Unstable ground

The decision of the Court of Appeal in Shovelar v Lane [2011] EWCA Civ 802 confirms that the rule in contentious probate claims that allows, in appropriate circumstances, the costs of all parties to be paid out of the testator’s estate does not apply in the context of a claim that the distribution of an estate is subject to a constructive trust arising from mutual wills. The decision also provides a salutary reminder to executors that they may be personally liable in costs if they unsuccessfully defend on behalf of the estate a mutual-wills claim by a third party.

The general rule, as set out in rule 44.3(2) of the Civil Procedure Rules (CPR), is, of course, that litigation costs follow the event. However, in contentious probate claims there is a long-established exception that has survived the introduction of the CPR. It applies where the cause of the litigation is the fault of the testator, or of persons who are interested in the residue of the estate. In such circumstances, the court may order that the costs be paid out of the estate rather than be borne by the unsuccessful party. One of the issues in Shovelar was whether that rule may apply in cases where a declaration of constructive trust is sought on the basis of an allegation of mutual wills.
 

Defensive line
 

The facts of the case were as follows. In 1996, Leslie Stallwood, a widower, married Alma Shovelar, a widow. Both Les and Alma had children and grandchildren by his or her first marriage. In 1999, they made mirror wills, each leaving his or her residuary estate to the other if he or she survived by 30 days, and otherwise as to one half to Les’s children and grandchildren and as to the other half to Alma’s children and grandchildren. Alma died in 2001 without having revoked her will. In 2003, Les made a new will leaving his estate to his three daughters and his granddaughter; no provision was made for Alma’s descendants. The will appointed two solicitors and Les’s son-in-law to be his executors.
 

Alma’s descendants alleged that Les and Alma had made mutual wills in 1999 and sought a declaration that the three executors held the net estate upon constructive trust for the beneficiaries under the 1999 will. The claim form named not only the three executors as defendants but also the four beneficiaries under the 2003 will. Service was accepted by the executors’ firm on behalf of all of the defendants. A defence was served on behalf of the executors (but not, at first, on behalf of the beneficiaries). The defence made no admissions, put the claimants to proof of the mutual-wills agreement, and alleged that any agreement would in any event be void for want of compliance with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 because it was not made in writing. It appears that the defence was subsequently amended so that it was made on behalf ?of both the executors and the beneficiaries.
 

Several offers to settle were made by Alma’s descendants, including a part 36 offer, but none was accepted. At trial, the judge found in favour of Alma’s descendants and granted the declaration. In relation to costs, she held that the claimants, being the successful party who had beaten their part 36 offer, were entitled to their costs.
 

However, the size of the costs (which included a success fee under a conditional fee agreement) were so high that it was not possible for the defendants to accept the offers made. Furthermore, the case was not one where the defendants ought to have known that the claimants would succeed: it was quite proper, in the judge’s view, for the defendants to test the evidence. Finally, the judge noted that the failure to accept an offer could, in any event, be properly taken into account by her under part 44 of the CPR when determining what order for costs ought to be made. In all the circumstances, it was unjust to require the defendants to pay the additional costs penalties set out in rule 36.14 of the CPR. The claimants were awarded their costs but not with the additional interest prescribed by that rule and not on the indemnity basis.
 

As to the burden of those costs, the judge concluded that the costs rule that applies in probate cases did not extend to a mutual-wills claim. Therefore, she did not accept the submission that the claimants’ costs should, in their entirety, be paid out of the estate. Instead, all seven defendants – including the three executors – were made jointly and severally liable as against the claimants but the executors would be indemnified in respect of their share of the claimants’ costs (and in respect of their own costs) from the estate on the basis that, in the judge’s view, the executors were ‘entirely reasonable’ in protecting the estate and putting the claimants to proof.
 

Holding up
It was held by the Court of Appeal (Ward, Arden and Moore-Bick LJJ):

1. The judge had been correct to conclude that the costs rule in probate cases did not apply to proceedings for a declaration of constructive trust, albeit one arising out of the execution of mutual wills. Having reviewed the authorities, Ward LJ concluded that the probate rule was rooted in the inquisitorial exercise of the ecclesiastical courts and the Probate Court, where the tribunal had to be satisfied as to the validity of a will before admitting it to probate.

However, the effect of mutual wills on an estate where a later will has been admitted to probate was a matter for the Chancery Division applying the law of trusts rather than a matter of probate law and practice. The nature of such litigation is adversarial rather than inquisitorial. It would have been wrong for the claimants to have been deprived of the benefit of their success by ordering costs to be paid out of the estate. Therefore, the judge was correct to order the defendants to pay the claimants’ costs.

2. However, the judge was wrong to give the executors an indemnity from the estate in respect of their share of the defendants’ liability (and in respect of the executors’ costs). Contrary to the judge’s view, the executors had not conducted themselves reasonably. Although he did not doubt their bona fides or their good intentions, Ward LJ felt that the executors had engaged in adversarial litigation. Therefore, they fell to be judged as the other defendants were judged and their conduct did not exculpate them from the general rule that costs follow the event.

3. The judge was also wrong in her conclusion that it would be unjust to order the defendants to pay indemnity costs and interest on costs pursuant to rule 36.14 of the CPR. In this regard, the judge’s comment that the failure to accept the offer could be taken into account under part 44 when determining what order ought to be made was flawed. Part 36 was a separate, self-contained code: if an offer attracted costs consequences under part 36 it could not be taken into account under part 44.

Counting costs

Second, the judge’s comment that the defendants could not have known that the claimants would succeed until the evidence had been tested in court was not a good reason for excluding the operation of part 36. It was almost inevitable in all litigation that the outcome cannot be predicted with certainty until all the evidence has been heard. Far from being a reason not to apply part 36, it was all the more reason for the parties faced with such a situation to make or accept proper offers under part 36. Finally, Ward LJ considered the judge’s comment that the high level of the claimants’ costs – £320,000 was spent fighting over an estate of £134,000 – meant that it was not possible for the defendants to accept the offer. He had considerable sympathy with the defendants on this point but concluded that the quantum of costs to be paid was a matter for assessment by the costs judge.

The decision of the Court of Appeal is one to which all executors should have regard before defending such third-party claims. In such cases, ?where the dispute is effectively between the beneficiaries under the will that has been admitted to probate and third parties, the only safe courses of conduct are to seek the directions of the court (through what are known as Re Beddoe applications, ?in which the executors ask for directions as to whether or not they ought to defend a claim) or to put in a neutral defence (and maintain a position of neutrality throughout) leaving those with the direct financial interest to litigate the matter at their own risk as to costs.

Joseph Goldsmith is a barrister at 5 Stone Buildings