CAUSLEY and ANOR v COUNTRYSIDE (NO 3) PTY LTD and ORS SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CLARKE, COLE and BEAZLEY JJA 14 August 1996, 2 September 1996 [1996] NSWCA 97 LIABILITY of beneficiaries to indemnify trustee. Clarke JA I agree with Cole JA. Cole JA The first respondent, Countryside (No 3) Pty Ltd claimed damages from the second respondent, Bayside Brunswick Pty Ltd (In liquidation) for breach of contract. It succeeded before Brownie J and there is no appeal from that decision. Brownie J held that the first respondent, Countryside (No 3) Pty Ltd, being a trustee under a unit trust deed dated 20 December 1993, in respect of which the appellants and others by subsequent application for units became holders of the units in the unit trust, was entitled to be indemnified by unit holders in respect of the liability for those damages incurred by the trustee in circumstances where the liabilities exceeded trust assets. Further, Brownie J held that the third respondent, McGeary Brothers Contractors Pty Ltd, itself a unit holder, was entitled to recover monies from the trustee in respect of work done by it for the trustee, and where the trust assets were insufficient to meet that liability, was entitled to indemnity from the other unit holders in respect of the trustee's unpaid liability to it. Each of these findings has been challenged on appeal on a number of bases to which I will refer. It is established that, absent provision in the trust deed denying the right of indemnity, or circumstances indicating good reason why a trustee should not be so indemnified, a trustee is entitled to be indemnified by the cestui que trust in respect of liabilities incurred by the trustee in pursuit of functions within power where the cestui que trust is or, if more than one, are the absolute beneficial owners of the trust property the legal title to which is vested in tee trustee.! Here cl4 of the trust deed vested beneficial ownership of the trust property in the unit holders. It was contended that the rule in equity which I have summarised above was negated by cl16 of the trust deed which, relevantly, stated that: "The Trustee... shall be indemnified out of the assets for the time being comprising the Trust Fund against liabilities and expenses incurred by it in the execution or attempted execution or as a consequence of withholding from exercise any of the trusts authorities powers and discretions hereof or by virtue of being the Trustee hereof..." 1. Hardoon v Belilios [1901] AC 118 at 123-126; JW Broomhead (VIC) Pty Ltd (In liquidation) v JW Broomhead Pty Ltd and Ors (1985) VR 891 at 936FF; Poignand v NZI Securities Australia Ltd and Ors (1992) 87 FCR 363 at 370-371 per Gummow J; Trautwein v Richardson [1946] Vol 52 Argus LR 129 at 134 per Dixon J; Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (1984) 1 QdR 576 at 584 per McPherson J; Re Pheon Pty Ltd (1987) 47 SASR 427 at 437 per White J. 2 UNREPORTED JUDGMENTS The argument was that that clause indicated that the trustee's sole remedy was recourse to the trust fund. Implicitly, so it was said, specifying that the trustee "shall be indemnified out of the assets" comprising the trust fund meant that no recourse could be had beyond that fund. That argument fails. C116 does not, nor does it purport to, negate the general position in equity. It was further contended that the nature of the transaction may exclude the operation of the equitable principle. That is undoubtedly so2. It was argued that there were a number of factors concerning the nature of this transaction which meant that the right of recourse to the beneficiaries was excluded. Those factors were, first, that the trust had been established by promoters who, as managers, obtained benefits from the trust operations. Thus not all benefits flowed to the cestui que trust. Second, at the time of the settlement of the trust, the trust managers were the directors of the trustee company. Third, the decision to incur the liability giving rise to the judgment against the trustee was made on 23 December 1983 at which time, with a minor exception, the appellants and other unit holders had not yet become unit holders. Fourth, the contract for the sale of the land which ultimately gave rise to the trustee's liability for breach of contract was entered into on 16 January 1984 by a vendor which knew that it was dealing with a unit trust. Fifth, the third respondent, McGeary Brothers Contractors Pty Ltd, performed the contract for roadworks in January 1984. This was said to be before the appellants and others became unit holders. As subsequently appeared, the contract upon which the third respondent sued was dated 14 December 1984 which was after the appellants and others had become unit holders. Sixth, the units issued to the appellants in April 1984 were issued expressly on the basis that the units were issued subject to the trust deed. C116 meant there was no liability in trust beneficiaries to indemnify the trustee. Seventh, the provisions of the trust deed showed that the managers in fact controlled the trust, not the trustee or the beneficiaries. It was later acknowledged that cl5 of the trust deed vested management of the trust in the trustees. And eighth, at all times it was known that funds to permit performance of the objects of the trust, namely development of land, were to be raised by the sale of trust units. It should be inferred that purchasers were liable only to the extent of the funds contributed by purchase of those units. It is apparent from what I have said that points 5,6 and 7 are without substance. Points 1 and 2 are irrelevant as circumstances grounding an exception to the general equitable principle. The fact that managers may make profits in the performance of the trust objects does not negate the underlying concept that the profits, after proper expenses, were for the benefit of the cestui que trust. It is clear that point 3 is not a feature extinguishing the obligation of indemnity for, as Lord Lindley said in Hardoon v Belilios3: "Although the defendant did not create the trust, he accepted a transfer of the beneficial ownership in the shares, first as mortgagee and afterwards as sole beneficial owner, with full knowledge of the facts that they were registered in the plaintiff's names as trustee for their original purchasers and their assignee, who ever they might be. By this acceptance the defendant became the plaintiffs' cestui que trust; and the plaintiff could not prevent it or effectively dispute his trusteeship for the defendant. By this acceptance the defendant created the trust for himself." 2. Wise v Perpetual Trustee Co Ltd [1903] AC 139 at 149-150. 3. [1901] AC 118 at 126. URJCAUSLEY and ANOR v COUNTRYSIDE (NO 3) PTY LTD and ORS (Beazley JA) 3 A similar situation applies to a subsequent holder of unit trusts whether obtained by transfer or allocation. The fourth point does not touch upon the obligation of indemnity as between the trustee and the beneficiaries, and nor does point 8. It was contended generally that because the purpose of the trust was the raising of funds by sale of trust units to the public for the pursuit of a commercial enterprise, persons dealing with the trust would assume they had no right to indemnity from unit holders beyond the trust assets. Further, it was contended that the trustee would not have contemplated that the initial subscribers for units, or presumably subsequent purchasers thereof, would be bound to indemnify the trustee in respect of liabilities in excess of trust assets, nor would the initial subscribers, or subsequent purchasers of trust units, have contemplated an obligation so to indemnify. There was no evidence to support these, submissions. Further, the submissions misunderstand the basis upon which liability to indemnify attaches. As was made clear by McGarvie J in Broomhead4: "The basis of the principle is that the beneficiary who gets the benefit of the trust should bear its burdens unless he can show some good reasons why the trustee should bear the burdens himself." Expectations of the trustee, or of the cestui que trust, which are not reflected in the terms of the trust deed upon the basis of which the cestui que trust acquired the trust units would rarely, if ever, constitute a sufficient reason why the general equitable principle should be regarded as inapplicable. In my opinion nothing has been advanced to negate the application of the general principle, and Brownie J's decision was correct. Similar considerations apply in relation to the cross claim by McGeary Brothers Contractors Pty Ltd. It follows, in my view, that the appeal should be dismissed with costs. Beazley JA I agree with Cole JA. Appeal dismissed with costs. Counsel for the appellant: JS Wheelhouse Solicitors for the appellant: Ferrier and Associates Counsel for the first respondent: MB Evans Solicitors for the first respondent: Tony Simons Counsel for the third respondent: G O'L Reynolds Solicitors for the third respondent: McKenzie Cox 4. (1985) VR 891 at 936.