Equity, trusts and trustees, powers, duties, rights and liabilities of trustees, liability for breach of trust;Byrnes v Kendle [2011] HCA 26 (3 August 2011)

August 19, 2011 |

The High Court undertook a detailed consideration of trusts in Byrnes v Kendle.  While the court unanimously upheld the appeal there are 3 separate recisions for decision; French CJ, Gummow and Haynes and Heydon and Crennan.

Facts

The facts are best summarised at paragraphs [1][5] of French CJ’s decision.  Martin Byrnes and his mother Joan Byrnes (“Mrs Brynes”) alleged breach of trust by her estranged husband Clifford Kendle (“Kendle”) regarding the collection of ranks from an occupant of a property owned by him in which she had a half share. Legal title to the property was held by Kendle. In 1997 he signed an acknowledgement of trust declaring that he held a half interest in the property as tenant in common upon trust for Mrs Byrnes.  Kendle let the property to his son from 2002 – 2007. The weekly rental was $125. Kendle collected a total of $250 during this period and took no steps to collect any arrears.

The primary judge dismissed the plaintiff’s claim as to the breach of trust. He found that Kendle was not a trustee because he lacked intention to create a trust, relying upon the High Court’s decision in Commissioner of Stamp Duty v Jolliffe. The Full Court of the Supreme Court of South Australia found that Kendle was not subject to the duty that would normally be imposed on the trustee to rent the trust property.

Decision

Construction of trust

Each reason for decision took issue with Jolliffe. French CJ set out the factual circumstances relating to Jolliffe ([13][17]) and found that it was a decision limited by the specific facts and only applicable to cases involving sham transactions.  French CJ made it clear that the primary judge’s approach in interpreting the trusts by looking at the intention of the settlor was wrong and the approach taken by Doyle CJ of the Full court was correct. What Kendle might not have fully understood was neither here nor there, It was the terms of the acknowledgement that was relevant (see [18]).  Gummow and Hayne JJ analysed how trusts should be interpreted ([52][65]).  At [53] they stated the key issue as “What is the meaning of what the parties have said?”, not to the question, “What did the parties mean to say?”  Where a trust or an interest in land is created by informal writing or orally evidence is admissible in determining whether there was sufficient intention to create a trust. that is distinct from the subjective intentions of the parties (see [55][58]).  At 59 they made clear that, just as with contract formation, the concern is not with the real intentions of the parties but with the outward manifestations of those intentions. Gummow and Hayne JJ reviewed Jolliffe and distinguished it, both in terms of the circumstances of the case and the governing statutory regime at the time. In the politest way possible their Honours found it was obsolete.

Heyden and Crennan JJ undertook the most detailed analysis of the decisions relating to constructions of trusts. At [98] they stated:

Contractual construction depends on finding the meaning of the language of the contract – the intention which the parties expressed, not the subjective intentions which they may have had, but did not express . A contract means what a reasonable person having all the background knowledge of the “surrounding circumstances” available to the parties would have understood them to be using the language in the contract to mean . But evidence of pre-contractual negotiations between the parties is inadmissible for the purpose of drawing inferences about what the contract meant unless it demonstrates knowledge of “surrounding circumstances”

The actual state of mind of either party is only relevant in very limited circumstances; duress, misrepresentation, undue influence amongst others ([101]). As with Gummow and Hayne JJ, they found that the rules for the construction contracts apply also to trusts ([102]) and subjective intention is only the relevant when the transaction is open to some challenge or some application for modification ([115]). Subjective intention is irrelevant on both the question of whether a trust exists or what its terms are. Their Honours were the most emphatic of all the justices in rejecting the ratio in Jolliffe (see [116]).

Duties as trustee

Kendle’s submission that there was a bare trust in place was rejected by the Court. French CJ (at [21][23]) considered the nature of the bare trustee and found it was not the case in this fact situation. He found that Kendle had both the power and responsibility to manage the property when he and Byrnes had vacated it in 2002. That power is associated with the duty which exists at general law ([22]) and was a fiduciary duty ([23]). Kendle’s exercise of that duty by letting the property to his son. He breached the duty in failing to recover rent. Gummow and Hayne JJ stated, at [67], that where a trust estate includes land it is the duty of the trustee to render the land productive by leasing it,  even if the trust instrument does not expressly so provide.  They found that Kendle failed to take steps to recover rent due and paid by the tenant of the property.

Heyden and Crennan JJ found that if there are no limits stated in the trust document then, at [119]:

“..trustee who receives a trust asset, like an executor of a deceased estate, must “lay it out for the benefit of the estate.” That is, it is the duty of a trustee to obtain income from the trust property if it is capable of yielding an income. If the property is money, it should be invested at interest or used to purchase income-yielding assets like shares. If the property consists of business assets, it should be employed in a business. If the property is lettable land, it should be let for rent . And if the intended means of gaining an income turn out to be unsatisfactory, those means must be abandoned and others found.”

Even if the device of a trust had not been used the position at equity was that the trust was created. Kendle’s duty as a trustee prevails ([121]).

Consent and acquiescence

Kendle pleaded that Byrnes’ failure to press the payment to rise to consent or acquiescence. French CJ undertook the most detailed analysis of the defences of consent and acquiescence.  Consent/concurrence and acquiescence are distinct defences even though some conduct giving rise to consent may overlap with conduct constituting acquiescence.  He quoted Handley JA in Spellson v George where his Honour stated:

“Consent may take various forms. These include active encouragement or inducement, participation with or without direct financial benefit, and express consent. Consent may also be inferred from silence and lack of activity with knowledge. However consent means something more than a state of mind. The trustee must know of the consent prior to the breach.”

There is a distinction between consent and the situation where one knows of the facts, hopes that the action will take place but does nothing to assist it (see [25]).   The fact that Mrs Byrnes was unwilling to insist upon Kendle collecting rent did not amount to consent to Kendle’s conduct.  Further, her action or inaction, did not induce Kendle to do nothing nor did he rely on that inaction in failing to collect rent.  Acquiescence arises in two circumstances, see [27]:

  • A person who is aware that an act is about to be done to his or her prejudice takes no step to object to it.

  • A person being aware of a violation his or her rights which has occurred fails to take timely proceedings to obtain equitable relief. This is acquiescence after the event which founds the defence of laches.

French CJ found that the evidence did not support a defence of acquiescence.  He found that Mrs Byrne’s inaction could be understood by reference to the matrimonial relationship.

Gummow and Hayne JJ dealt with the issue of consent by stating that there was not sufficient evidence in the findings of the primary judge to support the contention that Mrs Byrnes consented to the breach by Kendle and that he acted with the knowledge of that consent. Regarding acquiescence their Honours dealt with this issue at [79] citing Orr v Ford, that there needs to be calculated inaction by Mrs Byrnes which encouraged Kendle to reasonably believe that his conduct was accepted or not opposed by her. There was no such evidence at trial.

Heyden and Crennan JJ rejected the defences of consent and acquiescence (see [131][140]).

Issues

Trust disputes, often involving constructive trusts, resulting in litigation are quite common in the superior courts, often involving family members in arguments over contribution to property purchases.  This decision is particularly apposite to such causes of action both in terms of the construction point as well as the responsibilities of trustees in familial relationships. The court has made no distinction between members of families, with their particular dynamics, and other parties to trusts.  The implied, and no so implied, critisisms of the primary judge and the appellate bench was that extraneous factors were relied upon, and those factors were tied to the nature of the relationship of the parties to each other.

The High Court has emphatically made it clear that subjective intentions of parties are not relevant when interpreting a trust.  Notwithstanding matrimonial, paternal or filial relationships between parties trustees have an obligation to obtain a financial return on income earning assets, such as property.

The decision of French CJ regarding the defence of consent and acquiescence is a useful summary of defences which are much misunderstood and often poorly pleaded.

 

 

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