Dybac v Czerwaniw; The Estate of the Late Apolonia Czerwaniw (No. 2)

This is the Court’s second judgment in these proceedings. It should be read with the Court’s first judgment: Dybac v Czerwaniw; The Estate of the Late Apolonia Czerwaniw [2022] NSWSC 1279. Events, matters and persons are referred to in both judgments in the same way.

In the Court’s first judgment the Court concluded that it was not satisfied that the testator, Apolonia Czerwaniw, had testamentary capacity in January 2020 when she executed the testamentary instrument, referred to in the first judgment as the Change of Will document. The Court consequently granted probate of Apolonia’s 2005 will and 2009 codicil to the plaintiff, Zina Dybac, and dismissed the defendant’s, Basil Czerwaniw’s cross-claim that sought the admission to probate of the Change of Will document.

The Court directed that if the parties could not agree upon appropriate orders for the costs of the proceedings, then they should file concise costs submissions. Agreement was not reached. Submissions were filed. An oral hearing was held on 24 October 2022, when the Court reserved judgment.

Mr N Kirby of counsel instructed by McIntyre Legal appeared for the plaintiff/cross-defendant. Mr M Evans of counsel instructed by ELG Legal appeared for the defendant/cross-claimant, who began acting after delivery of the final judgment.

In early 2021 Zina, through her solicitors, McIntyre Legal, made an Offer of Compromise and shortly afterwards issued another letter of offer, which invoked Calderbank principles. These offers were made to Basil through his then solicitors, Terry A Kolomyjec & Associates. He accepted neither offer.

On 31 March 2021 Zina made an offer of compromise under Uniform Civil Procedure Rules 2005, r 20.26. She offered to compromise the proceedings on the basis that probate of the 2005 will and the 2009 codicil be granted in solemn form to her, that the defendant’s cross-claim be dismissed, that the plaintiff’s costs of the proceedings be paid out of the Apolonia’s estate on the indemnity basis and that the defendant’s costs of the proceedings be paid out of the estate on the indemnity basis. Basil did not accept this offer of compromise, which was served in parallel with an open letter inviting Basil to immediately withdraw his cross-claim in light of Dr Deacon’s expert report of 28 March 2021, which had just been a made available to the parties.

The offer of compromise was accompanied by an open letter that referred to Dr Deacon’s expert opinion which was recorded in the Court’s first judgment at [160] to the effect that it was unlikely that Apolonia’s “cerebration could be considered adequate to write a will”. The letter declared that in light of Dr Deacon’s report, Basil could no longer properly propound the change of Will document as a valid codicil. The open letter invited Basil to withdraw his cross-claim and consent to the orders sought in the statement of claim.

Then on 22 April 2021 McIntrye Legal sent a Calderbank letter to Basil’s solicitors. The Calderbank letter clearly invoked Calderbank principles and was structured slightly differently to the terms of the offer of compromise. The Calderbank letter offered to settle the proceedings on the basis that probate of the 2005 will and the 2009 codicil would be granted to Zina in solemn form; no occupation fee would be paid by the defendant for his occupation of Apolonia’s house after her death; each party would pay their own costs of the proceedings (excluding the costs of obtaining the grant of probate and the sale of Apolonia’s property); and Zina would receive 48% of the net value of Apolonia’s estate and Basil would receive 52% of the net value of Apolonia’s estate. The offer was open for acceptance until 4 pm on 21 May 2021 and warned that if not accepted that Zina would ask for her costs to be paid on the indemnity basis without recourse to the estate from the date of the letter.

The Calderbank letter was crafted to explain the cost efficiency considerations and legal reasoning that justified why Basil should accept the offer being made. It gave an estimate of the current net value of Apolonia’s estate ($1,019,200) and the estimated net value of the estate after the conclusion of a contested five-day probate hearing ($560,585). The calculation set out in the letter could be debated in places but was reasonable. The open letter noted that the occupation fee claimed from Basil, on account of his occupation of Apolonia’s property after her death, was continuing to accrue.

The Calderbank letter placed the financial choices facing Basil in stark terms. Based on reasonable grounds it calculated that Basil would receive $473,278 from Apolonia’s estate if he accepted the Calderbank offer, which would be $192,985.50 more than he was likely to receive, if the matter were to proceed to final hearing.

Zina now submits that Basil should be ordered to pay her costs of the proceedings on and from 1 April 2021 (the day after the offer of compromise), or alternatively from 22 April 2021 (the day of the Calderbank letter), on the indemnity basis.

She submits that to the extent that her costs are not met by Basil that she should have an indemnity from the estate for the difference. Otherwise, she submits that there should be no order as to the defendant’s costs of the proceedings to the intent that he bears his own costs.

Basil submits that all his costs of the proceedings should be paid out of the estate.

The applicable law is not in contest. In probate proceedings the general rule that costs follow the event is subject to two exceptions: Re Hodges; Shorter v Hodges (1988) 14 NSWLR 698 at 709 per Powell J (“Hodges”), Shorten v Shorten (No 2) [2003] NSWCA 60 (“Shorten”) and Perpetual Trustee Company Ltd v Baker [1999] NSWCA 244 (“Baker”). The first exception arises when it is established that the testator was the cause of the litigation. The second exception arises when it is established that there is a reasonable case for investigation in relation to the document being propounded. In Hodges, Powell J said (at 709) summarised the exceptions in the following way:

The application of one or other exception may lead to different costs outcomes. The application of the first exception leads to an order that costs come out of the estate. Where the second exception applies, the unsuccessful party is left to bear his or her own costs: Brady v Mikan (No 2) [2022] NSWSC 1320 at [37] and [39] (“Brady”). The onus of establishing that one of the probate exceptions applies, lies upon the party alleging that the exception applies: Pates v Craig; Estate of the late Joyce Jean Cole (Supreme Court (NSW), Santow J, 5 September 1995, unreported) at 5–6. There is no general rule in probate proceedings that costs are borne out of the estate: Petrovski v Nasev; The Estate of Janakievska (No 2) [2011] NSWSC 1474 at [10] per Hallen J.

The two exceptions tend to overlap. This is explained in Baker (at [14]) where Giles JA and Brownie AJA cite an unreported decision of Santow J in In the Estate of Moyle; Moyle v Moyle (Supreme Court (NSW), 18 June 1998, unreported) to the following effect:

The overlapping nature of the two exceptions was affirmed in Shorten (at [19] – [20]).

What may fall within the first exception has produced more legal analysis than what may fall within the second exception. In Shorten the Court of Appeal rejected a submission that a case must fall within the first exception merely because the deceased’s condition raises triable issues as to her testamentary capacity. But Shorten (at [19] – [20]) explains the width of the first exception in a formulation which is binding in the present circumstances:

The issue of the application of these exceptions not uncommonly arises in circumstances such as the present, where an argument is taking place about whether it was reasonable for a pre-judgment offer to have been rejected. For example, in In the Estate of Stanislaw Budniak; NSW Trustee & Guardian v Budniak (No 2) [2015] NSWSC 1317, Hallen J found that a party was entitled not to accept offers of settlement made where that party was propounding a “tenable” case to be propounded on behalf of beneficiaries, including a minor.

In the ultimate exercise of the Court’s discretion much may depend upon whether the proceedings can in substance be characterised as adversarial. Campbell JA explained this in BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton [2011] NSWCA 414; 82 NSWLR 336 at [213], where his Honour said:

Behind these exceptions are two competing policy considerations: “that doubtful wills should not pass easily into proof by reason of the cost of opposing them” and of equal importance, that “party should not be tempted into a fruitless litigation by the knowledge that their costs will be defrayed by others”: Gray v Hart; Estate of Harris (No. 2) [2012] NSWSC 1562 at [10] citing Sir J P Wilde in Mitchell v Gard (1863) 3 Sw & Tr 275 at 277; 164 ER 1280, at 1281.

The principles that govern the Court’s exercise of discretion in relation to costs where an offer of compromise is not accepted are well-known and are not repeated here. They have been summarised in authorities such as Benette v Cohen (No. 2) [2009] NSWCA 162 and Walker v Harwood [2017] NSWCA 228. One important matter of emphasis here is that prima facie the consequence of non-acceptance of an offer of compromise will be that the rule will be enforced against the non-accepting party, because from the time of the non-acceptance “notionally the real cause and occasion of the litigation is the attitude adopted by the [party] which has rejected the compromise”: Maitland Hospital v Fisher (No. 2) (1992) 27 NSWLR 721 at 724. The rationale for the rule is to encourage compromise of litigation to advance both the private and public interests and to oblige the offeree to give serious thought to the risk involved in non-acceptance: Maitland Hospital at 724.

Similarly, the principles concerning Calderbank letters are well-established. Indemnity costs do not flow as a matter of course from a Calderbank offer, which is better than the result but it must be demonstrated that rejection of the offer was unreasonable in all the circumstances: Leichardt Municipal Council v Green [2004] NSWCA 341 at [19].

The parties’ written submissions set out their cases comprehensively.

Zina’s submissions emphasise there are limits on the width of the first exception, that the deceased was the cause of the litigation. Zina submitted that it is insufficient to say that the deceased was responsible for the litigation, merely because she lacked the requisite capacity to make the “Change of Will” document. To fall within this exception requires “more than the mental frailty or incapacity of the deceased”: King v Hudson [2009] NSWSC 1500 at [10] and [12] per Ward J (as her Honour then was); Starr v Miller (No 2) [2021] NSWSC 685 at [67] per Hallen J; Brady v Mikan (No 2) [2022] NSWSC 1320 at [24] and [35] per Kunc J; Shorten v Shorten (No 2) [2003] NSWCA 60 at [27]. Zina submitted that this not a case where the deceased can be regarded as having been the cause of the litigation in the sense that phrase is understood in the context of costs in probate suits.

Zina’s submissions made a concession in relation to the second exception. She conceded that there was a reasonable case to investigate the circumstances surrounding the making of the “Change of Will” document for the period up to 28 March 2021. By that time, the lay evidence had been filed and the parties had received the report of the Court-appointed expert, Dr Deacon. Zina submitted that after this date, the second exception should not apply, and the defendant should be ordered to pay the plaintiff’s costs in accordance with the general rule.

In her written submissions under the heading, “the true character the litigation”, Zina submitted that this was “hard fought adversarial litigation”. She put the point as follows:

Finally, Zina submitted that both the offer of compromise and the Calderbank letter should have been accepted, which has cost consequences under UCPR, r 42.14 and the Calderbank principles. Zina submitted as follows:

Basil’s written submissions set out the legal principles which have been explained earlier in these reasons and claimed the benefit of both exceptions through the following reasoning:

Zina’s written submissions in reply and the submissions put during the oral hearing are dealt with in the Court’s consideration of its reasons below.

The parties are at issue as to whether the first exception applies and from when it applies. Even though Zina concedes the second exception applies, the parties differ as to the consequences of its application. And the parties are at issue about the proper exercise of the Court’s discretion based on the unaccepted offer of compromise and the Calderbank letter.

Does the first exception apply and if so until when? Apolonia’s conduct as testator can be said to be the initial cause of the litigation such that the first costs exception applies. But her conduct was not the cause of the significant costs of the long-running contest in this matter after 1 April 2021.

The unusual circumstances in which Apolonia suddenly initiated the Change of Will document represented something more than the mere “mental frailty or incapacity” of the testator. As Shorten explained (at [19]) the conduct of the testator that might attract the first exception could include “irrational actions giving rise to reasonable doubts about testamentary capacity provided they [the doubts] were genuinely held by those opposing the grant”. The Court’s findings in the first judgment about the execution of the “Change of Will” document show more than mere frailty. They show positive conduct that needed to be explained. The Court’s findings show that the Change of Will document was an unplanned, spontaneous and uncharacteristic act of Apolonia, leading to irrational testamentary gifts, given the quality of her relationships with her children. The Court does not accept Zina’s submission that this was just an unremarkable situation of “mental frailty or incapacity” of a testator.

It was reasonable for Basil to propound the Change of Will document until 1 April 2021. Thus the Court will order that Basil’s costs up to that date be paid out of the estate.

But this was only the position up to the time that report of the Court-appointed expert, Dr Deacon became available to the parties on or about 28 March 2021. From that time on the parties had a clear indication from a Court-appointed expert that Apolonia was significantly affected by anaesthetic agents and was unlikely to have had testamentary capacity when she made the Change of Will document. The first judgment shows the clarity with which Dr Deacon first expressed this opinion in writing: first judgment at [160]. His opinion was reaffirmed orally during the hearing and accepted by the Court.

Zina’s lawyers had collected and served by October 2020 the evidence of the three doctors who witnessed Apolonia’s signature on the Change of Will document. Dr Deacon had been provided with that material. There is no reason to believe he had not taken it into account in expressing his opinion. The Court’s reasoning in the first judgment shows that Dr Deacon well appreciated that the doctors who witnessed the Change of Will document may not have seen signs of her incapacity even though in his opinion it was present: first judgment at [174] to [183]. To anyone in Basil’s position a simple formal enquiry of Dr Deacon seeking clarification under UCPR, r 31.50 would have immediately shown there was no real inconsistency on the issue of capacity between Dr Deacon’s opinion and those of the doctors who witnessed the will.

Basil’s decision soon afterwards to engage his own expert evidence to attempt to gainsay the evidence of the Court expert, rather than make further enquiries to clarify the opinion of the expert, demonstrated that Basil was thereafter conducting this case as self-interested adversarial litigation, rather than pursuing genuine concerns about the validity of the Change of Will document. Then on Basil’s application, the Court’s decision on 10 August 2021 to allow the expert supplementary evidence beyond that of Dr Deacon, created a vigorous contest, which placed Basil, the party initiating that contest, at risk as to costs if that course were unsuccessful.

The Court effectively gave leave to Basil on 10 August 2021 to overcome the prohibition in UCPR, r 31.52 against adducing evidence from another expert on any issue already the subject of a report from the Court-appointed expert. The Court did not impose express terms upon the grant of leave to adduce other expert evidence, as it could have done, but was mindful of the fact that not to allow the additional expert evidence over Basil’s objection may have disadvantaged Basil: see Owners of Strata Plan 58577 v Banmore Development Finance Pty Ltd [2006] NSWSC 174. But the prohibition on other expert evidence, and the extra contest that would involve, is the normal result of the Court exercising its power to order a Court-appointed expert, as Hallen J did in this case in November 2020.

The contest that resulted was overtly adversarial and significantly lengthened the hearing and increased the costs both of trial preparation and submissions on both sides. The policy behind UCPR, r 31.52 is to reduce the costs of litigation by the Court appointing a single expert.

In addition to the information available to Basil from Dr Deacon’s report when it was served on him, Basil made a considered decision to seek to be excepted from that general policy behind UCPR, r 31.52. From that time, it can also be said that Apolonia was the cause of at least the expert contest in this litigation.

But when the available content of Dr Deacon’s report is taken into account in the circumstances then known to Basil, Apolonia cannot be considered after 1 April 2021 to be the cause of the wider contest, beyond the expert contest. This is not a finding based on mere hindsight. The Court’s findings show what Basil must have known on 1 April 2021, when he decided to continue this litigation after the receipt of Dr Deacon’s report.

Basil submits that applying Robb J’s observations in Colegrove v Dullaghan (No 2) [2016] NSWSC 1236, it was reasonable for him to continue to propound the Change of Will document after April 2021, because Apolonia was the cause of the contest that has resulted in this litigation. But the reasons Basil advances for this submission are not persuasive.

First, Basil submits that the question whether Apolonia had capacity was always to be decided by the Court by considering many matters other than expert reports and that there were many other evidentiary issues which it was reasonable for him to contest.

This argument is not persuasive. The expert anaesthetic evidence was the core of the case and occupied a very considerable part of the first judgment: from [143] to [221]. But the other matters that the Court had regard to in its final consideration of the issues of Apolonia’s testamentary capacity and knowledge and approval of the Change of Will document (first judgment at [241] to [269]) were well within Basil’s knowledge, either from the time of the Change of Will document itself, or from the affidavit evidence adduced before the making of the offer of compromise. Prominent examples of these in relation to the Change of Will document that featured in the first judgment were the following: the absence of legal advice for the Change of Will document, Apolonia’s lack of preplanning, the anomalies in the Change of Will document, the speed of Apolonia’s decision, Apolonia’s existing affectionate and close relationship with Zina, and Apolonia’s lack of memory of the change of Will document. The last two of these were matters which Basil refused to recognise throughout the trial and on which he adduced contrary evidence. But the Court can assess the reasonableness of Basil’s conduct of the proceedings now by judging Basil as always having been aware of the true facts that the Court has found must have been within his knowledge before April 2021.

Second, Basil submits that Dr Deacon was supplied with the affidavits of Drs Perera, Dinh and Mendis, but he made no reference to their evidence or to their observations of the Apolonia in his report.

This argument is not persuasive. Dr Deacon omitting to refer to some of the evidence does not justify an all-issues contest on the facts. A mechanism exists in UCPR, r 31.50 for this kind of problem to be resolved in a conciliatory non-adversarial way.

UCPR, r 31.50 answers another of Basil’s submissions. Basil contends that although the instructions given to Dr Deacon set out the legal test for capacity to make a will, his report does not refer to that legal standard and his conclusions are not expressed in terms of the legal test for will-making capacity. If this really was Basil’s issue with the court-appointed expert’s report he could easily have made an application under UCPR, r 31.50, rather than contesting the expert evidence by adducing countervailing expert evidence requiring three experts to be called.

Third, Basil submits that Dr Deacon, as an anaesthetist, is not qualified to give an expert opinion on a person’s cognitive function, whether by reference to that person’s age or state of health otherwise. But that is not persuasive. Dr Deacon’s expertise is judging the effects of anaesthetic agents on persons of different ages and in different states of health.

Fourth, Basil submits that the affidavit evidence of Drs Perera, Dinh, Mendis and Tejas showed that, to their observation, the deceased was not exhibiting any signs or symptoms of loss of cognitive function in the critical time when the Change of Will document was executed. But the Court found in the first judgment (at [183]) on the evidence of those doctors that they did not attempt to make any positive enquiries about Apolonia’s mental state and were ill-equipped to do so. This was obvious on the evidence and did not require to be resolved at a contested hearing. Moreover, had Basil sought to ask Dr Deacon under UCPR, r 31.50, about the consistency between the observations of Drs Perera, Dinh, Mendis and Tejas and Dr Deacon’s opinion, he is likely to have said to the Court, as he did in evidence, that it could be inferred that Apolonia had impaired cognition without positive evidence of her behaviour that pointed to that conclusion: first judgment at [178].

Fifth, Basil argues that Dr Sanders in his report came to a different conclusion than that stated by Dr Deacon. But this argument is circular. It already assumes that it was a reasonable course to open an adversarial hearing by adducing further expert evidence from Dr Sanders, rather than limiting the contest to clarification of Dr Deacon’s report under UCPR, r 31.50.

Sixth, Basil’s submissions criticise Dr Deacon for offering an opinion about the ultimate question of testamentary capacity, leaving aside the question of whether he applied the right test. But as the Court’s principal judgment shows, Dr Deacon had answered the fundamental questions within his expertise which asked him about the effect of various anaesthetic agents upon Apolonia. He offered some opinions about Apolonia’s actual testamentary capacity, perhaps giving a view about the ultimate issue in this case. But it was clear from his report overall that such opinions were really observations about the effect of various anaesthetic agents upon Apolonia’s capacity. But even if they are to be characterised as opinions about the ultimate issue, it should have been quite clear to both sides in these proceedings that such opinions would never have been binding on the Court and that his report would always have been used for the limited purpose of assessing the effects of the various anaesthetic agents on Apolonia at the relevant time, not to decide the ultimate issue. Once again if this was a troubling issue UCPR, r 31.50 was available.

The correct inference in all the circumstances here is that despite receiving Dr Deacon’s comprehensive report Basil wanted to keep maintaining the validity of the Change of Will document, and he judged that he would have had a better chance of success with another expert. He wanted to get another opinion so he could continue to advance that case in the face of the evidence. The situation that resulted from this decision was not caused in any way by Apolonia but by Basil himself. The first exception does not apply after 1 April 2021.

The Application of the Second Exception. Zina’s case concedes the application of the second exception and that there was a reasonable case to investigate the circumstances surrounding the making of the Change of Will document and that Basil should bear his own costs but only up until 28 March 2021 when Dr Deacon’s report become available, and her case maintains the normal rule that costs follow the event would apply thereafter.

But the Court’s reasoning on the first exception shows that it applies up to 1 April 2021, not the second exception. After that date it was perhaps arguable by Basil that he should pay his own costs based on the second exception.

But Zina’s argument is somewhat more persuasive as to what happens after 1 April 2021. The Court’s reasoning above shows that Basil could have utilised UCPR, r 31.50 to put to rest any queries that he had about Dr Deacon’s report and should have done so. But it would have taken time for him to have taken this course; longer than was available during the term of the offer of compromise or the Calderbank letter. It may have taken him up to another few months. Basil’s continuation of the proceedings after he had an opportunity (which he did not take) to explore any queries he had about Dr Deacon’s report was unreasonable. Once his continuation became unreasonable, even the second exception could not arguably apply, and Basil should pay Zina’s costs on the ordinary basis. The date on which his continuation of the proceedings became unreasonable can be fixed at 10 August 2021, the date that upon his application, the Court allowed him to engage an alternative expert, without first properly exploring his stated issues with Dr Deacon’s opinion.

The Offer of Compromise and Calderbank letter. Kunc J explained in Brady (at [44]) that there is no reason why a Calderbank letter should not be taken into account in probate litigation. I agree with Kunc J’s observations in Brady (at [44]) that the public interest behind Calderbank offers and offers of compromise in encouraging the settlement of destructive litigation is of greater force in probate cases between family members.

Zina has obtained a result in the proceedings which is no less favourable than each of the offers she made.

Had Basil accepted the offer of compromise, he would have been entitled to receive his costs out of the estate on the indemnity basis for the whole of the proceedings. This was a genuine compromise. Basil would not have been entitled to an indemnity out of the estate even if the Change of Will document were valid: the plaintiff’s appointment as executor remained unaffected by the Change of Will document.

Had Basil accepted the Calderbank Offer, he would have received 52% of the net value of estate, rather than 50% as he will receive under Apolonia’s 2005 will in 2009 codicil.

It follows from an application of UCPR, r 42.14 that Basil should pay Zina’s costs of the proceedings on the indemnity basis from 1 April 2021, unless the Court should “order otherwise” within UCPR, r 42.14.

But the Court’s reasons above (at [55]) show why the Court should “order otherwise”. Basil was ill-equipped to consider and accept the offer of compromise, until he had an opportunity to explore by clarification under UCPR, r 31.50 any queries that he had with Dr Deacon’s report.

Given this conclusion, it is not necessary for the Court also to consider the Calderbank letter. But were it called upon to do so, the Court would have concluded for the same reasons, that Basil’s rejection of the Calderbank offer was not unreasonable.

Thus, the result will be that Basil should play Zina’s costs of the proceedings on the ordinary basis after 10 August 2021. Those costs will include the costs of this costs argument. There will be no order as to costs between 1 April and 10 August 2022.

Zina’s Costs as Executrix. Zina, the executrix of Apolonia’s 2005 will, retains her right indemnity out of the estate in relation to this contest: Hodges at 709. This enables her to be fully indemnified for any shortfall from costs paid by the defendant and the Court will so order.

For these reasons the Court makes the following orders and notation: