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High Court of New Zealand Decisions |
Last Updated: 14 November 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-5466
BETWEEN GULF CORPORATION LIMITED (IN RECEIVERSHIP)
Plaintiff
AND CFL (NZ) LIMITED Defendant
Hearing: 2 May 2011
3 May 2011
Counsel: A Horne and I Rosic for Plaintiff
M Muir and S Bradshaw for Defendant
Judgment: 3 November 2011 at 4:30 PM
RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Application for Summary Judgment)
This judgment was delivered by me on 3 November 2011 at 4.30 pm pursuant to
Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date ..........................
Solicitors:
Minter Ellison Rudd Watts, PO Box 3798, Auckland
Clendons, P O Box 1305, Auckland
GULF CORPORATION LIMITED (IN RECEIVERSHIP) V CFL (NZ) LIMITED HC AK CIV-2010-404-5466 3
November 2011
Introduction
[1] The plaintiff, Gulf Corporation Limited, and the defendant, CFL (NZ) Limited, both wholly owned subsidiaries of Hauraki Nominees Limited, are parties to a litigation funding agreement that was entered into in August 2009, shortly before the Inland Revenue Department (IRD) conceded a GST refund to Gulf. The agreement was to provide funding for a proceeding Gulf had commenced to vindicate its rights to the refund.
[2] Gulf was put into receivership on 3 December 2009 pursuant to a composite security deed granted in favour of Bank of Scotland International Limited (BOSI).
[3] By application for summary judgment, filed on 18 August 2010 when this proceeding was commenced, Gulf’s receivers seek a declaration on the first cause of action in the statement of claim that the litigation funding agreement is an illegal contract under the Illegal Contracts Act 1970. Gulf also seeks an order that CFL repay $963,882.34 of the refund that the IRD paid to CFL, with Gulf’s consent, pursuant to the litigation funding agreement.
[4] Gulf’s receiver’s first cause of action is formulated on the basis that the litigation funding agreement is unlawful maintenance and champerty and an abuse of process. The receivers say its case for summary judgment is plainly established on the evidence and that CFL has no defence. Accordingly, the court should exercise its discretion to give judgment under High Court Rule 12.2(1).
[5] Rule 12 .2(1) states:
The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to [a cause of action in the statement of claim or to a particular part of any such cause of action].
[6] Though not referred to in the application for summary judgment, at the hearing counsel for Gulf’s receivers indicated, should I find that the litigation funding agreement is not unlawful but indeed lawful and binding, that they seek that judgment be entered against CFL for $844,178.78. This is the amount claimed in Gulf’s receiver’s second and third causes of action, in the alternative.
[7] CFL opposes the application for summary judgment. It says that Gulf cannot establish a prima facie case that the litigation funding agreement is unlawful despite champertous maintenance, and that the agreement is not an abuse of process. CFL also says it has a tenable defence, indeed an incontrovertible defence, to the second and third causes of action pursuant to s 94B of the Judicature Act 1908, as it received payment in good faith and altered its position in reliance on the validity of that payment.
[8] For reasons I shall come to, under the first cause of action I have concluded that the litigation funding agreement is arguably unlawful but that the question whether it is determinatively so is a question for trial. This judgment does not therefore deal with the alternative causes of action or questions of relief on any cause of action other than for contextual purposes.
Background
The GST refund
[9] The background to the GST refund requires mention. It is sufficient to note: (a) Gulf, as vendor, cancelled an agreement to sell a property at Gulf
Harbour for $9.4 million plus GST when BJ Homes, the purchaser, failed to settle;
(b) Gulf believed that it was entitled to recover a GST refund of
$1,329,318.96 from the IRD once the agreement fell through, based on an agreed set-off of the GST component of the purchase price in the terms of sale. The IRD was advised of the set-off at the outset;
(c) On 4 November 2008, Gulf filed a tax return claiming the refund. By a letter dated 11 February 2009, the IRD refused to release this GST refund to Gulf;
(d) In March 2009, Gulf’s solicitors, Hornabrook MacDonald, instructed a tax barrister, Mr James Coleman, to advise and to seek recovery of
the refund. With Mr Coleman’s advice, on 28 August 2009 Gulf
commenced proceedings against the IRD;
(e) On 5 October 2009, the IRD advised Gulf that it agreed to pay the refund and that it would be released shortly. The refund was paid in two tranches. The first, $1,7078,549.60, was paid to Hornabrook MacDonald’s trust account on 3 November 2009. The second,
$118,486.00, was paid to Gulf’s auditors on 15 December 2009.
The litigation funding agreement
[10] CFL agreed to fund Gulf’s proceedings against the IRD. In early September
2009, shortly after Gulf commenced proceedings, the two agreed the terms of a litigation funding agreement. CFL executed the agreement on 4 and Gulf on 7
September 2009.
[11] Materially, cl 2.1 of the litigation funding agreement states that CFL is required:
...to pay the following sums in respect of the proceedings:
b) the Enforcement Costs; and
c) any other costs incurred with the prior written consent of
[CFL].
[12] Clause 3.2 states that, provided CFL pays legal costs between the date of the litigation funding agreement and the conclusion of the proceedings, it will be entitled to 80% of the final amount recovered from IRD under cl 2.1. Failing this, CFL will be entitled to 10% of the recovered amount.1
[13] Relevantly, cl 1.1 defines “Legal Costs” and “Final Amount”.
1 Litigation Funding Agreement, cl 3.3.
Legal Costs mean the legal costs and disbursements of the representatives acting in connection with the proceedings from the date of this agreement and calculated in accordance with the costs agreement.
Final Amount means the gross amount received by the plaintiff whether by way of settlement, orders, judgment, award or any other finalisation of the proceedings without set-off or deduction of any amounts including but not limited to GST.
[14] The agreement also provides at:
(a) Clause 3.1 that the final amount received from the IRD was to be paid directly into Hornabrook MacDonald’s trust account. Thereafter, the amount would be distributed between Gulf and CFL according to cls
3.2 or 3.3;
(b) Clause 7.5 that Gulf agrees that they will not conclude the proceedings without prior consultation with CFL;
(c) Clause 7.3 that CFL acknowledges that Gulf is and will continue to instruct Hornabrook MacDonald in all matters relating to the proceedings. Gulf has “the right to direct, conduct and conclude by way of settlement the proceedings”.
(d) Clause 10.2 that Gulf agrees:
...it will not retain solicitors to act for them in the Proceedings other than [Hornabrook MacDonald or another solicitor approved by CFL], without the prior written approval of CFL, such approval not to be unreasonably withheld and shall not be withheld if any new solicitor agrees to enter into an agreement with CFL that contains terms and conditions that are no more onerous to that solicitor than applying to the plaintiff under this agreement.
Part payment of GST refund to CFL and the receivers’ demand for repayment
[15] Initially, Gulf accepted that it owed money to CFL under the litigation funding agreement. Accordingly, on 4 November 2009, Hornabrook MacDonald transferred $963,882.34 on Gulf’s behalf to CFL’s solicitor’s trust account. This was
80% of the first tranche of the GST refund. However, no further sum was paid to
CFL. The IRD paid Gulf the second tranche of the refund on 15 December 2009. By then BOSI had appointed the receivers who took a different view on Gulf’s liability to CFL.
[16] On 30 March 2010, the solicitors for Gulf ’s receivers wrote to CFL demanding repayment of $844,178.78. The basis for the demand was the receivers’ then view that CFL was only entitled to 10% of the final amount under the litigation funding agreement. They posited that CFL’s right to receive 80% under cl 3.2 of the litigation funding agreement was not invoked as any payments it made were made either:
(a) Before the date of the litigation funding agreement and therefore were not legal costs paid under the agreement; or
(b) After the proceedings had been concluded and therefore were caught by the limitation in cl 3.3.
[17] Subsequently, Gulf’s receivers revised their view on CFL’s entitlement. On
18 June 2010, the solicitors for Gulf’s receivers demanded that CFL repay the entire
$936,882.34 on the basis that the agreement is illegal.
[18] CFL has not repaid any portion of the sum that it received from the IRD.
The statement of claim
[19] Gulf’s receivers filed its statement of claim on 18 August 2010. There are three causes of action. The first cause of action, based on s 3 of the Illegal Contracts Act, alleges that the funding agreement is unlawful maintenance and champerty and an abuse of process, and therefore that CFL was not entitled to take payment of or keep any part of the GST refund. The second and third, relying on breaches of contract, mistaken payment, and unjust enrichment, plead that if the agreement is indeed valid CFL was entitled to recover only 10% of the final amount recovered from the IRD. Under each cause of action, Gulf’s receivers seek the relevant refunds.
Legal costs paid by CFL
[20] Though the parties agree that CFL made payments to cover some of Gulf’s legal costs, they dispute whether these payments were made “in respect of the proceedings” under cl 2 of the litigation funding agreement. If they were, CFL was entitled to 80% of the final amount. Otherwise, CFL was only entitled to 10% of the final amount.
[21] The parties agree that in evidence are three material payments made at or after the commencement of the litigation funding agreement, or arguably so. These are:
(a) $20,000 paid to Gulf’s solicitors, Hornabrook MacDonald, on 4
September 2009;
(b) A bank cheque for $4,759.00 to Mr Coleman, Gulf’s tax barrister, on
28 October 2009;
(c) $1,687.50 into Hornabook MacDonald’s trust account on 14 January
2010. Legal principles Summary judgment
[22] The principles applying to a plaintiff's summary judgment application are well established. They are summarised by the Court of Appeal in Jowada Holdings Ltd v Cullen Investments Ltd:2
In order to obtain summary judgment under Rule 136 of the High Court Rules a plaintiff must satisfy the Court that the defendant has no defence to its claim. In essence, the Court must be persuaded that on the material before the Court the plaintiff has established the necessary facts and legal basis for its claim and that there is no reasonably arguable defence available to the defendant. Once the plaintiff has established a prima facie case, if the defence raises questions of fact, on which the Court's decision may turn,
2 Jowada Holdings Ltd v Cullen Investments Ltd CA 248/02, 5 June 2003 (CA) at [28].
summary judgment will usually be inappropriate. That is particularly so if resolution of such matters depends on the assessment by the Court of credibility or reliability of witnesses. On the other hand, where despite the differences on certain factual matters the lack of a tenable defence is plain on the material before the Court, to the extent that the Court is sure on the point, summary judgment will in general be entered. That will be the case even if legal arguments must be ruled on to reach the decision. Once the Court has been satisfied there is no defence Rule 136 confers a discretion to refuse summary judgment. The general purpose of the Rules however is the just, speedy, and unexpensive determination of proceedings, and if there are no circumstances suggesting summary judgment might cause injustice, the application will invariably be granted. All these principles emerge from well known decisions of the Court including Pemberton v Chappell [1987] NZLR
1, 304, 5; National Bank of New Zealand Ltd v Loomes (1989) 2 PRNZ 211,
214; and Sudfeldt v UDC Finance Ltd [1987] NZCA 138; (1987) 1 PRNZ 205, 209.
[23] In Pemberton v Chappell, Somers J defined “no defence” as the “absence of any real question to be tried”. His Honour also noted that to defeat the application the defendant must provide sufficient particulars to show that there is a factual or legal issue worthy of trial. 3
[24] It is worth emphasising the approach that the Court will adopt to disputes of fact on summary judgment applications. Somers J stated in Pemberton:4
Where the defence raises questions of fact upon which the outcome of the case may turn it will not often be right to enter summary judgment.
[25] There will often be no reason why the court should not deal with issues of law and construction even though complex, if the facts are not materially in dispute. However, the Court of Appeal sounded a word of caution in Westpac Bank Corp v M M Kembla NZ:5
Although a legal point may be as well decided on summary judgment application as at trial if sufficiently clear..., novel or developing points of law may require the context provided by trial to provide the Court with sufficient perspective.
[26] In BNZ v Maas-Geesteranus, McGechan J noted, in similar vein, that the summary judgment procedure should not be permitted to stultify the development of
3 Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3.
4 At 4.
5 Westpac Bank Corp v M M Kembla NZ [2001] 2 NZLR 298 (CA) at [62].
the law, and that this may be a good reason for sending a claim in a developing area of law to trial.6
[27] In Couch v A-G, Elias CJ and Anderson J echo these sentiments. They caution that “particular care is required in areas where the law is confused or developing”.7 Though said in the context of the striking out jurisdiction, the statement is apposite in the context of summary judgment where the court would benefit from the context that a full trial provides. Their Honours also noted:
Lord Browne-Wilkinson in [X v Bedfordshire County Council [1995] 2 AC 633] thought it a great importance that such cases be considered on the basis of actual facts found at trial, not on hypothetical facts assumed (possibly wrongly) to be true for the purpose of the strike-out.
[28] Questions as to remedies sought under the Illegal Contracts Act may also be determined on summary judgment, though rarely will it be realistic to do so. In Phillips v Foster the Court of Appeal noted that validation of an illegal contract in summary judgment is only permitted where it is clear that there are no grounds for arguing that the discretion ought not to be exercised.8
Unlawful maintenance and champerty
[29] Traditionally, common law courts have treated litigation funding agreements as tortuous and unlawful maintenance and champerty.9 These common law torts have their origin in principles of public policy. They are designed to protect vulnerable litigants and to prevent “wanton and officious intermeddling with the disputes of others in where the meddler has no interest whatever, and where the assistance he renders... is without justification or excuse” with a view to receiving a
division of the winnings.10
6 BNZ v Maas-Geesteranus (1991) 4 PRNZ 689 (CA); Andrew Beck and Ors McGechan on
Procedure (online looseleaf ed, Brookers, accessed 10 October 2011) at [HR12.2.02].
7 Couch v A-G [2008] NZSC 45 at [33].
8 Phillips v Foster [1991] 3 NZLR 263 (CA).
9 Maintenance is where a person with no interest in a dispute provides another with the funding required to enable that person to undertake litigation. Champerty is where, as a result of the financial support, the funder is entitled to a share of the proceeds of litigation in the event of a successful outcome.
10 Giles v Thompson [1994] 1 AC 142.
[30] In the contractual context, litigation funding agreements were seen to pervert the course of justice and were void as against public policy. Funders who gave aid to one party to bring or defend a claim “without just cause or excuse” were seen as “improperly stirring up litigation and strife”.11
[31] There has been a shift however in the way the common law views such agreements. The law is evolving and moving on.
[32] In Trendtex Trading Corp v Credit Suisse, Lord Roskill observed that the courts have “adopted an infinitely more liberal attitude towards the supporting of litigation by a third party than had previously been the case.”12
[33] This more liberal approach was rationalised in Kaukomarrkinet O/Y v Elbe
Transport-Union Gmbh (the “Kelo”) on the basis that: 13
The contrast is between trafficking in litigation or selling lawsuits as articles of commerce on the one hand and taking an assignment in a case where one has a genuine commercial interest on the other. The former is invalid and the latter is not.
[34] In Australia, the courts now look more favourably on funding agreements that offer access to justice so long as any potential for abuse of process is controlled.14
[35] Canada adopts the same approach. In Stoczina Gdanska SA v Latreefers Inc
(No 2), the court observes: 15
...we think that it is undesirable to try to define in different worlds what would constitute trafficking in litigation. It seems to us to connote unjustified buying and selling of rights to litigation where the purchaser has no proper reason to be concerned with the litigation.
[36] In New Zealand, the Court of Appeal recently considered whether there is a bar to reviewing the common law on litigation funding agreements, and if not,
11 Burrows, Finn and Todd Law of Contract in New Zealand (3rd ed, Lexis Nexis, Wellington, 2007) at
13.4.3(b).
12 Trendtex Trading Corp v Credit Suisse [1982] AC 679 at 702.
13 Kaukomarrkinet O/Y v Elbe Transport-Union Gmbh (the “Kelo”) [1985] 2 Lloyds Rep 85 at 89 pnm.
14 Fostif Pty Ltd v Campbells Cash and Carry Pty Ltd [2005] NSWCA 83 at [105].
15 Stoczina Gdanska SA v Latreefers Inc (No 2) [2000] EWCA 17 at [61].
whether and to what extent New Zealand should follow the Australian and Canadian lead. The Court discussed in general terms the legitimate scope of litigation funding.16 It cautioned that there remains cause for anxious care in assessing funding arrangements.17 But, it observed that some relaxation of the former rules against champertous agreements is necessary to promote access to justice and comity in the common law world:18
We have concluded that, like the common law of Australia and that of Canada, the common law of New Zealand should refrain from condemning as tortuous or otherwise unlawful maintenance and champerty where:
(a) The court is satisfied that there is an arguable case for rights that warrant vindicating;
(b) There is no abuse of process; and
(c) The proposal is approved by the court.
[37] Yet, the Court went on to say:19
We are not in a position to determine whether any of these conditions should be found to be satisfied in this case. Whether there is an arguable case and the strength of that case cannot be assessed by this Court which has not received the respondents’ intimated amended statement of claim. The same is to be said about the issues of abuse of process and approval.
Certainly on the limited material before us we are unable to say that, despite the Securities Commission report, they must necessarily be answered in favour of the appellants. There are some aspects of the accounts of Feltex which may be unusual. The collapse of the company occurred very quickly. There is some evidence from Mr Gavigan, from Mr Terence Harrison, a director of a customer of Feltex, and from Associate Professor Newberry that may offer some support for the respondents’ contentions. Mr Eichelbaum accepted that more investigation is needed and clearer pleadings are required.
But there are also issues about the reliability of Mr Gavigan which require resolution as part of the overall evaluation, which can be made only by the High Court. They may include an allegation of materially misleading people as to the strength of the proposed claim.
[38] At first instance, French J the High Court in Saunders indicated that there must be something more than the core components of maintenance and profit sharing
16 Saunders v Houghton [2009] NZCA 610 (CA) at [22].
17 At [77].
18 At [79].
19 At [80]-[82].
before the arrangement can involve an abuse of process. Her Honour observed that factors that may point to an abuse of process include:
(a) The degree of control that the funder has over the litigation;
(b) Whether the funder stands to gain an excessive or disproportionate profit;
(c) Whether the funders are not merely providing funding but have in fact instigated the proceedings;
(d) Whether the funder is a stranger to the dispute and does not seek resolve the matter to achieve justice, but rather to make a profit.20
[39] The Court of Appeal implicitly accepts such factors are potentially relevant to the abuse of process element of the threefold set of conditions it set out in Saunders. The court captures the essence of French J’s factors when it treats as relevant:21
...the need for proper controls appropriate to the nature of the case and the particular funder and funding terms proposed.
[40] On the topic of control, French J noted that the litigation funding agreement in Saunders gave the funder significant control over the conduct of the litigation, including a sole right to decide whether to appeal and a prohibition on the litigant communicating with the other party.22 This amounts to “day to day control” of the proceedings, and has been found to be unacceptable in Australia.23 In Saunders, the Court of Appeal declined to make a finding on whether such a level of control was permissible.24
[41] In Re Oasis Merchandising Services Ltd (in liquidation) Ward v Aitken, the
English Court of Appeal said a funder will have an unacceptable level of control
20 Saunders v Houghton [2008] NZHC 1569; (2008) 19 PRNZ 173 (HC) at 204.
21 Saunders (CA) at [79].
22 Saunders (HC) at [183].
23 Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd [2005] NSWCA 83 per Mason P
at [136].
24 Saunders (CA) at [65].
where it is able to influence the course of or interfere with the litigant’s conduct in
the proceedings. 25
[42] In Re Nautilus Development Limited (in liquidation), Anderson J endorsed this approach. He upheld an agreement that required the funder to be consulted but acknowledged that the litigator had “the right to direct, conduct and conclude by way of settlement”.26
[43] In AMP Capital Investments No. 4 Ltd v IBS Group Limited (in liquidation), I
refused to approve an funding agreement because:27
...the fact that the funder must agree to every action in the litigation goes against the rule that the assignee of the fruits of a company claim may not interfere with the conduct of the litigation.
[44] In considering whether the funder stands to gain an excessive or disproportionate profit, the New South Wales Court of Appeal in Fostif Pty Ltd v Cash and Carry Pty Ltd observed that the general market rate for litigation funding agreements across Australia, United States and the United Kingdom is approximately
30-40% of the winnings.28
[45] In Saunders, the Court of Appeal noted that $82.5 to $95 million,
representing 33% or 38% of the likely amount recovered, is “very substantial”.29
[46] However, Australian courts have upheld agreements providing for the funder to receive a much higher proportion of the winnings: 75% in Buisex Ltd v Panfida Food Ltd (in liquidation);30 66.6% in Bell Group v Westpac;31 and 55% in Bandwill
Pty Ltd v Spencer-Laitt.32
25 Re Oasis Merchandising Services Limited (In lig) Ward v Aitken & Ors (1997) 1 All ER 1009.
26 Re Nautilus Developments Ltd (In liquidation) [2000] 2 NZLR 505 (HC) at [14].
27 AMP Capital Investments No. 4 Ltd v IBS Group Limited (in liquidation) [2008] NZHC 1740; (2009) NZCCLR 19 (HC).
28 Fostif at [144].
29 Saunders (CA) at [66].
30 Buisex Ltd v Panfida Food Ltd (in liquidation) [1998] NSWSC 516.
31 Bell Group v Westpac (1993) 18 WAR 21.
32 Bandwill Pty Ltd v Spencer-Laitt [2000] WASC 210.
The parties’ respective positions
[47] Each side relies on the Court of Appeal’s broad conclusion in Saunders at [79] as to where the common law should refrain from condemning, as unlawful, maintenance and champerty. They agree that, in terms of the threefold conditions set out in Saunders, the litigation funding agreement concerns rights that warrant vindication and therefore that the first condition is satisfied. However, they take opposite positions on whether the other conditions are satisfied.
[48] Counsel for Gulf’s receivers posit that the litigation funding agreement fails to satisfy the other two conditions. First, the agreement lacks approval. Secondly, there is plainly abuse of process. The facts relevant to the question of abuse are not materially in dispute and clearly show such abuse. On either basis, the issue of legality is essentially an issue of law and it is open to the court to determine that the litigation funding agreement goes beyond the scope of legitimate funding and ought to be declared unlawful maintenance and champerty.
[49] Counsel for CFL posits that the lack of court approval, though not contentious as a matter of fact, is not determinative. The overarching issue is abuse of process. On the relevant evidence there is no such abuse and the court should therefore find the agreement is indeed lawful. Alternatively, if on such facts as the court considers material, it considers those facts give rise to the possibility of abuse of process, summary judgment should be refused and the issue resolved by trial.
Issues
[50] For the summary judgment application to succeed on the first cause of action the court must be satisfied that Gulf’s receivers have demonstrated to the requisite civil standard of proof that the litigation funding agreement falls outside the legitimate scope of litigation funding and that CFL has no tenable defence with respect to liability and quantum.
[51] Based on the grounds relied on by Gulf’s receivers (and putting aside issues
relating to quantum) it should thus be clear that at least one of the two conditions set
out in Saunders cannot be satisfied and that the legal consequence is that the court must not to refrain from condemning the agreement as unlawful champerty and maintenance.
[52] The issues that counsel therefore raise for determination, though not couched in these precise terms, are essentially as follows:
(a) Does the failure to seek and obtain the court’s prior approval
inevitably result in illegality?
(b) Is it clear that there is abuse of process?
(i) Is it clear what facts are relevant to abuse of process?
(ii) Are the material facts not subject to substantial dispute?
[53] If (a) and (b) are not answered affirmatively, summary judgment will be inappropriate.
Discussion
[54] I am unable to make affirmative findings on either issue. My findings are:
(a) Failure to obtain the court’s prior approval is arguably not fatal but rather a factor to be considered in the overall evaluation of abuse of process.
(b) Abuse of process is arguable on the facts. The facts that Gulf ’s
receivers rely on as material to the question of abuse of process are:
i) Arguably all material facts; and
ii) Indeed the subject of substantial dispute. [55] I now come to my reasons for these findings.
Does the failure to seek and obtain the court’s prior approval inevitably result in illegality?
[56] I begin with counsel’s submissions. Counsel for Gulf ’s receivers submits that without court approval for the litigation funding agreement, the Court of Appeal’s third condition is not satisfied and therefore the litigation funding agreement is plainly unlawful maintenance and champerty.
[57] In response, counsel for CFL argues that the submission is circular and unsustainable because:
(a) The court’s reluctance to scrutinise private bargains has to be balanced
against the risk posed to the parties without access to the court;
(b) The Court of Appeal in Saunders therefore treats this condition as one to be determined “in consort” with the issue of abuse of process. Its particular relevance is to the extent of control of the funder and the question whether the funded litigant retains sufficient control over the litigation. That question turns on the terms of the agreement.
(c) The terms of the agreement are unimpeachable and ensure that Gulf retains control of the litigation. In particular, under cl 3.1 litigation and settlement proceeds are held by Gulf ’s solicitors on trust for both Gulf and CFL, in cl 7.3 Gulf reserves the right to direct, conduct and conclude proceedings, and cl 10.2 does not fetter Gulf’s right to change solicitors.
[58] Plainly, it would be prudent for parties to a litigation funding agreement to seek prior approval for their funding proposals but it is, I think, reading too much into the Court of Appeal’s threefold conditions to infer that failure to satisfy the third such condition at the outset is fatal. Though in Saunders the parties to the litigation funding agreement had not sought court approval, the Court of Appeal refused to make a finding on the significance of this or other factors, on the basis that all of these factors are best resolved at trial. It may be therefore that the real question is
one of what weight should attach to the failure to obtain prior approval. At first glance, and without the perspective provided by trial, it is difficult to see why an otherwise impeachable funding arrangement should be condemned because it lacks prior court approval, but I expressly make no determination to that effect. Either way, I am satisfied that the effect of the failure to obtain prior approval is best dealt with as part of the overall evaluation of the funding arrangement and in the context and perspective provided by trial. Such caution is all the more appropriate given the need referred to by the Court of Appeal in Saunders for anxious care in assessing funding arrangements.
[59] Were the question of prior approval the only issue remaining for resolution I would agree that it is one capable of resolution in the summary judgment context. But for reasons I shall come to presently, that is not the case.
Is it clear what facts are relevant to abuse of process?
[60] The parties are at odds as to what factors or conduct might constitute abuse of process. Each argues I should rule on the disputed factors. Examples of such disagreements follow.
Identity and experience of the funder
[61] Counsel for Gulf’s receivers contends that the identity of the funder’s backers and the funder’s experience as a litigation funder are material factors. Counsel submits that there is evidence that CFL was created solely for the purpose of entering into the litigation funding agreement and had no previous experience or expertise in litigation funding. Counsel argues that it is unclear who CFL’s financial backers are and that therefore the court is unable to decipher their reliability and trustworthiness.
[62] Counsel for CFL submits that case law does not suggest that the experience of the litigation funder is relevant to the evaluation of abuse of process. The law is disinterested in such experience. Therefore it does not matter that the identity of CFL’s backer is a mystery, or that BOSI did not inquire into CFL’s history as a litigation funder.
Disproportionate profit
[63] Counsel for Gulf ’s receivers also contend that excessive or disproportionate profit is material and moreover that the Court of Appeal indicates that a 30% profit is “very substantial”. On this basis, it is open to the court to find that the potential
80/20% division in favour CFL is on its face not only material to the inquiry, but unjustifiably high and prima facie harsh and exploitative.
[64] Counsel for CFL submits that:
(a) Though counsel for Gulf’s receivers cites Saunders for the proposition that an 80% award is “very substantial”, the Court of Appeal was referring to the amount received rather than the proportion. As the court noted, other courts have upheld litigation funding agreements
that provide for awards of similar amount to that in the present case.33
(b) Moreover, the level of profit provided by such an agreement is not for the court to determine. It is a matter of contractual autonomy between the parties and for them to choose how they deal with the surrounding commercial considerations and the financial pressures they face.
(c) BOSI itself considered the 80% split to be acceptable following extensive discussion and correspondence on the exact issue. That is not unusual as CFL’s funding was provided at the height of the global economic crisis to a property development company in a precarious financial position.
BOSI’s consent
[65] Counsel for CFL submits that BOSI’s consent to the litigation funding agreement is highly material and that Gulf’s receivers are therefore now estopped from challenging the validity of the litigation funding agreement. Such challenge
would, he argues, be unconscionable.
33 See [45] above.
[66] Counsel for Gulf’s receivers on the other hand accepts that consent is a relevant factor but not in the way that counsel for CFL proposes. It is not relevant and cannot raise an estoppel argument. If the agreement is illegal for abuse of process, consent cannot make it legal.
[67] Counsel for Gulf’s receivers argues that the relevance of BOSI’s consent is to the question of exploitation. Had BOSI been apprised of the true position, the terms of any litigation funding agreement would not have been weighted so heavily in CFL’s favour. The apparent connection between CFL and Gulf will also have a bearing on the legitimacy of BOSI’s consent and show that the litigation funding agreement was not an arms’ length commercial dealing.
[68] I am unable to say, despite counsel for CFL’s submissions to the contrary, that facts going to the identity and experience of the funder are not relevant to an enquiry on abuse of process. I also am unable to accept that the extent of the funder’s potential profit is solely a matter for the parties to a funding arrangement.
[69] In this case the allegations about profit, misrepresentation as to the strength of Gulf’s claim, and the closeness of Gulf’s relationship with CFL, together with other allegations about the surrounding factual circumstances may indicate something unusual about the funding arrangement that calls for further explanation. If there is something unusual (and I expressly do not infer that there is) relevance cannot be ruled out.
[70] I must also bear in mind that the law on unlawful champerty and maintenance is evolving. The disputes about relevance highlight, in my view, the need for caution of the kind referred to by the Court in Kembla and Couch. The law on what is lawful maintenance and champerty and where the boundary lies between what is avaricious meddling and exploitation, and thus abuse of process, and what is legitimate involvement to provide access to justice, is unclear. The Court of Appeal in Saunders does not discuss, other than in general terms, the principles that determine the legitimate scope of litigation funding. It notes that the interlocutory appeal
before it is not the occasion to deal with the legitimate scope of litigation funders.34
Its statement at [79] is obiter. It is a broad conclusion and not a definitive or settled test.
[71] The unsettled nature of the law following Saunders is illustrated by Allen J’s statement in G Waterhouse v Contractors Bonding Ltd, which is couched in a cautionary way:35
While that judgment may not be technically binding on this court because the relevant passages are obiter, it seems to me nevertheless that at [79] the court was intending to articulate an approach of general application.
[72] Moreover, the Court of Appeal in Saunders was careful not to limit what factors are relevant to the inquiry into abuse of process.
[73] The question as to what factors are relevant to abuse of process is therefore to be answered with these caveats in mind and with an eye to the Court of Appeal’s warning that there is need for anxious care in assessing litigation funding agreements.36
[74] Particular care is needed to avoid unwittingly imposing on the present inquiry as to relevance a formulaic strait jacket arising out of the constraints of a hearing that is summary in nature. The fuller investigation allowed by the trial process where the witnesses will be seen and heard and subject to cross examination will avoid that risk.
[75] Adopting the words of the Privy Council in Jones v Attorney General, it is
premature to exclude the “theoretical possibility” that such facts will not only be
relevant, but will be proven on evidence presented at a full hearing.37
34 Saunders (CA) at [77].
35 G Waterhouse and Anor v Contractors Bonding Ltd HC Auckland CIV-2010-404-3074, 13
December 2010 (HC) at [36].
36 Saunders (CA) at [77].
37 Jones v Attorney-General [2004] 1 NZLR 433 (PC) at [10].
Are the material facts not subject to substantial dispute?
[76] Gulf’s receivers contend that the material facts are not in dispute. Yet, CFL
substantially disputes the facts that Gulf relies upon.
[77] Counsel for Gulf’s receivers makes three main submissions to support the contention that the litigation funding agreement is unlawful maintenance and champerty. These submissions involve disputes of fact and cannot be answered without resolution of those disputes.
The three factual submissions
Exploitation
[78] First, counsel for Gulf’s receivers argues that the litigation funding agreement is unfairly weighted in favour of CFL and exploits Gulf, as evidenced by the circumstances in which the agreement was made and its terms. As well as being entered into shortly before Gulf went into receivership, Gulf did not obtain any meaningful legal advice before entering into the litigation funding agreement and Mr Carson acted for CFL despite a conflict of interests. This left Gulf vulnerable to exploitation.
[79] Counsel submits that there is also evidence that Gulf funded a large portion of the cost of the proceedings. By the time CFL started making contributions, it was highly likely that there would be no call for anything significant. At the same time, there was a high probability that the litigation would be successful, virtually assuring CFL of a disproportionally large return for minimal investment.
[80] The extent of Gulf’s self-funding also raises the inference that it was capable of funding its entire proceeding without the litigation funding agreement. This inference is further supported by the suggestion that BOSI gave Gulf a discretion to apply funds loaned as it saw fit.
[81] Counsel’s submission is these factors raise serious questions about the
rationale behind CFL’s involvement. It is unclear whether the real purpose of the
litigation funding agreement was access to justice or some ulterior purpose held by
CFL, or shared by CFL and Gulf as related entities.
[82] In response, counsel for CFL raises numerous factual disputes. He first argues that Gulf did obtain appropriate legal advice before entering into the litigation funding agreement. There is evidence that Hornabrook MacDonald reviewed a copy of the draft litigation funding agreement.
[83] Counsel also points out that in his affidavit in support of CFL’s opposition to summary judgment dated 17 September 2010, Mr Webb-Speights deposes that Mr Carson did not provide any advice to Gulf in relation to the litigation funding agreement. Mr Carson confirms in his affidavit of the same date that Carson Fox Legal provided only routine work for Gulf which would have been handled by a legal executive for the most part. During the course of this limited representation, Mr Carson says he acquired no information about Gulf that would give rise to a conflict of interest.
[84] Counsel next submits that BOSI exercised a high level of supervision over the funds loaned to Gulf. Hence, Gulf was unable to fund the entire proceedings against IRD itself.
[85] Counsel for CFL further argues that CFL did reimburse Gulf for legal costs incurred prior to the commencement of the litigation funding agreement. Hornabrook MacDonald paid Gulf’s solicitors $20,000 to cover outstanding legal fees previously incurred. CFL also paid three other invoices for work undertaken before the commencement of the litigation funding agreement.
BOSI’s consent
[86] Secondly, counsel for Gulf’s receivers submits that BOSI was misled into giving consent by CFL and, in any event, did not know of the precise terms of the litigation funding agreement.
[87] In her affidavit dated 15 October 2010, Ms Murray, an Associate Finance Director for BOSI, sets out the limited and misleading information allegedly provided to BOSI. She deposes that BOSI was unaware of Mr Coleman’s opinion that Gulf had a 65-75% chance of success in recovering the GST refund and his estimated legal costs. Rather, the information given to BOSI suggested that the estimated legal costs were $63,000 as opposed to $150,000 to $200,000. She also says that BOSI did not see the litigation funding agreement until it was forwarded by Hornabrook MacDonald.
[88] Counsel for CFL, on the other hand, argues that there was no misrepresentation. In his third affidavit dated 21 December 2010, Mr Webb- Speights, Gulf’s parent company’s General Manager, disputes Ms Murray’s evidence. Mr Webb-Speights deposes that he expressly told Mr Beecroft, a manager at BOSI, that funding of around $150,000 was required and he was “almost certain” that the litigation would be successful. Mr Coleman’s estimates as to the chances of success were also mentioned at this time. BOSI refused however to fund the commencement of any formal proceedings.
Relationship between Gulf and CFL
[89] Thirdly, Counsel for Gulf’s receivers submits that Gulf and CFL are related companies because they are essentially owned by the same people, including Mr Carson, a former director of CFL and a principal of Carson Fox Legal who had occasionally acted for Gulf. Counsel further argues that CFL is a shell company set up by those with beneficial interests in Gulf solely for the purpose of entering into the litigation funding agreement. These facts bear on the true level of control that CFL could exercise over the litigation. The relationship may also raise questions about whether the purpose of the litigation funding agreement was to promote access to justice or serve some other purpose.
[90] Counsel for CFL submits that Mr Carson is not the beneficial owner of CFL or a source of the funding. Nor are the directors and shareholders of CFL related parties to Gulf. Further, BOSI and CFL had numerous discussions as details and terms of the litigation funding agreement developed. However, BOSI’s focus was on
the chance of success and split of the proceeds, not the identity of CFL’s backers or therefore CFL’s experience as a litigation funder.
[91] To my mind, these disputes of fact are substantial. They are the kinds of disputes that mean that this case is precisely of the kind referred to by the Privy Council in Jones where it is premature to rule out the “theoretical possibility” that the alleged facts, if proven, will be relevant.38 They have a potentially significant bearing on whether the litigation funding agreement constitutes abuse of process. This is particularly so given that the factors relevant to this inquiry are unsettled.
[92] As in Saunders, I am not in a position therefore to determine whether the second condition as to abuse of process is satisfied. The result is that I am left uneasy on the following matters:
(a) The evidence pertaining to the identity of CFL’s backers. To my mind it is clearly relevant in law but there is insufficient evidence on the matter.39
(b) The extent to which BOSI’s consent is relevant to the issue of
misrepresentation and therefore to abuse of process.
(c) The degree of exploitation involved cannot be assessed with the degree of care contemplated by the Court of Appeal without first dealing with the issues of BOSI’s consent and the identity CFL’s backers.
[93] I find therefore that it is inappropriate to determine the question whether there has been an abuse of process by way of summary judgment. The question is in effect a mixed question of fact and uncertain law. It is best determined at trial because it is a developing area of the law. In this sense, I endorse the Court of Appeal’s words in Kembla stated at [28] above that a novel or developing point of
law may require the context provided by trial.
38 Jones at [10].
39 Saunders (CA) at [79].
Result
[94] For all of the reasons I have set out, I find, with respect to the first cause of action, that that the litigation funding agreement is arguably unlawful but that to decide whether it is determinatively so is a question for trial.
[95] Given this finding, it follows that I do not need to deal with the other issues raised in the application for summary judgment.
[96] The application for summary judgment is declined.
[97] Costs are reserved in accordance with the Court of Appeal’s decision in NZI Bank Ltd v Philpott.40
[98] The Registrar is to allocate the soonest available initial telephone case management conference.
Associate Judge Sargisson
40 NZI Bank Ltd v Philpott [1990] 2 NZLR 403 (CA).
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