Peter Tao Zhu & Anor v Domson Pty Ltd & 6 ors Trading As Litigation Lending... [2006] NSWCA 232 | Case summary

Peter Tao Zhu & Anor v Domson Pty Ltd & 6 ors Trading As Litigation Lending... [2006] NSWCA 232 | Case summary | Zoe

[15]

Wednesday 23 August 2006 Peter Tao ZHU & Anor v DOMSON PTY LTD & 6 ORS t/as LITIGATION LENDING SERVICES PARTNERS Judgment 1 SPIGELMAN CJ: The First Appellant was successful in proceedings against the Sydney Organising Committee for the Olympic Games in an action for inducing breach of contract with respect to an Agency Agreement to sell International Memberships in a service called the Olympic Club to residents of mainland China. Damages were awarded by Bergin J in the Supreme Court in the amount of $4,234,319 plus costs (Zhu v Sydney Organising Committee for the Olympic Games [2001] NSWSC 989). On appeal to this Court the damages were substantially reduced. (See Sydney Organising Committee for the Olympic Games v Zhu [2002] NSWCA 380.) On appeal to the High Court the orders of Bergin J were restored (Zhu v The Treasurer of the State of New South Wales [2004] HCA 56; 218 CLR 530). 2 The litigation was funded by the Respondents, being the companies trading as Litigation Lending Services Partnership ("LLS"). The arrangement was the subject of a Funding Agreement dated 3 August 2001. Subsequent to the decision of Bergin J, and after the appeal had been instituted in this Court but before the appeal had been heard, the Funding Agreement was terminated and new arrangements were put in place pursuant to a Termination Deed dated 6 February 2002. 3 LLS instituted proceedings in the Supreme Court of New South Wales for the payment of certain amounts owing to it pursuant to the Termination Deed. The First Appellant defended those proceedings, relevantly, on the basis that the Termination Deed was champertous and, accordingly, void and contrary to public policy. The Second Appellant is a firm of solicitors who hold the relevant Fund and submitted to the order of the Court, save as to costs. 4 White J rejected the First Appellant's defence and made orders requiring moneys to be paid to the Respondents in accordance with the terms of the Termination Deed (Domson & Ors v Zhu [2005] NSWSC 1070). The First Appellant seeks to appeal from the decision. 5 There was a suggestion in the materials before the Court that the company was perfectly solvent and was placed under administration for the sole purpose of entering into the Funding Agreement pursuant to the statutory power that an administrator would have. Although the Funding Agreement was challenged before White J, it does not appear that it was challenged on this basis. His Honour rejected the challenge and it has not been raised on appeal. Accordingly, this appeal must be determined on the basis that the Funding Agreement was valid and enforceable. 6 Four issues arise on the appeal. 7 The first issue is whether White J was correct to conclude that the agreement between Zhu and LLS came within the exception to the rules against champerty and maintenance which applies in the context of bankruptcy and corporate insolvency. (See e.g. Cotterill v Bank of Singapore (Australia) Limited (1995) 37 NSWLR 238; UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (No 2) (1996) 21 ACSR 457; Re Movitor Pty Ltd; Ex parte Sims (1996) 136 ALR 643.) The existence of the statutory exception was not challenged but its application was in issue. 8 The second issue is whether a provision in the agreement with respect to the control over the proceedings to be exercised by LLS was such as to take the agreement outside the statutory exception. 9 The third issue is whether White J was correct to hold that LLS had a sufficient legitimate interest to support the proceedings envisaged in the Termination Deed so as to render the agreement not void as contrary to public policy. This conclusion operates in the alternative to his Honour's findings with respect to the first two issues. 10 A fourth issue that arises involves the proper construction of the Termination Deed. The Appellant contends that on its proper construction the amount payable under the Deed is limited to $100,000 and that the part of the Deed which refers to the payment of a proportion of the monies recovered by Zhu is not applicable. 11 When this case came before the Court, the Court indicated that it would first hear submissions on issues 3 and 4. Having heard those submissions the Court indicated that it would dismiss the appeal with respect to both issues 3 and 4. Accordingly, it was not necessary to hear argument on issues 1 and 2.

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The Contract 12 It is necessary to set out the relevant provisions of both the Funding Agreement and the Termination Deed. 13 The company controlled by the First Appellant ("ACSC") which had entered into the relevant contracts with SOCOG went into voluntary administration in June 2001. It appears, on the materials before the Court, that that step was taken for the purpose of entering into the Funding Agreement so that LLS would have the benefit of the statutory exception. However, at no stage was there any challenge to the validity of the Funding Agreement, or to the continuation of the proceedings, based on this purpose. 14 I adopt the following summary of the relevant provisions of the Funding Agreement from the judgment of White J: "[21] Mr Condon was appointed as voluntary administrator of ACSC on 20 June 2001. On 17 July 2001, the creditors of ACSC resolved pursuant to s 439A of the Corporations Act 2001 (Cth) that it execute a deed of company arrangement. [22] The Funding Agreement was made on 3 August, 2001. The parties to it were Mr Condon, ACSC, and Mr Zhu. Mr Condon was still the administrator of ACSC. He was not yet the deed administrator. LLS agreed to provide funding to Mr Condon to pay the following: 1. His remuneration and disbursements incurred specifically in relation to the Proceedings from the date of the agreement; 2. Legal costs and disbursements up to a capped total of $300,000 inclusive of solicitors' and counsel's fees; 3. The costs, if any, of recovering the 'Final Amount' from the Defendant; and 4. Such other fees and expenses in respect of which Mr Condon obtained the prior written consent of LLS. [23] The 'Final Amount' meant the gross amount received by Mr Condon whether by way of settlement, orders made, or judgment entered, in respect of the Proceedings. [24] The 'Proceedings' were defined as the proceedings between Zhu, Mr Condon, and the defendants in Supreme Court of New South Wales Equity Division, Commercial List No. 50167 of 2000. In fact Mr Condon was not a party to those proceedings, but nothing turns on that. [25] Clause 2.6 of the Funding Agreement provided: 'The Insolvency Practitioner will pay LLS 10% of any settlement monies received in respect of the Proceedings if settlement occurs after any offer of funding pursuant to this Funding Agreement and before acceptance of that offer.' [26] Clause 5.4 provided: 'If, after this Agreement is terminated, the Insolvency Practitioner concludes the Proceedings and a Final Amount is received the Insolvency Practitioner agrees to repay to LLS any amounts paid by LLS under this Agreement from the Final Amount.' [27] Clause 3.1 required Mr Condon to repay the Funding to LLS on the Repayment Date. That meant the date of receipt as cleared funds of the Final Amount. If Mr Zhu was unsuccessful in his claim against SOCOG, the moneys advanced by LLS would have been irrecoverable as no Final Amount would have been received by Mr Condon. [28] Clause 3.2 provided: 'In addition to repayment of the Funding the Insolvency Practitioner agrees to pay to LLS an additional sum calculated as follows: 3.2.1 Where the Final Amount is less than $1,000,000 the sum of $100,000; 3.2.2 Where the Final Amount is between $1,000,001 and $6,000,000 an amount equal to $100,000 and 20% of the difference between the Final Amount and $1,000,000; 3.2.3 Where the Final Amount exceeds $6,000,000 the sum of $1,250,000.' [29] By clause 4.2, LLS acknowledged that the 'Representatives' were and would continue to be instructed by the Insolvency Practitioner in all matters relating to the proceedings and that the Insolvency Practitioner had the right, subject to clause 4.3, to direct, conduct and conclude the proceedings by way of settlement. [30] Clause 4.3 provided: 'Notwithstanding the provisions of clause 4.2 above, the Insolvency Practitioner and Zhu agree that in the event that an offer is received from the Defendants to settle the proceedings for less than $5,000,000 then such offer shall be referred to John Kelly QC for his advice. If Mr. Kelly advises that the offer should be accepted and LLS wishes to accept but Zhu refuses to accept then, LLS shall terminate this funding agreement immediately and Zhu shall be obliged to repay the LLS expenses to the date of termination.' " 15 After the success of his case before Bergin J, and before the matter was heard in the Court of Appeal, the solicitors for the First Appellant expressed a concern that an argument could be mounted, one which they did not believe would succeed, to the effect that the First Appellant had suffered no damage and that the entirety of the damage was incurred by his company ACSC. Following negotiations the Termination Agreement was entered into which, as its title suggests, included provision for the termination of the Funding Agreement. 16 The relevant provisions of the Termination Deed are set out in logical sequence by White J and I adopt his Honour's outline as follows: "[36] The Termination Deed was entered into on 6 February, 2002. The parties were LLS, ACSC, Mr Condon, Mr Zhu and Walker Hedges & Co. Clause 3.1 dealt with the distribution of the preliminary payment of $500,000 made by SOCOG pursuant to orders of the Court of Appeal made on 10 December 2001. $253,000 was to be paid to LLS, $147,000 was to be paid to Mr Zhu, and $100,000 was to be paid to Mr Hedges to be applied to fund the prosecution of the 'Action'. 'Action' was defined to mean the proceedings in the Equity Division of the Supreme Court, the Court of Appeal proceedings, and any proceedings by way of appeal from the Court of Appeal proceedings, or any re-hearing of the whole or any part of those proceedings. LLS was to apply the sum of $253,000 (called 'the LLS Amount') towards satisfaction of the obligations of Mr Zhu and ACSC under the Funding Agreement of 3 August 2001. Clause 3.3 provided that Mr Zhu would apply the amount of $147,000 towards satisfaction of all debts and liabilities of ACSC and the Deed Administrator to permit the deed of company arrangement to be terminated. Clause 3.4 provided that Mr Zhu and Walker Hedges & Co would apply the sum of $100,000 to fund the prosecution of the Action. [37] Clause 5.1 provided that if LLS was paid the LLS amount (that is, the sum of $253,000) in accordance with clause 3.1(a), then forthwith upon payment of the LLS amount, LLS released the Deed Administrator from all Claims it had against the Deed Administrator arising from or in connection with the Funding Agreement. [38] By clause 4.1, LLS, Hedges, Zhu, and ACSC, acknowledged that: '… (d) by their entry into this deed: (i) The Contingent Debt will become due and payable by Zhu to LLS; and (ii) Zhu must repay the Contingent Debt on the Repayment Date; and (iii) Zhu acknowledges that in addition to any sum payable under (ii), he must also pay to LLS the amount of $50,000 upon the earlier of; (A) the receipt by Zhu of the Final Amount; or (B) the receipt by Zhu of any funds whatsoever from SOCOG in the Action; and (iv) The obligations of Zhu and the Company to LLS under this deed shall prevail over and be observed and performed before and in priority to any arrangement or agreement or rights or obligations that may exist between Zhu and the Company.' [39] The expression 'Contingent Debt' was defined as follows: 'Contingent Debt' means the obligation under the Funding Agreement to pay LLS the sum of: (a) $100,000 from the first $1,000,000 recovered from the Action; and (b) where the Final Amount is between $1,000,000 and $6,000,000, 20% of the difference between the Final Amount and $1,000,000.' [40] The 'Repayment Date' meant the date of receipt of the Final Amount. 'Final Amount' meant 'the gross amount received by Zhu or the Company by way of settlement of or orders or judgment entered in respect of the Action'. [41] It will be observed that the definition of 'Contingent Debt' dealt with the Insolvency Practitioner's obligation under the Funding Agreement to pay an additional sum where the Final Amount was less than or equal to $6,000,000. Mr Zhu assumed the liability to pay an amount which was the same as the amount which Mr Condon had been obliged to pay under the Funding Agreement. However, the definition of Contingent Debt did not deal with the circumstance where the Final Amount exceeded $6,000,000. Under the Funding Agreement, Mr Condon had agreed to pay LLS the additional sum of $1,250,000 where the Final Amount exceeded $6,000,000. The definition of 'Contingent Debt' in the Termination Deed did not deal with that eventuality. [42] Clause 4.3 provided: 'LLS, Hedges, Zhu and the Company agree that: (a) on the date of this deed Zhu will execute and provide the Direction to LLS. (b) the Direction is unconditional and irrevocable, and shall be held by LLS for as long as it in its absolute and uncontrolled discretion determines. (c) as security for the performance of their obligations under this deed, Zhu (and to the extent required) the Company upon execution of this Deed hereby grants to LLS a first ranking charge over the Final Amount. (d) notwithstanding the termination of the Funding Agreement in accordance with clause 6, Zhu, the Company and Hedges will: (i) keep LLS informed about the conduct of the Action, and (ii) will not settle or conclude the Action without the prior consent of LLS.' [43] By clause 4.3(a), the Company agreed to Mr Zhu providing the Direction in the terms set out in Schedule 1. The deed administrator, Mr Condon, was also a party to the deed. The direction in Schedule 1 was addressed to Walker Hedges & Co and signed by Mr Zhu. It stated: 'You are hereby irrevocably directed to pay to LLS: 1. The sum of $50,000 in accordance with clause 4.1(d)(iii) of this Deed; and 2. from any other sum otherwise payable to me pursuant to any judgement, order or settlement in or of the Action the sum calculated in accordance with the following formula, where X is the amount otherwise payable to me, and P, is the amount to be paid to LLS pursuant to this direction to pay. P = $100,000 + 20% [X - $1,000,000]' [44] Accordingly, the direction covered the situation where the amount payable pursuant to a judgment exceeded $6,000,000. Rather than LLS being entitled to a fixed amount of $1,250,000, it was to be entitled to $100,000 plus 20% of the difference between the amount payable under the judgment and $1,000,000. Where the judgment was more than $6,000,000, this might be more or less than $1,250,000."

[18]

See also Project 28 Pty Ltd v Tim Barr Pty Ltd [2005] NSWCA 240 at [40]-[43]. 18 White J's reasons with respect to this issue were as follows: "[86] LLS advanced funds to support the action under the Funding Agreement, not under the Termination Deed. As LLS had the right under the Funding Agreement to recover an additional sum of up to $1,250,000 if the action was successful, one asks, in what respects did the Termination Deed amount to an officious intermeddling in the action without justification or excuse? The principal reason for the Termination Deed was to ensure no false issue was raised by SOCOG. LLS advanced no further moneys. It agreed to accept only $253,000 at that stage, which was less than it was entitled to be paid under the Funding Agreement. It agreed to $100,000 of the moneys paid by SOCOG being used to fund legal representation on the appeal and any further appeal. It had the right to veto a settlement. There was a change to the method of calculating the additional moneys to be payable to LLS if the recoveries exceeded $6,000,000. Given that the judgment obtained was for just under $5,000,000, inclusive of interest to 6 December, 2004, it might have been thought unlikely that recoveries would exceed $6,000,000. [87] In the absence of argument to the contrary, I assume that this may be sufficient to amount to an intermeddling or interference in the dispute between Mr Zhu and SOCOG. However, I accept that LLS, by virtue of the Funding Agreement, had enforceable and valuable rights in relation to the outcome of the litigation prior to entering into the Termination Deed. It dealt with these rights by entering into the Termination Deed. They were sufficient to give it a legitimate and genuine commercial interest in the payment provisions of the Termination Deed. ( Trendtex Trading Corporation v Credit Suisse [1982] AC 679 at 703). That existing interest was such that it cannot be said that the Termination Deed involved its ' wanton and officious intermeddling with the disputes of others in where [sic] the meddler has no interest whatever, and where the assistance he renders … is without justification or excuse ' ( Giles v Thompson [1994] 1 AC 142 at 164). [88] Normally, to constitute such a 'legitimate interest' the interest 'must be distinct from the benefit that the person supporting the action seeks to derive from the litigation: … It must be something beyond a mere personal interest in profiting from the outcome of the proceedings: …' ( Project 28 Pty Ltd v Barr [2005] NSWCA 240 at [41]). [89] However, that was not said in the context of a person already having an enforceable interest in the outcome of litigation under an agreement which was enforceable through an exception to the rule against champerty. In my view, because LLS had enforceable rights under the Funding Agreement prior to entering into the Termination Deed, it had a legitimate interest in obtaining the benefits to which it is entitled under the Termination Deed. [90] Accordingly, I consider that the whole of the Termination Deed is valid. I turn to the remaining question of LLS's rights under the Termination Deed." 19 I agree with the reasons of White J. 20 The Funding Agreement itself was, as I have noted, in issue before White J, but is not in issue in this Court. Accordingly, this appeal should proceed on the basis that the Funding Agreement validly created legal rights and obligations which would be enforced by the Court. 21 In these circumstances, in my opinion, White J was perfectly correct to come to the conclusion that LLS had a legitimate interest in the champertous element of the Termination Deed, on the basis of its interest under the Funding Agreement. 22 Mr J C Kelly SC, who appeared for the First Appellant, submitted that the Funding Agreement could not give rise to a legitimate interest because it was terminated. However, the termination occurred eo instanti with the creation of the new rights which operated in substitution for those which were to be superceded. 23 As a result of the judgment of Bergin J, LLS had an entitlement to receive a substantial amount of money under the Funding Agreement. That entitlement was placed in jeopardy by the appeal to the Court of Appeal. It does not appear, on the material and submissions before this Court that LLS was under any contractual obligation to fund the appeal. 24 The interest of LLS in ensuring that the appeal did not succeed was more direct than other commercial interests that had been found to justify support by a third party for litigation (e.g. that considered in Trendtex Trading Corporation v Credit Suisse [1982] AC 679 at 703). In my opinion, White J was correct to uphold the Respondents' contention that a legitimate interest in the outcome of the proceedings was sufficient to render valid the support it gave to the litigation process by deferring receipt of certain funds, to which it was entitled under the Funding Agreement, and by substituting its entitlements under the Funding Agreement with the similar, but not identical, rights acquired under the Termination Deed. 25 In this respect the appeal should be dismissed.

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Construction of the Termination Deed 26 On the issue of the proper construction of the Termination Deed, White J's reasons were as follows: "[92] I do not approach the Termination Deed on the assumption that it was intended to provide to LLS the same reward for its funding as was provided for by the Funding Agreement. Matters had moved on. The Termination Deed released LLS from its obligation under the Funding Agreement to provide funding for the costs, if any, of recovering the Final Amount. It imposed a personal obligation on Mr Zhu to make payments. It did not define 'Contingent Debt' wholly in accordance with clause 3.2 of the Funding Agreement. The direction for payment in Schedule 1 was in different terms from both clause 3.2 of the Funding Agreement and clause 4.1(d) of the Termination Deed. [93] When clause 4.1(d) is read with clause 4.3 in Schedule 1, I do not think it absurd that Mr Zhu should not have a personal liability to pay the Contingent Debt if the Final Amount was in excess of $6,000,000. That is because by clause 4.3 he gave an irrevocable direction to Walker Hedges & Co to pay moneys calculated in accordance with that schedule from the proceeds of the judgment or order in the Action. I see no reason to read the Direction or any part of it, as being inapplicable if the Contingent Debt exceeded $6,000,000. To do so would lead to an absurdity. [94] In my view, clause 4.1(d), the Direction, and the definition of Contingent Debt, should be given their literal meaning. The definition of Contingent Debt refers to the aggregate sum recovered from the litigation up to $6,000,000. The direction in Schedule 1 is on-going, and applies whenever a relevant sum of money comes into the hands of Walker Hedges & Co. Under clause 4.2(a) ACSC guarantees Mr Zhu's obligation to repay the Contingent Debt, but does not do so with respect to the direction. There is nothing remarkable in Mr Zhu's and ACSC's personal liability being limited to the case where recoveries do not exceed $6,000,000. On the other hand, Schedule 1 operates separately from and is not qualified by the definition of Contingent Debt. [95] It follows, that Walker Hedges & Co are bound by the Direction given by Mr Zhu to pay the sum of $50,000 upon the receipt by him of any funds from SOCOG in the Action. The first such payment received after the direction was given was an amount of $170,000 received by Mr Hedges on 28 August 2003. Mr Zhu has a personal liability to pay the sum of $50,000 in accordance with clause 4.1(d)(iii). Walker Hedges & Co is also required to account for that sum in accordance with paragraph 1 of Schedule 1. LLS is entitled to interest pursuant to s 100 of the Civil Procedure Act at the prescribed rates on the sum of $50,000 from 28 August 2003. [96] Mr Zhu is also liable to pay the sum of $100,000 pursuant to paragraph (a) in the definition of Contingent Debt from the first $1,000,000 recovered from the Action. That amount is also payable by Walker Hedges & Co from the moneys otherwise payable to Mr Zhu obtained pursuant to the judgment. In the events which have happened, the liability of both Mr Zhu and Walker Hedges & Co to pay that sum arose when Mr Hedges received a further payment of $50,000 on 25 November 2004. That was another sum otherwise payable to Mr Zhu referred to in paragraph 2 of Schedule 1. It also took the moneys recovered from the Action to above $1,000,000. LLS is entitled to recover that amount from either Mr Zhu or from Walker Hedges & Co together with interest pursuant to s 100 of the Civil Procedure Act from 25 November 2004. [97] I do not consider that LLS is entitled to any payment from Mr Zhu pursuant to paragraph (b) of the definition of Contingent Debt. It is however, entitled pursuant to paragraph 2 of the Direction in Schedule 1 to 20% of the further moneys in excess of $1,000,000 payable to Mr Zhu pursuant to the judgment and orders in the Action. At the date of the hearing, Mr Hedges had received $6,046,575.29. LLS is also entitled to be paid 20% of $5,046,575.29, or $1,009,315.06. It is entitled to interest on that sum from 6 December 2004. It is also entitled to a declaration that the second defendant is required to pay to it 20% of the further moneys received by him and payable to Mr Zhu pursuant to orders for costs made in the Action. These include the orders for costs made in respect of the appeal to the Court of Appeal, the application for special leave to the High Court, and the appeal to the High Court." 27 I agree with the reasons of White J. 28 The definition of Contingent Debt, set out in par [39] of his Honour's judgment, quoted in par [15] above, differs from the debt created in the Funding Agreement, as set out in par [28] of his Honour's judgment quoted in par [13] above. The relevant difference is that in the Termination Deed only pars 3.2.1 and 3.2.2 of cl 3.2 in the Funding Agreement are repeated. Clause 3.2.3 of the Funding Agreement which makes provision for an amount of an additional $250,000 where the amount recovered exceeds $6 million is not repeated in the definition of Contingent Debt in the Termination Deed. The effect of the original clause 3.2.3 was to provide an additional amount to LLS unrelated to any proportion of the recovery, albeit if recovery considerably exceeded the amount of $6 million then it was at least theoretically possible for cl 3.2.3 to operate as a cap on the recovery. 29 The First Appellant's contention is that there is no relevant provision creating a debt or a promise to pay anything other than the first amount of $100,000 if, as has occurred, the recovery, after the addition of interest and costs following the successive appeals to this Court and the High Court, exceeds $6 million. 30 The First Appellant submits that on the proper construction of the Termination Deed, LLS was entitled to $1.1 million if the ultimate recovery was in the sum of $6 million but, if the recovery exceed $6 million, LLS was only entitled to $100,000. Any such construction is commercially absurd and cannot have represented the intention of the parties. 31 The First Appellant's contention was that as the Direction issued in the terms of Sch 1 does not contain express words creating a debt, it should be understood simply as an intention to create an equitable assignment of the fund to discharge the Contingent Debt as defined in the Termination Deed and only that debt. In the events that happened that debt was only $100,000 and the assignment did not create any further entitlement. The issue in this case is whether the assignment had this limited effect, or as White J held (par [26] herein) the assignment took effect in accordance with the express terms referred to in pars [43]-[44] of the judgment of White J quoted in par [16] herein. 32 The terms of the direction are perfectly capable of being understood as creating an entitlement under the assignment where the Final Amount exceeded $6 million. Giving the contract as a whole a commercial interpretation inextricably leads to the conclusion that that is what the parties intended. This aspect of the appeal should be dismissed.

Peter Tao Zhu & Anor v Domson Pty Ltd & 6 ors Trading As Litigation Lending Services Partners

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