Capital Webworks Pty Ltd v Adultshop.com.limited

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

MOORE J 12 This appeal concerns an order made by a Nicholson J on 15 April 2005 that within 10 days of that date the appellant file and serve an affidavit "setting out in full the circumstances pertaining to the beneficial ownership of its cause of action". That order was made as a result of an interlocutory application ("the strike-out application") made by the first and second respondents to have the proceedings commenced by the appellant stayed or dismissed as a proceeding that is frivolous or vexatious or a proceeding that is an abuse of process of the Court. (See the Federal Court Rules O 20 r 2(b), (c)). The strike-out application came before Nicholson J as the docket judge. Leave to appeal from the interlocutory order made by his Honour was granted by French J on 6 July 2005. 13 The appellant is a company which had been the registered owner of the business name "Adultshop.com.au" in the Australian Capital Territory and had been the registered holder of the domain name "adultshop.com.au" ("the contentious domain name"). The appellant was removed from the register of domain names on 29 March 2000. The first respondent is the current registered owner of this domain name. 14 On 5 April 2000 the appellant commenced proceedings ("the principal proceedings") in this Court alleging the first respondent was engaged in misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) and s 10 of the Fair Trading Act 1987 (WA) and was, in effect, passing itself off or attempting to pass itself off as the appellant. In the principal proceedings, the appellant sought injunctive relief against the respondents, an account of profits and damages. The third respondent to the principal proceedings is the administrator of the country code domain "au" and was responsible, at relevant times, for the registration of domain names. Any subsequent reference to "the respondents" in this judgment is to the first and second respondents. 15 The appellant has not prosecuted the principal proceedings diligently. There have been a number of successful applications by the respondents for security for costs. In total, the appellant has paid $130,000 by way of security ($65,000 in relation to each of the first and second respondents). 16 The strike-out proceedings were commenced by the respondents by a notice of motion filed on 14 December 2004. The affidavit in support was an affidavit of the second respondent who is the chief executive officer of the first respondent. That affidavit annexed several documents including an affidavit of Mr Edward Justin Sweeney of 21 March 2003 ("the March 2003 affidavit"). The March 2003 affidavit had been filed by the appellant in an earlier interlocutory application for security for costs. Further affidavits were filed by the respondents in support of the strike-out application and annexed to one was another affidavit of Mr Sweeney sworn on 28 August 2002 ("the August 2002 affidavit") and filed by the appellant in proceedings seeking, amongst other things, to set aside an order concerning security for costs made on 4 February 2002. 17 In the August 2002 affidavit, Mr Sweeney explained how the appellant came to register the contentious domain name, the nature of the business it sought to establish and how, as it alleged, the respondents had unlawfully deprived it of that business. Mr Sweeney also explained how the appellant had borrowed $60,000 to satisfy an earlier order for security for costs and observed that if certain orders then proposed by the respondents were made, the appellant would lose its "right of action" and the lender would lose the $60,000 already advanced. In the March 2003 affidavit, Mr Sweeney explained how he and his brother (who had jointly sought to establish the business of the appellant), had no assets, how he was a university student and his brother was unemployed, that the appellant had no current assets other than the causes of action against the respondents and no debts other than in relation to the funds borrowed to pay the money into Court as security for costs. He also noted that the shareholders of the appellant were professional trustees who "[had] no beneficial interest in the [appellant] or in the cause of action". 18 Annexed to one of the affidavits read by the respondents in the strike-out application, was correspondence between the respective solicitors. By letter dated 25 July 2003, the respondents' solicitors wrote to the appellant's solicitors noting the financial circumstances of the appellant and, in particular that the appellant had no assets, those people immediately associated with the appellant (Mr Edward Sweeney and his brother) were not in employment and the funds to provide security for costs had been borrowed. The respondents' solicitors indicated that having regard to the available evidence, the respondents were concerned that the appellant's application (the principal application) was being unlawfully maintained. The letter then said: In order to assuage our clients' concerns we ask that you provide us by no later than the close of business, Thursday, 31 July 2003 with details of the arrangements between the lender of the funds and what legitimate interest the lender has in the litigation to rebut the reasonable inference our clients have drawn. 19 Also in evidence was the appellant's solicitors' response by letter dated 28 July 2003. They indicated that the appellant would not provide the information sought and stated that no inference should be drawn from the appellant's refusal to provide information to which the respondents had no legal entitlement. It should be noted that in the appeal papers there is a notice to produce dated 30 September 2003, which was apparently served by the respondents on the appellant. The notice sought production of records concerning the provision of the monies lent to provide security for costs and the terms on which the funds were borrowed and would be repaid. However, it appears that the notice was not called on during the hearing of the strike-out application 20 The appellant filed no evidence in opposition to the strike-out application. One basis on which the strike-out application was maintained, was that the principal proceedings constituted an abuse of process because they were being maintained for the benefit of a third party. We will refer shortly to some of the authorities concerning maintenance which were discussed by Nicholson J in the reasons he gave for making the order to which this appeal relates. 21 The gist of the argument of the respondents advanced before Nicholson J at the hearing of the motion on 7 April 2005, was that an unnamed person or entity had lent money to the appellant to enable the appellant to provide security. It could be inferred that, more generally, that person or entity was providing financial support to the appellant and was doing so because the lender had an interest in the outcome of the litigation. It was also asserted that it could be inferred that the lender was neither one or more of the shareholders (who are trustees) nor the individuals who, or entities which, held the beneficial interest in the shares. The submission was made that, in the circumstances, the Court could have a suspicion that the principal application was being unlawfully maintained and that in the absence of disclosure of the true position, the processes of the Court were being abused. 22 One submission made by the appellant to Nicholson J in response to the respondents' submissions, was that the appellant had no duty or obligation to disclose matters concerning, we infer, the funding of the principal application and no adverse inference could be drawn from any non-disclosure. Another submission was that there was simply no evidence that any person or entity was engaged in unlawful maintenance of the principal application. It was submitted that the respondents had a "high evidentiary onus" which they had come nowhere near satisfying. 23 The respondents replied by submitting that once a suspicion had arisen that the proceedings were being maintained unlawfully, the Court was entitled to an explanation as to whether they were. This was in order to enable the Court to protect its processes from abuse. This led to an exchange between Nicholson J and counsel appearing for the appellant during which, in effect, the appellant was invited to consider whether it would disclose "the identity of the beneficial owners of the interest in its cause of action" and a timetable was discussed for that to occur. 24 The appellant subsequently informed Nicholson J that it did not intend to take that step which led to his Honour making the order the subject of this appeal. His Honour also ordered that the strike-out application stand over until expiration of the time for compliance with the order by the appellant at which time it would stand reserved for judgment. The order made by French J on 6 July 2005 also stayed the further operation of Nicholson J's order and, therefore, the strike-out application remains undetermined.

The Orders of Nicholson J 25 In reasons for the orders made on 15 April 2005, Nicholson J set out the background and observed that the appellant and the shareholders of the appellant had consistently refused to disclose the identity of the person or entity on whose behalf the action was being maintained. His Honour then discussed circumstances where unlawfully maintained or champertous actions would give rise to abuse of process. It is convenient to set out some of that discussion. His Honour said (at [36] and following): For the applicant it is contended that issues of abuse before Australian courts have become manifest in actions that are unlawfully maintained or champertous. It is said this has been seen in a number of decisions: see (for instance) Carob Industries Pty Ltd (in liq) v Simto Pty Ltd (unreported, Supreme Court of Western Australia, Anderson J, 11 December 1997) especially at 19, Carob Industries Pty Ltd (in liq) v Simto Pty Ltd (1997) 18 WAR 1, Grovewood Holdings PLC v James Capel and Co Ltd [1995] Ch 80 (per Lightman J), Re Oasis Merchandising Services Ltd [1998] Ch 170, Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1996) 72 FCR 261, Faryab v Smyth [1998] EWCA Civ 1416, Stocznia Gdanska Sa v Latreefers Inc [2000] EWCA Civ 36, Clairs Keeley (a firm) v Treacy (2003) 28 WAR 139, Marston v Statewide Independent Wholesalers Ltd (2003) 54 ATR 75 at [39]-[59], Idoport Pty Ltd v National Australia Bank Ltd [2004] NSWSC 695, Gore v Justice Corporation Pty Ltd (2002) 119 FCR 429 at [18], Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd (2004) 51 ACSR 129 at [32]. In Elfic Ltd v Macks [2003] 2 Qd R 125, McMurdo P said: '[67] The mere fact that proceedings are financed by third parties with no interest in the outcome other than repayment and profit from the litigation is not itself sufficient to invoke the jurisdiction of the Court. Courts should be careful not to use that power to deny access to justice to a party who has sought to fund bona fide proceedings in a way which may be contrary to public policy unless that which has been done amounts to an abuse of the court's own process: Abraham v Thompson [1997] 4 All ER 364 at 372-374, Faryab v Smyth [1998] EWCA Civ 1416, and most recently in Sa v Latreefers Inc [2000] EWCA Civ 36 where the Court of Appeal of England and Wales noted: (at [59]-[61]) "There are many commonplace and unobjectionable circumstances in which modern litigation is funded by those who are not the nominal parties to it. Obvious examples of this are funding by insurers, trade unions or lawyers engaged on legitimate conditional fee arrangements. If an agreement of this general kind is held to be contrary to public policy, it may be unenforceable. That may have a variety of consequences. A claim which depends on the assignment of a bare right of action may fail because the assignment is ineffective. A person who has funded an action champertously may fail to enforce recovery of the agreed proportion of the spoils. A person who has secured a champertous agreement to fund his litigation may be unable to enforce payment of the agreed funds. But the fact that a funding agreement may be against public policy and therefore unenforceable as between the parties to it is by itself no reason for regarding the proceedings to which it relates or their conduct as an abuse. … the question whether the courts' process is affected or threatened by an agreement for the division of spoils is one to be considered in the light of the facts in each case. … Abuse of the courts' process can take many forms and may include a combination of two or more strands of abuse which might not individually result in a stay. Trafficking in litigation is, by the very use of the word "trafficking", something which is objectionable and may amount to or contribute to an abuse of the process. We think that it is undesirable to try to define in different words what would constitute trafficking in litigation. It seems to us to connote unjustified buying and selling of rights to litigation where the purchaser has no proper reason to be concerned with the litigation. 'Wanton and officious intermeddling with the disputes of others in which they [the funders] have no interest and where that assistance is without justification or excuse' may be a form of trafficking in litigation. … A large mathematical disproportion between any pre-existing financial interest and the potential profit of funders may in particular cases contribute to a finding of abuse but is not bound to do so."' The Full Court of this Court in Magic Menu Systems Pty Ltd at 267-268 had noted that public policy considerations have continued to shape the law as it is concerned with maintenance and champerty, gradually alleviating its strictness. At 268, the Court (Lockhart, Cooper and Kiefel JJ) said: 'The New South Wales Law Reform Commission concluded, in its Discussion Paper, with the observation that further consideration as to the remedies which might be provided to the other party with respect to interference in litigation, was necessary. These will concern costs but may extend to other aspects of compliance with procedures. Where more is involved, and where there may be the real potential for an abuse of the Courts' processes it seems to us that a stay might, in some cases, be justified. Whilst it had been said in Martell v Consett Iron (388-389) (referred to in this respect in Hodges v New South Wales (1988) 62 ALJR 190 at 193) that it would not be right to stay a maintained action, that was with respect to an action brought on the tort and which had not been determined. It could not then have been concluded that there was unlawful conduct and the stay was, for that reason, premature. But that is different from the position where an abuse of process has occurred, or is likely to.'(emphasis added) 26 Nicholson J then set out a lengthy extract from the judgment of Einstein J inIdoport Pty Ltd v National Australia Bank Ltd[2004] NSWSC 695 which need not be reproduced. His Honour went on to conclude (at [40]): It is clear from these authorities that the presence of unlawful maintenance will not of itself be an abuse of process. However, the courts must also consider whether the nature of the maintenance in respect of a particular proceeding is such that it is likely to be an abuse of process. It follows that the Court will not grant a stay or dismissal only upon the presence of maintenance and champerty. However, the Court is entitled to be informed of the circumstances relating to maintenance and champerty, if they exist, so that the Court may judge whether or not stay or dismissal on the grounds of an abuse of process is appropriate. The fundamental justification for this is that the Court must be the guardian of the right of a successful party in litigation to an award of costs to indemnify it against expense it has incurred. In Bandwill Pty Ltd v Spencer-Laitt (2000) 23 WAR 390, Templeman J emphasised that the observations of the Full Court of this Court in Magic Menu Systems were directed to the possibility that 'there may be' the 'real potential' for abuse of the court's processes. This carries with it the necessity for the Court to be informed, by way of evidence, of the circumstances that will enable it to judge whether or not there has been an abuse of process. Templeman J also referred (at 98) to Halsbury's Laws of England, 4th edn, at 36 par 75, where it was stated: '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.' This Court is not yet in the position where an affidavit is before it giving it the requisite facts in order to consider whether its jurisdiction to grant stay or dismissal may be properly exercised in the circumstances. To exercise that inherent jurisdiction it is necessary that it gives directions to the party concerned to bring before the Court the requisite evidence. Accordingly, I consider that the application for a stay or dismissal should be held over and a direction should issue to the applicant to bring before the Court affidavit evidence disclosing fully the persons beneficially entitled to the cause of action which it brings. Essentially for the reasons given in the penultimate paragraph, Nicholson J made the order to which this appeal relates.

Grounds of appeal 27 The grounds of appeal are as follows: · The learned Judge erred in holding that it was proper or competent for the Court to make the 15 April Order. · The learned Judge erred in holding that the law relating to champerty and maintenance warranted the making of the 15 April Order. · The learned Judge erred in holding that it was reasonable or necessary to make the 15 April Order in order to protect the processes of the Court. · The learned Judge erred in holding that the 15 April Order was warranted by considerations of risks relating to costs when this subject had already been dealt with by the security for costs orders made in favour of the first and second respondents. · The learned Judge erred in holding that the Court had inherent power to make the 15 April Order in the circumstances of this case.

The parties' submissions 28 The appellant did not put in issue the Court's power to make an order of the type under appeal. However, it did contend that the Court's discretionary power to make the order was not enlivened in the circumstances. The appellant submitted there was no evidence supporting a conclusion or suspicion that the action was being maintained. The appellant also submitted the making of the order amounted to the Court assisting the respondents. Doing so gave rise to an apprehension of bias. Any concern the Court had to protect the position of the respondents was misplaced as there was no suggestion that the security for costs provided by the appellant was inadequate. The appellant submitted that the direction converted the adversarial process into an inquisitorial one, creating uncertainty in the management of the Court's interlocutory processes. 29 The respondents pointed to the Court's power under s 23 of the Federal Court Act 1976 (Cth) to stay an action as an abuse citing a number of authorities. They also referred to this Court's implied power as a superior court of record to control its own process citing Hunter v Leahy (1999) 91 FCR 214 and CSR Ltd v Cigna Insurance Australia Ltd (1997) 189 CLR 345. Hunter v Leahy was also relied on for the proposition that the Court's power to prevent abuses of its process is not to be viewed narrowly. 30 As to the Court's exercise of its discretionary power, the respondents submitted that in the absence of any explanation from the appellant, the known circumstances gave rise to the real possibility that the beneficial owners of the appellant's shares had no pre-existing interest in the cause of action. Citing Idoport Pty Ltd v National Australia Bank Ltd at [135] they submitted that an assignment of the beneficial interest in the shareholding of a company with (as here) no other assets, would amount to an assignment of the bare right to litigate. The respondents submitted that the Court's power to prevent abuse of its processes is based on public policy considerations designed to protect the administration of justice and is not servient to the "forensic games" of the appellant. The respondents also submitted that an appeal court should be extremely reluctant to intervene in circumstances where the decision was a discretionary one concerning a matter of practice and procedure: Adam P Brown Male Fashions Pty Ltd v Phillip Morris Inc (1981) 148 CLR 170 at 177.

Consideration 31 The course followed by Nicholson J in ordering that the appellant file an affidavit concerning the matters referred to in the order, was an unusual one. The only authority to which we were referred where a similar step was taken is Abraham v Thompson [1997] 4 All ER 362 though in that case the affidavit was ordered by the trial Judge (a decision reversed by the Court of Appeal which allowed the appeal) when it was a suspected that a third party was funding the litigation but no arrangements for the provision of security had been put in place to protect the position of the defendants in the event that they obtained a costs order against the plaintiff. 32 It cannot be doubted that a Judge of this Court can take steps to avoid the abuse of the Court's processes which might include ordering a party to provide evidence on that issue at least when the Judge reasonably suspects that the processes are being abused. There is nothing novel about a Judge requiring a party to furnish evidence. It can, for example, be done in aid of enforcing a Mareva injunction:see, for example, the observations of Deane J in Jackson v Sterling Industries Ltd (1987) 162 CLR 612 at 622-623. However, in the present case it is not entirely clear why it was necessary for the affidavit to be ordered. On the evidence adduced to this point, it can be inferred that a third party (which may or may not be at arms length to the appellant) has lent money to the appellant to provide security ordered by Nicholson J. The evidence does not suggest anything more. Even if the lender is at arms length and anticipates repayment of the loan from the proceeds of the litigation if the appellant is successful, such a situation falls well short of one which would constitute an abuse of process. If, in addition, the lender was entitled to some or all of the proceeds of the litigation, that, of itself, is unlikely to render the principal application an abuse of process. There is nothing to suggest that there has been any "trafficking" in the litigation or that the appellant does not control the litigation. It must be remembered that the position of the respondents, in relation to any costs the appellant might ultimately be ordered to pay, has been protected to this point by the provision of security for costs. 33 It is also not entirely clear what information would likely be elicited in an affidavit filed in compliance with the order. It is more likely, on the material before us, that the lender has an interest in the proceedings in the sense that the lender would have a right under the loan agreement to repayment of the loan (and any additional amounts agreed) from any damages awarded to the appellant rather than a beneficial interest in the proceedings themselves. But the respondents have not challenged the form of the order. 34 However, ultimately we are considering an order made by the docket Judge who has case-managed the principal application since it was filed and has, on several occasions, considered applications for security and the position of the respondents having regard to the impecuniosity of the appellant. The order made by Nicholson J concerned a matter of practice and procedure and involved the exercise of discretion. It was an order he had power to make. As the High Court said in Adam P Brown Male Fashions Pty Ltd v Phillip Morris Inc, an appellate court must exercise particular caution in reviewing decisions pertaining to practice and procedure. The High Court followed that approach in that matter when they set aside the orders of a Full Court of this Court which, in turn, had set aside orders made by a single Judge concerning a matter of practice and procedure. 35 The appeal should be dismissed. The costs of the appeal should be costs of the motion before Nicholson J. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

FINN J 36 I have had the advantage of reading the reasons of Moore J and, subject to the following matters of elaboration, I agree with those reasons and with the orders proposed. 37 For my own part I am satisfied that Nicholson J's direction to file and serve the affidavit in question ought not to have been made. The material before us does not suggest that the beneficial ownership of the cause of action being prosecuted in this proceeding is vested in a person other than the appellant. Accordingly, I am satisfied that his Honour's exercise of discretion must have involved an error of principle as it lacked any proper foundation in the circumstances. 38 This error notwithstanding, and having regard to the particular procedural context in which it occurred, I am not satisfied that the error is one with which this Court ought interfere. It is necessary in an appeal such as this to have regard to the injustice which flows from the direction in question: Adam P Brown Male Fashions Pty Ltd v Phillip Morris Inc (1981) 148 CLR 170 at 177. 39 The "affidavit" direction was made in the context of a motion to strike out the appellant's proceeding as an abuse of process. Nicholson J, it should be noted, heard that motion and made the following order in relation to it: "2. The notice of motion of the first and second respondents dated 14 December 2004 be held over until the expiration of the time for compliance with the ['affidavit'] direction and then stand reserved for judgment": emphasis added. Compliance with the direction, doubtless may have exposed the appellant to unnecessary cost and inconvenience. I do not regard these as being of particular moment in this context. The real injustice to which the appellant might be exposed arises from the possible consequences of non-compliance with the direction. The strike-out application would then "stand reserved" and the fact of non-compliance may prove to be a factor to which his Honour would attribute significance in his decision on the motion. 40 In these circumstances, and having regard to the particular caution appellate courts should exercise in reviewing decisions on matters of practice and procedure, I am satisfied that the proper time to challenge the affidavit direction, if at all, is after judgment on the motion and as an aspect of an appeal against that judgment (assuming it to be adverse to the appellant and that non-compliance with the direction was integral to it). 41 Notwithstanding the vice in the direction itself, I am not satisfied that this Court should interfere with his Honour's conduct of the hearing of the motion in the manner proposed in this appeal. I certify that the preceding six (6) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn.

Associate: Dated: 10 November 2005 Counsel for the Appellant: P. Tottle