Supreme Court of WA|2000-08-24|Before: Mr J, Templeman J

Bandwill Pty Ltd & Anor v Spencer-Laitt & Ors [2000] WASC 210 (24 August 2000)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : BANDWILL PTY LTD & ANOR -v- SPENCER-LAITT & ORS [2000] WASC 210

Application for an interlocutory stay of action on the basis that it is being funded pursuant to a champertous agreement - Principles applicable to such applications - Whether sufficient risk of abuse of process to warrant a stay

Second Plaintiff : Mr D M Stone & Mr D R Kilpatrick

Second Defendant : Mr D R Meagher QC & Mr J D Karas

Fourth Defendant : Mr M Tobias QC & Mr G R Donaldson

Buiscex Ltd v Panfida Foods Ltd (1998) 28 ACSR 357

Dataquest (Australia) Pty Ltd v Dataquest Inc, unreported; 8 August 1996

Faryab v Smyth, unreported; English Court of Appeal; 28 August 1998

Freehill Hollingdale & Page v Bandwill Pty Ltd [2000] WASCA 150

Giles v Thompson [1994] 1 AC 143

Grovewood Holdings PLC v James Capel & Co Ltd [1995] Ch 80

Harrison v Schipp [1999] NSWCA 443

Hodges v State of New South Wales [1988] HCA 9; (1988) 77 ALR 1

Magic Menu Systems Pty Ltd v AFA Facilitations Pty Ltd (1996) 72 FCR 261

Martell v Consett Iron Co Ltd [1955] Ch 363

Re Movitor Pty Ltd (1966) 64 FCR 38

Re Oasis Merchandising Services Ltd [1998] 1 Ch 170

Re Trepca Mines Ltd (No 2) [1963] 1 Ch 199

Stocznia Gdanska v Latreefers Inc, unreported; English Court of Appeal; 9 February 2000

Trendtex Trading Corporation v Credit Suisse [1982] AC 679

Wild v Simpson [1919] 2 KB 544

Beatty v Brashes Pty Ltd (1998) 16 ACLC 1138; [1998] 2 VR 201

British Cash & Parcel Conveyers Ltd v Lanson Store Services Co Ltd [1908] KB 1006

Brownton Ltd v Edward Moore Inbucon Ltd [1985] 3 All ER 499

Carob Industries Pty Ltd (In Liq) v Simto Pty Ltd [1999] WASC 258; (1999) 18 ACLC 177

Christmas Island Resort Pty Ltd v Geraldton Building Company Pty Ltd (No 5) (1997) 18 WAR 334

Elfic v Peter Mack & Ors, unreported; SCt of QLD (Williams J); 22 February 2000

Ellis v Torrington [1920] 1 KB 399

Esso Australia Resources v Federal Commissioner of Taxation [1999] HCA 67; (1999) 168 ALR 123

Hill v Archbold [1968] 1 QB 686

Jago v District Court of NSW [1989] HCA 46; (1989) 168 CLR 23

McMullin v ICI Australia Operations Pty Ltd, unreported; FCA (Wilcox J); 18 November 1996

Neville v London Express Newspapers [1919] AC 368

Newton v Gapes (1910) 12 WAR 86

O'Keeffe v Scales [1998] 1 ILRM 393

Pioneer Machinery (Rentals) Limited v El-Jay Inc (1979) 93 DLR (3rd) 726

Re William Felton Co Pty Ltd (1998) 28 ACSR 228

Rogers v The Queen (1994) 181 CLR 257

SA Asset Management Corp v Sheahan [1995] SASC 5182; (1995) 13 ACLC 1138

Schultz v Ocean Accident Guarantee Corp Ltd (1923) 23 SR (NSW) 153

Sinclair v James [1894] 3 Ch 554

Smith v Malony (1998) 19 WAR 209

Stocznia SA v Latvian Shipping [1999] 3 All ER 822

1 The applicants, who are the defendants to this action, seek a stay. They contend that the action is being maintained against them pursuant to champertous agreements or arrangements between the plaintiffs and companies associated with Mr Hugh McLernon and Mr Daniel Martin Hill. Mr McLernon, who was formally a legal practitioner, is now engaged with Mr Hill in the business of litigation funding, through the medium of various companies including Expectation Pty Ltd.

2 The action was commenced by writ issued on 11 October 1999. The first plaintiff is a company which is effectively controlled by Mr McLernon: Bandwill Pty Ltd ("Bandwill"). The second plaintiff is Mr Gad Raveh, an Israeli lawyer who, although an Australian citizen, is now resident in Israel.

3 The first and second defendants are Mr Graham St John Spencer-Laitt and his wife, Malca Spencer-Laitt. Mr Laitt, who is a solicitor by profession, formerly practised as a member of the firm of Freehill Hollingdale & Page ("Freehills").

4 Mr Raveh alleges that Mr Laitt, as a partner of Freehills, acted for him in relation to a number of complex transactions from 1985 onwards. In summary, Mr Laitt is said to have advised Mr Raveh in relation to a discretionary trust known as the Interlaken Trust, of which Mr Raveh was the protector and he and his family the beneficiaries. Further, Mr Laitt is said to have acted in a series of transactions in 1990 which resulted in a substantial amendment to the Interlaken Trust Deed and the appointment of Lodi Holdings Pty Ltd ("Lodi") as a replacement trustee. Lodi, which is controlled by Mr and Mrs Laitt, is the third defendant to the action.

5 As a result of the amendment, Mr Laitt became an additional protector of the Interlaken Trust: and he and his family became additional beneficiaries.

6 The amendment provided also for the notional division of the Interlaken Trust Fund. Upon the nomination of a "trigger date" by either Mr Raveh or Mr Laitt, they and their respective families would each become entitled to an undivided one-half share in the fund, to be known as the A Fund and the B Fund.

7 The present assets of the Interlaken Trust Fund are substantial. According to Mr Raveh, they are worth in excess of $50 million. The principal asset, which is held through a hierarchical corporate structure, is a controlling interest in the Peters and Brownes group of companies, of which Mr Laitt is now the Managing Director.

8 In 1999, Mr Raveh, who claims that he was in urgent need of money, sought to realise his interest in the Interlaken Trust Fund by agreement with Mr Laitt. No agreement was reached.

9 In March 1999 Mr Raveh entered into a loan agreement with Biara Pty Ltd ("Biara") a company controlled by Mr McLernon. Pursuant to that agreement, Mr Raveh borrowed some $7.8 million against the security of his and his family's interest in the Interlaken Trust Fund and any relevant claim or right of action against any past, present or future adviser of any person connected with the trust.

10 In September 1999, Mr Raveh nominated a trigger date with a view to excising the A Fund. He also appointed Bandwill as the trustee of that fund. Bandwill is a wholly owned subsidiary of Biara.

11 Mr and Mrs Laitt and Lodi have denied that Mr Raveh was entitled to act as he did. However, Mr Raveh's interest in the trust fund is not in dispute: the issue is when he is entitled to realise that interest.

12 As I have noted above, this action was commenced on 11 October 1999. Mr Raveh claims against Mr Laitt to set aside the various transactions by which he and his family came to acquire an interest in the Interlaken Trust. Mr Raveh therefore seeks a declaration that Bandwill is the trustee of the entire fund: alternatively that it is the trustee of the A Fund only.

13 Mr Raveh's claim is based principally on his contention that at the material times Mr Laitt was his solicitor and was in breach of the fiduciary duties which he owed to Mr Raveh. The claims against Freehills are also based on alleged breaches of fiduciary duty, both by Mr Laitt, in his capacity as a partner in the firm, and by other "partners, representatives or employees." It is alleged that Freehills should have appreciated that a conflict existed between Mr Raveh and Mr Laitt and advised accordingly.

14 In their defence, Mrs and Mrs Laitt contend, in substance, that at the material times Mr Raveh and Mr Laitt were engaged in a series of commercial transactions as business associates, not as client and solicitor. It is alleged that Mr Raveh is himself a lawyer of considerable experience and that he entered into the relevant transactions in the exercise of his own judgment: not as a result of any influence by Mr Laitt.

15 Freehills, in their defence, contend that Mr Laitt ceased practising as a solicitor from about April 1986; and that thereafter he was a partner in the firm "in name only". This, it is alleged, was known to Mr Raveh. Freehills contend also that in the course of his business activities, Mr Laitt engaged various solicitors, including Freehills, to act for him: and that Mr Raveh was aware of these matters also. In short, Freehills deny all allegations of impropriety.

16 There is a counterclaim by the Laitt applicants in which they contend that in nominating a trigger date, Mr Raveh was in breach of fiduciary duties he owed the B Fund beneficiaries. Further, it is alleged against Mr Hill and Mr McLernon and various companies associated with them that the action is being funded pursuant to the champertous agreement or arrangement which I have mentioned above and to which I shall refer in more detail in due course.

17 It is alleged further that what are described as "the McLernon Interests" have "wrongfully, maliciously and unlawfully conspired" to injure the Laitt interests by various means including the loan and funding agreements.

18 There is also a counterclaim for defamation against Mr Hill arising out of a press release about Mr and Mrs Laitt said to have been published by him on 11 October 1999.

19 In addition, Mr and Mrs Laitt and Freehills have commenced separate proceedings against the relevant companies associated with Mr McLernon, and Mr Raveh, in which they seek permanent injunctions to restrain the continued maintenance of this action, and damages.

20 On 13 October 1999, two days after the action was commenced, Mr Raveh and the members of his family who are the beneficiaries of the Interlaken Trust entered into a deed with Biara, Bandwill and McLernon Group Ltd ("MGL"), an associate of Biara, whereby Biara agreed to fund the action; and MGL, which is a licensed investigator, agreed to provide investigation and litigation support services for a fee amounting to 55 per cent of any distribution made to the Raveh beneficiaries from the B Fund and 3 per cent of any such distribution from the A Fund.

21 There are two stay applications. One application is brought by Mr and Mrs Laitt and Lodi: the other by Freehills.

22 The applications are interlocutory in the sense that none of the applicants seeks a permanent stay of the action. However, it is contended by Mr Raveh that to stay the action would be effectively to stifle it.

23 Substantial affidavit evidence has been filed in support and opposition to the applications. I declined to permit cross-examination of the deponents, being unpersuaded that the circumstances were sufficiently exceptional to require a departure from the customary practice: see Seaman on Civil Procedure par [26.2.3] .

24 The hearing of the applications was conducted on the basis of both written and oral submissions. Mr and Mrs Laitt and Lodi were represented by senior counsel, as were Freehills. However, each counsel, to a large degree, adopted the other's submissions. It will therefore be convenient to refer to "the applicants' submissions" except where it is necessary to identify the Laitt applicants or Freehills separately.

25 The general concepts of maintenance and champerty are well established, having their origins in medieval jurisprudence. However, there are issues between the parties about the present state of the applicable law and the approach to be taken in applications of this kind.

26 The applicants rely on a definition of unlawful maintenance given by Lord Denning MR in Re Trepca Mines Ltd (No 2) [1963] 1 Ch 199, 217:

"improperly stirring up litigation and strife by giving aid to one party to bring or defend a claim without just cause or excuse."

27 Lord Denning took his definition from Martell v Consett Iron Co Ltd [1955] Ch 363, a case in which an association for the protection of riparian owners provided financial support for an action brought by a member of the association who alleged that the defendant's iron works was polluting a river. Both Dankwerts J at first instance and the Court of Appeal, held that the association, had a sufficient interest in the subject matter of the action to justify its funding. There was therefore, "just cause or excuse" (to adopt Lord Denning's definition) for the association's conduct, even though it had requested and encouraged the plaintiff to commence the proceedings.

28 To return to Re Trepca Mines: Lord Denning went on to deal with champerty. He said (at 219):

"But there is one species of maintenance for which the common law rarely admits of any just cause or excuse, and that is champerty. Champerty is derived from campi partitio (division of the field). It occurs when the person maintaining another stipulates for a share of the proceeds: see the definitions collected by Scrutton LJ in Haseldine v Hosken [1933] 1 KB 822, 831. The reason why the common law condemns champerty is because of the abuses to which it may give rise. The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses. These fears may be exaggerated; but, be that so or not, the law for centuries has declared champerty to be unlawful, and we cannot do otherwise than enforce the law...."

29 The case was concerned with a funding agreement between a creditor of a company whose proof of debt had been rejected by a liquidator, and a third party. The essence of the agreement was that the third party would fund an appeal from the liquidator's decision, in consideration of a one quarter share of the proceeds.

30 The Court of Appeal held that the agreement constituted "champertous maintenance", there being no "pre-existing common interest which could render the maintenance lawful": see Pearson LJ at 226.

31 On that basis, it is convenient to categorise as "lawful maintenance" an arrangement in which a person funds litigation in which he has a pre-existing interest in common with the plaintiff. If the funder has no such interest (and there is no other relevant exception) his conduct may be categorised as "unlawful maintenance".

32 In the latter situation, a funding agreement which provides for the division of the proceeds of the litigation will be unlawfully champertous. But what if a funder stipulates for a share in the proceeds of litigation in which he has a legitimate interest? That question did not arise in Re Trepca Mines, although Pearson LJ referred to it (at 226). He said it was not necessary to consider whether "champertous maintenance" could in any, and if so, what, class of cases be rendered lawful by the presence of (for example) a pre-existing common interest.

33 The question was considered again, in Giles v Thompson [1994] 1 AC 143. There, actions brought by plaintiffs who had been injured in motor vehicle accidents caused by the defendants, were funded by a company from which the plaintiffs had hired replacement vehicles. The agreements between the hire company and the plaintiffs entitled the company to sue in the plaintiffs' names and recoup the hire charges from the damages recovered.

34 Lord Mustill, with whom the other members of the House of Lords agreed, said (at 163-4):

"it is necessary first to consider whether the transaction bears the marks of unlawful champerty and then to enquire whether it is validated by the existence of a legitimate interest in the person supporting the action distinct from the benefit which he seeks to derive from it. For this purpose, close regard must be paid to Trendtex Trading Corporation v Credit Suisse [1982] AC 679...the law on maintenance and champerty can best be kept in forward motion by looking to its origins as a principle of public policy designed to protect the purity of justice and the interests of vulnerable litigants. For this purpose the issue should not be broken down into steps. Rather, all the aspects of the transaction should be taken together for the purpose of considering the single question whether ... there is wanton and officious intermeddling with the disputes of others in where [sic which] the meddler has no interest whatever, and where the assistance he renders to one or the other party is without justification or excuse."

35 In the Trendtex decision, to which Lord Mustill referred, the majority of the House of Lords restated the proposition that a bare right to litigate cannot be assigned. But in that case, Lord Roskill held that if the assignment in question was of a property right or interest to which the cause of action was ancillary, it should not be struck down: "the court should look at the totality of the transactions".

36 To return to Giles v Thompson: Lord Mustill went on to say that the question must be looked at first in terms of the harmfulness of the intervention of the funding party "which in turn calls for separate consideration of the risks to the administration of justice and to the interests of the [plaintiff]": in short, a balancing exercise. The implication is that even if the funder has a legitimate interest in the outcome of the litigation, the funding arrangements may still pose a sufficient threat to the administration of justice to render the champertous element unlawful.

37 Lord Mustill went on to consider whether there was any realistic possibility that the administration of justice might suffer in the way in which it undoubtedly suffered centuries ago. His Lordship thought not:

"or at any rate, none with which the skills and coercive powers of the contemporary Judge are unable to grapple".

38 In the result, the agreement in issue was held not to have been champertous: the hire company derived its profit from the hiring, not from the spoils of litigation. It was not, therefore, "wantonly or officiously interfering in the litigation": that being the single criterion by which, as Lord Mustill had held earlier in his speech, both maintenance and champerty should be judged.

39 It follows in my view, that on the "single question" approach, funding arrangements which entitle the funder to share in the proceeds of litigation may or may not be lawful. A situation might arise in which the funder had a legitimate pre-existing interest in the litigation but stipulated for a share in the proceeds on terms which constituted an unacceptable risk to the administration of justice. In those circumstances there would be unlawful champerty. But absent those unacceptable arrangements for division of the proceeds, there would be lawful maintenance.

40 However, if the arrangements involved unlawful maintenance (in the sense of wanton or officious interference, for example) then even an inoffensive agreement for sharing the proceeds would not prevent those arrangements from being classified as unlawful champerty.

41 Hence the need to consider whether the arrangements as a whole are objectionable on the grounds that they constitute an abuse of the court's process.

42 Lord Mustill's approach was considered by the Court of Appeal in Faryab v Smyth, (unreported; 28 August 1998).

43 There, the appellant, who had been ordered to provide security for costs by paying the sum of 40,000 pounds stg into court, had borrowed that amount from a consortium of financiers. The relevant agreements contained a guarantee by the appellant to repay the loan and substantial amounts up to a total of 150,000 pounds stg, depending on the extent to which the appeal succeeded. The appellant acknowledged that he was impecunious. The financiers could therefore obtain their returns only out of the proceeds of the litigation.

44 The respondent to the appeal applied for a stay on the ground that the funding agreements were champertous. In so doing, he relied on the passage in Lord Mustill's speech in Giles v Thompson, to which I have referred above.

"In my view the court is required to consider in the light of the facts of each case whether its process is affected or threatened by the agreement for division of spoils."

He went on to hold that the facts did not reveal any abuse of the court's process:

"although there may well be cases where the court can see that there is some feature - say, some element of trafficking in litigation - which must be regarded as abusive."

46 The other member of the Court, Simon Brown LJ was in general agreement. In his view:

"the point at which any particular funding agreement, even assuming it is technically champertous, could be said to constitute an abuse of process, is ..... very far from clear". (My emphasis)

His Lordship identified several possible factors. These included:

(2) the relationship between the parties to that agreement

(4) the relationship between the fund to be provided, any amount to be repaid and the sum in issue in the proceeding

I understand Simon Brown LJ's reference to "technical champerty" to mean an agreement by which the funder shares in the proceeds of litigation, but which is not objectionable, for that reason only: in other words, "lawful champerty".

47 A differently constituted Court of Appeal adopted a similar approach in Stocznia Gdanska v Latreefers Inc, (unreported; 9 February 2000). In that case ship brokers had agreed to pay the costs incurred by a petitioning creditor in the winding-up of a company and to fund an action by the creditor against the company and its ultimate holding company.

48 The action involved a claim for breaches of a ship-building contract. The ship brokers had arranged the contracts and would have earned commission had the ships been constructed. Their commission agreements therefore gave the brokers a legitimate interest in the outcome of the action.

49 The defendant sought a stay on the ground that the funding agreement entitled the brokers to share in the proceeds of the litigation and was therefore champertous. While recognising the funders' legitimate interest, the defendant submitted that their potential share in the proceeds was disproportionately large in comparison with that interest, such as to result in the funders "trafficking in litigation".

50 In a judgment given by Morritt LJ, to which all members of the Court had contributed, that submission was rejected. The Court held that a large mathematical disproportion between a pre-existing financial interest and the potential profit of funders might contribute to a finding of abuse, but not necessarily so.

51 The Court followed the approach of Chadwick LJ in Faryab v Smyth in holding that the question whether its process is affected or threatened by an agreement for the division of spoils is to be considered in the light of the facts of each case. The factors to which Simon Brown LJ had referred might be relevant and important, but they were not "exclusive nor necessarily determinative in the abstract".

52 Turning to the concept of "trafficking in litigation", Morritt LJ thought it undesirable to attempt a definition in different terms. However, he went on to say that it seemed to the court to connote "unjustified buying and selling of rights of litigation where the purchaser has no proper reason to be concerned with the litigation."

53 Lord Mustill's approach in Giles v Thomas has been followed in Australia. In Re Movitor Pty Ltd (1966) 64 FCR 38, Drummond J was asked to give directions to a liquidator who wished to enter into a debt retrieval agreement with an insurance company. The liquidator proposed to use the funds generated by the agreement to prosecute an action against former directors of the company in liquidation. The agreement provided for the proceeds of the litigation to be shared with the insurance company.

54 Drummond J adopted Lord Mustill's view that the arrangements would involve unlawful champerty unless the funder had an interest in the litigation which was separate from the potential benefit. But (at 388):

"old authority ... that an interest in litigation which might justify a stranger maintaining one of the litigants can never be sufficient to justify champerty cannot be accepted as stating the law."

55 Drummond J went on to hold that the arrangement proposed by the liquidator involved both unlawful maintenance and champerty because the insurance company had no interest in the litigation other than the opportunity to make a commercial profit. This involved trafficking in litigation.

56 The arrangements were, however, approved on other grounds, namely the liquidator's right to assign a past cause of action: a long established exception to the rules of maintenance and champerty.

57 The present plaintiffs contend it to be the law in Australia that a disproportionately high return to a litigation funder does not of itself constitute unlawful champerty. That was, in substance the conclusion reached by Hodgson CJ in Equity in Buiscex Ltd v Panfida Foods Ltd (1998) 28 ACSR 357, another case in which a liquidator sought court approval of a funding agreement.

58 The agreement provided for the funders to receive 75 per cent of the net return on any litigation, in return for funding an investigation into the company's affairs. However, Hodgson CJ considered that in all the circumstances, of which the extent of the return was only one, it was appropriate to grant approval. The circumstances included the fact that the liquidator had negotiated the agreement: and that the prospects of substantial recovery were not high.

59 I accept the applicants' submission that litigation involving funding agreements with liquidators must be regarded with some caution because liquidators have statutory rights, subject to court approval, to enter into such agreements. As Hodgson CJ noted (at 363) the public policy considerations underlying the rules about maintenance and champerty are of lesser significance in this context.

60 More to the point, I think, is the decision of a Full Court of the Federal Court in Magic Menu Systems Pty Ltd v AFA Facilitations Pty Ltd (1996) 72 FCR 261.

61 In that case the defendants, who were franchisees, sought injunctions to restrain the plaintiffs, who were their franchisors, from pursuing the action against them. It was said that the action was being maintained pursuant to a champertous funding agreement with the Australian Franchise Association Ltd ("AFA"), a non-profit making organisation, dedicated to advancing the interests of its members. The funding agreement entitled the AFA to a return which included a fee and a sum equal to 20 per cent of the proceeds of the litigation.

62 In a joint judgment the court referred to the vices originally thought to be inherent in champertous agreements: including the temptation to suborn witnesses and pursue worthless claims. However, the court went on to say that public policy considerations which shaped the attitude of the courts had changed with the times. Reference was made to Martell (supra) and the proposition that the court must recognise "a bona fide common interest, financial or philosophical", if the law is not to operate oppressively. The court expressed the view that today, an even wider view is likely to be taken of what might be acceptable, particularly if procedural safeguards are available.

63 Then, after considering some of the manifestations of champerty, and proposals for reform of the law, the court continued:

"That is not to say, however, that the policy considerations which gave rise to the offence and tort have lost all significance today. The ability of the Courts to treat agreements for maintenance as contrary to public policy, and therefore illegal, remains unaffected by the statutory provisions: see Trendtex Trading at 653; McFarlane v EE Caledonia (No 2) at 370; Roux v ABC at 605; Giles v Thompson [1993] UKHL 2; [1994] 1 AC 142. The giving of financial assistance to a litigant by a non-party will not however conclude the question as to whether it is unlawful on this ground (see Condliffe v Hislop). Questions of public policy with which the Courts will be concerned, as Byrne J observed in Roux v ABC at 605, are those which have regard to litigation and its funding in the contemporary world.

Trendtex, and the later cases to which we have just referred, were concerned with the question whether the Court ought lend its aid to the enforcement of champertous agreements. Questions will also likely arise for the Courts, where actions are funded by them, as to the integrity of its processes and in particular as to the uses to which they are being put, and as to the conduct of the maintained party and the maintainer with respect to the proceedings. In this connection it would be necessary to have regard to the provisions of the particular agreement."

64 In the present case the enforceability of the funding agreement is not in issue. But in holding that:

(1) the giving of financial assistance by a funder will not of itself conclude the question of unlawfulness; and

(2) it is necessary to have regard to the provisions of the particular agreement,

the court adopted precisely the approach taken by the English courts in the line of cases to which I have referred above.

65 The Full Court of this court has taken a similar view. In Freehill Hollingdale & Page v Bandwill Pty Ltd [2000] WASCA 150, at par 25, the court said:

"The question whether a particular action has been brought, or is being continued, in abuse of the court's process is one which depends on all of the material circumstances, of which the fact of maintenance or champerty may be only one."

The court went on to say that there was a considerable body of recent authority to support the proposition: including Magic Menu, Faryab v Smyth and Stocznia Gdanska v Latreefers.

66 This approach is binding on me. In requires me to consider whether the agreements or arrangements between Mr Raveh and the companies associated with Mr McLernon involve unlawful champerty and whether for that, or any other reason, there is an abuse of process.

67 However, I am not concerned here with the trial of an action. These are interlocutory applications for a stay, conducted on affidavit evidence without cross-examination. Despite some observations by leading counsel for the Laitt applicants which appeared to suggest otherwise, their application was made on the basis that "there will be no requirement for any cross-examination on affidavits". That was their position as set out in a letter dated 27 April 2000 from their solicitors to my Associate. And Freehills' application was pursued after I had decided not to permit cross-examination on affidavits: a decision which was upheld by the Full Court.

68 I therefore turn to consider the resolution of a stay application in these circumstances.

69 In Magic Menu, the Full Court expressed the view (at 72 FCR 268) that:

"where there may be the real potential for an abuse of the Court's processes ... a stay might, in some cases, be justified". (My emphasis)

The court noted that the question whether a stay should be imposed had been left open by Atkin LJ in Wild v Simpson [1919] 2 KB 544. The issue in that case was whether an agreement made between a solicitor and his client was champertous and therefore unenforceable. Atkin LJ pointed out that even if the agreement was illegal, there were two parties at least who were "not privy to the illegality - namely the opposing party and the Court itself". For that reason, Atkin LJ said, he would not expect proceedings to be declared void:

"...though I reserve my opinion as to whether the Court, on being satisfied that pending proceedings are being unlawfully maintained, has not power to stay them as being vexatious and oppressive and an abuse of the process of the Court, and to continue such stay until the Court is satisfied that the proceedings are purged of the taint of illegality."

70 Dankwerts J, in Martell ([1955] Ch at 388), regarded that as "a not unfavourable comment" on the availability of a stay, although he noted that no case had been found in which a stay had been granted.

71 However, the Court of Appeal was of the view that a stay should not be granted on the grounds of unlawful maintenance only. This was because, as Jenkins LJ explained:

1. The fact that an action is being maintained illegally is not a defence to the action and therefore provides no proper ground for a stay of the proceedings.

2. Once there has been illegal maintenance, the proceedings are tainted irretrievably. The taint cannot therefore be purged except by discontinuing the proceedings and bringing a fresh action. But this would effectively make maintenance a defence to the action, which it is not.

3. It is undesirable that the question whether the action is being maintained illegally should be adjudicated in interlocutory proceedings in the action. This is because the procedure would involve the trial of what was, at least theoretically, still a crime, in the absence of the accused.

72 I am told that since 1955, there have been two reported cases in which stays have been granted. The first is Grovewood Holdings PLC v James Capel & Co Ltd [1995] Ch 80, a decision of Lightman J, on which the present applicants place considerable reliance.

73 The application for the stay arose out of a funding agreement between a liquidator and a "sponsor" who was to receive one-half of the recoveries in the action, in which negligence and misrepresentation were alleged against Grovewood's former financial adviser. His advice, it was said, had resulted indirectly in the collapse of the company. The company's creditors and shareholders were unwilling to fund the litigation. The agreement authorised the sponsor to pursue the litigation without being subject to the control or interference of the liquidator.

74 There was a further agreement, between the sponsor and a provider of funds for the litigation. The agreement provided for the sponsor and the provider to share the liabilities (and in particular, any sum ordered to be paid into court as security for costs) and the 50 per cent share of recoveries. The agreement also enabled the sponsor to "unitise", or sell the share of the recoveries to which he was entitled to other providers, in return for payments of, or contributions towards, the half share of any security for costs for which he was liable.

75 It was common ground that the sponsorship agreement was prima facie champertous (ie involving unlawful champerty) because the sponsors did not assert any requisite interest or motive to justify their intermeddling.

"First, I cannot see how a liquidator can properly or at all surrender his fiduciary power to control the proceedings commenced in the name of the company. Second, I consider the provision for unitisation and further trafficking in the litigation objectionable."

77 It may be added that leading counsel for the liquidator, who opposed the stay, had nevertheless conceded in argument that it was "inconceivable" that a reputable liquidator, which his client was, would or could proceed with an action which was held to be champertous.

78 Lightman J accepted the submission that when proceedings are maintained champertously, the proceedings constitute an abuse of process. His Lordship said:

"This appears to me both logical and right in any ordinary case. The law of champerty is based on public policy considerations designed to protect both the administration of justice and the defendant from the prosecution of such proceedings. If the court does not intervene, it may be taken to be countenancing this abuse of its process."

79 Lightman J was encouraged in his decision by Lord Atkin's comment in Wild v Simpson, to which I have referred above, which he also described as "not unhelpful". He doubted that the expressions of opinion in Martell's case remained good law, since the crime of maintenance had been abolished and other grounds existed, which did not constitute defences, on which a stay might be granted. However, he was in no doubt that a stay could be granted in the particular circumstances, so as to put an end to an obvious abuse of process.

80 It seems to me, with respect, that the decision in Grovewood Holdings was entirely justified on the merits, although the reasons for the decision have been criticised: most notably by Millett LJ in Abraham v Thompson [1997] EWCA Civ 2179; [1997] 4 All ER 362; 377 - 378:

"I find it difficult to see how the decriminalisation of maintenance can form any rational basis for distinguishing (Martell). It is, to say the least, counterintuitive to reason that conduct which was not regarded as an abuse of the process of the court when it constituted a crime and a tort should be regarded as an abuse of its process when it is neither."

81 The second case in which a stay was granted was Re Oasis Merchandising Services Ltd [1998] 1 Ch 170.

82 There, the Court of Appeal held that a liquidator should not be permitted to enter into a champertous funding arrangement with a litigation support company on terms which enabled the company to conduct the litigation to the exclusion of the liquidator.

83 More fundamentally, the fruits of the litigation which were assigned by the liquidator were not the property of the company in liquidation, so as to be capable of assignment pursuant to the exercise by the liquidator of his statutory power.

84 It was that factor which persuaded the Judge at first instance to grant a stay, despite "considerable difficulty with that part of Lightman J's judgment on which Grovewood Holdings was decided". The Judge's decision was upheld by the Court of Appeal, which in addition, expressed itself to be "far from happy" about the right of interference given by the funding agreement to the litigation support company.

85 The case is not therefore of assistance in the present context, when the question is whether a stay should be granted on the grounds of actual or threatened abuse of process.

86 As to that: in Abraham v Thompson (supra) the Court of Appeal was of the view that the logic of Jenkins LJ in Martell retained its general force. I have referred above to the judgment of Millett LJ. The other member of the court, Potter LJ, observed (at 374):

"[Martell] assumes and recognises the general principle that a plaintiff is entitled to proceed to trial without a stay in a case where the action is brought bona fide and the ground on which the stay is sought is one which would involve a pre-trial investigation of facts, which even if established, would afford no defence to the persons sued."

"In my view, the starting point in any case where a stay is sought in circumstances which are not provided for by statute or rules of court, should be the fundamental principle that in this country an individual (who is not under a disability, a bankrupt or a vexatious litigant) is entitled to untrammelled access to a court of first instance in respect of a bona fide claim based on a properly pleaded cause of action, subject only to the sanction or consideration that he is in peril of an adverse costs order if he is unsuccessful, in respect of which the opposing party may resort to the usual remedies of execution and/or bankruptcy if such order is not complied with. This principle is of course subject to the further proviso that, if the court is satisfied that the action is not properly constituted or pleaded, or is not brought bona fide in the sense of being vexatious oppressive or otherwise an abuse of process then the court may dismiss the action or impose a stay whether under the specific provisions of the rules of court or the inherent jurisdiction of the court."

87 In Faryab v Smyth the Court of Appeal followed Abraham v Thompson. Chadwick LJ, while accepting that the court has power to stay proceedings which constitute an abuse of its process, said that the court:

"should be careful not to use that power so as to deny access to justice to a party who has sought to fund his proceedings in a way which may itself be contrary to public policy, unless that which has been done can be seen to amount to an abuse of the court's own process".

88 Earlier in his judgment Chadwick LJ had said that unless it was "plain and obvious" that the funding contracts were champertous, the court should avoid deciding that question in the absence of lenders, unless it was necessary to do so.

89 That view is of lesser significance in the present application, because the principal lender, Biara, is Bandwill's parent company. However, a reference by Chadwick J to discouraging "satellite litigation" is in my view, relevant in this jurisdiction.

90 The Court of Appeal in Stocznia Gdanska v Latreefers agreed with the view expressed by Chadwick LJ, that it would not usually be necessary to decide whether an agreement is champertous unless it is "plainly and obviously" so. In both of these cases, I understand the reference to champerty to mean unlawful champerty.

91 In my view, the approach to issues of this kind is the same in Australia as it is in England.

92 In Hodges v State of New South Wales [1988] HCA 9; (1988) 77 ALR 1, Brennan J, sitting as a single Judge of the High Court, heard an application to strike out a statement of claim in proceedings in which it was contended that the Transport Accidents Compensation Act 1987 of New South Wales was invalid.

93 Among other arguments, it was submitted that the proceedings constituted an abuse of process because the New South Wales Bar Association had provided financial assistance to the plaintiff to prosecute the challenge to the legislation. Brennan J observed (at 16):

"If the defendants had claimed that the Bar Association was unlawfully maintaining the action, the submission that the proceedings were an abuse of process would have been comprehensible. Even had such an allegation been made, however, it would be wrong to stay proceedings pending a determination of the issue of unlawful maintenance: Martell v Consett Iron Co Ltd".

94 As the Full Court pointed out in Magic Menu Systems (at 72 FCR 268), Martell was an action said to have been brought on the tort of maintenance. But that issue had not been determined when the stay application was made. Thus, an interlocutory stay would have been premature.

95 The position was similar in Hodges, where the potential issue to which Brennan J referred was whether maintenance by the Bar Association would constitute an abuse of process. The Martell approach was appropriate, because it was then possible in New South Wales, to bring a civil action for maintenance and champerty: that right remained until 1993, when the Maintenance and Champerty Abolition Act was passed.

96 Thus the position in New South Wales in 1993 was the same as it is now in this jurisdiction: and as it was in Queensland when Magic Menu Systems was decided. This, I think, explains the apparent lack of enthusiasm for an interlocutory stay: I repeat, with my emphasis, the observation of the Full Court in Magic Menu Systems that:

"Where there may be the real potential for an abuse of the court's processes it seems to us that a stay might, in some cases, be justified."

97 Given the reluctance of the courts to pre-judge in satellite or interlocutory proceedings, an issue which does not afford a substantive defence in any event, it seems to me that an applicant for a stay must demonstrate that the circumstances so clearly give rise to an abuse of process as to make that proposition almost unarguable. As Chadwick LJ said in Faryab v Smyth, the abuse must be "plain and obvious" (as it was in my view, in Grovewood Holdings).

98 Indeed, that reflects the usual approach of the courts to applications to stay proceedings. It is stated thus in Halsbury's Laws of England, 4th Ed, Vol 36 par 75:

"The court also has an inherent jurisdiction to stay or dismiss proceedings which are an abuse of its process. The jurisdiction may properly be exercised where facts are proved by affidavit which show an abuse of the process of the court, but the jurisdiction should be sparingly exercised, and only in very exceptional circumstances."

99 It was submitted by leading counsel for the Laitt applicants that the acknowledged discretion to grant an interlocutory stay should not be exercised until all the material facts are known. Once it is established that there is champerty then, it is submitted, the onus is on the plaintiff and his funder to prove that the evils of champerty and the potential for abuse of the court's process will not be realised. Unless and until the court is satisfied about these matters, there is no room for the exercise of discretion: the proceedings should be stayed.

100 There are, I think, two difficulties with that submission. First, these are interlocutory proceedings conducted on affidavit evidence. The affidavits have been directed not only to the present application, but, to some extent, to a previous application by the Laitt applicants which was not been pursued because it would have involved cross-examination on affidavits. The issues in the present applications did not crystallise fully until the evening before the commencement of the hearing. The Laitt applicants then delivered substantial written submissions and an analysis of the evidence, from which they sought to draw many inferences favourable to their case. Some of those inferences had been addressed in affidavits filed by or on behalf of the plaintiffs: but by no means all.

101 In these circumstances, I think it would be inappropriate for me to attempt to make findings of fact in relation to contested issues, or issues which have not been addressed by the plaintiffs. Apart from the general undesirability of adopting this course in interlocutory proceedings, there is the additional consideration that it would pre-judge to a considerable extent the Laitt applicants' counterclaim and the applicants' separate actions based on maintenance and champerty.

102 Secondly, the applicants' submission seems to me to be inconsistent with what I regard as now the orthodox approach, which requires an applicant for an interlocutory stay to make out a "plain and obvious" case.

103 The necessity for such a case is emphasised by the fact that although technically interlocutory, a stay based on abuse of process, in substance, terminates the action. That is because an action tainted with abuse can never be restored to a pure state.

104 Anticipating that their primary approach might not be accepted, the Laitt applicants sought alternative relief: namely that directions be given for the hearing and determination as a preliminary issue of their counterclaim for a permanent injunction to restrain the various companies associated with Mr McLernon from providing any financial or other assistance to the plaintiffs for any proceedings against Mr and Mrs Laitt.

105 I consider such a course to be equally unacceptable. It would involve a substantial trial of issues which are inseparable from those arising in the main action. In particular, it would be necessary to consider whether there had been "wanton and officious intermeddling" by Mr McLernon in the dispute between Mr Laitt and Mr Raveh: a dispute which Mr Laitt contends cannot be understood except in the context of their dealings over the past 15 years.

106 There is a further difficulty with this approach. The trial of a preliminary issue could result only in findings about abuses of process which had actually occurred. To the extent that the applicants rely on the potential for abuse such a trial would be of little, if any, utility.

107 Not being persuaded that I should accept the applicants' submissions as to the appropriate approach, I turn to consider their case on the evidence.

108 The applicants contend that the loan agreement of March 1999, and the funding agreement of October 1999 should be regarded as a single champertous transaction which was orchestrated by Mr McLernon, a trafficker in litigation. These circumstances, it is said, have the result that the present litigation is an abuse of the process of the court.

109 The applicants contend that even if the loan and funding agreements should be regarded as separate transactions, the funding agreement is champertous in any event.

110 The applicants contend also that some of the vices of champerty have already been manifested in various specific abuses of process: and that there is the real potential for further abuses. Before dealing with the "single transaction" submission, I turn to consider the loan and funding agreements.

111 The loan agreement was made, effectively, on 23 March 1999 when an earlier agreement was restated. The agreement was made between Mr Raveh as borrower and Biara as lender. Biara provided a facility to Mr Raveh of $7.8 million, and various defined expenses and "additional expenses" as defined.

112 The loan was secured by a mortgage granted by Mr and Mrs Raveh and their children (defined as the Primary A Fund beneficiary) in respect of various interests, including their interest in that fund, any property or assets which might be distributed from it, and the benefit of any award or judgment which they might at any time receive.

113 The security extended to any claim or right of action to which Mr Raveh or the beneficiary is or might become entitled:

"in respect of or in connection with the [Interlaken] Trust fund or the A Fund, or the establishment, variation or administration of the Trust or the A Trust...."

The persons against whom any such claim or right of action might exist included any past, present or future adviser (professional or otherwise); and anyone who, in the past, present or future had, or might have any connection with the Trust or the A Fund.

114 These potential defendants would obviously include Freehills: a matter which, it is now submitted, must have been in the contemplation of the parties which they entered into the loan agreement. That submission is made on the basis of cl 12.1(c) which contains a warranty by Mr Raveh that he had fully disclosed to Biara, in writing, all the facts "material to the assessment of the nature and amount of the risk" undertaken.

Bandwill Pty Ltd & Anor v Spencer-Laitt & Ors [2000] WASC 210

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (327 paragraphs)

Bandwill Pty Ltd & Anor v Spencer-Laitt & Ors [2000] WASC 210 (24 August 2000)

Parties

Legislation Cited (1)

Cases Cited (14)