyer’s benefit. The tenant then ambitiously embarked on proceedings, with some early success, effectively seeking to be substituted as the buyer under the terms of the amended contract. Tamberlin, Gyles and Gilmour held that the tenant only had a “right of first refusal, not of first and last refusal. Thus, in the absence of any suggestion of bad faith, prior arrangement, fraud, mistake or misrepresentation, the contract may be later varied between the grantor and the third party purchaser, and this will not revive the right so that a new offer must be made on the varied terms to the grantee. The right is exhausted when an offer to sell is rejected and the offer or a less advantageous offer is accepted by a third party.”

The judgment talks about the limits of rights of first refusal, in particular that they should be exhausted once a contract of sale has been properly entered into and not enlivened by a subsequent change in that contract. There is an implication in the judgment that a clause that appears to enliven the right upon contract variations would cause too much commercial uncertainty to be enforceable.

Contracts &Equity and Trusts rob on 12 Jan 2008

Agents may do more than just fill in details

On 14 December 2007 regulations were gazetted relaxing the tighter restrictions and penalties imposed by the Legal Profession Act 2007 on persons practising law by preparing land contracts. Last year’s legal clampdown was the subject of a previous blog posting on this website: Agents may only fill in details. Once the implications of the new law, effective 1 July 2007, had percolated through real estate agent and property lawyer circles there was observable arousal and agitation. As it turned out, there was no appreciable enforcement action or change in behaviour, especially after an assuring e-mail from the REIQ to its members. The government has now acted as though to clarify its legislative drafting to remove an unintended effect and maintain the established practice of real estate agent contract drafting and formation.

Contracts &Equity and Trusts rob on 24 Oct 2007

Agents may only fill in details

Section 24 of the Legal Profession Act 2007 prohibits engaging in legal practice unless the person is an Australian legal practitioner.  The maximum penalty is 300 penalty units ($22,500) or 2 years in prison.  There is however a limited exception for real estate agents:

” 24 (2) (e) .. work performed by a PAMDA licensee, or by an employee of a PAMDA licensee, if the licensee or employee only fills in details in a preprinted contract or other document as part of performing the work of a PAMDA licensee and does not give advice about the contract or other document or the details that are filled in; ..”

The Queensland Law Society put out a call to all solicitors in its October 17, 2007 e-mail update asking for information  about non-lawyers providing “conveyancing services” in breach of section 24.  It has taken consumer advocate Tim O’Dwyer M.A., LL.B to point out the really significant impact of the section is on the current peculiarly Queensland culture of real estate agent control of contract formation.  The section 24 exemption for filling in details would not seem to extend to the routine drafting of special conditions.  See O’Dwyer’s piece “Catch 24 on Agent’s Contracts”.

Contracts &Equity and Trusts rob on 17 Jul 2007

Deposits, penalties and liquidated damages

The New South Wales Court of Appeal has given a needed to refresher on the nature of a deposit and in doing so confirmed as worthless the typical “reduced deposit” clause.

Iannello & Anor. v. Sharpe [2007] NSWCA 61 involved a contract for the sale of a house for $4.5 million where $224,000.00 was paid as deposit but including a special condition as follows.

“Notwithstanding anything else herein contained, the Vendor shall accept, on exchange of this Agreement, payment of $225,000.00 being part of the deposit. The parties expressly agree that if the Purchaser defaults in the observance or performance of any obligation hereunder which is or has become essential the balance of the deposit, namely $225,000.00, shall become immediately due and payable and the Purchaser shall forfeit the whole of the sum of $450,000.00 pursuant to Clause 9 hereof to the Vendor.”

The Court of Appeal cited Luu v. Sovereign Developments Pty. Limited [2006] NSWCA 40 as a case with similar facts because on the front page of the contract in that case the price was $6.6 million and provided for a deposit of “$65,000.00 [followed by] 10% of the price unless otherwise stated” coupled with a special condition as follows.

“In the event that the Purchaser pays less than ten percent (10%) of the purchase price as deposit then if the Purchaser commits a default hereunder the whole of the 10% deposit shall become due and payable notwithstanding that this Contract is not completed. This clause shall not merge on completion and the Vendor shall be entitled to sue for recovery of so much of the 10% deposit that remains outstanding as a debt due by the Purchaser to the Vendor.”

Of course, in the Luu case, the purchaser defaulted and the vendor claimed the full 10% as damages. While allowed in the first instance, the Court of Appeal overturned that, holding that this “balance of deposit” amount was not part of the deposit but really a penalty. Bryson JA’s leading judgment on the relationship between deposits and penalties was quoted.

“.. Where parties make an agreement for a sale which is to be completed at some time in the future it is unremarkable and only to be expected that the vendor will require the purchaser to pay some part of the purchase money straight away so as to show that the purchaser is in earnest in committing himself to pay the rest, on the understanding that the purchaser will not get his earnest money back if he does not complete the sale. For contracts of sale of land it has long been customary practice and established law that the purchaser pays a deposit on account of the purchase money when the contract of sale in writing is made, and cannot recover that deposit if he later fails to complete the bargain and pay the rest; whether or not the vendor’s losses are actually more or less than the amount of the deposit. Notwithstanding the apparent inconsistency, the invalidity of contractual penalties does not apply to contractual provisions for forfeiture of reasonable deposits in sales of land. … The exception from the law relating to penalties relates and relates only to deposits, that is, to payments which truly have the character of earnest money paid on or in relation to entering into the Contract, and although provisions of contracts almost always establish what the deposit is, it is not open to parties to avoid the operation of penalties law by designating a payment or an obligation as a deposit if it does not otherwise have that character.”

In summary, calling it a deposit did not make it a deposit. An essential characteristic of a deposit is payment in earnest and this element was absent once the purchaser was in default and could not complete the contract.

If not a really a deposit, the question remained whether the so-called balance of deposit was a genuine pre-estimate of damages. In both the Luu case and in Iannello & Anor. v. Sharpe, it was concluded the claimed “balance of deposit” amounts greatly exceeded the vendors’ losses and was a penalty and not enforceable.

While the Court’s analysis on deposits and penalties was welcome, there was no convincing analysis on the interaction of the issue of liquidated damages, only a perfunctory note that a genuine pre-estimate of damages clause would overcome the rule against penalties.

The upshot: Do not rely on the enforceability of a payment described as a deposit payable on default. Payment (and forfeiture) of a good faith deposit due in instalments is fine, but upon a default, unless claiming actual damages, any further amount payable must on proper construction be liquidated damages (i.e. a genuine pre-estimate of damages) in which case proof of actual losses is not required. It is worth mentioning here too that a self-described liquidated damages clause may be found to be, in substance, an unenforceable penalty where it is extravagant and unconscionable compared to the maximum possible loss.

Equity and Trusts rob on 12 Jul 2007

Trustee not made of straw

The issue of whether a trustee’s right of indemnity can be excluded by trust instrument was considered by the Honourable Justice Debelle of the South Australian Supreme Court in MOYES & ANOR v J & L DEVELOPMENTS PTY LTD & ANOR (No 2) [2007] SASC 261 in a judgment delivered on 11 July 2007.

The trustee (J&L) had purchased land and then gone on to win an appeal in the Environment Court against a local Council decision declining its request to build a house on the land. The neighbours and the Council appealed further to the Supreme Court and succeeded in reinstating the original Council decision, ordering costs against J&L as trustee.

J&L refused to pay the costs. As trustee, J&L amended the trust deed so that it expressly stated: “the Trustees shall not be indemnified out of the Assets of the Trust Fund”. Soon after J&L resigned as trustee and was replaced as trustee by a new company, Palm Hills Pty Ltd, which became the new registered owner of the land and which promptly sold the land.

The question was whether the order for costs could be enforced against the sale proceeds of the land. Justice Debelle referred to a division of judicial opinion on whether a trustee’s right to indemnity against trust assets can be excluded by trust instrument. The right was either an inseparable incident incapable of being excluded or a matter akin to contract law: if a trustee is willing to disadvantage themselves in that way they should be free to do so.

The answer was found in the Victorian Trustee Act 1958, which provides:

A trustee may reimburse himself, or pay or discharge out of the trust premises, all expenses incurred in or about the execution of his trust or powers.

It was noted the provision was enacted not only in the interests of trustees and beneficiaries but also in the public interest, especially creditors. The trust amendment removing the indemnity was found to be void against public policy and inconsistent with the statute.

There is little doubt the same decision would be reached in Queensland with the corresponding provision being found in section 72 of the Trusts Act 1973

A trustee may reimburse himself or herself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers.

Equity and Trusts rob on 10 Jul 2007

Controller of family trust unable to give up control

A Queensland Supreme Court application on whether a family trust controller had successfully replaced himself before his death has been decided in the negative. In Jenkins v Ellett [2007] QSC 154, Douglas J pondered for some 6 months after hearing a typically elliptical clause allowing for changes to a discretionary trust:

 

“The Trustee may by Deed revoke add to release or vary all or any of the Trusts declared or any Trusts declared by any variation, alteration or addition made from time to time and may by the same or any other Deed declare any new or other trusts or powers concerning the Trust Fund but so that the Trustee shall not have any power to revoke add to or vary any of the Trusts so that the Settlor may acquire a beneficial interest in the Trust Fund or any part of it nor to effect [sic] the beneficial entitlement of any Beneficiary to any amount applied for him prior to the date of revocation or alteration and any other person or persons upon whom any power or powers so conferred on him or them. Upon this exercise of any release and revocation pursuant to this clause the power so released and revoked shall be absolutely and irrevocably determined.”

Mr. Jenkins, the original trust controller, relied on the clause to exercise power as trustee to amend the trust schedule to remove himself and install his only surviving child (Ellett – the respondent) as controller. After Mr. Jenkins died, probate was granted to his granddaughter (Jenkins – the applicant) who assumed control under the trust deed as the executor of the original controller.

Ellett’s counsel relied heavily on the Property Law Act 1974 which provides:

“205 Disclaimer etc. of powers

(1) A person to whom any power, whether or not coupled with an interest, is given, may by deed disclaim, release or contract not to exercise the power, and after such disclaimer release or contract shall not be capable of exercising or joining in the exercise of the power.

(2) On such disclaimer, release, or contract, the power may be exercised by the other person or persons or the survivor or survivors of the other persons to whom the power is given unless the contrary is expressed in the instrument creating the power.”

 

Jenkin’s counsel argued the power of the controller to remove and appoint trustees was entrenched and that it would be self-defeating to allow a trustee to get around that by amending the deed to remove the controller.

Douglas J saw the issue as a question of construction and context. He quoted Thomas on Powers (1st ed., 1998) at pp. 585-586, paras 14-31 to 14-32 seemingly as the touchstone.

“In all cases, the scope of the relevant power is determined by the construction of the words in which it is couched, in accordance with the surrounding context and also of such extrinsic evidence (if any) as may be properly admissible. A power of amendment or variation in a trust instrument ought not to be construed in a narrow or unreal way. It will have been created in order to provide flexibility, whether in relation to specific matters or more generally. Such a power ought, therefore, to be construed liberally so as to permit any amendment which is not prohibited by an express direction to the contrary or by some necessary implication, provided always that any such amendment does not derogate from the fundamental purposes for which the power was created. Thus, a power of amendment will undoubtedly be capable of making amendments which are essentially ancillary to, and for the better execution of, such fundamental purposes, e.g. so as to substitute an easier form of communication or service for the one originally stipu­lated, or so as to make other powers exercisable in writing rather than by deed, or, indeed, introduce other amendments which are not simply administrative or managerial in nature. It does not follow, of course, that the power of amendment itself can be amended in this way. Indeed, it is probably the case that there is an implied (albeit rebuttable) presump­tion, in the absence of an express direction to that effect, that a power of amendment (like any other kind of power) cannot be used to extend its own scope or amend its own terms. Moreover, a power of amendment is not likely to be held to extend to varying the trust in a way which would destroy its ‘substratum’. The underlying purpose for the furtherance of which the power was initially created or conferred will obviously be paramount.”

Douglas J went on to notice that “this Trust” was defined in the deed to include the schedule (where the controller is named) but the power to amend clause referred to “the Trusts declared”. The difference between the singular and plural limited the power to amend to the trusts created in the document, not the document itself. Douglas J also affirmed the executor applicant, Jenkin’s argument based on common sense by describing the respondent’s position as “destroying the substratum of the deed”.

Less convincing was Douglas J’s handling of the statutory disclaimer issue. He found that a disclaimer under section 205 of the Property Law Act had not been sufficiently invoked, but even if it had been, because the purported replacement under the deed was not authorised, such a statutory disclaimer was invalid. There was no further analysis and it was unclear if his reasoning was that the deed sufficiently expressed a contrary intention.