IN THE Court of appeal OF new Zealand

I TE KŌTI PĪRA O AOTEAROA	
 CA5/2019
 [2019] NZCA 552

	
BETWEEN	
KEVIN PAUL SUNDE
Appellant	
	
AND	
ROY MELVIN SUNDE, ANNE VERA SUNDE, MARINA ANNE SUNDE AND KEVIN PAUL SUNDE AS TRUSTEES OF THE LEROY TRUST
Respondents	

Hearing:	
4 September 2019	

Court:	
Kós P, Duffy and Woolford JJ	

Counsel:	
J R Wain for Appellant
J P Cundy for Respondents	

Judgment:	
13 November 2019 at 9.30 am	

JUDGMENT OF THE COURT

A	The appeal is dismissed.
B	The appellant must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________

REASONS OF THE COURT

(Given by Duffy J)
[1]	The parties in this appeal are members of the same family.  Because they each bear the same surname it is convenient to refer to them by their first names.
[2]	Roy, Kevin, and Marina are siblings.  Anne is their mother.  In 2005 they all agreed to transfer property they each owned to a trust to be known as the Leroy Trust (the Trust).  Each became a trustee and beneficiary of this trust.  In return the Trust became a debtor of each party for the value of the transferred property.  These debts, which were recorded in deeds of acknowledgement of debt, were payable on demand and attracted interest.  While the parties remained on good terms no demands for payment were made.  
[3]	Matters changed in February 2016 when Roy, Marina and Anne began the process to enable them to make demand for payment of interest for certain identified years and in March 2018 Marina and Anne did the same in relation to payment of the principal sum each was owed.  The total sum being sought was $2,547,152.05.  
[4]	Kevin did not agree with the others’ actions.  The parties were unable to reach agreement, which led to Roy, Marina and Anne commencing summary judgment proceedings to recover payment of the debts.  Because Kevin was not engaged in the recovery process he was chosen to represent the Trust’s interests in the summary judgment proceedings.  Kevin chose to oppose the summary judgment, but ultimately, he abandoned all his grounds of opposition.  This led to Downs J making an award of 2B costs against Kevin and ordering that he pay them personally as well as not drawing on the Trust’s funds to meet his own costs.  Kevin now appeals against those orders. 
General principles
[5]	The right of a trustee that costs and expenses properly and reasonably incurred in the administration of the trust are compensable out of the assets of the trust is longstanding and well settled.  In New Zealand this right has been codified in s 38(2) of the Trustee Act 1956:
38	Implied indemnity of trustees
…
(2)	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.
[6]	The classic authority for recovery of litigation costs is Re Beddoe.  In that case, a trustee had unsuccessfully defended an action against the trust.  He sought indemnity out of the trust fund.  Bowen LJ said:
The vanquished trustee now seeks to impose the costs of this idle and fruitless litigation on the estate … The principle of law to be applied appears unmistakeably clear.  A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges and expenses properly incurred for the benefit of the trust — a proposition in which the word “properly” means reasonably as well as honestly incurred.
[7]	Hammond J in the High Court addressed the principle in the following way:
The classical Chancery principle was, from the outset, that it is only expenses which are “properly incurred” which are the subject of a trustee’s indemnity.  The authority most often cited for this is Re Beddoe … but the principle still obtains today — see Holding and Management Ltd v Property Holding and Investment Trust plc …  The direct consequence of this principle is that improperly incurred expenses fall upon a trustee personally.  In that sense, a trustee is always at risk when he or she incurs expenses.
Can an express power of indemnity trump general principles?
[8]	Section 2(4) of the Trustee Act permits the settlor of a trust to go beyond the provisions of the Act:
The powers conferred by or under this Act on a trustee who is not a corporation are in addition to the powers given by any other Act and by the instrument, if any, creating the trust; but the powers conferred on the trustee by this Act, unless otherwise stated, apply if and so far only as a contrary intention is not expressed in the instrument, if any, creating the trust, and have effect subject to the terms of that instrument.

[9]	Here, cl 15 of the Trust Deed relevantly provides:
…
15.2	Where the Trustees take or omit any action or incur any liabilities, they do so as Trustees and not in their personal capacities.  No person has recourse to any property belonging to any Trustee which does not form part of the Trust Fund.
15.3	No Trustee is liable for any loss incurred by the Trust Fund or by any Beneficiary not attributable to that Trustee’s own fraud, dishonesty, or wilful commission or omission by that Trustee of an act known to be a breach of trust.
…
15.5	A Trustee is hereby fully and completely indemnified from the Trust Fund for any personal liability which that Trustee may sustain in:
	(a)	exercising or omitting to exercise any function, duty or power of the Trustee; or
	(b)	purporting, in good faith, to exercise as Trustee any function, duty or power which is not authorised or which may be a breach of this Trust;
unless such loss or liability is attributable to such Trustee’s fraud or dishonesty.
Thus, the language of cl 15 limits the trustee’s loss of indemnity to occasions of fraud or dishonesty.
[10]	In interpreting an exemption clause, the trustee bears the onus of establishing that he or she is protected.  Any exemption clause is construed narrowly against the trustee seeking to rely on it.
[11]	In Spencer v Spencer this Court made the following remarks in the case of a clause in a trust deed exempting liability for loss “not attributable [to the trustee’s] own dishonesty or to the wilful commission or omission by him or her of an act known to be a breach of trust”:

[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.
[12]	The Judge did not assess Kevin’s opposition to the summary judgment proceedings in light of the two-step approach outlined in Spencer v Spencer.  This is because the Judge approached the matter before him on the basis it was common ground Kevin was entitled to indemnity only if he had acted properly and reasonably as a trustee in opposing the proceeding.  In this regard, the Judge found that Kevin had not so acted. 
[13]	Kevin now contends the Judge applied the wrong legal test.  We are satisfied the Judge did not err. The presence of an indemnity clause will not oust the court’s supervisory jurisdiction to review whether costs and expenses incurred by a trustee have been necessarily incurred in the interests of the beneficiaries and are reasonable in amount.  The authors of Lewin on Trusts observe:
[I]t is difficult to see why a trust should not contain a provision allowing a trustee costs in respect of non-fraudulent acts or omissions, though questions of public policy arise in relation to provisions which purport to allow costs unreasonably incurred or unreasonable in amount.  … Terms of the trust entitling the trustee to indemnity in respect of costs incurred by him will be construed so as to cover only costs which are reasonably or properly incurred and so do not operate to enhance the trustee’s rights of indemnity under the general law.
[14]	This Court expressed similar views in Butterfield v Public Trust, albeit in relation to the implied rights of indemnity of constructive trustees.  However the principles apply equally to express rights of indemnity and limit their application to costs and expenses that are properly incurred:
[20]	It is one of the fundamental rights of an honest express trustee that costs and expenses properly incurred in the administration of a trust are compensable out of the assets of the trust. …
[21]	… The right is to an indemnity for reasonable costs and expenses incurred in the administration of the trust.  That is not the same as an award of indemnity costs in litigation.  The entitlement in the first instance is against the trust and its assets.  A current trustee may therefore deduct reasonable costs and expenses incurred in the administration of the trust from the trust assets, in exercise of a right of exoneration.  Former trustees may claim such costs and expenses from their successors or, failing satisfaction, via the court.  Exercising its supervisory jurisdiction the court will review costs and expenses incurred in ensure they are both necessarily incurred in the interests of the trust and reasonable in extent.  The limitation was set out in New Zealand Māori Council v Foulkes:
The limitation on a trustee’s right of indemnity is, however, that the expenses are “properly incurred”.  The duty to seek advice does not extend, for instance, to pose questions the answers to which are perfectly obvious.  Nor where no real and substantial dispute exists.  Unnecessary proceedings, or the taking of unnecessary procedural steps needlessly increasing costs, may mitigate (or eliminate) the right of indemnity.  Again, excessive costs lie beyond the scope of indemnity.  Every dollar paid in trustees’ expenses is a dollar denied to beneficiaries of the Trust.
[15]	A similar approach has been taken for the interpretation of contractual indemnities, and of mortgage deeds.   We consider the public policy grounds underlying these cases apply with even greater force to the scope of an indemnity provided by deed of trust.  
[16]	Accordingly, we are satisfied that here the existence of the indemnity clause is not determinative of this appeal, and that the Judge viewed the matter for determination through the appropriate lens.  Neither do we consider this outcome to be unduly harsh on trustees.  It is always open to a trustee, at the commencement of litigation, to seek a Beddoe order from the court.  Indeed, in this case there was plenty of time for Kevin to do so.
[17]	Furthermore, we observe that in terms of the second stage of the two-stage approach set out in Spencer v Spencer it was open to the Judge to conclude that when Kevin’s actions are viewed objectively they are not consistent with the actions of what equity would regard as an honest trustee placed in Kevin’s circumstances. 
[18]	The deeds of acknowledgement of debt were indisputable.  As the Judge found, the legal position was clear, and Kevin’s grounds of opposition without foundation.  Roy, Marina and Anne had every right to call up the debts the Trust owed to them.  This would have been obvious to Kevin from the outset.  Indeed, during the hearing we were advised that before the proceedings were commenced, on 27 March 2017 Kevin’s solicitor sent an email to Roy’s solicitors stating that Kevin agreed to the payment of the interest demands for the relevant years and the principal demands, which were sought by Marina and Anne.  The email went on to express the problems Kevin considered the Trust faced and the steps it would need to take to be able to make those payments because it lacked sufficient funds to do so.  Thus, before legal proceedings were commenced Kevin had realised the debts were properly due and payable and, therefore, opposing the demands was futile.  The collapse of all opposition to the summary judgment application shortly before the hearing simply confirms this.  
[19]	Seemingly, the opposition that Kevin needlessly maintained was, in part, due to the Trust’s inability to repay the debts without liquidating assets, which would have required the agreement of the other trustees.  That is no excuse for the stance Kevin took.  The reasonable approach in such circumstances would have been for Kevin to file an admission of claim and then negotiate with Roy, Marina and Anne about the means of payment.  By taking this step Kevin would have reduced the Trust’s potential exposure to costs.  As trustees, Roy, Marina and Anne would have been aware of the Trust’s financial circumstances, and in this role, they would have been obliged either to agree to take the requisite action to ensure the Trust could pay their demands or to stand aside and leave it to Kevin to take the necessary steps to obtain sufficient funds.  
[20]	Accordingly, we are satisfied that the Judge was right to make the orders that he did in relation to costs.  
Result
[21]	It follows that the appeal is dismissed. 
[22]	The appellant must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.

Solicitors: 
Atmore & Co, Auckland for Appellant
Lee Salmon Long, Auckland for Respondents