DATE: 20050615
DOCKET: C40584
COURT OF APPEAL FOR ONTARIO
CRONK, GILLESE and MACFARLAND JJ.A.
B E T W E E N :
THE CANADA TRUST COMPANY, in its capacity as an Executor and Trustee of the Estate of Hedley Maude McDougald, deceased
Harry Underwood and Erica J. Baron for the respondent
Applicant/Counter-Respondent (Respondent in Appeal)
- and -
EDWARD DOUGLAS GOODERHAM, EDWARD DOUGLAS GOODERHAM in his capacity as sole Executor and Trustee of the Estate of Cecil E. Hedstrom, DUNCAN GIBSON, ALEXANDER GIBSON, CECIL PADDY FENNELL, TIMOTHY PHILLIPS, MELINDA BRIELL (in her capacity as a Trustee of the Melinda Briell Family Trust) and MELISSA PHILLIPS (in her capacity as a Trustee of the Melissa Roecker Family Trust)
V. Ross Morrison and Stephen Lamont for the appellants
Respondents/Counter-Applicants (Appellants)
Heard: May 3 and 4, 2005
On appeal from the order of Justice Janet Wilson of the Superior Court of Justice dated July 30, 2003.
GILLESE J.A.:
[1] Wills often contain bequests, which are directions that specific items of property are to be given to named recipients upon the testator’s death. Sometimes the specified item cannot be found among the testator’s assets at the time of death. This can happen because the item is lost, destroyed, sold or given away before the testator dies. At common law, in such a situation, the bequest is held to have adeemed and the gift fails. If there are proceeds from the disposition of the item of property, the proceeds fall into residue and are distributed accordingly. The proceeds are not given to the named beneficiary.
[2] Section 36(1) of the Substitute Decisions Act, 1992, S.O. 1992, c. 30 (the “anti-ademption provision”) alters the common law relating to ademption. This appeal explores the proper interpretation and application of s. 36(1).
BACKGROUND
[3] Hedley Maude McDougald was a wealthy woman. She owned several residences, two stud farms, a valuable collection of antique automobiles and substantial liquid investments.
[4] She also owned all the shares in a holding company. The holding company, El Brillo Properties Ltd., held title to property in Palm Beach, Florida, with the municipal description of 640 South Ocean Boulevard. Ms. McDougald enjoyed the Palm Beach property and used it frequently until health problems intervened.
[5] In 1986, Ms. McDougald made a will in which she left the Palm Beach property and all of its contents, to her sister, Cecil Hedstrom. Paragraph. 3(12) of her will provided:
- I GIVE my property, including any property over which I may have a general power of appointment, to my Trustees upon the following trusts:
- To transfer to my sister, CECIL E. HEDSTROM, if she survives me for a period of sixty days for her own use absolutely the property municipally known as 640 South Ocean Boulevard, Palm Beach, Florida, U.S.A. and owned by me together with all furniture, furnishings and equipment therein contained or used in connection therewith.
[6] Paragraph 4 of her will provided:
If at my death any property referred to in paragraph 3 is owned by a corporation controlled by me immediately prior to my death, I direct my Trustees to do or cause to be done all things necessary to transfer that property held by the corporation to the person referred to in that paragraph without consideration.
[7] Ms. McDougald’s will also provided that the residue of her estate was to be divided among a number of relatives, including her two great‑nephews, the appellants.
[8] On November 13, 1992, Ms. McDougald executed a continuing power of attorney in which she appointed, as her attorneys, the same four people who were the officers and directors of El Brillo. The power of attorney explicitly provided that it was to continue in force notwithstanding her incapacity. Thereafter, the attorneys administered Ms. McDougald’s property. They made decisions on the maintenance and disposition of her property and dealt with any legal and administrative issues that arose in respect of her property.
[9] Ms. McDougald’s attorneys sold the Palm Beach property in February 1996, while Ms. McDougald was still alive, for approximately US$5 million. At the attorneys’ direction, the net proceeds of sale were placed in a separate bank account in the testator’s name.
[10] A number of considerations underlay the attorneys’ decision to sell the property. They recognized that Ms. McDougald had no continuing use for the property, as she was not sufficiently well to travel. The cost to maintain the property was considerable, requiring an expenditure of over US$1 million in the three years prior to its sale. The attorneys had been forced to encroach upon capital to maintain the property. Keeping the property was depleting Ms. McDougald’s assets, a problem exacerbated by the fact that she was “asset rich and cash poor”.
[11] Before selling the property, the attorneys received legal advice that the provisions governing ademption in the Act were to be amended in the very near future. They understood that if the Palm Beach property were sold before the amendments came into effect, s. 36(1) of the Act would prevent the gift from adeeming.
[12] The attorneys were of the view, at the time of sale, that Ms. McDougald lacked the capacity to manage her property. They executed a special resolution on the date of the sale that made it clear that El Brillo held the property solely for Ms. McDougald’s benefit.
[13] In June 1996, following a determination by her counsel that she had testamentary capacity for the purpose of executing a codicil, Ms. McDougald executed a codicil in which she changed the age at which the appellants were to receive their shares of her estate to 21.
[14] Ms. McDougald died on November 17, 1996, at the age of 87. Her sister, Cecil Hedstrom, survived her by more than sixty days. Ms. McDougald’s estate brought an application for directions in respect of the proceeds of sale of the property.
[15] In her decision dated July 30, 2003, Wilson J. found that Ms. McDougald was incapable of managing property at the time of her death. The application judge held that, by virtue of s. 36(1) of the Act, the specific bequest did not adeem as a result of the sale and the proceeds of sale did not form part of the residue of the estate. She directed that the monies be paid to the estate of Cecil Hedstrom.
[16] The appellants, Duncan Gibson and Alexander Gibson, are residuary beneficiaries of Ms. McDougald’s estate. They argue that the application judge erred in concluding that the anti-ademption provision applied. They contend that the bequest adeemed as a result of the sale and that the sale proceeds form part of the residue of the estate.
THE ISSUES
[17] This appeal raises four issues.
(1) Does the anti-ademption provision apply to the sale even though a corporation, and not the testator, held title to the property at the time of the sale?
(2) Does the anti-ademption provision apply to the sale even though the sale was not necessary to meet the immediate needs of the testator?
(3) Did the application judge err in finding that the testator was incapable of managing property at the relevant time and in finding that the attorneys had reasonable grounds to believe that the testator was incapable of managing property at the time of sale?
(4) Did the application judge err in admitting: (a) affidavit evidence of one of Ms. McDougald’s attorneys who was unable to testify due to illness, and (b) notes made by nurses who had cared for the testator?
THE APPLICABILITY OF S. 36(1) TO A SALE OF PROPERTY BY A CORPORATION
[18] The Substitute Decisions Act, 1992, was proclaimed in force on April 3, 1995. The anti-ademption provision at that time, and which was in effect at the date of the sale of the Palm Beach property, reads as follows:
- (1) The doctrine of ademption does not apply to property that a guardian of property disposes of under this Act, and anyone who would have acquired an interest in the property acquires a corresponding interest in the proceeds.
[19] The appellants argue that s. 36(1) does not apply to the bequest because the word “property” in s. 36(1) can only mean property actually owned by the incapable person and Ms. McDougald did not own the Palm Beach property. Rather, she owned the shares in the corporation that held title to the property. Thus, they contend, s. 36(1) does not apply because a corporation owned the property and a corporation - not a guardian of property - disposed of the property.
[20] The application judge concluded that s. 36(1) applied to the bequest. She reasoned as follows:
The Attorneys and their counsel believed that the Anti-Ademption Section would apply. Although there was thought given to transferring the property from the corporation to Mrs. McDougald prior to the sale, had the transfer occurred, tax costs of at least $33,000 (US) would have become payable.
The Act is intended to provide a structure to protect individuals who are incapable of managing their financial affairs. The wishes of the incapable person must, where possible, be respected.
Section 10 of the Interpretation Act, R.S.O. 1980, c. 219, provides that every Act "shall be deemed to be remedial" and directs that every Act shall "receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Act according to its true intent, meaning and spirit."
Principles of statutory interpretation are made clear in Re Rizzo & Rizzo Shoes Ltd., 1998 837 (SCC), [1998] 1 S.C.R. 27 (S.C.C.). Iacobucci J. adopts at para. 22 a citation from Driedger in Construction of Statutes (2nd ed. 1983):
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
The Act and section 36 should be given a large, robust interpretation to ensure the intended purpose of the legislation is respected.
Often, individuals, particularly with vacation properties abroad hold these properties in a corporation to avoid potential tax problems and residency issues. An overly technical approach, as suggested by the respondents, would defeat the clear intentions and wishes of Mrs. McDougald. In my view, it matters not whether it was a corporation solely owned by Mrs. McDougald or it was Mrs. McDougald personally who owned and sold the personal use Property. Section 36 of the Act only says that the doctrine of ademption does not apply to “property,” not “personally held property.”
Mrs. McDougald in her will providing the bequest to her sister referred to the Property as being “owned by me.” By the terms of the Will, if a property was held by a corporation, it was to be treated as if owned by the Testator personally to give effect to the specific bequests. There is clearly, in this case, an identity of interest between the Testator and the corporation that held her personally used Property.
Since Mrs. McDougald owned the corporation and provided for the disposition of its holdings in her Will, the fact that the corporation held Property does not affect the application of section 36 of the Act.
[21] I agree with the application judge’s interpretation of s. 36(1) and with the reasons that she gave.
[22] I would go further, however, and say this. On a plain reading of s. 36(1), it applies to the sale of the Palm Beach property.
[23] Section 36(1) does not abolish the doctrine of ademption. It limits the scope of application of the doctrine by providing that the doctrine of ademption does not apply to “property that a guardian of property disposes of under this Act”. Therefore, in order to determine whether s. 36(1) applied to the sale, it must be determined whether there was: (1) property, (2) that a guardian of property, (3) disposed of, (4) under the Act.
1. Property
[24] The first requirement is that there be “property”. Clearly, the Palm Beach residence and lands are property. There is nothing in s. 36(1) to suggest that the word “property” should bear anything but its usual meaning. Nor is there anything in the anti-ademption provision that suggests that the word should be limited to property that an incapacitated person holds personally. Ms. McDougald’s treatment of the property was consistent with regarding it as her own. By the terms of the bequest, she gave her sister not only the property but also all of the furniture, furnishings and equipment used in connection with the property and, by para. 4 of her will, she directed her trustees to take whatever steps were necessary to transfer property held by a corporation to the intended recipient.
[25] Accordingly, in my view, the first requirement is met.
2. Guardian of Property
[26] The second requirement is that a guardian of property is to be the person who disposes of the property. Who disposed of the property in this case? Ms. McDougald’s attorneys or the officers and directors of El Brillo? After all, they are one and the same persons and both groups were necessary in order to validly convey title to the property to the purchasers. The attorneys were Ms. McDougald’s guardians of property, by virtue of the continuing power of attorney and the provisions of the Act. While the attorneys were acting in their capacity as directors and officers when they transferred title to the Palm Beach property to the purchaser, it was in their capacity as attorneys that they made the decision to sell. It was the attorneys who instructed the corporation to dispose of the property. Thus, in my view, it was the attorneys, as the guardians of Ms. McDougald’s property, who disposed of the property.
3. Disposition
[27] It goes without saying that a sale is a type of disposition and, therefore, the third requirement is met.
4. Under the Act
[28] As I explain in the following section, in my view, when the attorneys disposed of the property, they did so under the Act. Thus, the fourth requirement is also met.
Conclusion on the Applicability of s. 36(1) to a Sale by a Corporation
[29] At the time that the attorneys considered selling the Palm Beach property, they faced two apparently conflicting obligations. The first was their obligation to ensure that Ms. McDougald’s assets were managed prudently. They had to manage Ms. McDougald’s property so as to provide her with adequate care while ensuring that her assets were preserved. Both at common law and by virtue of s. 32(1) of the Act, as discussed below, the attorneys were required to act diligently, with honesty and integrity and in good faith, for Ms. McDougald’s benefit.
[30] The attorneys’ second obligation was to ensure that Ms. McDougald’s testamentary intentions were fulfilled. Under the terms of Ms. McDougald’s will, her sister, Cecil Hedstrom, was to receive the Palm Beach property. The fact that a corporation owned the property was not a problem because paragraph 4 of the will directed her trustees to do whatever was necessary to transfer property held by the corporation to the beneficiary.
[31] Absent the anti-ademption provision, the trustees could not have fulfilled both obligations. If they sold the property in order to prudently manage Ms. McDougald’s assets, they would upset Ms. McDougald’s desire to give the property to her sister. If they retained the property and transferred it to Ms. Hedstrom on Ms. McDougald’s death, they would have permitted Ms. McDougald’s assets to be depleted.
[32] Section 36(1), as interpreted above, enabled the trustees to meet both obligations. They were able to manage Ms. McDougald’s property prudently. In this regard, it is worthy of note that the application judge found that the attorneys’ decision to sell the property was prudent. And, the attorneys were able to respect Ms. McDougald’s clear wish that her sister receive the property, by giving her the proceeds of sale of the property.
[33] As the application judge noted, the Act is to be given a large and liberal interpretation so as to best ensure the attainment of its objects. The intent of the Act is to provide a structure to protect individuals who are incapable of managing their financial affairs. It provides methods by which the property of persons whose capacity is diminished may be managed by others, including by means of a continuing power of attorney. Unlike a capacitated testator, Ms. McDougald did not have the ability to revise her will when it became apparent that the property should be sold. On the interpretation of s. 36(1) of the Act given above, the attorneys were able to take the steps required to manage Ms. McDougald’s property in a way that respected her needs and her wishes at a time when she was incapable of managing her affairs on her own.
THE APPLICABILITY OF S. 36(1) WHERE THE SALE WAS NOT NECESSARY TO MEET THE TESTATOR’S NEEDS
[34] Section 37(1) of the Act sets out the circumstances in which a guardian is obliged to make expenditures for the benefit of the incapable person or his or her dependents. It reads as follows:
(1) A guardian of property shall make the following expenditures from the incapable person's property:
The expenditures that are reasonably necessary for the person's support, education and care.
The expenditures that are reasonably necessary for the support, education and care of the person's dependants.
The expenditures that are necessary to satisfy the person's other legal obligations.
[35] The respondent concedes that the sale of the property was not required to pay expenses related to the support, education or care of the testator or her dependants. Nor was it necessary to satisfy the testator’s legal obligations. In short, the sale was not made pursuant to their obligations under s. 37(1).
[36] The appellants make two arguments as to why the anti-ademption provision cannot apply, given that the sale of the property was not made pursuant to s. 37(1) of the Act.
[37] On March 28, 1996, the Act was amended and s. 35.1 was added. The appellants’ first argument is that s. 35.1(1) applies to the sale and, therefore, the anti-ademption provision does not. Section 35.1 reads as follows:
35.1(1)A guardian of property shall not dispose of property that the guardian knows is subject to a specific testamentary gift in the incapable person’s will.
(2) Subsection (1) does not apply in respect of a specific testamentary gift of money.
(3) Despite subsection (1),
(a) the guardian may dispose of the property if the disposition of that property is necessary to comply with the guardian’s duties; or
(b) the guardian may make a gift of the property to the person who would be entitled to it under the will, if the gift is authorized by section 37.
[38] The sale of the Palm Beach property took place on February 11, 1996, before s. 35.1 came into effect. There is nothing in the legislation to suggest that s. 35.1 is to have retroactive effect. In my view, the application judge correctly held that s. 35.1 of the Act, as amended, did not govern the sale. The attorneys were not bound by a provision that was not in effect at the time of the sale. The governing provisions were those in effect at the time of the sale, not those in effect at the time of the testator’s death.
[39] In any event, the appellants’ position ignores s. 35.1(3)(a), which specifically permits a disposition of property when “necessary to comply with the guardian’s duties”. In my view, the language in s. 35.1(3) is broad enough to encompass prudent dispositions of specifically bequeathed property and the application judge found that the sale of the property was a prudent decision.
[40] The appellants sought to buttress their argument that s. 35.1 applied to the sale by reference to Doyle v. Doyle (1995), 9 E.T.R. (2d) 162 (Ont. Gen. Div.) aff’d (1998), 22 E.T.R. (2d) 17 (C.A.). In Doyle, the trial judge suggested that s. 36(1) of the Act was intended to apply to situations where a guardian unwittingly disposed of property that was subject to a specific bequest. I see nothing in s. 36(1) to suggest that it was to apply only to unintended dispositions. To read that limitation into s. 36(1) would undermine its remedial intent. Moreover, it would lead to the absurd result that conscious, thoughtful dispositions by attorneys are to be treated in a less favourable manner than dispositions made through inadvertence.
[41] The appellants’ second argument is that in order for a sale to be made “under this Act”, as s. 36(1) requires, the sale must be made pursuant to s. 37(1). They contend that because the sale was not made pursuant to s. 37(1), it did not take place under the Act.
[42] I do not accept that s. 36(1) is limited to dispositions of property that are made pursuant to s. 37(1). There is nothing in s. 36(1) to suggest such a limitation and to imply such would undermine its purpose.
[43] The question remains, however, whether the sale of the Palm Beach property was a disposition under the Act.
[44] Section 38(1) of the Act states that certain provisions that govern statutory or court-appointed guardians, including s. 36(1), apply to attorneys acting under continuing powers of attorney where the property owner is incapable or the attorney has reasonable grounds to believe that the property owner is incapable of managing property. Section 38(1) was amended at the time that s. 35.1 was added but its essence, related in the immediately foregoing sentence, remains unchanged. Section 38(1), at the time of the sale of the property, read as follows:
- (1) Section 32, except subsections (10) and (11), and sections 33 to 37 also apply with necessary modifications, to an attorney acting under a continuing power of attorney if the grantor is incapable of managing property or the attorney has reasonable grounds to believe that the grantor is incapable of managing property [emphasis added].
[45] Section 38(1) applies to Ms. McDougald’s attorneys because they were acting under a continuing power of attorney.
[46] The attorneys’ duties under the Act were not limited to making expenditures in accordance with s. 37(1). Section 32(1), which also applied to the attorneys by virtue of s. 38(1), provides that the attorneys were fiduciaries and required to perform their duties and powers diligently and with honesty, integrity and in good faith.
[47] In my view, while it is correct to say that the attorneys were acting pursuant to the terms of the power of attorney when they sold the property, it is equally correct to say that they were acting in accordance with the dictates of s. 32 of the Act. Accordingly, the disposition of the Palm Beach property was made “under this Act”.
THE TESTATOR’S INCAPACITY
[48] As stated above, s. 38(1) of the Act provides that s. 36 applies to an attorney acting under a continuing power of attorney if the grantor is incapable or the attorney has reasonable grounds to believe that the grantor is incapable. For ease of reference, s. 38(1), as it read at the time of sale of the property, is set out again below.
- (1) Section 32, except subsections (10) and (11), and sections 33 to 37 also apply with necessary modifications, to an attorney acting under a continuing power of attorney if the grantor is incapable of managing property or the attorney has reasonable grounds to believe that the grantor is incapable of managing property [emphasis added].
[49] The use of the disjunctive “or” in s. 38(1), in my view, makes it clear that its provisions apply so long as there is actual incapacity on the part of the grantor or the attorney had reasonable grounds to believe, at the relevant time, that the grantor was incapable of managing property. Section 38(1) does not require that both conditions be met.
[50] The appellants argue that neither requirement was met. They say that the application judge erred in finding both that Ms. McDougald was incapable of managing property and that the attorneys had reasonable grounds to believe that Ms. McDougald was incapable of managing property.
[51] As a finding of fact, the application judge’s determination that Ms. McDougald was incapable is to be afforded deference. On the record, in my view, the finding is unassailable. The evidence of incapacity is overwhelming.
[52] The application judge relied primarily on the evidence of two people in concluding that Ms. McDougald was incapable of managing her property at the time the Palm Beach property was sold. First, there was the evidence of Dr. Marotta, an eminent neurologist and the testator’s treating physician during the relevant time period. Dr. Marotta testified that Ms. McDougald’s physical and mental health deteriorated significantly between 1992 and 1996. It was Dr. Marotta’s evidence that by 1995 and 1996, the testator suffered from multi-system deterioration and avascular necrosis, a neurological disease. Her deteriorating physical condition was evidence of the progression of her neurological disease, which had a demonstrable effect on her mental condition. Dr. Marotta testified that Ms. McDougald had pronounced deficits including marked impairment of recent and remote memory; an inability to compute numbers; loss of orientation; lack of insight and inability to do abstract reasoning; loss of general information; and, loss of all higher cognitive functions. She was, in his words, “demented”.
[53] Dr. Marotta prepared a report in May 1992 in which he opined that the testator was not able to manage her affairs. He also prepared a note in November 1992, shortly after examining the testator, in which he stated his view that Ms. McDougald lacked testamentary capacity. It was Dr. Marotta’s opinion that Ms. McDougald was incapable of managing property during the relevant period.
[54] Dr. Marotta’s evidence was confirmed by the evidence of Mr. Donald Guthrie. In 1993, Mr. Guthrie was asked to represent Ms. McDougald by taking instructions on her behalf from the attorneys. He was then (and remains) an experienced estate lawyer.
[55] As her new lawyer, Mr. Guthrie met with the testator in August 1993. He found her to be very frail, thin and hunched over. He had difficulty understanding her due to slurring of speech. In Mr. Guthrie’s opinion, she had no interest in, or grasp of, business matters or the complex structure of her assets.
[56] Mr. Guthrie provided the attorneys with legal advice in 1995 and 1996 in respect of the ademption issue and was present when Ms. McDougald signed a codicil in June 1996. Mr. Guthrie testified that he believed that Ms. McDougald had the capacity to make the codicil to her will in 1996, given the very narrow question addressed by it. However, he testified that she lacked capacity to make a new will and that she could not have understood sufficient information to make a codicil to address the sale of the Palm Beach property.
[57] The application judge found Mr. Guthrie’s evidence, like that of Dr. Marotta, to be credible and neutral.
[58] The appellants contend that the application judge erred in considering the testator’s age and physical health, and the complexity of her estate when making a determination of incapacity. I see no error in such an approach. On the contrary, in my view, such considerations are necessary to a proper determination of capacity. Ms. McDougald’s physical condition was very relevant to her mental condition. She suffered from a neurological disease that impaired her higher cognitive functions. The complexity of her estate was a relevant factor in deciding whether she had the capacity to manage her property, particularly as the evidence shows that she had been aware of the size and nature of her financial affairs during the 1980’s. Her inability to focus and lack of interest were directly relevant to her capacity to manage her property. The legal complexity surrounding the sale of the property and its possible ademption were relevant considerations, as well, when determining whether the testator had the requisite capacity.
[59] The fact that approximately four months after the sale of the property, Ms. McDougald executed a codicil that provided that beneficiaries of the estate would take at age 21, does not undermine the application judge’s finding of incapacity. As the application judge noted in this regard, perhaps at the moment that Ms. McDougald signed the codicil, she had one of her “windows” of superficial lucidity and, thus, was mentally capable for the purpose of executing the “very narrow codicil”. In any event, there is a considerable difference between deciding the simple issue of the age at which beneficiaries are to take and comprehending the complex considerations involved in relation to the sale of the Palm Beach property.
[60] The application judge applied the correct legal principles and considered the relevant evidence before concluding that Ms. McDougald was incapable in February 1996. There is no basis upon which to interfere with her finding of actual incapacity. As that finding is sufficient to trigger the operation of s. 38(1), it is unnecessary to decide whether, as the appellants contend, the attorneys lacked reasonable grounds to believe that Ms. McDougald was incapable of managing her property at the relevant time.
THE ADMISSIBILITY OF AFFIDAVIT EVIDENCE AND NURSING NOTES
The Affidavit Evidence
[61] Early on in the hearing below, the application judge ruled that witnesses who had provided affidavit evidence in respect of the testator’s capacity would be required to give oral testimony.
[62] Murray T. Nicholson had been an officer and director of the El Brillo. He was also a representative of the respondent executor and attorney, The Canada Trust Company. He gave affidavit evidence and was cross‑examined on that evidence.
[63] Mr. Nicholson was too ill to testify in the proceedings so the application judge adjourned the hearing to permit Mr. Nicholson to give oral testimony at a later date. However, before the scheduled return date, Mr. Nicholson was diagnosed with inoperable biliary cancer. His surgeon advised that it would not be in Mr. Nicholson’s interests to testify. The application judge ruled, over the appellants’ objection, that she would admit Mr. Nicholson’s affidavit evidence and the transcript of his cross-examination. Mr. Nicholson subsequently died.
[64] The appellants submit that the application judge was bound to follow the procedure that she had established. They say that, having made the decision that those who gave affidavit evidence had also to testify, once it was determined that Mr. Nicholson could not testify, the application judge either had to adjourn the proceedings until he was available or exclude his affidavit evidence. She did neither. The appellants also note that the application judge referred to Mr. Nicholson’s evidence in her reasons. Therefore, the appellants argue, a new trial should be ordered.
[65] Although the application judge considered Mr. Nicholson’s evidence, she stated that his evidence was “not necessary” in order to reach a decision on the testator’s incapacity. I agree. For the reasons already given, the evidence of Ms. McDougald’s incapacity was overwhelming.
[66] In any event, it was within the application judge’s discretion to admit Mr. Nicholson’s affidavit. Mr. Nicholson was unavailable due to legitimate medical reasons. His evidence had been given under oath. He had been thoroughly cross-examined on that evidence and the transcript of the cross-examination was available. In the circumstances, I see no basis upon which to interfere with the application judge’s decision.
The Nursing Notes
[67] Before oral testimony was heard in the proceeding below, the respondent tendered nursing notes as exhibits. The appellants say that there was no evidentiary basis established for their admission. They point to the fact that no witness identified the notes and that there was no evidence verifying their authenticity. For a variety of reasons, they argue that the notes were improperly admitted into evidence and, as the application judge relied upon them, a new trial is necessary.
[68] The testator had full-time nursing care for a number of years before her death. The notes in question were made by her caregivers in the ordinary course of their duties in caring for Ms. McDougald. The notes were obtained after the application judge recommended that the respondent attempt to locate additional information relevant to Ms. McDougald’s capacity, including medical records.
[69] As a result of that recommendation, counsel for the respondent located Pat Patterson, one of Ms. McDougald’s former nurses. Ms. Patterson had been one of Ms. McDougald’s main caregivers and had cared for the testator for a number of years. Counsel for the respondent also contacted Dr. Marotta who provided an affidavit on Ms. McDougald’s capacity during the relevant time.
[70] The appellants requested production of Dr. Marotta’s records. Those records and a portion of the nursing notes from the relevant period, including notes that had been prepared by Ms. Patterson, were located in the files of Ms. McDougald’s former solicitor, Mr. Guthrie. A complete copy of the documents was provided to the appellants before oral testimony was heard on the issue of capacity.
[71] Ms. Patterson was living in Saskatchewan and preferred not to travel to Ontario unless it was absolutely essential. The application judge offered the appellants’ counsel the opportunity to cross-examine Ms. Patterson by means of teleconference. He declined.
[72] Even if there is some issue as to the admissibility of the nursing notes, absent those notes the evidence of incapacity remains overwhelming. I would add that it appears that the application judge relied on the nursing notes only in concluding that the attorneys had a reasonable belief in Ms. McDougald’s incapacity. The matter of the attorneys’ belief was an alternative basis upon which the application judge held that s. 38(1) applied and, for the reasons already given, was unnecessary given her determination of actual incapacity.
[73] Accordingly, I would not give effect to this ground of appeal.
COSTS
[74] The appellants seek their costs from the estate, on a substantial indemnity basis, in any event of the outcome of the appeal. Alternatively, if unsuccessful on appeal, they seek an order that their costs be paid from the estate on a partial indemnity basis or that they bear their own costs.
[75] As support for their primary position, the appellants point to the fact that the traditional rule in estate litigation is that the estate bears the costs of all parties. They say that the traditional rule should apply because: the dispute could have been avoided had the will been drafted more clearly or had the attorneys handled Ms. McDougald’s affairs in a consistent fashion; they played no role in the events giving rise to the dispute; the legal issues relating to the doctrine of ademption and the interpretation and application of the Act were not straightforward; and, if successful, all of the residuary beneficiaries will benefit financially, therefore it is just that all the residuary beneficiaries bear the costs of the litigation, which is the effect that the requested costs award would have.
[76] The respondent asks that costs follow the event.
[77] In my view, it is appropriate that the appellants pay costs to the respondent on a partial indemnity basis. In explaining why I have reached this conclusion, it is useful to begin by considering the basis upon which costs are awarded, at first instance, in estate litigation.
[78] The practice of the English courts, in estate litigation, is to order the costs of all parties to be paid out of the estate where the litigation arose as a result of the actions of the testator, or those with an interest in the residue of the estate, or where the litigation was reasonably necessary to ensure the proper administration of the estate. See Mitchell v. Gard (1863), 3 Sw. & Tr. 275, 164 E.R. 1280 and Spiers v. English, [1907] P. 122. Public policy considerations underlie this approach: it is important that courts give effect to valid wills that reflect the intention of competent testators. Where the difficulties or ambiguities that give rise to the litigation are caused, in whole or in part, by the testator, it seems appropriate that the testator, through his or her estate, bear the costs of their resolution. If there are reasonable grounds upon which to question the execution of the will or the testator’s capacity in making the will, it is again in the public interest that such questions be resolved without cost to those questioning the will’s validity.
[79] Traditionally, Canadian courts of first instance have followed the approach of the English courts. While the principle was that costs of all parties were ordered payable out of the estate if the dispute arose from an ambiguity or omission in the testator’s will or other conduct of the testator, or there were reasonable grounds upon which to question the will’s validity, such cost awards became virtually automatic.
[80] However, the traditional approach has been – in my view, correctly – displaced. The modern approach to fixing costs in estate litigation is to carefully scrutinize the litigation and, unless the court finds that one or more of the public policy considerations set out above applies, to follow the costs rules that apply in civil litigation. Four cases usefully illustrate this modern approach.
[81] In Re Lotzkar (1985), 19 E.T.R. 135 (B.C. S.C.), a trust company was executor of an estate. It brought an application for power to lease a parcel of land; the power was not given to it by the terms of the will. Justice Spence acknowledged that an executor has an obligation to seek the advice and direction of the court where there is room for serious doubt or difference of opinion in respect to the interpretation of a will. He recognised that costs awards cannot be used to deter executors from fulfilling that obligation. However, he found the action of the executor in bringing an application in relation to a proposal that was improvident and opposed by a majority of the beneficiaries was “unnecessary and ill-advised”. He ordered the executors to bear their own costs and pay the costs of the responding parties.
[82] In Beaurone v. Beaurone (1997), 31 O.T.C. 236 (Gen. Div.), a testator left a will in which she gave a small bequest to one of her sons, the plaintiff, and the balance of the estate to her other son. The plaintiff unsuccessfully challenged the will on the basis of incapacity. Justice McDermid stated that there was nothing incompatible between the need for a court to be satisfied that a testator had capacity and giving effect to Rule 49 offers. He ordered the defendant’s costs payable out of the estate on a solicitor and client scale and the plaintiff to pay party and party costs to the estate, stating at paras. 6 and 7:
In my opinion, it is often the case that wills are challenged in the expectation that there is little or nothing to lose by doing so, because at the end of the day, costs will be payable by the estate. The challenger, often a slighted relative who is denied the testator’s largesse, has everything to gain and nothing to lose by trying to overturn the will.
Here, the estate is small and the intention of the testatrix will be thwarted if the plaintiff’s costs are paid from the estate. The worst that the plaintiff might expect under the traditional rules is that he would retain his $1,000 bequest and have his costs paid from the estate. He would thereby at least have the satisfaction of ensuring that if he were not to benefit from his mother’s estate, neither would his brother. I believe that in such circumstances plaintiffs should be given reason to pause and reflect upon the consequences of unsuccessful litigation before commencing it.
[83] In Re Marshall Estate (1998), 50 O.T.C. 357 (Gen. Div.), Sutherland J. found that an attack on testamentary capacity was unreasonable, there were no reasonable grounds for persisting with the litigation and its continued pursuit was irresponsible. He ordered costs against the unsuccessful challenger on a solicitor and client basis.
[84] In Gamble v. McCormick (2002), 4 E.T.R. (3d) 209 (S.C.J.), Greer J. found that there was no reasonable basis to a husband’s challenge to the validity of his late wife’s will. At para. 13 of her reasons she states:
The cost of the emotional wreckage caused by this trial to all parties, leaving what had been a warm, loving family unit in tatters, is incalculable. None of their lives will ever be the same again. Costs on a solicitor and client basis cannot heal those wounds. It can only pay for the monetary cost of what took place.
[85] The modern approach to awarding costs, at first instance, in estate litigation recognises the important role that courts play in ensuring that only valid wills executed by competent testators are propounded. It also recognises the need to restrict unwarranted litigation and protect estates from being depleted by litigation. Gone are the days when the costs of all parties are so routinely ordered payable out of the estate that people perceive there is nothing to be lost in pursuing estate litigation.
[86] I pass now to the question of what principles govern costs awards in estate litigation at the appellate level. Although the jurisprudence on point is limited, in my view, it is to the effect that at the appellate level, costs are normally ordered against an unsuccessful appellant. In Re Fleck (1924), 55 O.L.R. 441 (App. Div.), the appellate division of the Ontario Supreme Court ordered the unsuccessful appellant to pay costs, saying at p. 447:
The appeal must be dismissed with costs. I should have been disposed, because the difficulty here is caused by the testator’s language alone, to give costs out of the estate. But costs of an unsuccessful appeal do not come within the rule applied, for that reason, to the costs of the original application or action.
[87] Re Haig (1925), 57 O.L.R. 129 (App. Div.) was decided shortly thereafter. A majority of the court allowed the appeal and ordered that all parties be paid their costs out of the estate, with those of the executors payable on a full indemnity basis. Hodgins J.A. dissented. He would have dismissed the appeal and, relying on Re Fleck, ordered the appellants to pay costs.
[88] Justice Hodgins, writing for the court in Re Smith (1927), 61 O.L.R. 412 (App. Div.), allowed the appeal in an estate matter and ordered costs of the parties from the estate saying that, as the appellants had succeeded, the rule in Re Fleck did not apply.
[89] This court considered the matter of costs in estate litigation more recently in Eady v. Waring (1974), 1974 492 (ON CA), 2 O.R. (2d) 627. As the court made no reference to any jurisprudence when deciding the matter of costs, it appears that it may not have had the benefit of the decisions reviewed above. Nonetheless, the court ordered costs against the unsuccessful appellant, saying at p. 643:
The appeal should therefore be dismissed. The trial judge allowed the costs of all parties out of the estate of the testator. This was, I think, a perfectly proper order, because the executors had a duty to bring forward what purported to be the last will of the testator. I do not think their duty extended to appealing from the adverse finding against the will, particularly when one of the appellants was a son of a principal beneficiary, and had himself been a participant in the circumstances leading up to the execution of the will in respect of which probate has been refused.
[90] While the appellants argue that the decision in Eady v. Waring should be confined to circumstances in which the appellant has been personally active in a suspicious manner in the events leading up to the litigation, I do not read the reasons as being limited to such situations.
[91] In ordering the appellants to pay costs, I act on the principle that the same rules that govern costs in civil litigation at the appeal level apply to unsuccessful appellants in estate litigation. I see nothing in the circumstances of the parties to warrant departing from that principle.
[92] The appellants are two of the eight remaining residuary beneficiaries of the estate. They are entitled to a relatively small portion of the residue of the estate. None of the other residuary beneficiaries took a position in the application by the estate trustees, the appellants’ counter-application or the appeal. The matters that concerned the appellants were thoroughly dealt with below. Arguably, such matters would have been fully explored and resolved by means of the application alone. Be that as it may, the application judge gave thoughtful, cogent reasons in granting the respondent’s application and dismissing the appellants’ counter-application. The application judge allowed the appellants their costs, payable out of the estate of the testator. To require the estate to bear the costs of the appeal for all parties would be to make all of the residuary beneficiaries pay for the application, the counter-application and the appeal when only the appellants embarked on such litigation and on the appeal. Application of the usual costs rule, however, results in the estate bearing only that portion of the respondent’s costs not recovered from the appellants.
DISPOSITION
[93] Accordingly, I would dismiss the appeal with costs to the respondent fixed at $17,000, inclusive of GST and disbursements.
RELEASED: June 15, 2005 (“EAC”)
“E. E. Gillese J.A.”
“I agree E. A. Cronk J.A.”
“I agree J. MacFarland J.A.”