Volpes v Permanent Custodians Limited

Consumer Credit (NSW) Code LEGISLATION CITED : Contracts Review Act 1980 Supreme Court Act (1970) (NSW)

Cutts v Head [1984] Ch 290 Elphic Ltd v Mack [2003] 2 Qd R 125 Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd [2005] NSWCA 83 Giles v Thompson [1994] 1 AC 142 Magic Menu Systems v AFA Facilitation Pty Ltd (1997) 72 FCR 261 CASES CITED : Project 28 Pty Ltd v Barr & Anor [2005] NSWCA 240 QPSX Limited v Ericsson Australia Pty Ltd [2005] FCA 933 933 Rush & Tompkins Ltd v Greater London Council & Anor [1989] AC 1280 Thai Trading Co v Taylor [1998] QB 781 Williams v Spautz (1992) 174 CLR 509

PARTIES : G & S A Volpes v Permanent Custodians Limited

(P) D E Grieve QC & A A Henskens COUNSEL : (D) T D Castle & A J Abadee

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1584/04: G & S A VOLPES v PERMANENT CUSTODIANS LIMITED JUDGMENT

1. By its motion of 2 December 2004 Permanent Custodians Limited ("Permanent") seeks that the proceedings instituted by Mr and Mrs Volpes ("the Volpes") against it be stayed or that Liberty Financial Pty Ltd ("Liberty") be restrained from further funding them in the proceedings. Permanent seeks such other relief as the Court thinks fit. The motion sought, alternatively, that Liberty provide within seven days security for costs to Permanent of $200,000. I was asked not to concern myself with the question of security for costs as the parties had reached an agreement on this issue.

The Volpes have sued Permanent seeking reduction of the deferred establishment fee payable under a written agreement of 28 November 2002 between them pursuant to s 72(1) of the Consumer Credit (NSW) Code, a determination that the loan agreement was unjust or that certain provisions were unjust pursuant to the Contracts Review Act 1980 and the sum of $16,480. Before any reduction of the deferred establishment fee can occur, the Court must hold that a fee or charge payable on early termination of a credit contract is unconscionable The agreement provided that the Volpes might be charged a deferred establishment fee, that they had not been charged the full costs of setting up the loan, that is they had not been charged 4 per cent of the total amount of the credit received, that the Volpes might pay this establishment fee on the settlement date if they wished; however, if they did not pay the establishment fee on the settlement date, Permanent would waive the whole of this fee provided the Volpes kept the loan for 3 years from the settlement date. It was provided that if the Volpes repaid the loan in full during the first year of the term they must pay an establishment fee of 4 per cent of the total amount of credit (the deferred establishment fee"). The agreement provided that if the loan was repaid in full and all security discharged, the Volpes must pay Permanent a discharge administration fee and its documentation costs associated with the discharge. It was probably attractive to borrowers, especially if in difficult financial circumstances, that the establishment fee was not taken out of the loan moneys when initially advanced provided it was not excessive The amount payable on account of the establishment fee reduced on repayment in the second and third years.

The total amount of credit was $412,000. The loan was a credit contract to which the Consumer Credit(NSW) Code applied. The loan was repaid in full on 14 July 2003 and the deferred establishment fee of $16,480 was paid along with a discharge administration fee of $500.

Permanent is the trustee for the mortgage funding business of Bluestone Group Pty Limited ("Bluestone") which originates the loans. Bluestone and Liberty are loan originators in the sub-prime market. Many, if not all of their clients would be unable to obtain loans in the prime lending market. Bluestone and Liberty are the largest lenders in the sub-prime market and in strong competition with each other. Liberty provided the funds which enabled the loan agreement between Permanent and the Volpes to be fully repaid.

Liberty and the Volpes entered an Indemnity Funding Deed, the terms of which were fully discussed in open Court. Under that deed Liberty agreed to pay all legal costs and disbursements of the Volpes to bring and prosecute this action. This is thus the case of an action against a major lender in the sub-prime lending market by a borrower (or a former borrower) being financed by its major competitor. Without funding the Volpes would not be able to bring and maintain their action against Permanent. While Permanent suggested, somewhat faintly, that the Volpes may be able to find another funder, that is not so. The amount at stake is small and ordinarily this action would be in the Local Court, but questions of principle of some importance were said to be involved. The cost of litigating the matter is likely to be high with experts' reports on both sides as to the reasonableness of Bluestone's method of financing and level of fee charging when a loan is repaid in full within 12 months of the credit being given.

It is necessary to refer further to the terms of the Funding Deed. By cl 2 Liberty agreed to pay "all legal costs and disbursements of the Volpes to bring and prosecute" the action taken by the Volpes against Permanent and/or Bluestone. Clause 2 further provided that subject to the Deed's terms Liberty is to "reimburse all reasonable costs incurred by the Volpes personally in bringing or prosecuting" the action. By cl 3.1 Liberty, subject to cl 5 (dealing with Liberty having the right to discontinue its funding obligations on certain terms as to notice and meeting the Volpes' costs up to the date of discontinuance) agreed to indemnify the Volpes against any costs order made against them in the action.

Clause 4 provided for the consideration stated in it that the Volpes could retain any moneys recovered by or paid to them by Permanent in the action, except that any costs recovered by them shall be paid to Liberty.

Thus this is not a case of champerty but one of maintenance

Clause 5 provided that Liberty may at any time discontinue its funding obligations provided it gives the Volpes 30 days prior notice and meets all costs and disbursements incurred by the Volpes to the date of discontinuance and any they may be ordered to pay in respect of costs incurred by Permanent up to such date.

Under cl 6, whilst Liberty continues to provide funding the Volpes agreed to appoint Middletons Lawyers (Liberty's lawyers) or such other firm as may be nominated by Liberty as solicitors having the principal conduct of the action.

Under cl 6.2 Liberty acknowledged that from time to time the Volpes may need to engage separate solicitors to advise them separately. The Volpes had to obtain the consent of Liberty which was not to be unreasonably withheld. Liberty agreed to pay the reasonable costs of the separate solicitors.

Under cl 6.3 the Volpes agreed to prosecute the claim to conclusion upon the directions and instructions of Liberty and to co-operate fully with Liberty and the legal team.

Clause 6.4 provided that the Volpes would not withdraw, discontinue, consent to judgment or otherwise terminate or compromise or settle the action without Liberty's prior consent.

Clause 6.5 provided that the lawyers shall be retained by Liberty and not the Volpes and that in the event that the Volpes provided instructions in conflict with Liberty's instructions, Liberty should have the unfettered power to discontinue its funding or continue the action or bring any appeal in the names of the Volpes to which they thereby gave their consent. These "rights" of Liberty may be somewhat theoretical. If the Volpes did not wish to proceed but wanted to settle it may be reasonably hard for Liberty to continue.

Clause 6.6 provided that if the Volpes wanted to settle the action on terms not agreed by Liberty, or if the Volpes do not want to settle the action when Liberty considers it appropriate, then Liberty retains an unfettered power to conduct or settle the action in the name of the Volpes.

Clause 6.8 provided that the Volpes would keep confidential and secret the agreement and any communications between themselves and/or Liberty and/or the legal team related to the action.

Permanent contended that the terms of the Deed effectively gave Liberty complete control of the plaintiff's action. The Volpes, for example, could not settle without Liberty's consent.

On 5 April 2004 Liberty instituted proceedings against Permanent and Bluestone in the Federal Court of Australia, Victoria District Registry. By its amended statement of claim Liberty asserted that in order to induce potential borrowers to enter into the loans Permanent, by its agent Bluestone represents and states to each potential borrower that: (a) the full costs of setting up the loan amount to 4 per cent of the total amount of the credit (the amount of the loan);

(b) the borrower will not be charged the full costs of setting up the loan, which amount to 4per cent of the total amount of the credit;

(c) the amount of the deferred establishment fee, being 4 per cent of the total amount of the credit, is calculated as being the costs associated with writing the loan;

(d) the deferred establishment fee does not include any amount in respect of Permanent's loss of profit on early termination of the loan; In its Amended Defence Bluestone admitted representations (a), (b) and (c), but denied that in sub-paragraph (d).

Liberty alleged that the full costs of setting up the loan are substantially less than 4 per cent of the total amount of the credit and that the deferred establishment fee includes an amount in respect of Permanent's loss of profit on early termination of the loan. Liberty alleged that Permanent's representations were false and constituted conduct in relation to financial services that was misleading or deceptive or likely to mislead or deceive within s 12DA of the Australian Securities and Investments Commission Act 2001.

It was alleged that Bluestone aided or abetted, counselled or procured the contraventions alleged and is directly or indirectly knowingly concerned in or party to the contraventions.

The Amended Defence in the Federal Court proceedings asserted that the establishment fee was intended to recover the unamortised costs incurred in establishing a loan, having regard, inter alia, to typical costs of funding, servicing, assessing and administering such loans. Bluestone denied that the admitted representations constituted conduct in relation to financial services that is misleading or deceptive or likely to mislead or deceive within s 12DA of the Australian Securities and Investments Commission Act 2001. In the alternative Bluestone said, if (which is denied) any other representations are made, such representations do not constitute conduct in relation to financial services that is misleading or deceptive or likely to mislead or deceive within s 12DA.

A major contest is looming in the Federal Court as to the practice of Bluestone in charging a deferred establishment fee of the amount in question payable on early termination of a credit contract.

Settlement Negotiations 23. Settlement negotiations commenced with the letter of 2 April 2004 from Gadens (Permanent's solicitors) to Middletons (the Volpes' solicitors who also act for Liberty). There is no need to summarise the early correspondence. Permanent asserted that while it had a good and complete defence to the action it preferred to settle the action. By letter of 27 July 2004 Gadens advised that they were instructed to offer to resolve these proceedings on the following terms: "Without admission

1. Our client to pay your clients, within 14 days of acceptance in writing of this offer: (a) $16,480; and

(b) interest pursuant to statute on the amount of $16,480 from 14 July 2003 up to the date of payment; (14 July 2003 was the date of payment of the deferred establishment fee, being also the date on which the mortgage was discharged)

2. Our client to pay your client's party and party costs of these proceedings as agreed or assessed;

3. The subject matter of these proceedings and the fact and terms of this settlement to remain confidential and not be disclosed to any person other than the parties to the proceedings and the court; and

4. The proceedings to be discontinued."
5. The terms of settlement proposed and the course of negotiations between the parties were canvassed in detail in open court. By FAX of 6 August 2004 Middletons sought a draft copy of the formal terms of settlement. By FAX of 11 August 2004 Gadens forwarded a draft deed of settlement to Middletons. That draft deed provided for payment of $16,480 and interest on that sum pursuant to the Supreme Court Act (1970) (NSW) from 14 July 2003 to the date of payment and for Permanent to pay the party and party costs of the Volpes of the action. It also provided for the proceedings to be dismissed. I was told that that was a mistake and that the Draft Deed and annexed Short Minutes should have provided for the proceedings to be discontinued.

25. The Draft Deed provided: "5. The Volpes agree that the subject matter of the proceedings and the fact and terms of this settlement are to remain confidential and are not to be disclosed to any person other than the parties to the proceedings and the court or as required by law."

This proved to be a sticking point. By FAX sent on 12 August 2004 Middletons wrote to Gadens: "Mr and Mrs Volpes wish to resolve the proceedings but are unable to do so on the terms proposed with respect to the confidentiality clause.

As you are well aware Liberty Financial Pty Ltd are providing funding assistance in respect of the proceeding. Given those arrangements, the extent of confidentiality clause hinders settlement of this proceeding. The clause that you have proposed also seeks confidentiality with respect to the subject matter of the proceedings which are a matter of public record and cannot be the subject of confidentiality. Further we would wish to include our client's financial advisors as being a party to whom the terms may be disclosed. May we suggest an alternative clause which is hopefully acceptable to both parties: 'The Volpes agree that the terms of settlement, including this deed are to remain confidential and are not to be disclosed to any person other than the parties to the Proceeding, their financial advisors, the court or as required by law'. "

26. Permanent endeavoured to make a great deal out of the FAX stating the Volpes "wish to resolve the proceedings but are unable to do so." I was asked to infer that the Volpes wanted to accept the offer which had been made, but could not do so because Liberty would not agree to the settlement. That is reading too much into the letter. It was submitted that Liberty would not agree because it was against its interests for the terms of the settlement to remain confidential.

27. By FAX of 25 August 2004 Gadens advised that they did not understand why the extent of the confidentiality clause hindered settlement in circumstances where Liberty was providing funding assistance. That was disingenuous. A funder does need to know what is proposed in the litigation which is being funded. It would, for example, need to know what was proposed as to costs. Gadens wrote that if it was necessary for the Volpes to disclose the fact of settlement to Liberty it would have to enter into a confidentiality agreement in respect of that information. The solicitors exchanged a number of e-mails.

28. By FAX of 30 September 2004 Gadens re-submitted their earlier offer of settlement, including the draft deed. The confidentiality clause was varied by adding to the list of those to whom the settlement may be disclosed, that is, "as agreed in writing by the parties." Again the draft Deed of Settlement provided for the dismissal rather than the discontinuance of the action. Gadens advised Middletons that Permanent would agree to the Volpes notifying Liberty of the fact of the settlement only by letter in the terms of an attached draft which read: "This letter and its contents are confidential and are not to be disclosed by you to any third party.

We have reached a settlement of the proceedings with Permanent as a consequence of which we will not require you to provide any further funding in relation to this matter.

We have agreed with Permanent that the fact of, and terms of, the settlement are to remain confidential and are not be disclosed otherwise than as agreed between us and Permanent.

We provide you with this notice that the proceedings have settled, for the purposes of enabling us to bring the funding arrangement to an end only. You are not to disclose the settlement of the proceedings to any third party." 29. By a further FAX of 30 September 2004 to Middletons Gadens again raised and asserted that Middletons had an apparent conflict of interest. By their FAX of 22 October 2004 to Gadens, Middletons denied any conflict of interest in acting on behalf of Mr and Mrs Volpes in these proceedings and Liberty, the party providing assistance, and stated, "The Volpes at all times received independent legal advice in relation to all offers of settlement made by your client (Permanent)." It subsequently emerged that the Volpes had consulted an independent solicitor, Mr Sidaway, as to the settlement of the action. The correspondence in early 2005 reveals a marked difference between Permanent and the Volpes as to the disclosure of the settlement and its terms and the extent and content of the confidentiality clause.

30. On the second day of the hearing of the motion for a stay Gadens, confirming Permanent's offer made the previous day in Court as to settlement of this action, set out the details of that offer: "Without admission: 1. our client [Permanent] to pay your clients [the Volpes], within 14 days of acceptance of this offer

(a) $16,480; and (b) interest pursuant to statute on the amount of $16,480 from 14 July 2003 up to the date of payment;

2. our client to pay your client's party and party costs of the proceedings as agreed or assessed excluding your client's costs of the hearings of the notices of motion before Windeyer J and Smart AJ.

3. the subject matter of these proceedings and the fact and terms of this settlement to remain confidential and not to be disclosed to any person other than the parties to the proceedings and the court;

5. the parties to enter into the enclosed draft deed of settlement and release."
6. The Draft Deed mostly incorporates those terms. It provides for Permanent to pay $16,480 and interest on exchange of the deed and for a full release by the Volpes of Permanent from all claims. The Confidentiality Clause has been enlarged slightly from the terms by also allowing disclosure "as agreed in writing between the parties". Given the entrenched positions taken by the parties, this provision is of little practical use.

The Short Minutes of Order annexed to the Draft Deed repeat the previous mistake by providing for the proceedings to be dismissed rather than discontinued. The Short Minutes need to be amended as does cl 3.3 of the Deed. Perhaps there are other consequential amendments.

The Volpes relied on two affidavits by Mr B P Stimpson, one sworn on 9 March 2005 and the other on 27 June 2005. Mr Stimpson, a solicitor, is in the employ of Middletons at its Sydney office. The earlier affidavit sets out the personal circumstances of the Volpes. They are in their mid-thirties with two dependent children aged 7 and 3½. Their taxable incomes were: Mr Volpes Mrs Volpes Year Ended 30/6/03 $31,785 $52,557 30/6/04 $ 4,800 $58,113 As at February 2004 the assets of the Volpes totalled $539,024, of which $437,675 represented the estimated value of their home. Their total liabilities amounted to about $461,789. Mr Volpes runs his own business. Their cash flow is poor and the surplus is more apparent than real.

As at June 2005 the assets of the Volpes totalled $496,226 and their total liabilities amounted to $468,965. That leaves a surplus on paper of about $27,260. As some $56,000 of the assets is attributable to furnishings, in reality, there is no available surplus. The approximate monthly income of Mr Volpes was about $5,252 and that of Mrs Volpes was about $3,647. Their monthly expenses consume most of their income. The expense detailed suggest a modest standard of living.

The Volpes are in default on their loan of $459,000 from Liberty over their home. They failed to pay the instalment of principal and interest due on 24 October 2004 and were served with a default notice dated 28 October 2004 claiming that $3,813.06 was due. From the Loan Statement issued by Liberty it appears that payments were subsequently made by the Volpes. As at 24 December 2004 it appears that Liberty was claiming that about $4,500 was outstanding. (The print on the statement is very small and is hard to read even with a magnifying glass). This sum of $4,500 appears to include several default administration fees. The mortgage start date is shown as July 2004.

The financial details supplied show that the Volpes are in a poor financial condition. It can readily be accepted that without the support of Liberty under the funding agreement that the Volpes would not have been able to commence nor continue these proceedings.

In his affidavit of 27 June 2005 Mr Stimpson deposes to the Volpes seeking advice from a separate solicitor, Mr Kerry Sidaway of Turramurra in December 2003 and from time to time to date pursuant to cl 6.2 of the funding agreement and to Mr Sidaway's fees being paid by Liberty.

Mr Stimpson said that he first became involved in this matter shortly after the Notice of Motion of 2 December 2004 was served., It appeared that the matter was principally being handled by a partner and employed solicitor in the office of Middletons, Melbourne. Mr Stimpson assisted when something had to be done in Sydney. It also appeared that Mr Stimpson had a very limited role in relation to the proceedings initiated by Liberty against Bluestone in Melbourne. He was not familiar with the timetable or the steps taken in the Federal Court proceedings.

By letter of 6 February 2004, Mr G Hodges, General Counsel of Liberty wrote to Mr K Sidaway, attaching Indemnity Funding Deed executed by Liberty by way of exchange of parts and requesting receipt of one part executed by the Volpes. Mr Hodges confirmed that Liberty would not approach the media in respect of the action (of the Volpes against Permanent) unless requested to do so by the Volpes. Mr Hodges wrote: "It is not our intention to turn this litigation into a media promotion. Our intention is to either force Bluestone to change their policy or alternatively to obtain a judgment pursuant to which one of the regulatory authorities will then pursue the matter on behalf of all other consumers. … As you're aware I am extremely keen to have these proceedings initiated." It was not suggested that Liberty was funding the Volpes for altruistic reasons. Liberty's funding was driven by what it believed were its own commercial interests. That is not necessarily objectionable.

By letter of 2 March 2004 Mr Hodges wrote to the Volpes and advised that the proceedings against Bluestone had been instituted and that both Middletons and Kerry Sidaway would keep them advised of progress in that action. Mr Hodges continued that Liberty was going to institute separate proceedings in the Federal Court against Bluestone Mortgages seeking an injunction preventing them continuing with their deferred establishment fee. The letter endeavoured to explain the advantage of these separate proceedings to the Volpes and sought the consent of the Volpes to Liberty being able to use the Volpes contract with Permanent in the proposed Federal Court proceedings. The Volpes were invited to telephone Mr Hodge or Mr K Sidaway if they had any queries.

When it was put to Mr Stimpson that the only reason why the these proceedings had not been settled in response to the offers provided by Gadens to Middletons was that Liberty's interests were being preferred to those of Mr and Mrs Volpes, Mr Stimpson replied that this was not his understanding. He also said that he did not know about Liberty's motives.

Mr Stimpson said that he did not know that Liberty was also seeking to obtain the benefit of conducting proceedings against Bluestone in two separate courts to gain some collateral advantage or otherwise put pressure on Bluestone .

When asked what was his understanding as to why Permanent's offer was rejected Mr Stimpson thought that his answer may well impinge upon solicitor/client privilege. It was a very broad question. The matter was pursued. Mr Stimpson agreed that he had an understanding as to why the offer of settlement put by Gadens to Mr and Mrs Volpes had not been accepted to date. When he was asked to state his understanding, counsel for Mr and Mrs Volpes objected. Mr Stimpson explained that the difficulty he had was that the question seemed to go to matters protected by legal professional privilege between him and his clients, the Volpes. Permanent was very critical of this claim and the Volpes relying on the evidence of Mr Stimpson, whose knowledge was very limited. It had been deprived of the opportunity of cross-examining a solicitor with greater knowledge.

Abuse of process covers a wide field and many disparate situations. The abuse of process alleged in the present case arises out of the funding deed and what has flowed from its provisions. I apply these principles: 1. Access to justice is now regarded as a fundamental human right which ought to be readily available to all (per Millett LJ in Thai Trading Co v Taylor [1998] QB 781 at 786).

2. The policy underlying the law of maintenance is directed against wanton and officious intermeddling with the disputes of others in which the maintainer has no interest whatever and where the assistance he renders to the one or the other party is without justification or excuse (per Fletcher Moulton LJ in 1908 adopted by Lord Mustill in Giles v Thompson [1994] 1 AC 142, 161). The language and the policy it described are redolent of the ethos of an earlier age - per Millett LJ, supra.

3. The considerations of public policy which once found maintenance and champerty so repugnant have changed over the course of time. The social utility of assisted litigation is now recognised and the provision of legal and financial assistance viewed favourably as a means of increasing access to justice. ( Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd [2005] NSWCA 83 at [91] and following. 4. Maintenance is permissible when the maintainer has a legitimate interest in the outcome of the suit. This is not confined to cases where the maintainer has a financial or commercial interest in the result. It extends to other cases where social, family or other ties justified the maintainer in supporting the litigation, for example, an employer and employee, an heir, a near relative or where a poor man is helped out of charity to maintain a right which he might otherwise lose. ( Thai Trading at 786-787). Similarly, a trade union will help its members.

5. Support of legal proceedings based upon a bona fide common interest, financial or philosophical must be permitted if the law itself is not to operate oppressively. The Courts today are likely to take an even wider view of what might be acceptable, particularly if procedural safeguards are present or able to be applied. See Magic Menu Systems v AFA Facilitation Pty Ltd (1997) 72 FCR 261 and Fostif at pars [95] and [96].

6. "It is not correct in this State to conflate the principles of maintenance/champerty with those touching abuse of process, or view them as arming a defendant with a right to stay proceedings because they are maintained (even champertously)" (Fostif at [93].

7 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. The court 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. ( Fostif at par [114] per Mason P).

8. Trafficking in or speculating in causes of action is impermissible. ( Elphic Ltd v Mack [2003] 2 QdR 125 per Byrne J). In Fostif at par [123] Mason P tentatively expressed the view that "the cases involving the elusive notion of 'trafficking' all appear to involve the funder taking some role akin to that of an assignee in relation to claims that are incapable of assignment because they are bare causes of action for damages."

9. The "court's basal inquiry should be whether the role of the particular funder has corrupted or is likely to corrupt the processes of the court to a degree that attracts the extraordinary jurisdiction to dismiss or stay permanently for abuse of process. The standard of proof is high where … the plaintiff has a genuine and viable cause of action. The court will lean in favour of moulding its remedy so as to eliminate the abuse resorting to dismissal only as a last resort where this is impossible." ( Fostif per Mason P at par [132])

10. Some degree of control over the proceedings residing in the funder is permissible. The funder has to keep abreast of the course which the litigation is taking and protect its own legitimate interests. Excessive control, when established is probably impermissible, although the Court must be wary of unwarranted paternalism. (See Fostif at par [137])

11. The possibility, even likelihood, that circumstances may arise in which situations of conflict may present themselves calls for vigilance but is not itself a basis for finding abuse of process meriting an unconditional stay. ( Fostif at par [138])
12. As to the principle numbered "4" above Liberty, as a major and strong competitor of Permanent and the Bluestone Group has a legitimate interest in the outcome of the proceedings instituted by the Volpes. Is a deferred fee of 4 per cent of the amount lent and payable if the mortgage is discharged by the borrower within 12 months of entry into it unconscionable and impermissible. Is it a breach of the Consumer Credit (NSW) Code. This raises a matter of permissible lending practice.

46. During argument reference was made to Williams v Spautz (1992) 174 CLR 509. That case dealt with the instance of abuse of process where proceedings are instituted and maintained for an improper purpose. It was found there that the proceedings were instituted and maintained by the person prosecuting them for some collateral advantage beyond that which the law offers, and to exert pressure to effect an object not within the scope of the process. The focus was on the purpose for which the proceedings existed and on the dominant purpose of the person instituting and maintaining them.

47. This case differs from Spautz. He had a dominant ulterior and improper purpose. The Volpes press the relief they seek and want to recover the $16,480 which they had to pay to obtain a discharge of the mortgage. In Spautz at 519 four Justices said: "It is of fundamental importance that unless the interests of justice demand it, courts should exercise, rather than refrain from exercising their jurisdiction … It is equally important that freedom of access to the courts should be preserved and that litigation of the principal proceeding, whether it be criminal or civil, should not become a vehicle for abuse of process issues on an application for a stay, unless once again the interests of justice demand it. In the United States great weight has been given to these factors.

These factors have considerable force. There is a risk that the exercise of the jurisdiction to grant a stay may encourage some defendants to seek a stay on flimsy grounds for tactical reasons. But the risk and the other policy considerations already mentioned are not so substantial as to outweigh countervailing policy considerations and deter the courts from exercising the jurisdiction in appropriate circumstances." 48. The Volpes have a viable cause of action. Section 72(1) of the Consumer Credit Code provides that the Court may annul or reduce an establishment fee which is unconscionable and make ancillary or consequential orders. Section 72(3) provides that in determining whether an establishment fee is unconscionable regard is to be had to whether the amount of the fee is equal to the credit provider's reasonable costs of determining an application for credit and the initial administrative costs of providing the credit, or is equal to the credit provider's average reasonable costs for those things in respect of that class of contract. Section 72(4) deals with a fee payable on termination.

The Volpes, in seeking a determination that the loan agreement between them and Permanent was unjust appear to rely on the deferred establishment fee being excessive and including impermissible factors. Some reliance also appears to be placed on the way in which Permanent handled their application to refinance the loan. They refer to their personal circumstances, to the conditional approval by Permanent of a loan of $420,000 subject to a satisfactory property valuation, the reduction after valuation to $412,000 of the amount of the loan, the interest rate of 11.6 per cent with the first two years on interest only payments, to the offer not providing them with enough funds to pay out all their debts and not reducing their monthly payments and that by reason of the conditional approval they had not sought alternative finance and by the time the final offer was made by Permanent, their position in respect of their loan from Westpac was such that they had no alternative but to accept the final offer from Permanent.

As to monetary compensation the Volpes only sought $16,480, that is, the amount of the deferred establishment fee. Thus, that fee and whether it is unconscionable or unjust is at the heart of the dispute between the parties.

Whether payment of or insistence upon a deferred establishment fee of 4 per cent of the amount lent if the loan is repaid within 12 months, is impermissible is the central issue to be determined both in the Federal Court proceedings and these proceedings. I was told that in the Federal Court proceedings a number of expert reports had been, or were about to be served on the opposing party, and that if these proceedings were not settled a similar course would have to be pursued. Not surprisingly this latter prospect was not attractive to Permanent.

The costs of an extended hearing in this Court would be out of proportion to the amount at issue. The Volpes could not afford a hearing in any Court, unless they were funded and Liberty is the only realistic funder. The Volpes claim, with the small amount of money at issue and the high cost of conducting any court proceedings in respect of that claim (including significant expert evidence) this means that only a substantial competitor would be prepared to fund the Volpes claim, especially as Liberty has agreed to indemnify the Volpes against any costs order made against them in this action. Relatives and close friends would be most unlikely to be able to afford the amounts needed to finance the Volpes' action and even more unlikely to provide an indemnity:

This case has a number of features which in combination tend to make it somewhat unusual.: (a) the Volpes wish to litigate a point of principle, namely, whether a deferred establishment fee of 4 per cent of the amount of the loan when it is repaid within 12 months is unconscionable within s 72(1) of the Consumer Credit Code and unjust within the Contracts Review Act

(b) the extent of the funding provided by Liberty, that is, payment of all legal costs and disbursements of the Volpes to bring and prosecute the proceedings and an indemnity in favour of the Volpes as to any costs order made against them

(c) the costs of a hearing in any Court would be out of proportion to the amount in issue, especially if the hearing lasted some days because of expert evidence

(d) in the absence of generous funding the Volpes' viable cause of action against Permanent could not be brought as the Volpes do not have the resources to prosecute their claim or sustain a costs order against them

(e) realistically, a major competitor, namely, Liberty, is the only funder available to the Volpes

(f) Liberty would be in a position to make available the substance of its expert reports used in the Federal Court proceedings and its expert witness to the Volpes as to the unconscionability of the deferred establishment fee of 4 per cent loan. This would represent a considerable saving on costs. Liberty, by its Federal Court proceedings, wishes to litigate the same point of principle as the Volpes. 54. The critical point is whether the control exercised or capable of being exercised by Liberty is excessive bearing in mind it is a competitor. The parties' submissions on this point are diametrically opposed. The extent of the exposure of Liberty for costs is high, as are the probable costs of conducting the Volpes case and repelling that of Permanent. With such a large exposure Liberty would reasonably require the Volpes to prosecute the claim to conclusion upon the direction and instruction of Liberty, otherwise the point of principle would not be resolved. With its resources Liberty will probably be able to assist the Volpes in gathering evidence.

Clauses 6.4, 6.5 and 6,6 of the funding deed are necessary to protect Liberty's interests as to costs and control its costs liability. The employment of Liberty's lawyers would probably facilitate the conduct of the Volpes' action and help to control costs. Liberty having the right to discontinue its funding obligation in the circumstances of the present case is not objectionable and does not lead to the action being characterised as an abuse of process.

While it is desiraabe to avoid a multiplicity of hearings these proceedings are necessary to enable the Volpes to attempt to recover $16.480 andf for definitive rulings on the NSW Credit Code and the NSW Contracts Review Act

The evidence indicates that, where it was desirable, Middletons asked the Volpes to obtain independent advice and the Volpes did so.

It was unrealistic for Permanent to stipulate that the Volpes and Middletons should not disclose the fact and terms of settlement to Liberty. Such a provision was contrary to the obligations of the Volpes under the funding agreement. It was also unreasonable in view of the extent of the financial exposure of Liberty. Even if that exposure had been less it is reasonable for the Volpes and its funder to confer when an offer of settlement is received.

It is galling for Permanent to have to confront a situation where its main competitor is funding an action against them by one of its erstwhile and dissatisfied borrowers, but there is no other funder on the horizon. Without such funding the Volpes would not be able to pursue their viable cause of action.

There are other factors. At this point what is under consideration is settlement of the Volpes action against Permanent, rather than its pursuit. Settlement cannot be considered in a vacuum. Funders with the financial exposure of Liberty would insist on the right to control the proceedings and to be able to withdraw their financial support. It is an everyday occurrence for insurers to control actions brought by others against an insured and to nominate the solicitors to conduct the proceedings on behalf of the insured. It is the insurer who provides the verdict moneys and costs.

The control given by the funding deed to Liberty is not excessive. From a practical point of view it would be hard for Liberty to proceed with the action if the Volpes wanted to settle. While it would be possible for Liberty to still proceed, it would probably encounter difficulties in such circumstances. It would probably have to call at least one of the Volpes (probably Mr Volpes) and hope for favourable evidence, or risk damaging comment if Mr Volpes was not called. The alternative of discontinuing its funding obligations may be more attractive. If the Volpes went ahead and accepted the settlement offer against Liberty's wishes questions would arise as to what actions for damages could be taken against them. It is not profitable to explore this improbable scenario.

At the present time the offer of Permanent would be unattractive to the Volpes as it does not include their costs of the proceedings before Windeyer J (1 day) and before me (2 days). It should not be assumed that Liberty would meet those costs if the Volpes settled the action contrary to Liberty's wishes. The costs of the Volpes of the proceedings before Windeyer J and myself would probably exceed $16,480. Even if my rough assessment is wrong (which I doubt) there would be but a small portion of that sum left.

After a contested hearing on 17 February 2005, Windeyer J, on 25 February 2005, ordered that up to the determination of the claim in para 1 of the notice of motion filed on 2 December 2004 or earlier order, the Volpes be restrained from disclosing to Liberty the contents of without prejudice offers of settlement made by Permanent to the Volpes and that the costs of the notice of motion be costs in the proceedings on para 1 of that notice of motion. Windeyer J thought there was much substance in the view that publication at large of without prejudice settlement negotiations would be harmful to the object of such negotiations and contrary to the assumption on which they are ordinarily conducted. Windeyer J said: "The motion for a stay of proceedings as an abuse of process is not one which will clearly fail. The law as to maintenance of actions for a collateral purpose is not yet certain even in days of competition policy. If the motion for a stay succeeds … it would be a breach of confidence to disclose the offer to Liberty. If the stay application fails … an order would not be made preventing disclosure to Liberty."

Windeyer J held the balance of convenience favoured making the orders mentioned.

Permanent rightly stressed that this Court and the law strongly encourages parties to settle their differences and disputes rather than litigate them to a finish: Rush & Tompkins Ltd v Greater London Council & Anor[1989] AC 1280 at 1299 and Cutts v Head [1984] Ch 290 at 306 per Oliver LJ. That often involves extensive without prejudice negotiations. It would be a breach of confidence to disclose those negotiations which are, except in extraordinary circumstances conducted on a confidential basis. The disclosure of such negotiations to the world at large would lead to parties not undertaking settlement negotiations and that would be so undesirable as to be contrary to public policy. Ironically, in the present case failure to consult with the litigation funder and obtain its consent would result in settlement not being able to be achieved.

Disclosure of a settlement offer to a litigation funder does not of itself entitle the funder to disclose that offer to the world at large. However, a litigation funder may need to take the advice of a solicitor and barrister and perhaps its accountant and financial adviser, none of whom would be at liberty to disclose the without prejudice settlement negotiations generally.

In Fostif at [82] Mason P remarked: "The insurance analogy also illustrates the regularity of informed arrangements whereby solicitors represent both insurer and insured as principals, even though conflicts of interest issues may arise and, if they do, will have to be dealt with properly." ( Citation omitted)

Fostif was followed and applied by the Court of Appeal in Project 28 Pty Ltd v Barr & Anor [2005] NSWCA 240 where Ipp JA said at [69] "The insurance context provides a useful example of how the law copes adequately with a situation where control over litigation is given to a person who is not a party to the litigation itself."

Ipp JA then gave a number of examples of how the law copes in the insurance context. Ipp JA continued at [73] " There is another situation where the law, for more than 200 years, has accepted that a person, not a party to particular litigation, may control that litigation in the name of a party. That is where the assignee conducts legal proceedings in the name of the assignor" 70. At [77] Ipp JA said: "… the mere existence of such control [ie, absolute control of litigation] in the hands of a person not formally a party to the litigation does not, on its own, constitute an abuse of the process of the Court. It is, however, a relevant factor when regard is had to the whole picture, which is required when considering whether or not to grant a stay on the grounds of abuse of process. " 71. There is a general principle that poverty is no bar to a litigant. However, there is an exception introduced to prevent abuse of process where a nominal plaintiff sues for the benefit of some other party and is not able to pay the successful party's costs. Under SCR Pt 53 r 2(1)(b) the Court may, on the application of a defendant where it appears that a plaintiff is suing, not for his own benefit, but for the benefit of some other person and there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if required to do so, order the plaintiff to give such security as the Court thinks fit for the costs of the defendant and that the proceedings be stayed until such security is given.

72. In the present case the plaintiff is suing for his own benefit. He seeks a reduction in the fee, a determination of unjustness and the sum of $16,480. It is true that, if successful, the proceedings will be of benefit to Liberty. A telling personal example of what has occurred is of assistance even when considering the broad permissibility of a substantial deferred establishment fee of 4 per cent of the amount of the loan having to be paid by the borrower if the loan is repaid within 12 months. If the Volpes succeeded, Liberty would be able to publicise the result of the proceedings and Permanent may have to re-structure their loan agreements. There may be an unintended benefit to the community, namely, publicising the result may prompt comment on the high cost of borrowing on the sub-prime market with all its extra fees and a general enquiry into such fees..

73. In QPSX Limited v Ericsson Australia Pty Ltd [2005] FCA 933 (French J) the motion for a stay of proceedings was "based upon the contention that … the applicants entered into an agreement with IMF Limited under which they sold to IMF(the litigation funder) the bare rights of action which predicate their claims against Ericsson Australia [and its parent company described as LME]. It is said that the sole effect of the outcome of the present proceeding will be to determine the monetary value of the bonus payment to be made by IMF to the applicants in consideration of the sale to it by the applicants of the chose in action. It is submitted that where the Court's process is being utilised for the sole purpose of assisting in the trafficking of litigation the extraordinary jurisdiction to stay a proceeding for abuse should be attracted. "

74. French J said: "50. The integrity of the Court's primary function may be compromised where litigation is conducted in order to serve the interests of a stranger to the controversy before the Court. That is because decisions may be taken, in the name of a party to litigation, for purposes foreign to the proper purposes for which that party may prosecute or defend the proceedings. The question whether there is an unacceptable risk of abuse of the Court's processes arising out of litigation funding arrangements is to be assessed by reference to functional considerations including the role and powers, if any, assumed by a funder in relation to the conduct of the litigation. …

55 The public policy concerns associated with handing over the conduct of litigation to a non-party, whether by assignment or other means, remain. For the assumption of control by a non-party raises the possibility that decisions may be made affecting the conduct of the litigation which serve the interests of the funder in a way that is incompatible with the interests of the funded party and the legitimate purposes for which the litigation is to be prosecuted or defended. … 56 On an application for a stay of proceedings, the primary question must be a functional one, namely whether the funding arrangement raises an unacceptable risk of an abuse of the Court's process. As the Court said in Magic Menu Systems (at 268-269): '... where there may be the real potential for an abuse of the Courts' processes it seems to us that a stay might, in some cases, be justified. Whilst it had been said in Martell v Consett Iron at 388-389 ... that it would not be right to stay a maintained action, that was with respect to an action brought on the tort and which had not been determined. It could not then have been concluded that there was unlawful conduct and the stay was, for that reason, premature. But that is different from the position where an abuse of process has occurred, or is likely to.' " 75. QPSX did not raise any question of funding being necessary for the plaintiffs to obtain access to justice. The parties were described as "sophisticated, well resourced commercial actors operating in domestic and international markets for the sale of complex and potentially very lucrative technologies". The terms of the funding agreement in that case differed markedly from those in the present case as did the circumstances of the funding.

I am not persuaded that the litigation is being conducted to serve the interests of Liberty rather than those of the plaintiff. The plaintiff has the primary interest and seeks to recover $16,480 as well as the reduction of the fee and the determination of unjustness. Liberty is more interested in the latter and the underlying principles. Liberty is perhaps even more interested in the costs orders given its liability in that aspect.

In Magic Menu Systems the Full Court of the Federal Court was very guarded in its approach to granting a stay remarking that where more was involved than costs and other aspects of compliance with procedures, a stay might in some cases be justified. The use of the word "might" is important. As always, much depends on the facts. In the present case any balancing exercise of the competing considerations requires the refusal of a stay.

This case poses acute problems. At the risk of repetition, on the one hand the Volpes could not afford to institute and maintain the proceedings up to and including the hearing without a funder. This is high cost litigation. Thus, without funding they would be deprived of litigating their viable causes of action in which they seek relief of importance to them. The offer made, with its limitations as to costs and involving the foregoing of formal rulings on paragraphs 1 and 2 of the relief sought and any acknowledgment or finding of fault (unconscionability and unjustness) is not particularly attractive. On the other hand Liberty, the funder and a competitor, has the control of the action and can effectively determine whether the offer is accepted or rejected. Permanent has objected to Liberty being told of the terms of the offer, although from the full discussion which took place in open court, Liberty must be aware of them. When the whole of the circumstances are considered there is no objection to the funder, although a major competitor, being appraised of the terms. Its interests as the funder require reasonable protection. Nor is there any reasonable objection to the funder obtaining reasonably required professional advice. Those advisors would not be at liberty to disseminate the terms of the offer at large. Obviously, they can advise their client, Liberty.

The potential conflict of interest between the Volpes and Liberty could arise on two fronts. First the Volpes may wish to accept $16,480 and some of their costs, whereas Liberty may prefer to proceed to a hearing. Alternatively, both the Volpes and the funder may wish to settle but on somewhat different terms. Further, both may not regard the terms proffered by Permanent as acceptable. Secondly, the Volpes may fear that any publicity which mentions them might be harmful to his business, which seems to be in its early stages, in that it may tend to indicate that he is in a difficult financial position. Liberty may regard any publicity as to the impermissibility of the deferred establishment fee charged by Permanent as desirable. With proper professional advice this issue should be capable of resolution. Both the Volpes and Liberty may determine the limitation on the costs offered renders the offer unacceptable.

There are a number of issues to be resolved between the Volpes and Liberty. The Volpes have received independent advice at the cost of Liberty and this seems to be a continuing process. I would not assume that the outstanding issues cannot be resolved in a permissible way, given proper professional advice.

I am unable to accept the underlying premise of Permanent's argument, namely, that its offer of settlement, as finally formulated, was so attractive it could not fairly be declined by the Volpes unless illicit factors came into play or were taken into account. Permanent suggested that what was holding up settlement was the control Liberty was entitled to exercise and that Liberty's interests were, because of the funding arrangement and deed, being preferred to those of the Volpes. Permanent was insisting that the Volpes not tell Liberty of the terms of the offer and that the Volpes make their own decision. The Volpes did not wish to be placed in a position where they committed a breach of the funding deed and rendered themselves liable in damages to Liberty. The stand adopted by Permanent precluded the Volpes from obtaining the consent of Liberty as to the course to be taken.

Because of the accommodation reached between the parties as to security for costs it is unnecessary for me to pursue this matter.

In my opinion, the role of Liberty has not corrupted and is not likely to corrupt the process of the Court to a degree that attracts the extraordinary jurisdiction to stay permanently for abuse of process. The Volpes should be enabled to bring their proceedings and be permitted to discuss with their funder any offer of settlement received.

Permanent suggested that one alternative to granting a permanent stay now would be to insist that Liberty's solicitors no longer act for Mr and Mrs Volpes in the subject proceedings. In other words, a permanent stay be granted if, after the expiration of 14 days Liberty's solicitors continued to act for the Volpes. This is not an acceptable solution. First, it does not overcome the problems created by the Funding Deed and the funder's reasonable expectation and insistence to be consulted about any proposed settlement and to state its attitude to the proposed settlement. Secondly, it would probably involve the Volpes in appreciable costs, especially as Middletons have been gathering expert evidence to mount an attack on the deferred establishment fee of 4 per cent of the amount of the loan payable if the mortgage is discharged within twelve months of the advance of the loan.

There is one matter that was not argued and which I do not consider, namely, whether it is in the public interest, in default of the parties' agreement, for a deferred establishment fee of the magnitude and kind in question to be covered up by confidentiality provisions, given its apparent widespread usage.

The motion for a stay of proceedings is dismissed with costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.