J P Morgan Portfolio Services Limited v Deloitte Touche Tohmatsu

REASONS FOR JUDGMENT WILCOX J: 1 The respondents to this proceeding have applied by Notice of Motion for an order summarily dismissing, or permanently staying, the principal proceeding. The background facts 2 The principal proceeding was instituted on 3 December 2004 by J P Morgan Portfolio Services Limited ('JPMPSL'). JPMPSL was formerly called BT Portfolio Services Limited ('BTPS'). The respondents comprise two firms of chartered accountants, two companies and one natural person. 3 The applicant's Further Amended Statement of Claim, filed on 18 July 2005 ('the SoC'), alleges that the respondents were, at one time, associated in various ways with a share registry services business which traded in Sydney, Melbourne, Brisbane, Auckland and Perth under the names 'National Registry Services' and 'National Registries' ('the NRS Businesses'). For present purposes, it is unnecessary to detail the nature of the NRS Businesses or the respondents' alleged associations with them. 4 The SoC alleges that, on about 25 August 1998, BTPS opened negotiations for the purchase of the NRS Businesses. It is alleged that negotiations occupied several weeks and involved all the respondents in various ways. Information was supplied and valuations were obtained. An offer was made and due diligence procedures were undertaken. 5 In December 1998, a purchase agreement ('the main agreement') was signed. It covered the whole of the NRS Businesses other than the Western Australian operations (and possibly New Zealand). The main agreement contained some warranties and indemnities. The main agreement was completed on 4 January 1999. 6 Subsequently, pursuant to an agreement made on 13 April 1999 ('the WA agreement'), BTPS purchased the Western Australian operations. 7 It is convenient to follow the parties' lead in referring to the main agreement and the WA agreement, collectively, as 'the NRS Sale Agreements'. 8 The SoC alleges various disconformities between the condition of the NRS Businesses at the respective completion dates and matters that were warranted or represented during the course of negotiations. It is unnecessary, for present purposes, to specify the allegations. It is sufficient to say that, in the principal proceeding, JPMPSL alleges various breaches of the contracts for sale of the NRS Businesses to BTPS (as the applicant then was), misleading and deceptive conduct towards BTPS in contravention of various Commonwealth and State statutes and resultant loss. The relief claimed in the Application includes damages, orders for indemnity pursuant to the agreements and orders under s 87 of the Trade Practices Act 1975 (Cth) and similar statutory provisions. 9 As I understand their position, the respondents dispute many of the applicant's allegations. No defence has yet been filed. So the extent of the dispute is uncertain. However, the respondents do not contend the facts stated above provide a basis for an order striking out or staying the claim. They rely upon additional facts which are set out in affidavits filed in relation to the motion and are not in dispute. The respondents argue these facts establish that the principal proceeding is an abuse of the process of the Court. The additional facts 10 The additional facts may be summarised as follows: (i) At the time of the NRS Sale Agreements, all the shares in BTPS were owned by BT Australia Limited ('BT Australia'), a member of the Bankers Trust ('BT') group of companies; (ii) On 14 December 2000, BTPS transferred the NRS Businesses to BT Registries Pty Limited ('BT Registries'), another member of the BT group of companies; (iii) Pursuant to an agreement made on 7 September 2000, as varied on 19 December 2000, in January 2001, BT Australia sold all its shares in BTPS to the Chase Manhattan Bank ('Chase Manhattan'). A clause in the relevant agreement excluded from the sale the interest of BTPS (and any related BT group company) in the share registry business. There was also a provision whereby BTPS purported to assign to other companies in the BT group any cause of action arising under or in connection with the NRS Sale agreements. It is common ground between the present parties that this clause is legally ineffective. (iv) In August 2001, BT Australia sold the whole of its shares in BT Registries to companies in the Computershare group; (v) On 31 October 2002, Westpac Banking Corporation ('Westpac') became the ultimate holding company of BT Australia. 11 The result of the above transactions was that, after 31 October 2002, Chase Manhattan owned BTPS (now JPMPSL) and Westpac owned the BT group of companies. The December 2004 agreement 12 The agreement for purchase of BTPS by Chase Manhattan was negotiated on the basis that BTPS would first be stripped of its registry services businesses, including any right of action held by BTPS that arose out of the NRS Sale Agreements. Presumably, the purchase price paid by Chase Manhattan was negotiated without reference to the value of that right of action. 13 The assignment agreement was designed to allow BT Australia, and/or other companies in the BT group, to exploit that right of action and thereby to obtain, for the benefit of the BT group, the monetary value of the right of action. However, it was subsequently realised that the assignment of the right of action was legally ineffective. This meant that any exploitation of the right of action on behalf of BT Australia must be through a proceeding brought in the name of BTPS (now JPMPSL). The difficulty was that JPMPSL had no interest in bringing the action on its own account. The new owner of JPMPSL, Chase Manhattan, had not acquired BTPS' registry business or the right of action; those assets had been left with BT Australia, now owned by Westpac. 14 In these circumstances, an agreement was made by a letter that was dated 1 December 2004 ('the Letter Agreement'). The letter was signed on behalf of Westpac on the one hand and two Chase Manhattan companies ('the JP Morgan entities'), JPMPSL and J P Morgan Chase Bank NA, on the other. The Letter Agreement provided that proceedings against the present respondents 'will be conducted by JPMPSL on behalf of, and for the benefit of, Westpac'. The agreement provided for Westpac and JPMPSL jointly to retain Clayton Utz 'to conduct the proceeding as solicitors of record for JPMPSL'. Both parties were to receive copies of Clayton Utz's bills of costs; Westpac was to pay them. Westpac agreed to provide information about the progress of the proceeding to the J P Morgan entities. Provision was made for mediation of any dispute that might arise between Westpac and the J P Morgan entities. JPMPSL was to retain Mallesons Stephen Jaques, solicitors, at Westpac's expense, to hold a watching brief. The agreement provided for Westpac to indemnify the J P Morgan entities against all costs, expenses, claims and other liabilities connected with the proceeding. 15 Importantly, in the present context, clause 6 of the Letter Agreement provided that 'Westpac's interest in the proceeding, and the fact that it is indemnifying JPMPSL in respect of the proceeding, may be disclosed to the Court and the respondents in the proceeding'. The strike out application 16 On 21 March 2005, Clayton Utz wrote to Holding Redlich, the solicitors for the respondents, confirming an earlier oral communication that Westpac had an interest in the claim. Holding Redlich raised an issue about JPMPSL's ability to pay any costs that might be ordered against it. They sought information relevant to that matter. Clayton Utz responded that Westpac would meet any costs order that might be made against JPMPSL in the proceeding. 17 On 13 May 2005, Clayton Utz forwarded to Holding Redlich a copy of the Letter Agreement. Holding Redlich sought advice from counsel and, on 22 July 2005, filed the Notice of Motion now under consideration. The respondents' submissions (i) General principles 18 The respondents' counsel, Mr D J Hammerschlag SC and Mr A P Spencer, extracted from decided cases what they contended to be three relevant principles. Those principles were stated as follows: '(i) The Court may stay an action brought on the basis of an agreement which constitutes maintenance or champerty, where the underlying offending arrangement results in the proceedings being an abuse of the processes of the Court or poses a real risk of such abuse. (ii) By abuse of process is ordinarily meant the use of the processes of the Court for purposes outside their proper scope. Even a moving party with a prima facie case may be prevented from prosecuting proceedings that amount to an abuse. (iii) In cases of funding arrangements which are "de facto" assignments of causes of action, the Court will examine the terms of the funding arrangements to assess whether there is an unacceptable risk of abuse of process. Factors which will point to such a risk include: (a) the interests of the Plaintiff have been made subservient to the funder; (b) the Plaintiff is a "mere cipher"; (c) the Plaintiff will not benefit from a successful outcome; (d) the Plaintiff is not able to make informed decisions about the conduct of the litigation; (e) the solicitors on the record are not independent of the funder.' (footnotes omitted) 19 In their outline of submissions, counsel sought to apply these principles to the present case. They said: 'Westpac is in sole and absolute control over the proceedings. Apart from a term of the Letter Agreement which provides for a mediation of any dispute that may arise between Westpac and JPMPS as to the manner in which the proceedings are being conducted (unsupported by any contractual entitlement reserved to [JPMPSL] to influence the conduct of the proceedings), Westpac has sole control over the proceedings. The Applicant is a mere cipher. Westpac also has the exclusive right to the entire fruits of the proceedings. The proceedings are brought in circumstances where, it is submitted, an assignment of the causes of action sued upon could not be effected to Westpac. The proceedings therefore do not involve the adjudication of a real justiciable controversy between Deloitte and [JPMPSL], but rather the de facto adjudication of a suit brought by Westpac, which is not a party to the proceedings. There are no circumstances readily apparent which might displace what appears to be a paradigm example of where the court will intervene.' (ii) Clairs Keeley 20 In the course of oral argument, Mr Hammerschlag put the following submission: 'In circumstances where a party to a proceeding before the Court: (a) has no interest in the outcome; (b) has given control to a third party; and (c) the claim is incapable of assignment, the proceeding is an abuse of the process of the Court and is liable in those circumstances to be stayed. 21 Mr Hammerschlag said this submission is supported by a decision of the Full Court of the Supreme Court of Western Australia, Clairs Keeley (a Firm) v Treacy (2005) 29 WAR 479 ('Clairs Keeley (No 2)'). 22 Clairs Keeley (No 2) arose in the course of litigation of claims by lenders to recover losses arising from the non-recovery of secured loans made by them through finance brokers. The appellant firm of solicitors was a defendant in the actions. The respondents were financially supported by a litigation funder, IMF. A previous Full Court had stayed the actions on the ground that they contravened public policy because they were incontestably inimical to the public interest: see Clairs Keeley (a Firm) v Treacy (2003) 28 WAR 139. As a result of that decision, the funding arrangements were revised and new agreements were made between the plaintiffs, their solicitors (Solomon Brothers) and IMF. The plaintiffs applied for an order lifting the stay of action. They were unsuccessful. At [71] to [75], the second Full Court (Steytler, Templeman and McKechnie JJ) set out some principles: 'It is acceptable for the litigation to be pursued by plaintiffs who, although funded by a third party, are acting in their own interests in the pursuit of justice in their respective causes, and are so acting on the advice of independent solicitors. It is not acceptable for the litigation to be pursued in such a way that the interests of the plaintiffs are subservient to those of the funder. That would be an abuse of process. The court cannot know how, or on what basis, the plaintiffs are being advised. It can have regard only to the potential for abuse. As was said by Steyn LJ in Giles v Thompson [1993] 3 All ER 321 at 333: "The correct approach is not to ask whether, in accordance with contemporary public policy, the agreement has in fact caused the corruption of public justice. The court must consider the tendency of the agreement. The question is whether the agreement has the tendency to corrupt public justice. And this question requires the closest attention to the nature and surrounding circumstances of a particular agreement." We do not think that the judgments in the House of Lords detracted from that proposition: see Giles v Thompson [1994] AC 142. Indeed, it has always been so. As Lord Denning MR said in Re Trepca Mines Ltd (No 2) [1963] Ch 199 at 219-20: "The reason why the common law condemns champerty is because of the abuses to which it may give rise." In the Full Court, Pullin J expressed the majority view when he said: "I recognise that 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 courts. The court must be careful not to use its power to stay proceedings which will 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." The position is the same in England. Most recently, in Gulf Azov Shipping Co Ltd v Idisi [2004] EWCA (Civ) 292, Lord Phillips MR, giving the judgment of the Court of Appeal, said (at [54]): "Public policy now recognises that it is desirable, in order to facilitate access to justice, that third parties should provide assistance designed to ensure that those who are involved in litigation have the benefit of legal representation." There can be no doubt that one of the most important considerations in this context, is the position of the solicitors. The Court can be more confident that its processes will not be abused by a litigation funder if the solicitor acting for the funded party is independent of the funder, is alive to the possibility of abuse or conflict and is fully aware of his fiduciary obligations to his client. That point is made very clearly in De Crittenden v Bayliss [2002] EWCA (Civ) 50, where the Court of Appeal emphasised the distinction between solicitors controlling litigation as officers of the court who are subject to its rules, and lay litigation funders who are subject to no such constraints.' 23 At [124]-[125], the Court summarised its position in this way: 'Although the conduct of the litigation is in the hands of Solomon Brothers, there is no doubt that IMF continues to exercise a degree of control. However, that will be inevitable in the case of any litigation funding of this kind. Without some degree of control the risk would be too great for the funder to undertake the funding, especially when the litigation is protracted, complex and expensive. If litigation funders were to be discouraged, by denying them some measure of control sufficient to protect their investment, the number of oppressive or unmeritorious claims and defences might be reduced, but at the risk of preventing access to justice, or equal access to justice, by many others with genuine claims or defences and no other means of advancing, or effectively advancing, them. Consequently, it is necessary to balance the competing interests in the course of assessing that risk to the due administration of justice which has been introduced by the funding arrangements. In seeking that balance one important consideration should, we think, be whether or not the litigation is, in truth, still that of the plaintiff or defendant. That is to say, the funded party should still be in a position to benefit from a successful outcome and should be entitled to make informed decisions which are critical to the litigation. If the funder's level of control is such that, in reality, it will be making decisions of that kind, or even if the funded parties are not to be given sufficient information to enable them properly to make decisions of that kind, there will be a substantial risk that the funder's intervention will be inimical to the due administration of justice and that the court's processes will be misused for commercial gain.' (iii) Fostif 24 Mr Hammerschlag properly drew my attention to two decisions of the New South Wales Court of Appeal that were handed down after the decision in Clairs Keeley (No 2). The first of these is Fostif Pty Ltd v Campbells Cash and Carry Pty Ltd [2005] NSWCA 83 ('Fostif'). Judgment was delivered on 31 March 2005. I have been informed that the High Court of Australia has granted special leave to appeal against this decision but no date has yet been fixed for the hearing of the appeal. 25 Fostif related to a series of actions brought by licensed tobacco retailers against their respective licensed wholesalers to recover licence fees that had been paid by the retailers to the wholesalers in respect of taxes that were subsequently held to have been invalidly imposed. The claims were brought as representative proceedings on behalf of all retailers who chose to opt-in. The proceedings were financed by a litigation funder. A primary judge ordered that the proceedings not continue as representative proceedings on the ground that they were an abuse of process. The judge made adverse findings about the role of the litigation funder and the solicitor for the plaintiffs. 26 The Court of Appeal allowed an appeal from the primary judge's orders. The leading judgment was given by Mason P. At [88] his Honour commenced a section of his reasons which he headed 'Funding arrangements, public policy, abuse of process and trafficking in litigation'. He noted a changed attitude about the common law crime and tort of maintenance (officious intermeddling with litigation), including that species of maintenance that was known as champerty (maintenance that involved a division of the spoils of the litigation). That change of attitude had been reflected in New South Wales in the enactment of the Maintenance and Champerty Abolition Act 1993 (NSW). However, at [97] Mason P noted that, even at common law, for a defendant to obtain a stay of an action, it was not enough to show that the plaintiff was receiving unlawful assistance from a third party; abuse of process had to be demonstrated. His Honour approved a statement of McMurdo P in Elfic Ltd v Mack [2003] 2 Qd R 125 at [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 ....' 27 After referring to other authorities to like effect, Mason P at [102] turned to the Clairs Keeley litigation. He observed that the common law of maintenance and champerty continues to apply in Western Australia. He noted the unsatisfactory arrangements identified by the first Full Court and commented: 'A champertous arrangement may have a particular tendency to lead to abuse of process, whether or not champerty remains tortious. But it is that tendency, and not its champertous nature as such, that must be considered in an application for a stay.' 28 At [114] his Honour expressed disagreement with what he called the 'categorical thrust' of the second and third sentences in the extract from the Clairs Keeley (No 2) judgment set out at para 22 above. He said: 'In my opinion, a conclusion about abuse of process must stem from a finding directed at the actual or likely conduct of the party in whose name the litigation is brought (or its agents). The court is not concerned with balancing the interests of the funder and its clients. Indeed, it is not concerned with the arrangements, fiduciary or otherwise, between the plaintiff and the funder except so far as they have corrupted or have a tendency to corrupt the processes of the court in the particular litigation. It is only when they have that quality that the defendant has standing to complain about them. Even at common law, the aspects of public policy hostile to champerty were concerned with the interests of the opposing party, not the party who had entered into the champertous arrangement (Giles v Thompson[1993] 3 All ER 321 at 336 per Steyn LJ).' 29 At [116] Mason P considered profiting from litigation. He said: 'The additional vice of champerty compared with mere maintenance lay in the attempted profiting from the assistance provided. But a profit motive is no longer the touchstone of illegality, even at common law. Many people seek profit from assisting the processes of litigation, including lawyers, expert witnesses, printers, couriers, forensic accountants. A desire to earn a "success fee" may have a tendency to corrupt processes and that tendency may be greater if the fee is higher and the activity is unregulated. But such a finding should focus clearly on the dangerous tendency, not the profit as such.' 30 Mason P accepted, at [118], that the greater the share of the spoils that the funder may receive 'the greater the temptation to stray from the path of rectitude', but he went on at [119]-[120] to say: 'In general, it is simply no business of a defendant to be taking up the cudgels on behalf of the funded litigants who are either parties or represented persons, invoking interlocutory processes ostensibly on behalf of the funded litigants but in reality in its own interest. As this appeal demonstrates, such satellite proceedings have the capacity of diverting resources and attention from the true issues as between the plaintiffs (and those they represent) and the defendant. Defendants may in proper cases seek security for costs and they may obtain special costs orders against funders if the proceedings fail. But they have no entitlement (as contended for by the "Metcash respondents" "to be protected from litigation where the Appellants have been indemnified by an intermeddler, against the negative effect of adverse costs orders".' 31 Sheller and Hodgson JJA agreed with Mason P.