Court of Appeal (WA)|2003-12-03|Before: Mr J, Murray J, Parker J, Templeman J, Wheeler J, Pullin J

Clairs Keeley (A Firm) v Treacy & Ors [2003] WASCA 299 (3 December 2003)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : CLAIRS KEELEY (A FIRM) -v- TREACY & ORS [2003] WASCA 299

Practice and procedure - Application by defendant to stay action - Ground of maintenance and champerty - Funding agreement between plaintiff and third party - Retainer agreement between third party and plaintiffs' solicitors - Discretion to stay action for abuse of process

Appellant (Sixth Defendant) : Mr A C Archibald QC & Mr S M Davies

Respondents (Plaintiffs) : Mr D H Solomon & Mr J C Giles

Appellant (Sixth Defendant) : Mallesons Stephen Jaques

Abraham & Anor v Thompson & Ors [1997] EWCA Civ 2179; [1997] 4 All ER 362

Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965

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Carob Indutries Pty Ltd (In Liquidation) v Simto Pty Ltd, unreported; FCt SCt of WA; Library No 970692; 11 December 1997

Castlemaine Tooheys Ltd v Williams and Hodgson Transport Pty Ltd (1986) 162 VLT 395

Chedambara Chetty v Renga Krishna Muttu Vira Puchaiya Naickar LR 1 Ind App 241

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Comfort v Betts [1891] 1 QB 737

Condliffe v Hislop [1996] 1 WLR 753

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Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 201 CLR

Findon v Parker [1843] EngR 786; 11 M&W 675

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Gray v Motor Accident Commission (1998) 196 CLR 1

Hamilton v Al Fayed (No 2) [2002] EWCA Civ 665; [2003] 2 WLR 128

Hill v Archbold [1968] 1 QB 686

Hodges v New South Wales [1988] HCA 9; (1988) 62 ALJR 190

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JC Scott Constructions v Mermaid Water Tavern Pty Ltd [1984] 2 Qd R 413

Johnson Tiles Pty Ltd v Esso Australia Ltd [1999] FCA 1363 (1999)

Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178

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McIntyre v Attorney General of Ontario (2002) 218 CLR (4th) 193

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Murcia & Associated v Grey & Anor [2001] WASCA 240; 25 WAR 209

National Trustees Executors & Agency Co of Australasia Ltd v FCT [1954] HCA 71; (1954) 91 CLR 540

Neville v London "Express' Newspaper Ltd [1919] AC 368

Norman v Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9

Paul v Pavey & Matthews Pty Ltd (1985) 3 NSWLR 114

Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221

Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126

R (Factortame Ltd & Ors) v Secretary of State for Transport, Local Government and the Regions (No 8) [2002] EWCA Civ 932; [2002] 3 WLR 1104

Re Daniel Efrat Consulting Services (rec apptd) (in liq) [1999] FCA 412; (1999) 30 ACSR 640

Re Vassis: Ex parte Leung [1986] FCA 21; (1985) 64 ALR 407

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Schokker v Federal Commissioner of Taxation [2000] FCA 1734; (2000) 106 FCR 134

Sievwright v Ward (1935) NZLR 43

Skelton v Baxter [1916] 1 KB 321

South Australian Management Corporation & Sheahan (1995) 16 ACSR 45

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Thai Trading Co (a firm) v Taylor [1998] EWCA Civ 370; [1998] QB 781

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Varawa v Howard Smith Co Ltd [1911] HCA 46; (1911) 13 CLR 35

Woodings (as receiver and manager of Elcos Australia Pty Ltd) (in liq) v Stevenson & Jefferson (as liquidators of Elcos Australia Pty Ltd) (in liq) [2001] WASC 174 (2001) 24 WAR 221

1 MURRAY J: In this matter I have had the advantage of reading in draft the judgments of Templeman and Pullin JJ. I am indebted to Templeman J for his careful exposition of the relevant portions of the agreements between the respondents and the litigation funder, to whom I shall also refer as IMF. I am relieved by his Honour's judgment of the need to canvass in any detail the evidence and the important provisions of the agreements by which the arrangements between the respondents, their solicitors Solomon Brothers, and the litigation funder are made. I shall refer to the evidence only in summary.

2 I am reminded that, as I understand it, a bench of five judges was convened in this case as a result of the suggestion that the proper decision of this case might involve this Court in overruling its judgment in Freehill Hollingdale & Page v Bandwill Pty Ltd [2000] WASCA 150. For my part, I would see it as being unnecessary to embark for the purpose of the decision of this case upon any review of the law as stated in the previous judgment of the Full Court, but I should also say that for my part I would see no reason to resile from what the Full Court then said.

3 This was an application for a stay of proceedings which failed at first instance. The stay was to be regarded as being of an interlocutory character because it was sought pending an adjustment of the relationships between IMF, Solomon Brothers and the respondents in such a way as would not attract the concern of the Court. It was therefore necessary when the application failed at first instance to seek leave to appeal. For the reasons which follow and with respect to the contrary view, I would refuse leave.

4 The proceedings in question have been described by Templeman J. The application for a stay is centred entirely upon the involvement by the respondents of their litigation funder, IMF. It is said that the arrangement between IMF, the respondents and their solicitors is champertous and therefore contrary to public policy. Upon that ground and having regard to the specific features of the contractual arrangements involved, it is argued that the Court should take the exceptional step of staying the proceedings brought by the respondents, effectively pending the dismantling of the funding arrangements involved and their reinstatement in such a way as not to attract the concern of the Court. In truth, I think, when one considers the terms of the stay which would be granted, the stay would be permanent and it should be accepted that the respondents' capacity to pursue their action would be frustrated by such an order.

5 I should, at the outset, declare that I have previously been involved as a single Judge in ruling upon such an application as that now before the Full Court: Choules v Siglin [2002] WASC 230. I refused the application for a stay in that case, having regard to evidence which seems to me now to have established a funding arrangement not materially different from that relied upon by the applicants in this case. I have carefully reconsidered the views to which I then came, but, again with respect to the contrary view, can see no reason to resile from the views which I then expressed.

6 The essential factual elements seem to me to be these:

• There is a retainer agreement for the engagement of the solicitors between the firm of Solomon Brothers and IMF. I am not clear in my mind how that relates to any agreement between the solicitors and the respondents, although it is described as part of a tripartite arrangement.

• By that agreement, Solomon Brothers undertake to reduce their charges by 20 per cent below their standard rates until the recovery by the respondents is such as to defray all the costs and expenses incurred by IMF in achieving that recovery.

• Thereafter, IMF agrees that Solomon Brothers solicitors' costs will be increased retrospectively to 25 per cent above their standard rates.

• These costs are payable out of moneys recovered by the respondents. The agreement to which I have referred is one between IMF and the solicitors. As I said in Choules v Siglin, there must be a real question, having regard to the provisions of the Legal Practitioners Act 1893, whether any such costs arrangements would be enforceable by Solomon Brothers ultimately against the respondents, who seem not to be parties to this retainer agreement. I note that Templeman J takes the same view.

• Perhaps from a pragmatic point of view, the concern so expressed matters little because it is IMF who is liable for the solicitors' costs. The sting in that tail is the asserted entitlement of IMF (under their funding agreement) to reimburse itself from moneys successfully recovered on behalf of the client.

7 The respondents have agreements with IMF, whom they appoint as their agent to collect the debt claimed by the respondents, to investigate the claim and receive the moneys. The agreements together then create the asserted tripartite arrangement, but there is another entity involved in the funding agreements, the Real Estate Consumer Association Inc, known as RECA, Ms Brailey. Her interest is acknowledged in the recitals and her fee arrangements, payable by IMF, are disclosed. In fact, she seems to do little to merit the payment of her fees. Her activities seem to be concerned basically with introducing clients to IMF and providing some sort of liaison between clients such as the respondents, IMF and the solicitors. The role of RECA is discussed by Templeman J. It seems to me to be irrelevant to the issue raised by the applicants' application and I propose to make no further mention of it.

8 The essential features of the funding agreements appear to me to be:

• IMF agrees to pay the costs of investigation, the costs of evidence-gathering, the solicitors' fees, the taxed costs of successful defendants and to provide any security for costs required by order of the court.

• The clients, such as the respondents, are the only persons entitled to instruct the solicitors. It is by them that the solicitors will be instructed in the ordinary way of a solicitor/client relationship.

• IMF is to receive monthly reports from the solicitors upon the conduct of any litigation and it is to receive immediate advice of any proposed settlement.

• There are detailed provisions in relation to the achievement of a settlement. Again, the solicitors are to take their instructions from the client, but IMF is to be advised so that it may review the adequacy of a proposed settlement. If it disputes the adequacy of the settlement and ends up in disagreement with the client, IMF may insist upon the opinion of senior counsel being taken by the solicitors. If ultimately the client decides to proceed with a settlement which IMF thinks to be inadequate or which is not supported by the opinion of senior counsel, a penalty applies. IMF is entitled to retain as its fee 10 per cent more of the moneys received at settlement than would otherwise be the case.

• As I read the agreements, it is only in respect of its oversight of the settlement process that IMF has a capacity conferred by the contract to interfere in the processes of any claim or litigation which, by the funding agreement, is to be driven by the client, the person in the position of the respondents, who retain the capacity to instruct the solicitors, who are in turn obliged to seek and receive instructions from the client, not from IMF.

9 That is not to say, of course, that IMF may not, in fact, exercise a considerable degree of influence in relation to the processes of pursuing a claim and the processes of any litigation undertaken, but to my mind, with respect for the contrary view, there is nothing in the evidence to suggest that it is intended that the contractual arrangements should be mere window-dressing permitting a different and more objectionable arrangement to be pursued behind the scenes.

10 There is no doubt that on the face of the contract, IMF will fund the process of investigation and the making of a claim. It is responsible for payment of the solicitors' costs at whatever rate they are ultimately charged. It is obliged to undertake such assistance, and provide funding to meet disbursements, required by the solicitors. IMF is obliged to meet all party and party costs which may be incurred along the way and ultimately to meet the costs of a successful defendant, when taxed. They are to meet any required security for costs. IMF, indeed, carries the entire risk of the litigation by the respondents in this case and it is evident that unless the litigation is funded by IMF, it could not proceed, at least at present (there being, I think, no more than a suggestion that alternative funding might be obtained).

11 The reward available to IMF, if a claim and any consequent litigation is pursued to a successful end is considerable. The respondents will never incur an independent liability to pay costs or fees or disbursements to anyone. It is only out of moneys recovered that such payments are to be made. IMF is entitled first to be reimbursed for all costs it has incurred in funding the litigation and in the process of investigation. If the moneys recovered exceed the sum required to repay these amounts, then, as has been mentioned, there will be an additional obligation by way of solicitors' costs which, from the outset of the solicitors' involvement, will increase from 20 per cent below to 25 per cent above the solicitors' standard rates. I suppose that, in itself, is a sort of success fee. When all those obligations have been discharged, IMF's fee is 35 per cent of the moneys collected, if enough remains in the pot to permit that charge.

12 In Choules v Siglin I expressed my concern about the capacity of such contractual arrangements to consume all or most of the moneys which may be recovered. I said then that I thought the contractual arrangements were, from the point of view of both the solicitors and IMF, "of a frankly commercial character". I described them as undesirable and "not noticeably altruistic". But I thought then that to conclude that the ultimate recovery by people such as the respondents might, if at all, be limited to a relatively small proportion of their original investment, was not a factor which would justify a stay of proceedings of a kind calculated to create a grave risk that the action in question would be stultified.

13 Perhaps from the point of view of IMF, although IMF is not, of course, a party to these proceedings, it might be said that the 35 per cent fee (putting to one side the 45 per cent fee which might arise on a settlement, which has a distinct penalty element in it) is justified by the extent of the risk and the financial burden which IMF must carry before any recovery is made. In addition, it should not be overlooked that IMF may only control the extent of that risk by terminating it, by revoking its appointment. While it may have an input into the settlement process which I have discussed, it is overall subject to the terms of clause 8 of the funding agreement which provides:

"The Appointor [the client] shall ensure that IMF's rights under this Agreement are observed but, in exercising such rights or providing services under this Agreement IMF will not interfere with the conduct of legal proceedings or the terms of any settlement thereof which shall remain at the discretion of the Appointor and the Solicitors."

14 I move from that brief review of the factual material before the Court, to remind myself that the proceedings before the Court are an application by a firm of solicitors, a defendant in an action brought by the respondents. They seek leave to appeal the decision of Scott J, by which their application to stay the respondents' action was dismissed. We should not overlook, in my respectful opinion, that the applicant wishes to be relieved of the burden of defending the respondents' claim on the essential ground that it is the nature of the funding arrangements between the respondents, their solicitors and IMF which make the litigation to which they are subjected, possible.

15 They do not, of course, rely simply upon that fact, but point to what are asserted to be the objectionable aspects of those funding arrangements which they contend the Court ought to be alert to make ineffectual because they are contrary to public policy. In effect it is said to be against public policy that the courts should be used by plaintiffs who would not otherwise get their claims before the court, and it is unfair that defendants should be oppressed by claims brought in those circumstances, of which it is said there may be some thousands available to be brought by litigants such as these respondents, against a variety of defendants, including solicitors such as the applicant firm.

16 I hasten to add that the applicants' argument relies substantially, as it must, upon what are described as elements of the arrangements between the respondents, their solicitors and IMF, which are said to pose a risk to the administration of justice and a risk that the proceedings themselves may be subverted to serve the interests of IMF, which may be in conflict with those of the respondents. In that regard, it is to be borne in mind that, as is generally the case in such matters, the application is brought by a defendant.

17 I propose to approach consideration of the merits of the application for a stay, and hence the question whether it is arguably the case that Scott J erred in dismissing the application and whether an appeal against his Honour's decision should be allowed, from the starting point of a consideration of the grounds upon which a stay of proceedings may be granted.

18 That a court such as this possesses an inherent jurisdiction to grant such a remedy is undoubted, but it is also accepted that it is a remedy of an exceptional character, to be granted only in an extreme or clear case. In my opinion, that must be so, once it is appreciated that the remedy involves the incapacity immediately, if not permanently, for the other party to pursue to the point of its adjudication a claim which presents a recognisable cause of action to the court. That would be this case and ordinarily the court will be astute to facilitate the process by which a litigant may bring such a claim to the point of its final adjudication.

19 There could never be a closed list of circumstances in which the Court would be moved to exercise its discretion to grant a stay, but the grounds have always been accepted to come under the general rubric of an appeal to public policy. They will generally be found in cases "in which the processes and procedures of the court, which exist to administer justice with fairness and impartiality, may be converted into instruments of injustice or unfairness": Walton v Gardiner (1993) 177 CLR 378 at 393. There are many different cases which provide examples of the exercise of the jurisdiction, cases where the defendant is exposed to litigation in an inappropriate forum, where the matter truly at issue between the parties has already been decided, where the plaintiff's claim may be seen to be foredoomed to fail for reasons which would not necessarily entitle the other party to summary judgment.

20 Here, as I understand the applicants' argument, it relies upon the perceived unfairness of its exposure to the respondents' action, but of course it is appreciated that there can be no unfairness or injustice for a defendant who is exposed to litigation by a plaintiff who has a legitimate claim against the defendant. Further, to say in such a case that the claim should be stayed because the plaintiffs may see very little of any moneys recovered, which will be substantially, or even entirely, consumed in paying people like the plaintiffs' solicitors, IMF and RECA, remuneration which may, in part at least, be unjustified, seems to me to add nothing to the application for a stay.

21 From the point of view of the defendant, if those events should ensue, it does not seem to me to be a circumstance which adds any element of injustice or unfairness by way of a subversion of the legitimate judicial process to an improper end, by way of permitting a situation where those apparently acting in aid of the litigation may be exposed in a conflict of interest, or any such circumstance.

22 It is, I think, the need to rely upon such a circumstance as constituting relevant injustice or unfairness which causes the applicant to rely upon the notion that the funding agreement is properly to be regarded as being champertous. While it may be that such an agreement may constitute a ground for the grant of a stay of proceedings: cf In Re Oasis Merchandising Ltd [1998] Ch 170, to find that litigation is being improperly or wrongfully maintained under a champertous agreement, while it may result in the agreement being held to be unenforceable as being contrary to public policy, will not necessary result in the proceedings so supported being stayed: Freehill Hollingdale & Page v Bandwill Pty Ltd [2000] WASCA 150 by the Full Court at [25].

23 Maintenance, and that form of it particularly constituting champerty, is not a crime. I see no reason to revisit the question whether it constitutes a tort. In my view, the decision of the Full Court in Newton v Gapes (1910) 12 WALR 86, 89, remains good law, but in a real sense the debate about that is a distraction in the present proceedings and the question how maintenance and champerty are properly to be defined is very much a matter of semantics. I do not propose again to discuss any of the cases. I remain of the view that the law of maintenance and champerty is, and its relevance to the grant of a stay of proceedings is, as I expressed it to be in Choules v Siglin at [30]:

"I would summarise my conclusions in the following way: maintenance is the improper support or promotion of litigation. There would seem to be no closed category of cases where relevant impropriety of that kind might be established, but maintenance will not lie merely in the support of litigation for a party by a stranger to the litigation. It will lie in some wrongful intermeddling, some interference with the processes of the courts, some oppression or attempt at a collateral advantage. Champerty is the employment of such impropriety for a share of the spoils by way of reward. In a grave or clear case such an arrangement may amount to an abuse of the processes of the court of sufficient gravity by reason of the unfairness or injustice involved, to warrant a stay of the proceedings, at least until the abuse is remedied, even in a case where it is recognised that the plaintiff has a legitimate claim which may be stifled, even permanently, by the grant of a stay."

24 When one analyses the contractual arrangements between IMF and the respondents' solicitors and between IMF and the respondents, I can see no ground upon which the Court would be justified in taking the grave step of the grant of a stay of proceedings. Relative to the role of this Court, I can see no basis upon which it might be held that Scott J erred in the exercise of his discretion in this regard. I can see no relevant conflict of interest between IMF and the solicitors and the respondents which might cause injustice to the defendants.

25 In particular, I can see no problem in the way the contractual arrangements are framed in respect of the process of settlement. Certainly, the nature of the fee arrangements means that IMF and the solicitors have an interest to maximise the respondents' recovery and to do so as cheaply as possible. Perhaps the respondents might refuse a reasonable offer of settlement, preferring to hold out for more, against the advice of their solicitors, and against the perceived interest of IMF because the risk of failure entirely or substantially in the litigation would then remain. I see nothing in that circumstance which exacerbates the situation unfairly from the point of view of the applicant defendant or which might be said to involve any capacity to subvert the legitimate processes of the court arising out of the terms of the funding agreement.

26 On the other hand, it might be that, despite the penalty of increased payment to IMF which may be involved, the respondents would wish to take a settlement offered by the applicant which is less than that advised by the solicitors and thought by IMF to be appropriate. In that event, it seems to me that the respondents' position is protected by the requirement that they should have access to the independent advice of senior counsel and, in any event, I can again see nothing in that process which, on public policy grounds, should cause the Court to stay the litigation entirely as an abuse of process.

27 I have already said that I can see nothing of relevance in the prospect that the respondents will be enabled to maintain an action against the applicant which they might not otherwise get to court, or in the prospect that there might be many other plaintiffs who would be similarly enabled to pursue their claims, if necessary, by a process of litigation. I have already said that I can see no or insufficient ground for the grant of a stay in the circumstance that there may be, in the end, an element of exploitation of the respondents in the way of the recovery of fees by the solicitors, IMF and RECA.

28 Nor do I think it is permissible to disregard clause 8 of the funding agreement and to approach the matter upon the basis that, in breach of that contractual provision, IMF will, in some way, take over the pursuit of such litigation as this, presumably in connivance with the solicitors, in a way which would be unfair and unjust to the applicant and in conflict with the best interests of the respondents.

29 Finally, I should mention, as does Templeman J, that we were advised that since Scott J gave judgment at first instance on the application for a stay, IMF and Solomon Brothers have agreed that what is misleadingly described as a "20 per cent uplift" in a letter by Mr McLernon should be paid to the solicitors out of what is referred to as "the share of IMF". I am not sure that I have understood the effect of the correspondence between Mr McLernon and Mr Solomon by which agreement to modify the retainer agreement is said to have been reached. I think what is referred to is the uplift of 45 per cent from a fee rate of 20 per cent below Solomon Brothers' standard rates to 25 per cent above them, an entitlement they achieve retrospectively at the point where recovery raises sufficient funds to repay all other costs and outgoings incurred by IMF and produces funds out of which IMF may be paid their fee.

30 The terms of the correspondence suggest that what is proposed is that IMF will continue to deduct from the funds so available 100 per cent of the solicitors' costs and disbursements charged at their standard rate. In effect then, that will become a cost to the respondents, whose payout will be reduced accordingly. The further 25 per cent uplift is to be paid by IMF out of its 35 per cent fee and so the cost would not be passed on to the respondents.

31 As I say, I am not sure that I have understood the effect of the arrangement from the correspondence, but however that may be, I can see nothing in this development which bears either way upon the exercise of a discretion to grant or refuse a stay of proceedings and it was not, of course, a matter in evidence before Scott J.

32 For my part then, and with respect for the contrary view, I would refuse the application for leave to appeal.

33 PARKER J: I have very greatly benefited from reading in draft the reasons of Templeman and Pullin JJ. What their Honours have written essentially reflects my own views. There is no other matter of significance that I would wish to add.

34 I agree, for the reasons given by Templeman and Pullin JJ, that the application for leave to appeal should be granted and that the appeal should be allowed to the extent indicated by Templeman J.

35 TEMPLEMAN J: The applicants, who are a firm of solicitors, are the sixth defendants to an action brought by a number of their former clients. The applicants sought an interlocutory order to stay the action on the basis that it was an abuse of the process of the Court, being champertous and unlawfully maintained. The application was unsuccessful before the learned primary Judge, Scott J. The applicants now seek leave to appeal from the decision of Scott J. It will be convenient to refer to the respondents as "the plaintiffs".

36 The applicants have prepared a draft notice of appeal which raises a multitude of grounds. I do not propose to deal with them individually, because I do not think it helpful: the real issues are few, and well defined.

37 The plaintiffs loaned moneys to the first defendant. The loans were secured by a mortgage granted by the first defendant in respect of several

properties which it owned: a pooled mortgage. In addition, the second defendant guaranteed repayment of the loans.

38 The transactions were arranged by the third defendant, a mortgage broker. The fourth and fifth defendants were directors of that company.

39 Subsequently, the first defendant - the borrower - became insolvent and was placed in voluntary liquidation. The plaintiffs obtained a judgment against it and the guarantors. The plaintiffs alleged against the broker that it had engaged in various kinds of conduct in breach of the Fair Trading Act 1987, the Trade Practices Act (Cth) 1974, the Corporations Law or the Corporations Act 2001, The Australian Securities and Investment Commission Act 2001, and in negligence. The plaintiffs obtained a default judgment against the broker.

40 The plaintiffs contend that the applicants acted not only as their solicitors, but also as solicitors for the borrower and the broker. It is alleged that the solicitors preferred their own or their other clients' interests over the plaintiffs' interests. The plaintiffs' claim against the applicants is based on alleged breaches of fiduciary duty, negligence, breaches of the various statutes to which I have referred above, or being knowingly concerned in, party to, or aiding abetting or counselling various breaches of those statutes by other defendants.

41 The plaintiffs are five of some 2,000 investors who claim to have suffered financial loss as a result of the activities of unscrupulous finance brokers, in what has become known as "the finance brokers scandal". Many of those investors, including the plaintiffs, have brought an action against the Finance Brokers Supervisory Board ("FBSB") based on misfeasance in public office and negligence (AB 1079).

42 The plaintiffs' actions are being funded by a company known as Insolvency Management Fund Ltd ("IMF"), a public company, listed on the Australian Stock Exchange. IMF's executive chairman is Mr Hugh McLernon who, through the medium of various companies, has carried on business in the litigation funding field since 1990 (AB 462-3).

43 One such company is Insolvency Litigation Fund Pty Ltd ("ILF"), which was previously named IMF, but which is now a wholly-owned subsidiary of IMF. It will be convenient to use the abbreviation IMF to refer to both IMF and ILF.

44 The plaintiffs have all entered into funding agreements with IMF and, as part of the arrangements, have all agreed to retain the firm of Solomon Brothers as their solicitors.

45 It is the nature of the litigation funding arrangements and the relationship between IMF, Solomon Brothers and the plaintiffs, which prompted the applicants to seek a stay of the action.

46 Much has been written in recent years on the subject of maintenance and champerty, no doubt because of the increased incidence of litigation funding. I reviewed the law in Bandwill Pty Ltd v Spencer-Laitt [2000] WASC 210; (2002) 23 WAR 390, an interlocutory application for a stay of an action which was being funded in an allegedly champertous manner, also by a company controlled by Mr McLernon.

47 I do not wish to repeat what I said in Bandwill about the modern law of maintenance and champerty, but I offer some additional observations.

48 In Bandwill, the applicants relied on the tort of unlawful maintenance, as defined by Lord Denning MR in Re Trepca Mines Ltd (No 2) [1963] 1 Ch 199 at 217:

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

49 The present applicants take their definition of maintenance from Halsbury's Laws of Australia, Vol 6, [110-7135]:

"The giving of assistance or encouragement, by a person who has neither an interest in the litigation nor any other motive recognised as justifying the interference, to a party to litigation."

The authorities cited in support of that proposition include Re Trepca Mines (No 2).

50 The present applicants take their definition of champerty from Halsburys Laws (supra) at [110-7140]:

"'Champerty' is a particular form of maintenance, namely maintenance of an action in consideration of a promise to give the maintainor a share in the proceeds or subject matter of the action."

51 Halsbury cites many authorities (including Re Trepca Mines) in support of those definitions, which are now generally accepted.

52 The definitions are important. There cannot be champerty without maintenance. And there cannot be maintenance unless the assistance or encouragement (by way of litigation funding, for example) is unjustified. If, therefore, the maintainer has a legitimate interest in the proceedings, or a justifiable motive for his involvement, the fact that he stipulates for a share of the proceeds of litigation, will not, of itself, render the relevant agreement champertous.

53 For this reason, I adopted in Bandwill, the apparent oxymoron "lawful champerty". I used that term to refer to circumstances in which an action was being funded by a person who contracted to take part of the proceeds, but where there was no "maintenance" in the pejorative sense. I derived the term from a passage in Lord Mustill's speech in Giles v Thompson [1993] UKHL 2; [1994] 1 AC 142, 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." (my emphasis)

54 In a similar way, in Faryab v Smyth (unreported, Court of Appeal, UK, 28 August 1998, Simon Brown LJ referred to the possibility of a funding agreement being "technically champertous", that is, (in my terms) involving "lawful" champerty.

55 In summary, therefore, it is incorrect to describe a litigation funding agreement as champertous simply because it provides the funder with a share of the proceeds of the action. The essential question is whether the litigation funder is "maintaining" the action in the impermissible sense. And that, in the modern law relating to maintenance and champerty, requires a consideration of the arrangements as a whole.

56 In Bandwill, I was bound, as was Scott J in this application, by the unqualified statement in the judgment of the Full Court in Freehill Hollingdale & Page v Bandwill Pty Ltd [2000] WASCA 150 at [27]:

"There is no doubt that the tort of maintenance and champerty remains part of the law of Western Australia."

57 However, the plaintiffs have submitted to this Court that it would now be appropriate to restate the law, having regard to the fact that the crimes of maintenance and champerty have long been abolished. That being so, it is submitted, the eponymous torts have also ceased to exist.

58 Whether that is so, is an interesting question. It is raised in a Notice of Contention. However, it is not a question which requires an answer in these proceedings. That is because the present applicants do not make a tort-based claim.

59 Mr Archibald QC, leading counsel for the applicants, made his clients' position plain:

"We do not ground ourselves at all on the probable tortious character of this conduct .... We ground our application on the circumstance that champerty is contrary to public policy ... because of the risk to the administration of justice posed by conduct of that kind." (TS 11-12)

This approach accords with the observation made by the Court in Freehill Hollingdale & Page v Bandwill Pty Ltd, at [27] that:

"There is no doubt also that a maintenance agreement could, depending on its circumstances, so taint or infect proceedings as to render them an abuse of the process of the court."

"The question whether a particular action has been brought, or is being continued, in abuse of the Court's process is one which depends upon all of the material circumstances, of which the fact of maintenance or champerty may be only one." (at [25])

60 If an applicant for a stay who alleges champerty relies on the tort, he has only to prove the existence of the elements of that tort, as set out above, in order to establish a prima facie case. It is not necessary to identify any particular risk to the administration of justice, although such risks provide the rationale for the tort. As Lord Denning said, in Re Trepca Mines (supra) at p 219:

"The common law fears that the champertous maintainer might be tempted, for his own personal gain, to influence the damages, to suppress evidence, or even to suborn witnesses."

That was in 1963. Over 30 years later, when Giles v Thompson [1993] UKHL 2; [1994] 1 AC 142 was decided, the public policy criteria by which maintenance was judged, had been relaxed considerably. As Lord Mustill said, at p 153:

"As the centuries passed the courts became stronger, their mechanisms more consistent and their participants more self-reliant. Abuses could be more easily detected and forestalled, and litigation more easily determined in accordance with the demands of justice, without recourse to separate proceedings against those who trafficked in litigation. In the most recent decades of the present century maintenance and champerty have become almost invisible in both their criminal and their tortious manifestations. In practice, they have maintained a living presence in only two respects. First, as the source of the rule, now in the course of attenuation, which forbids a solicitor from accepting payment for professional services on behalf of a plaintiff calculated as a proportion of the sum recovered from the defendant. Secondly, as the ground for denying recognition to the assignment of a 'bare right of action'. The former survives nowadays, so far as it survives at all, largely as a rule of professional conduct, and the latter is in my opinion best treated as having achieved an independent life of its own."

61 Later in his speech, Lord Mustill expressed the view that:

"the law on maintenance and champerty can best be kept in forward motion by looking to is origins as a principle of public policy designed to protect the purity of justice and the interests of vulnerable litigants." (at p 164)

62 The interests of vulnerable litigants was emphasised by Atkin LJ in Wild v Simpson [1919] 2 KB 544 at 563, who said:

" ... the offence of maintenance, apart from the interest of the public generally, is directed primarily, not at the client maintained, but at the other party to the litigation. He has the right to be free from litigation conducted by the assistance of persons working for their own interests, and not in order to give lawful professional aid to the opposing litigant."

63 This principle is reflected in the proposition stated by Lord Loughborough in Wallis v Duke of Portland [1797] EngR 536; (1797) 3 Ves 494:

"that parties shall not by their countenance aid the prosecution of suits of any kind, which every person must bring upon his own bottom, and at his own expense."

64 This proposition was accepted as "the general rule against maintenance" by Dixon J in Stevens v Keogh [1946] HCA 16; (1946) 72 CLR 1 at 35. But as his Honour noted, "the law from the earliest times has countenanced some relaxation of the utmost strictness of that rule". One notable exception to the rule is the poverty of the litigant. Thus, in Stevens v Keogh the funding by the Police Association of New South Wales of an action brought by an impecunious member did not constitute maintenance.

65 Dixon J observed earlier in his judgment (at 28) that "the law of maintenance is founded not so much on general principles of right or wrong or of natural justice as on consideration of public policy. However:

"Notions of public policy are not fixed but vary according to the state and development of society and conditions of life in a community."

66 Although the applicants base their case on public policy, they have not identified any specific risks to the administration of justice in their written submissions. There, they rely on various features of the arrangements between IMF, Solomon Brothers and the plaintiffs, which, although they might provide a foundation for alleging the tort, are not directly relevant to a claim based only on public policy grounds.

67 In the course of argument, leading counsel for the applicants was asked by the Court to say what the mischief is, which threatens the administration of justice so as to result in champerty being regarded as contrary to public policy today (TS 15).

"It inevitably has the tendency to distort what's sometimes called the purity of the litigious process."

69 When pressed to clarify that answer, counsel submitted that this could happen in a variety of ways: "... the more extravagant ways are the ones that tend to be identified in the cases, suborning witnesses and so on". Counsel submitted that a distinction should be drawn between, on the one hand, litigation in which a plaintiff seeks only to recover compensation for a loss; and on the other, litigation maintained champertously, where "the funder is in it for the profit" (TS 16).

70 Counsel submitted, in substance, that it is inappropriate, or impractical to wait and see whether some "gross evil" actually happens. If it did happen, it might never be discovered: or at least until it was too late to be remedied. Hence,

" ... the public policy sets itself against entertaining that risk" (TS 16)

71 It may be that litigation funding agreements give rise to risks of the kind identified by counsel. But are those risks any greater than they would be (for example) in litigation funded by an insurance company? Obviously, the situation is different in that, there, a pre-existing relationship exists: that of insurer and insured. However, whether the claim arises from a motor vehicle accident or alleged negligence on the part of a legal practitioner, it is common practice for the insurer, who is subrogated to the rights of the insured, to investigate the claim, assemble evidence, instruct its own solicitors and generally exercise control over the litigation.

72 In terms of risk of abuse, therefore, there may be no difference in fact between a litigation funder with an eye to maximising profits and an insurance company with an eye to minimising losses. Indeed, it may be said that the litigation funder has a greater incentive to ensure that he conducts himself properly. Not only are his activities likely to be the subject of close scrutiny, but any transgression is likely to have a markedly deleterious effect on his ability to conduct his business in the future. By contrast, only a small portion of an insurer's business is likely to lead to litigation.

73 How then, does the court identify or define public policy in this area of the law? In Giles v Thompson [1993] UKHL 2; [1993] 3 All ER 321, in the Court of Appeal, Steyn LJ referred to public policy as "an intractable field". As he pointed out:

"The private notions of judges as to what is good or inexpedient policy are irrelevant. Still less is it relevant what judges consider the policy in an ideal community should be."

74 In a different context - whether an agreement was contrary to public policy and therefore void - Isaacs J said in Wilkinson v Osborne [1915] HCA 92; (1915) 21 CLR 89 at p 97:

"In my opinion the 'public policy' which a Court is entitled to apply as a test of validity to a contract is in relation to some definite and governing principle which the community as a whole has already adopted either formally by law or tacitly by its general course of corporate life, and which the Courts of the country can therefore recognize and enforce. The Court is not a legislator: it cannot initiate the principle; it can only state or formulate it if it already exists."

75 The High Court considered a similar question in A v Hayden [1984] HCA 67; (1984) 156 CLR 532. There, at 558, Mason J referred to a passage in the judgment of Jordan CJ in Liebermann v Morris [1944] HCA 13; (1944) 69 CLR 69 who said:

" ... the phrase 'public policy' appears to mean the ideas which for the time being prevail in a community as to the conditions necessary to ensure its welfare; so that anything is treated as against public policy if it is generally regarded as injurious to the public interest ... public policy is not, however, fixed and stable. From generation to generation ideas change as to what is necessary or injurious, so that 'public policy is a variable thing. It must fluctuate with the circumstances of the time': Naylor, Benzon and Co v Krainische Industrie Gesellschaft [1918] 1 KB 331 at 342."

"The problem is one of formulating with any degree of precision the criteria or the circumstances which will justify a court in refusing to enforce a contract on the ground that there is a countervailing public interest amounting to public policy. The difficulties in ascertaining the existence and strength of an identifiable public interest to which the courts should give effect by refusing to enforce a contract are so formidable as to require that they 'should use extreme reserve in holding such a contract to be void as against public policy, and only do so when the contract is incontestably and on any view inimical to the public interest', to use the words of Asquith LJ in Monkland v Jack Barclay Ltd [1951] 2 KB 252 at 265." (my emphasis)

77 In my view, the same consideration should apply not only to striking down a contract on the grounds that it contravenes public policy but also, in staying proceedings on that basis.

78 That being so, the applicants face two significant obstacles. First, it cannot now be said that every litigation funding agreement is inherently bad. Under the Corporations Laws, liquidators are empowered to enter into such agreements, subject to court approval. It must therefore be regarded as being in the public interest to enable liquidators of insolvent companies to proceed in this way, so as to obtain compensation for wrongs which might otherwise go unremedied.

79 Litigation funders who contract with liquidators for this purpose will usually have a profit motive. And the fact that the Court approves the arrangements cannot eliminate the risks of the kind identified by the present applicants. However, such risks are no doubt regarded as acceptable when the liquidator is an experienced professional, who has the benefit of advice from an independent legal practitioner. In a compulsory liquidation, the liquidator is also an officer of the court. In those circumstances, there would be little likelihood of the defendants being oppressed unfairly by the litigation.

80 Secondly, in this case, the arrangements offered by IMF appear to have the approval of the executive government, at least in principle. On 31 July 2001, the Minister for Consumer and Employment Protection made a statement in the Legislative Assembly about "Litigation funding for victims of the finance broking scandal".

81 The Minister said he wished to give the Assembly "details of funding for investors taking legal action to recover losses from finance brokers and their professional advisers. This included funding to be made available through the Legal Aid Commission. The Minister's statement concluded:

"Investors now have a choice between applying for Government Assistance for their legal case or using the services of (IMF).

Investors will know that (IMF) will collect a 30 per cent fee from any successful case. A further five per cent will be paid to the Real Estate Consumers' Association." (AB 1082)

82 In my view, the Minister's recognition of IMF in this way reflects a public interest in permitting litigation funding. If this amounts to an endorsement of IMF's activities, it emphasises the need for the applicants to identify some devil in the detail of the funding arrangements, if they are to succeed in their application for a stay.

83 I therefore turn to an examination of the arrangements in question. There are two related elements: funding agreements and retainer agreements. I deal with them in turn.

84 The agreement dated 14 August 2001 and made between IMF and Joanne Marie Treacy, the first named plaintiff, provides the basis for the applicant's submissions, being typical of the agreements in question (AB 317).

85 The agreement recites that IMF is licensed pursuant to the provisions of the Debt Collectors Licensing Act 1964 and the Security and Related Activities (Control) Act 1996. The recitals then refer to the debt owed by the first defendant to Ms Treacy (there referred to as "the Appointor") which is said to have arisen out of a mortgage lending transaction brokered by the third defendant. The recitals continue:

"The Appointor wishes to appoint IMF to collect the Debt, to investigate the facts and circumstances surrounding the Debt, and the Transaction and to receive any moneys agreed or adjudged to be due to the Appointor in relation to the Debt and/or the Transaction.

IMF has agreed with the Real Estate Consumer Association Inc to retain the services of the Association to assist IMF with the work set out herein upon the basis that IMF will pay the Association $30 per hour and one-seventh of any amount received under cl 9 hereof.

The Appointor has been provided with the Explanatory Material."

86 The explanatory material is a short document dated 30 July 2001 prepared by IMF and entitled "Explanatory Material for West Australian Finance Broking Victims" (AB 323).

87 The explanatory material refers to an agreement between IMF and the Real Estate Consumer Association Inc ("RECA") to provide funding for victims of West Australian finance brokers, to enable them to recover their debts and losses from loans and other investments made through such brokers. RECA is said to be providing support and assistance to IMF.

88 The document goes on to refer to the fact that recovery would be pursued "from all available and worthwhile sources, including the Finance Brokers Supervisory Board". The nature of the recovery action would depend on the circumstances applicable to the particular debt or loss recovery claim.

89 Under the heading "How to join the IMF plan", the document summarises the effect of the funding agreement, including the remuneration of IMF and RECA. It is said that IMF would assess, and where appropriate, investigate the remedies available for recovering the debt or the consequential losses. If IMF considered there was no worthwhile remedy, it would advise the client (ie the plaintiff) and terminate the appointment: "If that occurs, the client will owe IMF nothing".

90 If, however, IMF considered the pursuit of a remedy to be worthwhile, it would notify the client and take appropriate steps. These steps included "engaging Solomon Brothers as solicitors for the client".

91 IMF agrees to pay all legal and other expenses of investigation and funding recovery, including remuneration to RECA for its services, at the rate of $30 per hour. IMF agrees also to pay all legal costs awarded to a successful defendant.

92 Under the heading "Remuneration of IMF and RECA", the document states:

"If the client recovers any money, IMF will be owed by the client:-

a) the amount spent in funding and investigation costs; and

b) 35% of the amount recovered (from which 5% of the total amount recovered will be paid by IMF to RECA)

Clairs Keeley (A Firm) v Treacy & Ors [2003] WASCA 299

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (350 paragraphs)

Clairs Keeley (A Firm) v Treacy & Ors [2003] WASCA 299 (3 December 2003)

Is the funding agreement contrary to public policy?

Developments since the hearing before Scott J

Parties

Legislation Cited (6)

Cases Cited (32)