In a High Court of Australia decision that concluded an eight-year legal battle, Herbert Smith Freehills Kramer was successful in trust-related litigation that has significant lessons for families and businesses using trusts. On 9 May 2024, the High Court of Australia refused special leave to appeal in the long-running Cardaci litigation. The refusal ended an eight-year legal battle between Mae Cardaci and members of the Cardaci family. We acted for Mae, who was the Plaintiff and who succeeded at all stages of the litigation and successfully opposed the applications for special leave. The judgments of the Supreme Court and the Court of Appeal offer a detailed examination of the rights and obligations of trustees and the remedies available to beneficiaries.
Summary
- The Cardaci litigation traversed a wide range of legal issues that can arise in private wealth, trusts and estate disputes, including the exercise of discretionary powers by trustees, control and administration of trusts and deceased estates, the removal of trustees, and the use of trust assets.
- Mae Cardaci succeeded in the Supreme Court of Western Australia, the Court of Appeal of Western Australia and in having applications for special leave refused by the High Court of Australia.
- The litigation is significant for setting out the principles
that apply to:
- the duties of trustees of discretionary trusts and their obligations in their dealings with beneficiaries;
- applications for the removal of a trustee for misconduct;
- the implications of litigation funding on whether an applicant may be appointed as trustee;
- trustees seeking indemnity from trust assets for their legal costs; and the role of trust guardians
- clauses in trust deeds which indemnify or exclude a trustee from liability.
Lessons
Trusts can be an effective structuring and succession tool for your family or business. However, the rights and obligations they entail, and the complex situations they can create, involve risk that needs to be understood and managed.
If you have trusts in your family or business, you should regularly review the arrangements and consider if they are still fit for purpose. Consider all possible scenarios. The identity of the trustee, the powers given to them, the assets they hold, and the identities and classes of beneficiaries should all be regularly assessed.
Marriages, divorces, births, deaths and major transactions affecting the trust assets or business can often have implications for a trust. The best time to consider those implications is before the event.
If a dispute does arise, the conduct of the trustee can be an especially sensitive issue. Timely legal advice and, if necessary, judicial directions can assist trustees to exercise their powers and discretions appropriately.
It is important to note that a wide range of factors, including the specific terms of a trust, applicable legislation, other legal agreements, and the conduct of the parties can affect your position. Seek legal advice to understand your own situation.
Background2
Marc Cardaci was a businessman. In 2007, he became Chief Executive Officer of one of the largest private businesses in Western Australia (the CFC Group). Marc's brother, Philip, was Executive Chairman of the CFC Group.3
Marc married Mae, a lawyer, in September 2012 and they moved to Perth.4
Most of Marc's assets were held in a discretionary trust called the Washburn Trust. Originally, Marc was the trustee, appointor and guardian. Around the time of their marriage in 2012, Marc added Mae as one of the beneficiaries of the Washburn Trust. He subsequently appointed Philip as appointor and guardian of the trust.5
In late 2012, Marc also made a new will and a Memorandum of Wishes. Marc's will appointed Philip as his executor and trustee. He gave all of his property to his trustees to establish a discretionary trust and Mae was the primary beneficiary. Similarly, Marc's Memorandum of Wishes expressed his wish that the trustee of the Washburn Trust pay all income and capital received by the Trust from time to time to Mae, after making suitable provision for tax and other expenses.6
Marc's parents, Frank and Grace, both passed away in 2014. Grace's will established testamentary trusts for each of her three children (Philip, Marc and Angela). Each trust held essentially a third of her estate. The trust holding Marc's share was called Marc's Testamentary Trust. Marc was originally the trustee, but he subsequently appointed a company he controlled, Ongold Corporation Pty Ltd (Ongold), as trustee. Mae was one of the beneficiaries of Marc's Testamentary Trust.7
The effect of these arrangements was that Mae was a beneficiary of her husband's will, the Washburn Trust and Marc's Testamentary Trust.
Marc passed away in 2015 after a battle with cancer. After Marc's death, Philip appointed a company that he controlled, Washburn Pty Ltd (Washburn), as trustee of the Washburn Trust. Philip therefore had control of the Washburn Trust. As executor and trustee under Marc's will, Philip also had control of Marc's estate and Ongold (being the trustee for Marc's Testamentary Trust).8
In 2016, the relationship between Philip and Mae deteriorated. The trial judge found that in May 2016, Philip said to Mae words to the effect that he was the trustee of the Washburn Trust, that as trustee he would never distribute anything to Mae from the Washburn Trust and he would put all of Marc's wealth from the Washburn Trust into the foundation for Marc.9 For the 2016 financial year, Philip made no distribution to Mae from the net profit of the Washburn Trust and Marc's Testamentary Trust.10 The trial judge found that in July 2016, Philip made a 'settlement offer' to Mae. It involved a $2 million cash payment to Mae and Mae retaining assets or being relieved of liabilities of approximately $4.3 million, in exchange for buying out Mae's interests in Marc's estate and the two trusts.11 Philip applied to the Federal Circuit Court for orders that Marc's estate be administered in bankruptcy.12 In 2017, Philip and Angela also purported to appoint another company controlled by Philip, Rectangular Pty Ltd (Rectangular), as trustee of Marc's Testamentary Trust.13
Mae commenced proceedings in the Supreme Court of Western Australia seeking relief including further provision from Marc's estate, orders removing Philip as executor of Marc's estate, orders removing the companies controlled by Philip as trustee of the Washburn Trust and Marc's Testamentary Trust respectively, and orders appointing Mae as trustee in their place.
Result and appeals
Following a 30-day trial, the Supreme Court of Western Australia made orders with the effect, amongst other things, of awarding Marc's net estate to Mae, removing Philip as executor of Marc's estate, and appointing Mae to replace the trustees of the Washburn Trust and Marc's Testamentary Trust.
The Supreme Court also found that Marc's estate was not insolvent, but stopped short of ordering Philip to pay damages for the additional costs and expenses incurred by Marc's estate by reason of being administered in insolvency.14
The Supreme Court also ordered that the former trustees, Washburn and Rectangular, were not entitled to be indemnified from trust assets to pay their legal costs of defending the case. They were subsequently ordered to repay over $4.6 million back to the trusts (such monies having been withdrawn from the trusts' funds so as to pay the former trustees' legal costs in defending the proceedings).
Philip, Ongold, Rectangular, Washburn and Angela appealed all of the relief ordered after the trial. Mae cross-appealed the order dismissing her claim for damages arising from Marc's estate being administered in bankruptcy. There were total of 41 grounds of appeal, cross-appeal and contention. In a unanimous judgment (3-0) following a 3-day hearing, the Court of Appeal dismissed the appeals and allowed Mae's cross-appeal.15
Finally, Washburn and Rectangular sought special leave to appeal to the High Court of Australia. They appealed their removal as trustee of the Washburn Trust and Marc's Testamentary Trust respectively, and Washburn appealed the order to reimburse the legal costs it spent from the Washburn Trust in defending the case. The High Court unanimously (7-0) refused special leave, commenting:
Neither of the proposed appeals enjoy sufficient prospects of success and P26/2023 is not an appropriate vehicle to consider the scope of application of trust deed provisions that exclude trustee liability for loss or damage. Further, in each matter, it cannot be said that the interests of the administration of justice weigh in favour of the grant of special leave.16
Significance
The unanimous judgment of the Court of Appeal, and unanimous refusal of special leave, mean that the judgment of the Court of Appeal is of high authority. Over 10 other cases around Australia have already cited the Trial Judgment or Appeal Judgment, including an early judgment in the Pratt family litigation brought by Paula Hitchcock.17
The Cardaci litigation involved consideration of a wide range of issues that can arise in contentious family trust and estate matters. The judgments articulate and apply important principles that are relevant to all trustees, beneficiaries, guardians and executors.
The lessons are equally important to parties who are facing a dispute as they are to parties who wish to ensure their affairs are structured and conducted so as to minimise such risks.
Duties of trustees
The Cardaci litigation is a good reminder of the duties owed by trustees, particularly in the context of discretionary trusts where trustees may appear to have significant flexibility as to the exercise of their powers.
The Court of Appeal explained that a trustee is the "archetype of a fiduciary", with a duty of "absolute and disinterested loyalty" that takes the form of the well-known 'no conflict' and 'no profit' rules.18 The Court of Appeal then elaborated:
Further, the minimum obligations of the trustee necessary to give substance to the trusts are the duties of the trustee to perform the trusts 'honestly and in good faith' for the benefit of the beneficiaries. In the case of a discretionary trust, these obligations may be better expressed as duties to perform the trusts honestly and in good faith for the benefit of the class of persons entitled to their due administration, ie, the class of eligible objects.19
Importantly, where a trustee is given discretion as to whether, and to whom, to make distributions from the trust, that does not mean the trustee can completely ignore a beneficiary. The broad discretion is affected by the overarching obligations of a trustee, such that there must be "due administration of the trust", and a beneficiary is entitled to "a 'real and genuine' consideration or the 'exercise of an active discretion'."20
Trustees must also be careful to comply with their duties in dealings with beneficiaries. This issue can arise when there is discussion of certain parties 'buying out' the interests of others in a trust. In such situations, it is essential that the trustee not conflate their duties as trustee with their personal interests.21 A trustee should not use their position to place pressure on a beneficiary.22 As the Court of Appeal observed in the Cardaci case:
If Philip were to obtain that relinquishment and release then, to avoid a breach of fiduciary duty, Philip would need to show (relevantly) that Mae had provided informed consent to the transaction. That need would arise both from the 'fair dealing rule' and, more generally, the conflict rule.23
Removing trustees
If a trustee breaches their duties, an important question that follows is whether the trustee can be removed.
In Western Australia:
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.24
A similar power exists in all Australian States and Territories.25
At trial, Mae successfully obtained orders removing Washburn and Rectangular as trustee of the Washburn Trust and Marc's Testamentary Trust respectively, and appointing Mae as trustee in their place. The Supreme Court made those orders because there was a "real risk, at the least, that even with correct legal advice and the benefit of these reasons, the interests of Mae may not be given real and genuine consideration" by Washburn and Rectangular.26
On appeal, the appellants argued that the Court should not have removed the trustees. The appellants contended that such a removal required a finding or evidence of bad faith, improper purpose, misconduct or a failure or refusal to consider the exercise of powers in favour of an eligible object.27 However, the Court of Appeal dismissed those arguments.28 The Supreme Court applied the correct test based on "the depth and extent of Philip's unwillingness ever to consider Mae as a potential object of bounty, and his desire to procure the relinquishment of all her interests and the means by which he was prepared to achieve that".29
Where a trustee is a company, the Cardaci litigation also shows that the intention of the controller (as to the exercise of a discretion and in other decision-making for the trust) can be attributed to that trustee company. The Court can examine the conduct and intention of the controller.
The High Court refused special leave to appeal the decision to remove Washburn and Rectangular as trustees. This leaves the Court of Appeal's judgment as high authority for the principles applicable to Courts removing trustees. The Court of Appeal's approach affirms that the Court's power is of a "broad nature"30 and can assist the beneficiaries of discretionary trusts.
Litigation funding for an applicant seeking appointment as trustee
When a dispute arises in relation to a family trust, another important consideration – and often a major strategic driver in any litigation – is how the litigation will be funded. This can be a difficult issue where a party has effectively lost access to the trust.
A significant aspect in the Cardaci litigation was that we were able to assist Mae in finding third-party litigation funding. The litigation funding was essential to combat the power imbalance between the parties. However, it also became a focus of attack.
On appeal, the appellants argued that the trial judge should have regarded Mae's obligations to her litigation funder under the litigation funding agreement as "placing her in a position where her interests would conflict with her duties as trustee of the Washburn Trust and/or Marc's Testamentary Trust such that it was not appropriate to appoint her as trustee of those trusts".31
The Court of Appeal (like the Supreme Court) held that the litigation funding arrangement did not disqualify Mae from being appointed as trustee. While the Court of Appeal recognised that there is a general preference not to appoint a beneficiary or relative of a beneficiary as trustee,32 the circumstances of the Cardaci case were exceptional. Those circumstances included Mae's competence and integrity, cost savings, Marc's intention as the "substantial creator" of the Washburn Trust, and Mae's position as the "prime and natural candidate for provision from each of the trusts". These circumstances supported a finding that Mae's litigation funding did not create a conflict of interest such as to preclude her appointment as trustee.33
The case therefore shows that, depending on the circumstances, an applicant to be installed as trustee is not necessarily disqualified from being the trustee just because they have incurred a liability to a litigation funder in bringing their action and will have an obligation to repay that liability.
Indemnity of trustees and the importance of judicial advice
Continuing with the theme of funding litigation, but from a different perspective, there are important lessons in the Cardaci litigation for a party that does have access to trust assets and wishes to draw on them to pay for their legal costs.
As a matter of principle, the Court of Appeal recognised that:
A trustee is entitled, in equity and under s 71 of Trustees Act, to be indemnified out of the trust estate against all of the trustee's proper costs, charges and expenses incident to the execution and proper administration of the trust.34
However, Mae argued that the legal fees for opposing her applications should not have been paid out of the trusts (at the time controlled by the former trustees). The Supreme Court and the Court of Appeal agreed. The (former) trustee companies were ordered to reimburse all monies paid from the trusts.
The Supreme Court commented that, as a general rule, if a trustee has resisted removal but been found unjustified in doing so, then its costs were not reasonably incurred in the interests of the beneficiaries and it has no claim to indemnification from the trust.35 In the Cardaci case, the costs of the litigation incurred by the trustee companies were found to be not properly incurred in the administration of their respective trusts due to various findings, including that the trustee companies, in defending the proceedings, in substance represented and supported Philip's interest.36
A trustee who faces litigation arising from some act or omission by the trustee therefore should seek advice and carefully consider whether those costs are properly and reasonably incurred in the execution of the trusts, before using trust monies to pay legal costs.37
When assessing whether a trustee was entitled to draw on the trust fund to pay legal costs, an important factor is whether the trustee first sought directions from the Court as to the appropriateness of that conduct.38 In Western Australia, a procedure for seeking judicial directions exists under s 92 of the Trustees Act 1962 (WA). The appellant parties in the Cardaci litigation – who had to reimburse legal costs to the trusts – did not seek such directions.
Conversely, once Mae had been appointed trustee of the 2 trusts (following her success at trial) she then sought judicial advice that it was appropriate to use trust funds to pay for the legal fees in opposing the appeals and was authorised by the court to do so.
Indemnity and exclusion of liability clauses in the trust deed
Trust deeds commonly contain specific language about an indemnity, or exemption from liability, in favour of the trustee. These specific terms need to be carefully considered as well. In the Cardaci litigation, clauses 10 and 16 of the Washburn Trust Deed did provide certain protections for the trustee.
Clause 16 was an indemnity which provided that "The Trustee shall be entitled to be indemnified out of the assets comprising the Trust Fund against liabilities incurred by the Trustee in the execution ...of the trusts authorities powers and discretions."
Clause 10 was an exclusion of liability clause which provided that "No Trustee shall be responsible for: 10.1 any loss or damage occasioned to the Trust Fund...by the exercise of any discretion or power...or by any failure to exercise any such discretion or power; or 10.2 any breach of duty whatsoever unless the same shall be proved to have been committed made or omitted in personal conscious and fraudulent bad faith by the Trustee charged to be so liable..."
The Court of Appeal held that the former trustee could not rely on clauses 10 and 16 to avoid liability to repay to the trusts the monies withdrawn to pay legal fees in defending the proceedings. In the circumstances, the costs incurred by the trustee were not incurred in or incidental to the execution or attempted execution of the Washburn Trust or the exercise of the powers and discretions conferred on the trustee. Further, the clause providing that no trustee shall be responsible for "any loss of damage occasioned to the Trust Fund" was held not to exclude liability to account to the trust. That is, the clause did not avoid the trustee having to account to the trust for the payment of trust funds to discharge the trustee's own liability for costs, in circumstances where the trustee had no right to indemnity out of the trust estate, and so had conferred an unauthorised benefit on themselves.39
The appellants sought to challenge the Court of Appeal's interpretation of the exclusion clause in the High Court, but the High Court refused special leave. The Court of Appeal's approach will therefore be influential in future trust disputes where the trust deed includes a similar liability clause.
Powers of trust guardians
Lastly, the Cardaci litigation provides useful guidance on the role of trust guardians. Not all trusts have a guardian, but it is possible for a trust deed to include one as a further safeguard for the beneficiaries.
In the Supreme Court, the trial judge considered whether it was possible to appoint a 'receiver' of the exercise of the powers of the guardian of the Washburn Trust.40 In other words, could an independent person be given control over the powers of a guardian?
The Supreme Court held that appointing a receiver was not possible. The first reason for this result was that a guardian's power, at least under the terms of the Washburn Trust, was not an asset or property or tantamount to property.41 Rather, the guardian's powers under the deed were 'blocking' or veto powers – that is, negative powers.42 In this way, the case was different to situations where a receiver can be appointed, such as when a receiver is appointed over trust assets, powers of revocation and interests under discretionary trusts.43
The second reason for not appointing a receiver was that the Court will not appoint a receiver to exercise the powers of a guardian permanently. An order for a receiver should be interim in nature or effect.44
The issue was not considered further by the Court of Appeal.
Removal of Philip as executor of the Estate related to conduct as trustee
Both the original judgment and that of the Court of Appeal held that Philip's lack of understanding, or disregard of, the duties and responsibilities of trustees, were of sufficient gravity and relevance to justify his removal as executor of the Estate, as they reflected his unsuitability for any fiduciary office in which duties were owed to Mae.45 Further, those courts held that Philip's manner of defence of the proceedings was inconsistent with any recognition that, as executor, he was acting in a representative capacity for the benefit of beneficiaries of the Estate.
Raft of litigation and insolvency processes leading to outcome
Following delivery of the original judgment, the Defendants sought to stay enforcement of the judgment pending the outcome of the appeal, but their application failed. Mae then progressed with a taking of account by the court (to quantify the amounts withdrawn from the trusts by the former corporate trustees to pay their legal expenses), and upon that being completed, Mae issued statutory demands upon the former corporate trustees to pay the sums assessed. The corporate trustees then failed in their applications to set aside those statutory demands.
Footnotes
1. See primarily Cardaci v Cardaci [2021] WASC 331 and [2021] WASC 331 (S) (Trial Judgment); Cardaci v Cardaci [2023] WASCA 158 (Appeal Judgment); Washburn Pty Ltd v Cardaci [2024] HCASL 136 (Special Leave Decision). In addition, 14 other judgments were handed down in relation to other issues in the proceedings.
2. A full summary of facts is set out in the Appeal Judgment, [1]-[177]. A more detailed review of the evidence is set out in the Trial Judgment.
3. Trial Judgment, [22], [42].
4. Trial Judgment, [67], [68].
5. Trial Judgment, [2], [43], [66], [71].
6. Trial Judgment, [72], [73].
7. Trial Judgment, [77], [80], [81], [82].
8. Trial Judgment, [2], [4], [104].
9. Trial Judgment, [350]; Appeal Judgment, [119]-[120].
10. Appeal Judgment, [127]-[128].
11. Trial Judgment, [7], [162], [401]; Appeal Judgment, [132].
12. Appeal Judgment, [168]-[169].
13. Trial Judgment, [8], [193], [194]; Appeal Judgment, [168]-[170].
14. Trial Judgment, [13], [14].
15. Appeal Judgment, [7] – [9], [27] – [32], [666].
16. Special Leave Decision, [2].
17. Hitchcock v Pratt Group Holdings Pty Ltd as trustee for the Pratt Family Holdings Trust [2024] NSWSC 1292.
18. Appeal Judgment, [641].
19. Appeal Judgment, [642].
20. ppeal Judgment, [227].
21. Appeal Judgment, [326], [342].
22. Appeal Judgment, [327].
23. Appeal Judgment, [320].
24. Trustees Act 1962 (WA) s 77(1).
25. See Trustee Act 1958 (Vic) s 48; Trustee Act 1925 (NSW) s 70; Trusts Act 1973 (Qld) s 80; Trustee Act 1936 (SA) s 36; Trustee Act 1898 (Tas) s 32; Trustee Act 1925 (ACT) s 70; Trustee Act 1893 (NT) s 27.
26. Trial Judgment, [512], [515].
27. Appeal Judgment, [178], [181].
28. Appeal Judgment, [178]-[234].
29. Appeal Judgment, [222].
30. Appeal Judgment, [200].
31. Appeal Judgment, [437].
32. Appeal Judgment, [443], [461].
33. Appeal Judgment, [447]-[469].
34. Appeal Judgment, [568].
35. Trial Judgment (Supplementary), [22], [56].
36. Appeal Judgment, [581]-[588].
37. Appeal Judgment, [571].
38. Appeal Judgment, [577].
39. Appeal Judgment, [624], [626], [630]-[631], [649].
40. Trial Judgment, [682].
41. Trial Judgment, [688].
42. Trial Judgment, [702].
43. Trial Judgment, [690]-[692].
44. Trial Judgment, [688], [710].
45. Appeal Judgment, [547], [558].
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
