CLAIRS KEELEY (A FIRM) -v- TREACY & ORS [2004] WASCA 277
| (2004) 29 WAR 479 | |||
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2004] WASCA 277 | |
| THE FULL COURT (WA) | |||
| Case No: | FUL:114/2002 | 7 SEPTEMBER 2004 | |
| Coram: | STEYTLER J TEMPLEMAN J MCKECHNIE J | 25/11/04 | |
| 38 | Judgment Part: | 1 of 1 | |
| Result: | Application dismissed | ||
| A | |||
| PDF Version |
| Parties: | CLAIRS KEELEY (A FIRM) JOANNE MARIE TREACY GEORGE ROBERT SOULLIER MARY JOY SOULLIER COLIN DOUGLAS HENNING DOREEN RUTH HENNING |
Catchwords: | Practice and procedure Application to lift stay of proceedings Maintenance and champerty Whether change in circumstances since stay granted Whether potential for abuse of process Whether solicitors independent from financiers of proceedings Whether, therefore, solicitors in potential conflict with clients Whether plaintiffs have been advised sufficiently of their position |
Legislation: | Nil |
Case References: | Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 Arkin v Borchard Lines Ltd [2003] EWHC 2844 Brimaud v Honeysett Instant Print Pty Ltd, unreported; SCt of NSW; Library No 3059; 19 September 1988 Brown v Talbot & Olivier (1993) 9 WAR 70 Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357 Clairs Keeley (A Firm) v Treacy & Ors (2003) 28 WAR 139 De Crittenden v Bayliss [2002] EWCA 50 Elfic Ltd v Macks [2003] 2 Qd R 125 Giles v Thompson [1993] 3 All ER 321 Giles v Thompson [1994] AC 142 Gulf Azov Shipping Co Ltd v Idisi [2004] EWCA 292 In re Trepca Mines Ltd [1963] Ch 199 Leslie v Hydro-Electric Corp (1997) 7 Tas R 239 Nominal Defendant v Manning (2000) 50 NSWLR 139 R (Factortame Ltd & Ors) v Secretary for Transport Ltd (No 2) [2003] QB 381 Todd v Novotny [2000] WASC 308 Wentworth v Rogers, unreported; SCt of NSW (Sperling J); 9228 of 1982; 28 April 1995 Arata Potato Co Ltd v Taylor Johnson Garrett [1995] 4 All ER 695 Australian Granites Ltd v Eisenwerk Hensel Bayreuth Dipl-ing Burkhardt Gmb [2001] 1 Qd R 461 Bandwill Pty Ltd v Spencer-Laitt (2000) 23 WAR 390 Callery v Gray [2002] 3 All ER 417 Cattanach v Melchior (2003) 215 CLR 1 Choules v Siglin [2002] WASC 230 Clare v Joseph [1907] 2 KB 369 Co-ownership Land Development Pty Ltd v Queensland Estates Pty Ltd (1973) 1 ALR 201 DA Christie Pty Ltd v Baker [1996] 2 VR 582 Ellingsen v Det Skandinavske Co [1919] 2 KB 567 Freehill Hollingdale & Page v Bandwill Pty Ltd [2000] WASCA 150 Gore v Justice Corp Pty Ltd (2002) 119 FCR 429 Hamilton v Al Fayed (No 2) [2003] QB 1175 Henderson v Henderson (1843) 3 Hare 100 Hill v Archbold [1968] 1 QB 686 Jarbin Pty Ltd v Clutha Ltd (in liq) (2004) 22 ACLC 550 Kuligowski v Metrobus (2002) 26 WAR 137 Kuligowski v Metrobus (2004) 208 ALR 1 Lyddon v Moss (1859) 4 De G & J 104 McIntyre v Attorney-General of Ontario (2002) 218 DLR (4th) 194 Metropolitan Petar v Mitreski [2003] NSWSC 1007 Movitor Pty Ltd (in liq) v Sims (1996) 64 FCR 380 Norglen Ltd (in liq) v Reeds Rains Prudential Ltd [1999] 2 AC 1 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 R v Lord Chancellor; ex parte Witham [1998] QB 575 Scott v Pedler [2004] FCAFC 67 Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116 Thai Trading Co v Taylor [1998] QB 781 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 Waddington v Silver Chain Nursing Association (1998) 20 WAR 269 Walton v Gradiner (1993) 177 CLR 378 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA TITLE OF COURT : THE FULL COURT (WA) CITATION : CLAIRS KEELEY (A FIRM) -v- TREACY & ORS [2004] WASCA 277 CORAM : STEYTLER J
- TEMPLEMAN J
MCKECHNIE J
- Appellant (Sixth Defendant)
AND
JOANNE MARIE TREACY
GEORGE ROBERT SOULLIER
MARY JOY SOULLIER
COLIN DOUGLAS HENNING
DOREEN RUTH HENNING
Respondents (Plaintiffs)
Catchwords:
Practice and procedure - Application to lift stay of proceedings - Maintenance and champerty - Whether change in circumstances since stay granted - Whether potential for abuse of process - Whether solicitors independent from financiers of proceedings - Whether, therefore, solicitors in potential conflict with clients - Whether plaintiffs have been advised sufficiently of their position
(Page 2)
Legislation:
Nil
Result:
Application dismissed
Category: A
Representation:
Counsel:
Appellant (Sixth Defendant) : Mr J T Gleeson SC & Mr S M Davies
Respondents (Plaintiffs) : Mr S J Gageler SC & Mr J C Giles
Solicitors:
Appellant (Sixth Defendant) : Mallesons Stephen Jaques
Respondents (Plaintiffs) : Solomon Brothers
Case(s) referred to in judgment(s):
Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170
Arkin v Borchard Lines Ltd [2003] EWHC 2844
Brimaud v Honeysett Instant Print Pty Ltd, unreported; SCt of NSW; Library No 3059; 19 September 1988
Brown v Talbot & Olivier (1993) 9 WAR 70
Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357
Clairs Keeley (A Firm) v Treacy & Ors (2003) 28 WAR 139
De Crittenden v Bayliss [2002] EWCA 50
Elfic Ltd v Macks [2003] 2 Qd R 125
Giles v Thompson [1993] 3 All ER 321
Giles v Thompson [1994] AC 142
Gulf Azov Shipping Co Ltd v Idisi [2004] EWCA 292
In re Trepca Mines Ltd [1963] Ch 199
Leslie v Hydro-Electric Corp (1997) 7 Tas R 239
Nominal Defendant v Manning (2000) 50 NSWLR 139
R (Factortame Ltd & Ors) v Secretary for Transport Ltd (No 2) [2003] QB 381
(Page 3)
Todd v Novotny [2000] WASC 308
Wentworth v Rogers, unreported; SCt of NSW (Sperling J); 9228 of 1982; 28 April 1995
Case(s) also cited:
Arata Potato Co Ltd v Taylor Johnson Garrett [1995] 4 All ER 695
Australian Granites Ltd v Eisenwerk Hensel Bayreuth Dipl-ing Burkhardt Gmb [2001] 1 Qd R 461
Bandwill Pty Ltd v Spencer-Laitt (2000) 23 WAR 390
Callery v Gray [2002] 3 All ER 417
Cattanach v Melchior (2003) 215 CLR 1
Choules v Siglin [2002] WASC 230
Clare v Joseph [1907] 2 KB 369
Co-ownership Land Development Pty Ltd v Queensland Estates Pty Ltd (1973) 1 ALR 201
DA Christie Pty Ltd v Baker [1996] 2 VR 582
Ellingsen v Det Skandinavske Co [1919] 2 KB 567
Freehill Hollingdale & Page v Bandwill Pty Ltd [2000] WASCA 150
Gore v Justice Corp Pty Ltd (2002) 119 FCR 429
Hamilton v Al Fayed (No 2) [2003] QB 1175
Henderson v Henderson (1843) 3 Hare 100
Hill v Archbold [1968] 1 QB 686
Jarbin Pty Ltd v Clutha Ltd (in liq) (2004) 22 ACLC 550
Kuligowski v Metrobus (2002) 26 WAR 137
Kuligowski v Metrobus (2004) 208 ALR 1
Lyddon v Moss (1859) 4 De G & J 104
McIntyre v Attorney-General of Ontario (2002) 218 DLR (4th) 194
Metropolitan Petar v Mitreski [2003] NSWSC 1007
Movitor Pty Ltd (in liq) v Sims (1996) 64 FCR 380
Norglen Ltd (in liq) v Reeds Rains Prudential Ltd [1999] 2 AC 1
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
R v Lord Chancellor; ex parte Witham [1998] QB 575
Scott v Pedler [2004] FCAFC 67
Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116
Thai Trading Co v Taylor [1998] QB 781
Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603
Waddington v Silver Chain Nursing Association (1998) 20 WAR 269
Walton v Gradiner (1993) 177 CLR 378
(Page 4)
1 JUDGMENT OF THE COURT: On 3 December 2003, the Court, by a majority (Parker, Templeman, Wheeler and Pullin JJ, Murray J dissenting) allowed an appeal against the decision of the primary Judge, Scott J, and stayed the action brought by Joanne Marie Treacy and others ("the plaintiffs") against their former solicitors, Clairs Keeley: Clairs Keeley (A Firm) v Treacy & Ors (2003) 28 WAR 139. The reasons of the majority for granting the stay, were, in essence, that a funding agreement between the litigation funder, Insolvency Management Fund Ltd ("IMF") and the plaintiffs was champertous and that there were features of the agreement and a retainer agreement between the plaintiffs, their solicitors (Solomon Brothers) and IMF which were contrary to public policy: there had been a de facto assignment of the plaintiffs' causes of action to IMF, which was, in effect, trafficking in litigation. Further, Solomon Brothers had placed themselves in a position in which their interest conflicted with their duty to the plaintiffs and had breached their fiduciary duty to the plaintiffs.
2 There is now an application before the Court to lift the stay. The application is made on the basis that the previous arrangements between the plaintiffs, IMF and Solomon Brothers have been varied in such a way as to quiet the Court's concerns. In summary, the funding and retainer agreements have been revised; the plaintiffs have been invited to enter into the new agreements by IMF and Solomon Brothers, and have been given an opinion from independent counsel, Mr Neil McKerracher QC, in relation to certain aspects of those agreements.
3 The application is made nominally by the plaintiffs, but in reality by IMF. It is supported by some new affidavits, principally that of Mr Hugh McLernon, IMF's Managing Director.
4 Clairs Keeley contend that Mr McLernon's affidavit is largely objectionable, on the basis that it seeks to re-argue IMF's opposition to the stay. We shall deal below with that issue, and the objections to the other new affidavits.
5 In setting out our reasons we shall use the nomenclature of the previous judgment. However, we shall refer to Clairs Keeley by that name, in order to avoid the confusion which might otherwise arise from the fact that although they are the appellants, they are the respondents to this application.
6 These reasons should be regarded as supplementary to those which Templeman and Pullin JJ gave in (2003) 28 WAR 139, with which Parker
(Page 5)
- and Wheeler JJ agreed. We shall use numbers in square brackets to identify paragraphs in those reasons.
The law relating to this application
7 Because the order made by the Court in December 2003 was interlocutory, it is open to the plaintiffs to apply to lift the stay. However, on an application to vary an interlocutory order it is not generally permissible for the party against whom the order was made to re-argue the original application on the basis of material which was available then, but which was not put before the Court. As was said by the majority of the High Court in Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170, at 178:
"A further order will be appropriate whenever, inter alia, new facts come into existence or are discovered which render its enforcement unjust …."
8 In Brimaud v Honeysett Instant Print Pty Ltd, unreported; SCt of NSW; Library No 3059; 19 September 1988, McLelland J said:
"In the present case I am dealing with an interlocutory order of a substantive nature made after a contested hearing in contemplation that it would operate until the final disposition of the proceedings. In such a case the ordinary rule of practice is that an application to set aside, vary or discharge the order must be founded on a material change of circumstances since the original application was heard, or the discovery of new material which could not reasonably have been put before the Court on the hearing of the original application …"
9 In Wentworth v Rogers, unreported; SCt of NSW; 9228 of 1982; 28 April 1995, noted in (1996) 70 ALJ 613, Sperling J expressed the point in the following way:
"I hold that, as a general rule, an interlocutory order made after a hearing at which each side has the opportunity to put its case should not be set aside, varied or discharged, except to accommodate a change of circumstances or where evidence has become available which was not available at the earlier time. By the same token, where an application for interlocutory relief has failed, a further application for the same relief should, as a general rule, not be entertained, subject to the same qualifications, at least after a hearing on the merits, particularly
(Page 6)
- where the application is designed to finalise the principal proceedings, such as an application for summary judgment or for a permanent stay." [emphasis added]
10 The principle was considered by the Court of Appeal in New South Wales in Nominal Defendant v Manning (2000) 50 NSWLR 139, where Mason P at [12] referred to the principle stated by McLelland J (and Sperling J to the same effect), as "a rule of practice".
11 Mason P was of the view that where a second interlocutory application fell foul of the rule, there would be an abuse of process. Heydon JA, who agreed with Foster AJA, took a more relaxed view. Thus, Foster AJA regarded as "too extreme", the submission that:
"… no second interlocutory application can be entertained unless there is a change of circumstances or unless evidence is relied on which could not reasonably have been obtained earlier." [at [72]]
12 However, Foster AJA went on to say that the deliberate non-tender of evidence for use in a second interlocutory application, should the first fail might be "fatal to success"; and:
"… even the non-deliberate … failure to tender evidence is extremely risky."
13 But ultimately, as McLelland J said in Brimaud v Honeysett Instant Print Pty Ltd (supra):
"… the Court should do whatever the interests of justice require in the particular circumstances of the case."
14 The rule was considered in Todd v Novotny [2000] WASC 308, where Parker J heard a renewed application for a Mareva injunction. The application was based on evidence which had been available when the first application was made, but which was not then adduced. His Honour said, at [18]:
"…The formulation of the rule of practice propounded by McLelland J in the Brimaud decision, … is expressly directed to interlocutory orders of a substantiative nature, although there is no elaboration which makes clear whether an application for a costs (sic, assets) preservation order is within his Honour's appreciation of such an order. The formulation of Sperling J in
(Page 7)
- Wentworth v Rogers, which Mason P in Nominal Defendant v Manning at [12] did not see to involve any material difference from the formulation of McLelland J in Brimaud, referred initially to interlocutory orders made after a hearing inter partes but went on to regard the rule of practice as 'a general rule … particularly where the application is designed to finalise the principal proceedings, such as an application for summary judgment or for a permanent stay'. While this formulation does not confine its possible application to such applications designed to finalise the principal proceedings it appears to contemplate that the rule of practice might more readily not be applied to some other interlocutory applications. The view of the majority in Nominal Defendant v Manning would appear to leave it open as a matter of general discretion whether or not to allow a renewed interlocutory application." [emphasis supplied]
15 Clairs Keeley's application in the present case was for a permanent stay of the proceedings. Although the order was interlocutory, it was not an order of the kind which remains in force only until trial. Unless there was a change in the arrangements made between IMF, Solomon Brothers and the plaintiffs, there would be no trial: the stay would be permanent.
16 If the rule was not applied in those circumstances, there would exist the following factors identified by Parker J in Todd v Novotny (supra):
" … which tell against the relitigation of an issue which has already been fully argued and judicially determined between the same parties, even if only in an interlocutory hearing. These include the risk of conflicting decisions, unnecessary vexing of respondents, judge-shopping, the diminution of certainty in the conduct by respondents of their affairs, the potential harm to public confidence in the integrity of judicial decisions, and the unnecessary expenditure of time and money which relitigation involves; cf Nominal Defendant v Manning at [72]."
17 With these principles in mind, we turn to consider the evidence sought to be adduced by the plaintiffs in the present application.
The new evidence
18 The principal affidavit on which the plaintiffs rely is that sworn by Mr McLernon on 23 December 2003. From par 4 to par 224 inclusive of that affidavit, Mr McLernon sets out the role of IMF and the history of his
(Page 8)
- and IMF's involvement in this litigation, IMF's relationship with RECA and the negotiations which led to the funding and retainer agreements (AB 62 – 113). Subject to two exceptions, to which we shall refer below, none of this is new material. It was available when the matter came before the Court on the previous occasion.
19 Mr McLernon seeks to justify his affidavit in the following way:
"6. The [stay] application recited grounds on which the appellant applied for the stay, being that the action was champertous and therefore an abuse of process.
7. The affidavit in support of the stay did not set out any particulars of the grounds upon which the stay was being sought, other than those referred to in the application.
8. Consequently, my earlier affidavits addressed those grounds for opposing litigation funding enunciated in earlier judicial decision, particularly those which dealt with maintenance and champerty as a tort. As a result, I did not depose in those affidavits to a number of questions of fact which were decided by the Full Court. Further, some of the facts deposed to below arose after the application at first instance was heard."
20 We accept the proposition in the final sentence of par 8, that some of the material facts arose after Scott J had delivered his judgment. However, the Full Court had regard to those matters which were relevant, when the appeal was heard. Templeman J referred to them at [159] and following of his reasons, under the heading "Developments since the hearing before Scott J".
21 In Mr McLernon's affidavit of 26 February 2002 in opposition to the stay application (and in support of an application for non-party discovery) he referred to substantially the same matters as are set out in his new affidavit, albeit in less detail. These matters included Mr McLernon's litigation experience, the extent of his involvement in litigation funding, IMF's role in this litigation, its relationship with RECA and Solomon Brothers and the negotiations which led to the retainer and funding agreements. Mr McLernon referred also to the matter of control of the litigation. He said:
"In the present case, all legal work and all legal decisions are made by Solomon Brothers. When settlement negotiations are
(Page 9)
- entered into, Solomon Brothers will have conduct of those settlements. I am informed by Mr Jeremy Giles, a solicitor employed by Solomon Brothers who has conduct of this action together with and under the supervision of Mr Douglas Solomon, and do believe, that Solomon Brothers are likely to seek IMF's input into settlement negotiations. Because of my background and training, and because I am in charge of the investigation team, I discuss legal and factual matters with members of Solomon Brothers on a regular basis."
- The majority accepted that evidence, but nevertheless drew the inference from all the circumstances that there was a real potential for the Court's processes to be abused [33], [134-5], [183], [184].
22 Following the decision of Scott J, Clairs Keeley filed a draft notice of appeal dated 24 July 2002. The issues raised in that document were argued before the Full Court on 10 April 2003. At the hearing, it was not suggested to the Full Court that the plaintiffs were in any way surprised or embarrassed by the case put against them. Nor was any application made by the plaintiffs to supplement Mr McLernon's affidavit.
23 The first exception referred to above is new evidence about the settlement of other proceedings funded by IMF. These were:
(1) the litigation arising from a loan to Penman Holdings Pty Ltd and Mr T J Saulsman;
(2) Choules v Siglin (CIV 1566 of 2001).
24 As we understand it, the evidence is said to be relevant to the control issue. However, we do not regard it as relevant to the issues arising on the present application. The Court is now concerned with agreements different from those relating to the earlier litigation: and in particular, with the potential for IMF to control the litigation, in the light of the revised agreements and the breaches of fiduciary duty by Solomon Brothers.
25 The second exception is the evidence contained in exhibit 31B to Mr McLernon's affidavit, (AB 278), which is a printout of a presentation made to stockbrokers on behalf of IMF, after the hearing of the appeal, "to keep the market informed of (IMF's) general commercial approach and progress". This exhibit is referred to at par 178. It is relevant to the issue of control and was relied on by Clairs Keeley. We would receive that exhibit. We shall refer to it later in these reasons.
(Page 10)
26 In par 225 to par 233 of his affidavit, Mr McLernon deposes to the circumstances in which the funding and retainer agreements were varied and an opinion was obtained from Mr McKerracher concerning certain aspects of those variations. The relevant documents and correspondence between IMF and the plaintiffs are exhibited.
27 We consider that these matters are relevant to the present application and should be admitted, other than par 232. This deals with the way in which the settlement statement in Choules v Siglin (supra) was calculated. It is therefore irrelevant.
28 In our view, there is nothing in the balance of the affidavit which requires a departure from the rule of practice referred to above. We do not think the interests of justice would be served by putting before the Court what is, essentially, an expanded version of Mr McLernon's previous evidence. To do so would be to require the stay application to be re-opened, so as to judge whether any of the additional material was significant. This course would give rise to all the evils to which Parker J referred in Todd v Novotny (supra) following Nominal Defendant v Manning (supra). We would not receive that material.
29 In opening this application, leading counsel for the plaintiffs said:
" … we of course accept unquestioningly that we are bound by the existing decision of the Full Court." (TS 111)
30 On that basis, counsel submitted that reliance on the new affidavits was not an attempt to have the appeal re-heard. Rather, it was an attempt to show that the concerns expressed by the Court were not justified. In the outline of submissions, it is contended that because the Court looked behind the original agreements "and inferred that particular facts existed or were likely to exist, Clairs Keeley must show that the same inference should still be drawn".
31 We do not accept that proposition. It is inconsistent with the authorities to which we have referred above. The onus is on the plaintiffs to demonstrate that the position has changed.
32 The next affidavit relied on by IMF is that of Jasmine Bree Florence Bartley sworn on 23 December 2003. Ms Bartley is a solicitor in the employ of Solomon Brothers. She exhibited to her affidavit copies of the acceptance of the revised terms offered by Solomon Brothers and IMF by each of the plaintiffs. This is new material which was obviously unavailable previously. It should therefore be admitted.
(Page 11)
33 There is then an affidavit of Joanne Marie Treacy, the first named plaintiff. Ms Treacy deposed to having received a bundle of documents from IMF in about August 2001. The materials included a document setting out IMF's prediction of the likely return should the claim be successful. This document was available previously. In our view, it should not be received.
34 The plaintiffs seek to put similar material before the Court through the affidavits of George Robert Soullier sworn on 23 January 2004 and Colin Douglas Henning sworn on 29 January 2003. For the same reasons, we would not receive this evidence.
35 An affidavit in opposition to the plaintiffs' application to lift the stay has been filed by Sarah Elizabeth Harrison. Ms Harrison is a solicitor employed by Mallesons who are acting for Clairs Keeley. In her affidavit sworn on 19 March 2004 she seeks to answer certain assertions made by Mr McLernon in his affidavit of 23 December 2003.
36 Because we would not receive those parts of Mr McLernon's affidavit to which Ms Harrison refers, we would not receive her affidavit either.
37 For the same reasons, we would not receive an affidavit sworn on 1 April 2004 by Jeremy Christopher Giles, a solicitor in the employ of Solomon Brothers who seeks to answer matters raised by Ms Harrison in her affidavit.
38 There is a further affidavit of Mr McLernon sworn on 18 June 2004. Mr McLernon exhibits a copy of the funding agreement between the liquidator of Bell Group Finance Pty Ltd (in liq) and, inter alia, the State Government Insurance Commission, Law Debenture Trust Corporation Plc and the Commonwealth of Australia. In a further exhibit to his affidavit, Mr McLernon seeks to draw a comparison between that funding agreement and the IMF agreement in issue in these proceedings.
39 Mr McLernon exhibits also a copy of a printout from the website of the Law Society of South Australia relating to the Litigation Assistance Fund established under s 14A of the Legal Practitioners Act 1981 (SA) and the Rules of the South Australian Legal Assistance Funds.
40 In our view, this material is of questionable relevance. In any event, it was available previously. Applying the principles set out above, we would not receive this affidavit.
(Page 12)
41 Finally, there is an affidavit sworn on 3 September 2004 by Elizabeth May Swift, a solicitor employed by Mallesons. Ms Swift exhibits a copy of Solomon Brothers' brief to Mr McKerracher, being a letter dated 5 December 2003 (without enclosures). The document was provided to Mallesons at their request, pursuant to O 26 r 8(2) of the Rules of the Supreme Court. This is fresh evidence which should be admitted.
What has changed since the stay was imposed?
42 Shortly after the stay was granted on 3 December 2003, IMF and Solomon Brothers produced a supplemental funding agreement and prepared amendments to the retainer agreement. The amendments to the retainer agreement are set out in a circular letter sent by Mr Solomon to his 3,000 clients. The draft is dated 10 December 2003. However, it was sent together with Mr McKerracher's opinion, which is dated 15 December, and with the supplemental funding agreement and a letter from Mr McLernon. It is necessary to consider each of these documents.
The supplemental funding agreement
43 The majority was concerned that the original funding agreement operated as a de facto assignment to IMF of the plaintiffs' causes of action. The concern was that IMF would be running the litigation substantially for its own benefit so that the Court's processes would be subverted to a commercial enterprise. The arrangements involved no risk for the plaintiffs. Although each plaintiff retained the right to settle his or her individual claim, if the claim was settled on terms which were unacceptable to IMF, and which an independent Queen's Counsel also regarded as inadequate, the amount of the commission payable by the plaintiff would be increased from 35 to 45 per cent.
44 The funding agreement provided, in substance, that one-seventh of the 35 per cent commission payable by the client to IMF (ie 5 per cent of the total recovery) would be paid by IMF to RECA, which had introduced the plaintiffs to IMF.
45 The majority concluded that in all the circumstances, the funding agreement constituted an abuse of process: [34], [141], [183], [209].
46 Although it was not necessary for the Court to say so, it is implicit in its conclusion that the original funding agreement was unenforceable. However, the Supplemental Agreement was drawn on the basis that the agreement was valid. It was recited that:
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- "A. The Appointor and IMF are parties to a litigation funding agreement ('the Agreement') concerning losses sustained by the Appointor through a Transaction brokered by a finance broker.
B. The Full Court of the Supreme Court of Western Australia has held on 3 December 2003 in judgment [2003] WASCA 299 ('the Judgment') that aspects of the Agreement and arrangements made by IMF with the Solicitors on behalf of the Appointor and others gave rise to an abuse of process.
C. The parties have agreed to enter into this supplemental agreement, and the Appointor has directly engaged the Solicitors, to correct the issues of concern raised in the Judgment."
47 The effect of the operative part of the Supplemental Agreement may be summarised in the following way:
• no further payments would be made to RECA
• the commission payable by the plaintiff to IMF would be 22.5 per cent of net receipts if the action settled before mediation, and 30 per cent if settled after mediation or if the action went to judgment
• the provision for increasing the commission to 45 per cent of monies received on an inadequate settlement was deleted
• the plaintiffs would themselves appoint Solomon Brothers as their solicitors
• IMF's "role and conduct" would be governed by the terms of the new retainer.
48 It was submitted by leading counsel for the plaintiffs that the Supplemental Agreements had been proposed bona fide by IMF for the purpose of overcoming "the problems of detail" identified by the Court in its original decision (TS 125).
49 In particular, it was submitted that the risk of de facto control had been removed, because of the direct engagement of Solomon Brothers by
(Page 14)
- the plaintiffs. We shall consider the question of control later in these reasons.
50 It is true that the plaintiffs now stand to receive a greater percentage of any recovery. However, this is at the expense of RECA, not IMF. Thus, unless an action settled at or before mediation, when IMF's commission would be 22.5 per cent, its potential profit remains the same. Although commission is expressed now to be payable on net receipts, rather than gross, Mr McLernon has deposed to the fact that it was always his intention to calculate commission on the basis of net receipts: par 232 of his affidavit of 23 December 2003.
51 There remains a question as to the basis on which net receipts would be calculated. It is by no means clear how the plaintiffs would be charged for the costs of any unsuccessful interlocutory applications brought in their names, or how the very substantial expenses incurred by IMF thus far in relation to its 2,500 clients would be apportioned. (IMF's figure for client numbers is lower than that of Solomon Brothers).
52 It was submitted by leading counsel for Clairs Keeley that the increase in commission payable by the plaintiffs – from 22.5 per cent if settling at or before mediation, to 30 per cent if settling later, or obtaining a judgment – represented an incentive to early settlement which favoured IMF.
53 IMF's answer is that it is justified in requiring a higher commission where it accepts the increased risk inherent in rejecting an early offer of settlement and proceeding to trial. It is true that IMF would be exposed to a greater risk in those circumstances. However, IMF retains the absolute right to terminate the funding agreements, pursuant to cl 2.3, thereby avoiding the risk.
54 It may be said that since IMF has confidence in the success of the actions and has already incurred costs of approximately $3 million, it would be unlikely to cease funding contrary to its assessment of the merits, especially if that would lead to actions being discontinued or struck out, with the consequence of adverse costs orders. However, the termination of funding for a recalcitrant plaintiff might well prove to be a powerful incentive to others to accept an early offer, or risk the same fate. It might therefore be advantageous to IMF to pay the costs of one action with the expectation of settling many more for a 22.5 per cent commission, rather than proceeding to trial for 30 per cent of a potentially larger amount.
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55 It must be accepted as being reasonable for a litigation funder "to have some say and control in relation to settlement": Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357 at 363, per Hodgson CJ in Eq. Indeed, a legally aided plaintiff who declines to accept a reasonable offer of settlement may have his funding terminated: see Legal Aid Commission Act 1976, s 38(2)(a), which entitles the Commission to terminate legal aid at any time, and, thereby, to exercise some control over the litigation, albeit for other than commercial reasons.
56 These considerations are all relevant to the general issue of control, to which certain provisions of the new retainer agreement are directed. We therefore turn to consider those provisions.
The control provisions of the revised retainer agreement
57 The revisions to the retainer agreement are contained in a letter dated 10 December 2003 from Mr Douglas Solomon to each of Solomon Brothers' 3,000 clients. The letter dealt with a number of matters arising from the decision of the Court to stay the proceedings. In relation to control, Mr Solomon said:
4. Day to day conduct of litigation involves various decisions. Those decisions usually involve the exercise of professional judgment. Many, and perhaps most, of those decisions have no real impact on the outcome of the litigation. It is impractical to take instructions from all of our approximately 3,000 clients in relation to each decision. It is not unusual for lawyers to make decisions, even where there are only one or two clients in a matter. For example, during any hearing counsel must make instantaneous decisions, involving the exercise of discretion and judgment, as to how to pursue an argument or as to witnesses to be called or the questions to be asked in cross-examination. Such decisions, unlike many made during pre-trial conduct of litigation, can sometimes significantly affect the outcome of an action. Consequently, by this agreement you direct us:-
4.1 Subject to 4.2 below to make decisions in relation to the conduct of litigation you are party to and which is funded by IMF, unless the decision to be made is, in our reasonable opinion, such that it is necessary (as the decision may have a material impact on your commercial recovery from the
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- litigation) and practical to take express instructions from you first. By doing so, you instruct us to make decisions within that category of decision, and to act on those decisions in the conduct of the relevant litigation, as we reasonably regard as being in your best interests;
- 4.2 In relation to matters which are likely to have a significant impact on either the possible result of the litigation or the commercial outcome of the litigation to you, to seek express instructions from you unless impossible to do so. However, other than with respect to settlement or settlement proposals, we are to act in accordance with the instructions given by a majority of the plaintiffs for whom we act in the relevant action;
4.3 Although we cannot foresee a situation where taking direct instructions will be impossible, should such a situation arise you instruct us to act as we reasonably consider is in your best interests;
4.4 In relation to any settlement proposal, the decision to accept, reject or make a proposal is entirely your decision. We are to seek your instructions in relation to any settlement proposal. You will not be bound by the views or instructions of any of our other clients, or IMF concerning any settlement proposal;
4.5 To report to you (whether in writing or orally) as follows:-
4.5.1 when a matter which is likely to affect your commercial return from the litigation occurs, or we require your express instructions as provided for in paragraphs 4.1, 4.2 and 4.4 above;
4.5.2 in any event, no less often than every three months. We have chosen a period of three months as, from time to time, there are long periods in litigation where either little occurs or during which very time
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- consuming tasks are undertaken without a final result. For example, the process of providing the Finance Brokers Supervisory Board's solicitors with a list of files of documents relevant to that action took a number of months;
- 4.5.3 the report will recite steps taken in the litigation on your behalf, and progress which has been made."
58 Mr Solomon went on to explain the role of IMF:
"The role of IMF in relation to this retainer is limited. So that the role of IMF is clear, we emphasise the following important matters:
6.1 You are entitled to contact us, whether in writing or orally, at any time to obtain advice in relation to the litigation funded by IMF, to obtain a report as to progress of that litigation and/or to give us instructions. As we have approximately 3,000 clients, if all of our clients telephone us regularly that will place a significant burden on our resources. Consequently, we request that you exercise your discretion in relation to frequent telephone calls. You are also entitled to write to or telephone IMF to receive reports, ask questions as to progress of the litigation or in relation to the funding of the litigation. However, IMF cannot and will not provide advice in relation to any legal issues;
6.2 Your instructions prevail over any course of action recommended by IMF. IMF may, so long as it does not provide legal services or advice, discuss the litigation with us, provide us with administrative and investigative assistance and provide recommendations to us as to tactical decisions in the litigation. However, if you give us an instruction contrary to a recommendation by IMF, your instructions will prevail."
59 It is far from clear how these provisions would work in practice, particularly having regard to the fact that Solomon Brothers apparently regard the present five plaintiffs as but a small element of the group of some 3,000. We think it must be accepted that the exigencies of litigation
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- are such as to make it impossible to anticipate every circumstance which might arise. Thus, the proper implementation of the retainer agreement will depend to a considerable extent on the professionalism and objectivity of Solomon Brothers, and the plaintiffs' full understanding of their respective positions. But in reasons which we shall set out below, we consider that those matters are open to doubt.
Other aspects of control
60 In relation to control, it has emerged since the Court granted a stay, that there is considerable tension between IMF's role as portrayed by the funding and retainer agreements in this case and IMF's general approach to litigation funding.
61 As we have noted above, in his affidavit of 23 December 2003, Mr McLernon referred to a presentation made by IMF to stockbrokers and posted on its website.
62 The presentation refers to Mr McLernon as having been in legal practice for 20 years as a criminal prosecutor, barrister and partner at Clayton Utz; to his 10 years' experience in litigation funding and 7 years' experience as a director of numerous listed companies. Mr McLernon's responsibilities are said to encompass the overall performance of IMF and in particular, its operations in Western Australia, South Australia and the Northern Territory. It is stated in the presentation that:
"IMF does not do any legal work. Executives of the company are required to give up their legal practising certificate upon joining the company. The business model is that IMF will have a close relationship with three or four legal firms in each State who will carry out a large part of the company's litigation. If a particular client requests a particular lawyer then, in most cases, that lawyer will be appointed." (AB 286)
63 Despite the statement that IMF does not engage in legal work, the services provided by the company are said to include "legal", on the basis that the company has people with that expertise on its staff (AB 288).
64 The presentation continues:
"Any business which simply provides funding for litigation is destined to fail. This is because the decision making, strategy and investigation and negotiation is left to the solicitors running
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- the case. Solicitors are generally good at running cases through the courts but that is all.
…
IMF oversees the activities of the solicitors and ensures the timelines, budgets and court orders are met.
IMF executives will often be involved in the major strategic moves during the course of the litigation.
• IMF reports to the client during the course of the litigation and takes instructions from the client on any major steps.
• The decision as to settlement of the litigation always remains with the client." (AB 288-9)
65 The presentation sets out examples of matters which have been funded and concluded by IMF. One such matter involved tobacco retailers. In relation to that case:
"It was a major administrative task to sign up all of the 8,000 individual retailers to a litigation funding agreement. We employed about 150 canvassers to go out into the market place, meet with the retailers and get them signed up.
…
This case taught us an enormous amount about how to organise very large numbers of plaintiffs in an efficient and timely way. It also taught us the importance of regular communication. We have honed our multiple plaintiff procedures as a result of our experience with this very large case." (AB296-7)
66 In a section entitled "Risks" the presentation discounted the possibility that there might be a lack of cases to fund:
"The history of the human race shows that the last two creatures left alive on this planet will be a cockroach and a litigator. It is highly improbable that the supply of funding opportunities will dry up.
In fact, a large number of cases which are funded by IMF would not have seen the light of day, so, in effect, IMF is, on many
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- occasions creating litigation (by enabling litigants to have their day in court when they would otherwise be denied that opportunity)." (AB 303-4)
- The risks of "staying too long in a bad case" are said to be minimised by fortnightly discussions within the company at which "cases are kept constantly under review" (AB 304-5).
67 The presentation contains a list of current cases. These range in value from $2 million to $90 million, the latter being the "Finance Broking case" in this Court. That is the present litigation. It is, therefore, potentially, the most profitable in IMF's portfolio and gives rise to the greatest incentive to exercise control.
68 On the hearing of the appeal, the decision of the majority was that the action should be stayed:
"at least until some safeguard was put in place to ensure that IMF's role was confined to funding." [144], [33-4], [183], [184].
- But in the light of the presentation set out above, IMF's business is based on the proposition that if it was simply to provide funding, it would be destined to fail. Hence, the need for IMF to "sign-up" its clients, to organise them, to monitor the proceedings and to oversee the activities of the solicitors. The solicitors may be left to run the cases through the courts, but not, it seems, the decision making, strategy, investigation and negotiation.
69 Mr McLernon touched on the issue of control in his circular letter of 10 December 2003. Under the heading "Committee of Investors", he said:
"30. The Court has also expressed strong concern that investors have not played a more direct role in the conduct of the proceedings." (AB 361)
31. It would of course be entirely impractical to expect 2500 sets of instructions to be given each time the solicitors need to make a decision and I do not believe that the Court is suggesting that this should be the case.
32. Amendments have been made to the solicitors' retainer agreement to make it clear that you, the client, have the right to direct the solicitors on any step involved in the litigation.
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- 33. Please carefully read Mr Solomon's enclosed letter in this regard and also the enclosed memorandum of advice from Mr McKerracher QC.
34. We considered requesting the 2,500 clients to appoint say a five person committee but, on reflection, it became clear that because there are some 500 groups of clients (ie…one group for each mortgage) it was in fact better that all clients had a say in the important matters that may arise during the litigation.
35. The point is that the Court clearly wants investors at least to be able to take a more active role in their own litigation.
36. IMF is entirely comfortable with that occurring but we of course consider that we have something to add to the litigation and that we can assist to keep the costs down especially by continuing with the mammoth task of administration, documentation and factual investigation.
37. The better line however is that each client will be able to instruct the solicitors in relation to the litigation as and when they see fit."
70 That is undoubtedly the better line. The question is, where will the line be drawn in the present case? Clearly, the plaintiffs do not have the knowledge or expertise in matters relating to law, litigation and finance possessed by IMF. Thus, as in any litigation involving parties who are similarly disadvantaged, the plaintiffs can be expected to instruct in accordance with the advice they receive. In the present case, that advice might be given directly by Solomon Brothers. However, it is also open to IMF to advise its clients. As will be seen, Mr McLernon's circular letter of 10 December 2003 contains much advice to the recipients. As discussed earlier in these reasons conflicts of interest between the plaintiffs and IMF might arise, particularly in relation to settlement proposals. The Court therefore needs to be confident that the instructions given by the plaintiffs in such a situation will reflect independent advice and will not be the result of pressure from IMF.
71 It is acceptable for the litigation to be pursued by plaintiffs who, although funded by a third party, are acting in their own interests in the pursuit of justice in their respective causes, and are so acting on the advice of independent solicitors. It is not acceptable for the litigation to be
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- pursued in such a way that the interests of the plaintiffs are subservient to those of the funder. That would be an abuse of process. The Court cannot know how, or on what basis, the plaintiffs are being advised. It can have regard only to the potential for abuse. As was said by Steyn LJ in Giles v Thompson [1993] 3 All ER 321 at 333:
"The correct approach is not to ask whether, in accordance with contemporary public policy, the agreement has in fact caused the corruption of public justice. The court must consider the tendency of the agreement. The question is whether the agreement has the tendency to corrupt public justice. And this question requires the closest attention to the nature and surrounding circumstances of a particular agreement."
"The reason why the common law condemns champerty is because of the abuses to which it may give rise."
73 In the Full Court, Pullin J expressed the majority view when he said:
"I recognise that the mere fact that proceedings are financed by third parties with no interest in the outcome, other than repayment and profit from the litigation, is not itself sufficient to invoke the jurisdiction of the courts. The court must be careful not to use its power to stay proceedings which will deny access to justice to a party who has sought to fund bona fide proceedings in a way which may be contrary to public policy, unless that which has been done amounts to an abuse of the court's own process." (p 170)
74 The position is the same in England. Most recently, in Gulf Azov Shipping Co Ltd v Idisi [2004] EWCA 292, Lord Phillips MR, giving the judgment of the Court of Appeal, said:
"Public policy now recognises that it is desirable, in order to facilitate access to justice, that third parties should provide assistance designed to ensure that those who are involved in litigation have the benefit of legal representation." [54]
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75 There can be no doubt that one of the most important considerations in this context, is the position of the solicitors. The Court can be more confident that its processes will not be abused by a litigation funder if the solicitor acting for the funded party is independent of the funder, is alive to the possibility of abuse or conflict and is fully aware of his fiduciary obligations to his client. That point is made very clearly in De Crittenden v Bayliss [2002] EWCA 50, where the Court of Appeal emphasised the distinction between solicitors controlling litigation as officers of the court who are subject to its rules, and lay litigation funders who are subject to no such constraints.
76 Similarly, in R (Factortame Ltd & Ors) v Secretary for Transport Ltd (No 2) [2003] QB 381, at [90], the Court of Appeal noted, in relation to a funded action which had settled:
"… the litigation was being conducted by a well known and highly experienced firm of commercial solicitors. [The solicitor] had very properly insisted on remaining in control of the litigation. The suggestion that [the funder] might have attempted to procure a settlement on terms which was at odds with their appreciation of the merits we regard as unrealistic."
77 See also Elfic Ltd v Macks [2003] 2 Qd R 125 at [107]; Arkin v Borchard Lines Ltd [2003] EWHC 2844 at [14].
78 In granting the stay in this case, the majority of the Full Court was of the view that Solomon Brothers were not sufficiently independent of IMF and were in breach of their fiduciary duty to the plaintiffs. It now seems that Solomon Brothers have not understood fully the decision of the Full Court and its implications. We have formed that view in the light of the changes to the arrangements relating to Solomon Brothers' fees, the nature of the advice they sought from Mr McKerracher QC and the terms of Mr Solomon's letter to the clients. We deal with these matters in turn.
The retainer agreement: changes relating to Solomon Brothers' fees
79 The original retainer agreement, in cl 1.1, cl 1.2 and cl 1.3, contained provisions which restricted Solomon Brothers' charges to 20 per cent below their standard rates unless and until IMF recovered all its costs and expenses pursuant to the funding agreement. If that level of recovery was achieved, Solomon Brothers were entitled to adjust their fees from the inception of the relevant matter, to 25 per cent above the standard rates.
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80 These provisions constituted a costs agreement within the meaning of s 59 of the Legal Practitioners Act 1893 (then in force). But it was an agreement made between Solomon Brothers and IMF, without the plaintiffs' knowledge. The majority of the Full Court was of the view that Solomon Brothers were in breach of their fiduciary duty to the plaintiffs in failing to disclose the arrangements made on their behalf and to advise them that it was contrary to their interest to pay fees above the scale: [162].
81 That agreement was varied subsequently by IMF and Solomon Brothers (without reference to the plaintiffs). The variation was a response to Scott J's criticism that the plaintiffs had not been informed about the 25 per cent uplift of Solomon Brothers' charges as a success fee. IMF and Solomon Brothers had sought to overcome that problem by agreeing that the plaintiffs would be responsible only for 100 per cent of Solomon Brothers' usual fees and that IMF would be responsible for the 25 per cent uplift.
82 This arrangement did not alter the fact that the retainer agreement remained a costs agreement. Further, by agreeing that IMF would pay the uplifted portion of their fees out of its commission, Solomon Brothers had placed themselves in a position of conflict or potential conflict with their respective clients. That was because IMF's commercial interest in pursuing or settling the action might not have coincided with the client's interest: [168-9].
83 In his letter of 10 December 2003, Mr Solomon referred to the change in the retainer agreement which was made to accommodate Scott J's criticism of the fee uplift. He said:
"2.5 Despite that change, the Court is concerned that part of our remuneration is dependent on success in the litigation, and that this may put us in a position of conflict with our clients. We entered into the original and subsequently varied arrangement as we understood the law to have developed to a point where 'no win no fee' agreements or agreements which provided for solicitors to be paid part of their remuneration only on success were acceptable. We considered the retainer to be within that category of agreement. The Full Court has reached a different conclusion.
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- 2.6 The Full Court has also held that, even though the clients, if successful in their claims, will not pay out of their judgment or settlement proceeds more than 100% of our standard hourly rates, there is an issue of concern that the 100% rate may exceed the fees which might be recoverable by us from our clients under the scale which sets rates recoverable by solicitors who do not have a costs agreement with their clients. Given that our hourly rate fees are being spread amongst so many clients, the possibility that our fees to any individual clients, if the IMF arrangements did not exist, might exceed scale is one which we consider unlikely to eventuate.
2.7 The Court held that IMF, as agents for the clients, should only have engaged us to be remunerated according to the scale. For litigation such as the 3,000-odd plaintiffs claim being pursued against the Finance Brokers Supervisory Board ('FBSB'), we consider that it is extremely unlikely that any solicitor whatsoever would accept an engagement to conduct such litigation on the basis of remuneration according to the scale. In making the agreement with IMF, we consider IMF could properly agree an hourly rate arrangement (with a discount and uplift on success as referred to in 2.5 above). The Full Court has, however, concluded otherwise.
2.8 The Full Court's decision is, of course, binding and must be complied with unless and until reversed on appeal. For us to continue to represent you and other plaintiffs whilst the High Court proceedings are pending, or pending the Court lifting the stay if it accepts that varied arrangements are satisfactory, we must make new arrangements with you which deal with the Court's concerns and therefore may be accepted by the Full Court.
2.9 IMF has from the outset been responsible for payment of all our costs and disbursements during the course of the litigation, and that will continue. Similarly, IMF has from the outset agreed to be responsible for costs awarded to a successful defendant which are incurred whilst your funding agreement with IMF continues, and that will continue. What has to change as a result of the
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- Full Court's decision is the arrangement by which we reduced our fees (payable on a monthly basis by IMF) to 80% of our hourly rates until Outlay Recovery, and thereafter charge 125% of our hourly rates if Outlay Recovery is achieved, of which, as referred to in 2.4 above, IMF had agreed to pay the portion of above 100% to 125%."
84 In our view, these passages reflect a misunderstanding of the decision of the Full Court and of the law applicable when a solicitor acts for multiple parties.
85 In par 2.5 above, Mr Solomon created the impression that the Full Court viewed the "no win no fee" agreement as objectionable. That was not, of course, the reason for the decision. As explained above, the problem arose because of the conflict of interest. Similarly, in relation to par 2.6 above, the concern was not that Solomon Brothers might be entitled to fees above the scale, it was that the plaintiffs had not been told about the costs agreement and had never ratified it. Nowhere in the letter were the plaintiffs informed that the Court had found Solomon Brothers to be in breach of their fiduciary duty to their clients.
86 Solomon Brothers' conflict of interest is highlighted by Mr Solomon's statement in par 2.9 that the arrangement relating to the payment of their fee uplift "has to change as a result of the Full Court's decision".
87 Had the plaintiffs been advised properly, they would have been told that because the existing costs agreement had not been approved or ratified, it was unenforceable. This was a matter which should have been disclosed to the plaintiffs by Solomon Brothers' in the discharge of their fiduciary duty. As Ipp J said in Brown v Talbot & Olivier (1993) 9 WAR 70 at p 77:
"The relationship between client and solicitor is one of the most important fiduciary relationships known to the law: see Re Van Laun; Ex parte Chatterton [1907] 2 KB 23 at 29; Law Society (NSW) v Harvey [1976] 2 NSWLR 154 at 169-170. In the latter case, Street CJ, in delivering the judgment of the Court of Appeal of the Supreme Court of New South Wales, said (at 170):
'Where there is any conflict between the interest of the client and that of the solicitor, the duty of the solicitor is to act in
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- perfect good faith and to make full disclosure of his interest. It must be a conscientious disclosure of all material circumstances, and everything known to him relating to the proposed transaction which might influence the conduct of the client … To disclose less than all that is material may positively mislead.'"
88 However, Solomon Brothers had no interest in providing such advice because if the plaintiffs had elected not to continue with the action, or to continue with other solicitors, Solomon Brothers would have lost the opportunity of earning very substantial fees from this litigation. It was therefore in Solomon Brothers' interest to encourage the plaintiffs to enter into new agreements which would preserve their (ie Solomon Brothers') position by apparently ratifying the previous agreements.
89 That was the effect of Solomon Brothers proposal that:
"With effect from 9.30 am on 3 December 2003, which was when the Full Court's decision was delivered (the Effective Time), your engagement of us will be on the terms of the 31 July 2001 letter (which has applied until the effective time) with the following variations."
90 The variations included the following provision:
"Solomon Brothers will charge and be paid fees and disbursements at the rates stipulated in the 2003 Terms of Engagement, unless and until the hourly rates are varied with the prior written consent of IMF under cl 1.5 of the 31 July 2001 letter."
91 Clause 1.5 of the 31 July 2001 letter provided that the hourly rates specified in Solomon Brothers' terms of engagement would not be amended before finalisation of the claim against the Finance Brokers Supervisory Board without the prior written consent of IMF. That provision was contained in the agreement made between Solomon Brothers and IMF, which was purporting to act as the plaintiffs' agent. The new proposal involved Solomon Brothers entering into agreements with the plaintiffs themselves. That being so, we regard it as inappropriate for the consent to any increase in Solomon Brothers' fees to be given solely by IMF.
92 Mr Solomon's letter continued:
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- "Effect of Change
There will be no discount or uplift in Solomon Brothers' fees from the Effective Time. Instead charges will be at the standard (100%) rate in the 2003 Terms of Engagement, all to be paid by IMF during the course of the litigation. IMF will therefore continue meeting all of the costs of the litigation which, to date, total some $1.5 million, including legal fees and disbursements, disbursements by IMF in obtaining title and company searches and paying expert fees and other disbursements.
Uplift for Work Done Before the Effective Time
Solomon Brothers has charged at 80% of standard hourly rates until the Effective Time. To avoid Solomon Brothers having any interest depending on the outcome of litigation (a matter of concern to the Full Court), IMF will, pursuant to the litigation funding agreement between the clients and IMF, pay Solomon Brothers the difference between fees calculated at 100% of standard hourly rates and fees calculated at 80% of hourly rates for all work done up to the Effective Time. That payment will be made at this stage and will not be deferred or depend upon successful outcome of the litigation. In consideration for that payment, Solomon Brothers will release and abandon any claim or entitlement to the difference between 125% of hourly rates and 100% of hourly rates for work done up to the Effective Time which would have been payable on success in the litigation under the terms of clause 1 of the 31 July 2001 Letter prior to the variation made by 3(b) above."
93 The reference under the first paragraph set out above to costs of litigation totalling some $1.5 million obviously relates to all of the 2,500 or 3,000 clients, not to the present plaintiffs. They were not told the extent of the costs incurred on their behalf. Nor were they told how the fees chargeable under the 2003 Terms of Engagement compared with the scale.
94 The proposed arrangements in relation to the uplift would confer a substantial benefit on Solomon Brothers. They were charging previously at the rate of 80 per cent of their standard hourly rates. Acceptance of the proposal would result in Solomon Brothers receiving, immediately, the additional 20 per cent, an amount of some $200,000. Although it was said that IMF would make that payment, it would ultimately be a cost to the
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- plaintiffs because it would be payable out of the damages recovered in the action.
95 Solomon Brothers' agreement to forego any claim for the previous uplift was said to be made in consideration for the payment by IMF of the difference between 80 per cent and 100 per cent of the fees chargeable up to the Effective Time. However, as we have noted above, the previous agreement would have been unenforceable. The consideration was therefore illusory.
Mr McKerracher's opinion
96 Included among the documents sent to the plaintiffs following the Full Court's decision was Mr McKerracher's opinion dated 15 December 2003. Mr McKerracher summarised his instructions in par 2 of his opinion:
"I am requested by Solomon Brothers to provide an independent opinion (having had no previous involvement in the litigation) to the clients of Solomon Brothers confined to the issue of whether the clients will be prejudiced in any way under the proposed new arrangements." (AB 355) [emphasis added]
97 As appears from his letter of instruction from Solomon Brothers, Mr McKerracher was instructed also to provide "a brief, plain English, explanation of the effect of the litigation funding agreement and Solomon Brothers' retainer".
98 In our view, confined in the way described by Mr McKerracher, Solomon Brothers' instructions were inappropriate. What was required was a clear explanation of the plaintiffs' position in the light of the decision of the Full Court: a plain English explanation of the effect of the documents was inadequate. The plaintiffs should have been advised that the costs agreement with Solomon Brothers was unenforceable, and the funding agreement probably so. All the options available to the plaintiffs should have been set out.
99 To ask only whether the plaintiffs would be prejudiced by the proposed arrangements was to ignore the finding of the Full Court that Solomon Brothers were in breach of their fiduciary duty to the plaintiffs. Solomon Brothers were entitled to tell the plaintiffs that they did not agree with the finding, but they were obliged to make full disclosure of their position: Brown v Talbot & Olivier (supra). Solomon Brothers could not
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- discharge that obligation by providing their clients with independent advice of the kind sought from Mr McKerracher.
100 In his opinion, Mr McKerracher summarised the proposed changes to the funding and retainer agreements. He continued:
"5. It should now be clear to the clients from the documents I have referred to and from this advice that –
• if they do not wish to participate in the litigation they do not have to do so;
• Solomon Brothers acts in the litigation on behalf of the clients, not on behalf of IMF;
• IMF is providing the funding for the case but the instructions for important aspects of the litigation are to be given by the clients, not by IMF – particularly on whether or not the proceedings should be settled 'out of court';
• nevertheless, because IMF is funding the litigation it is entitled under the arrangements to be kept informed of developments in relation to it."
- Later in his opinion he said:
"9. The previous arrangement that contained the discount and the uplift formula has been replaced by a provision that Solomon Brothers will charge on a time spent basis at their normal hourly rates with no adjustment for success in the litigation.
10. The clients should also understand that there is a difference between legal charges at the scale rate and legal charges based on time spent. Charging on time actually spent is only permissible where the client signs an agreement that approves that course. Such agreements are very common and particularly so in lengthy and complex court cases. In some cases charging on a time spent basis will result in a higher charge than on a scale basis. In other cases the position would be the reverse. In this case, however, if every one of the many lender clients of Solomon Brothers was charged on a scale basis,
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- it is certainly quite possible that the fees the firm could recover would be greater than it would recover by charging on an hourly basis for work actually done. In my opinion, from a practical perspective, charging on an hourly basis for work actually done so that the charge is spread amongst the very many clients, produces a result that is fair both to the clients and the solicitors. That, of course, assumes that the time spent is fairly and accurately recorded and the work done is necessary and appropriate. The actual hourly rates charged are, broadly speaking, consistent with the rates one would expect to see in comparable firms of solicitors handling work of this nature. If clients are concerned about the fairness of the charges, they have certain rights that the solicitors are obliged to explain to them clearly and frankly. The issue is rather academic as it is unlikely, in reality, to arise as the fees should be paid by IMF."
101 Leading counsel for Clairs Keeley took issue with the proposition that it would have been open to Solomon Brothers to charge each of their clients on the scale, for work carried out for that client which was common to all clients. It was this proposition which led to the inference that time charging was likely to be more favourable to the plaintiffs.
102 Counsel's criticism was, we think, justified. Even if the actions were not consolidated, so that separate costs orders were made in each, it would still be open to require the taxing officer to apportion costs as appropriate: Leslie v Hydro-Electric Corp (1997) 7 Tas R 239 at 246, 263-4.
103 Equally justifiable, in our view, was counsel's criticism of Mr McKerracher's opinion that the basis on which Solomon Brothers charged was "rather academic … as the fees should be paid by IMF". It is true that IMF is obliged to pay the plaintiffs' legal costs. And if the action was unsuccessful, that would be the end of the matter. However, if the plaintiffs obtained a judgment, IMF would be entitled to recoup its "funding costs" (which include Solomon Brothers' fees) from the monies collected or received: Funding Agreement, cl 5.2 and 9.1. That is, of course, in addition to the commission to which IMF would become entitled.
104 A judgment in favour of the plaintiffs would be likely to include an order for costs. However, there might well be a shortfall between the taxed costs received from Clairs Keeley and the costs actually charged by
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- Solomon Brothers. This has not been explained to the plaintiffs, who might be unaware that IMF can afford to be generous at their expense.
Mr McLernon's letter – costs aspects
105 We have referred above to Mr McLernon's letter, in relation to aspects of control of the litigation. We now refer to other matters arising from the letter.
106 In the opening paragraphs, Mr McLernon said:
"The Full Court effectively indicated that IMF should redo the litigation funding agreement and the lawyer's retainer agreement in such a way as to bring it into line with the judgment of the Court." (AB 359)
107 That is not what the Full Court said. However, the tenor of the letter was that the problems had been overcome by making changes to the documents which were "clearly to the benefit of each client" (AB 364).
108 Under the heading "Solicitors Fees", Mr McLernon referred to the proposal that IMF should pay Solomon Brothers an additional 20 per cent of their fees charged to date, that Solomon Brothers would then receive the full amount of its "normal fee", and that "in return" they would "forgo" the 25 per cent uplift.
109 We repeat our earlier observation that the consideration is illusory, because the original costs agreement would have been unenforceable.
110 Mr McLernon went on to say that Solomon Brothers' normal fees would be charged at an hourly rate "below that charged by other senior litigation lawyers" (AB 360). While that may be so, the plaintiffs have not been given any indication of the level of fees: nor any comparison between Solomon Brothers' normal fees and the scale.
111 Mr McLernon continued:
"14. The Court was critical of both Solomon Brothers and IMF for entering into this arrangement because it thought that the potential to earn the extra 25% might make Solomon Brothers do something inappropriate in the future so as to favour its position over the position of its clients.
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- 15. I do not personally believe that Mr Solomon would do anything to harm any of his clients and we are not agreeing to pay these extra monies because of any apprehension that he would do so. We are agreeing to pay because the Court has pointed out its concern and we want to ensure that the matter proceeds through the Court system as quickly as possible (2½ years have already gone by). In summary therefore IMF will make a to date payment of more than $200,000 to Solomon Brothers to make up the 20% and Solomon Brothers will give up its right to an extra fee.
16. One of the major criticisms by the Court was that when we became your agent to appoint Solomon Brothers as solicitors we did not have your specific authority to enter into this risk sharing arrangement with the solicitors. The current proposal fixes that problem." (AB 360)
112 In our view, par 14 above is an inaccurate and misleading summary of the decision of the Full Court.
113 The Court's concern arose from the fact that IMF and Solomon Brothers had entered into (and varied subsequently) a costs agreement on behalf of the plaintiffs without their knowledge: an agreement which conferred a substantial benefit on Solomon Brothers, who had placed themselves in a position of conflict with the plaintiffs and were thereby in breach of their fiduciary duty.
114 The Court's concern was not therefore, that Solomon Brothers might "do something inappropriate in the future": inappropriate conduct had already occurred.
115 The explanation given by Mr McLernon in par 15 above, for paying an additional 20 per cent of Solomon Brothers' fees is encapsulated in the final sentence of his par 16, that "the current proposal fixes that problem".
116 This is a piece of gratuitous legal advice, which Mr McLernon was not entitled to give and which is incorrect, for the reasons given above.
117 Mr McLernon continued his advice to the plaintiffs in the final section of his letter, under the heading "Procedure". He said:
"50. We suggest that you start by reading the original litigation funding agreement.
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- 51. You should then read the variation to the litigation agreement to see how it has been changed.
52. It would then be helpful for you to read the solicitor's retainer agreement followed by the variation to that agreement.
53. Once you have a basic understanding of the changes that are to be made it would assist you to read the opinion of Mr McKerracher QC. Mr McKerracher is a litigation specialist. He has been retained to provide independent expert advice on the changes to these two agreements for the benefit of the investors. His report is the yellow document.
54. If you are satisfied with the changes, then you should sign the two variation agreements and return them to IMF as quickly as possible. These are the green and blue documents.
55. If during this procedure you have any questions of IMF, then please give us a call.
56. Because we have a financial interest in the matter you may also want to get your own independent advice. Our advice would be honest but not independent.
57. You may also want to obtain the advice of Solomon Brothers. They also have an interest in the matter and could not be described as independent. This is why we have arranged for the opinion of Mr McKerracher QC.
58. I think it is reasonable of me to say however that all of the changes that have been made are clearly to the benefit of each client.
59. Finally if you would like to read a copy of the Supreme Court judgment then please call and we will post it to you. You can also find it on the internet at (AB 363-4)
118 Mr McLernon was right to say that Solomon Brothers "could not be described as independent". However, it was a statement which fell far short of describing the position of Solomon Brothers as the Full Court
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- held it to be. Further, the implication in par 53 and par 57 above that Mr McKerracher's advice was comprehensive, was misleading, having regard to the limited scope of his instructions.
119 The plaintiffs were therefore being encouraged to enter into new agreements with IMF and Solomon Brothers on the basis that the plaintiffs are the sole or significant beneficiaries, when, in fact, IMF and Solomon Brothers probably stand to gain far more than the plaintiffs do. Furthermore, although the plaintiffs were invited to obtain independent advice, at the same time, they were effectively discouraged from doing so, because Mr McKerracher's opinion had been provided to them on the basis that he was an independent Queen's Counsel who was expert in litigation.
120 As we have noted above, the evidence is that the plaintiffs have accepted the revised terms offered by IMF and Solomon Brothers. Having regard to the inadequacy of the advice given to the plaintiffs, we do not regard this as a compelling factor in support of the application to lift the stay. In any event, it appears that some of the plaintiffs signed the acceptance documents before 15 December 2003, and could not have received Mr McKerracher's opinion.
Summary and Conclusions
121 IMF has attempted to address the concerns of the Full Court by proposing variations in the funding agreement and by ensuring that the plaintiffs appoint Solomon Brothers themselves, rather than through the agency of IMF.
122 Whether or not the financial terms of the revised funding agreement provide an adequate return for the plaintiffs must be a matter for them. However, that decision should only be made with full knowledge of all the arrangements and their implications.
123 IMF's publicly stated objective is to organise its clients in order to maximise IMF's profit potential. In the present case, the alacrity with which the plaintiffs have accepted the proposed arrangements (in some cases, apparently, without seeing the independent advice) is a testament to IMF's organisational ability. The result has been achieved by encouragement and advice in the form of Mr McLernon's letter, which is somewhat misleading and which contains legal advice, despite IMF's lack of qualification to give such advice.
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124 Although the conduct of the litigation is in the hands of Solomon Brothers, there is no doubt that IMF continues to exercise a degree of control. However, that will be inevitable in the case of any litigation funding of this kind. Without some degree of control the risk would be too great for the funder to undertake the funding, especially when the litigation is protracted, complex and expensive. If litigation funders were to be discouraged, by denying them some measure of control sufficient to protect their investment, the number of oppressive or unmeritorious claims and defences might be reduced, but at the risk of preventing access to justice, or equal access to justice, by many others with genuine claims or defences and no other means of advancing, or effectively advancing, them.
125 Consequently, it is necessary to balance the competing interests in the course of assessing that risk to the due administration of justice which has been introduced by the funding arrangements. In seeking that balance one important consideration should, we think, be whether or not the litigation is, in truth, still that of the plaintiff or defendant. That is to say, the funded party should still be in a position to benefit from a successful outcome and should be entitled to make informed decisions which are critical to the litigation. If the funder's level of control is such that, in reality, it will be making decisions of that kind, or even if the funded parties are not to be given sufficient information to enable them properly to make decisions of that kind, there will be a substantial risk that the funder's intervention will be inimical to the due administration of justice and that the Court's processes will be misused for commercial gain.
126 It is contended on behalf of the plaintiffs that the revised arrangements now in place do give them the right to make critical decisions. However, the plaintiffs are discouraged from contacting Solomon Brothers frequently to obtain advice or information. Further, Solomon Brothers are required to report only three-monthly to the plaintiffs, whereas they report monthly to IMF.
127 It is for Solomon Brothers to decide when it is "necessary … and practical to take instructions" from the plaintiffs before making a decision in relation to the conduct of the litigation (cl 4.1 of Mr Solomon's letter dated 10 December 2003). However, Solomon Brothers do undertake to seek the plaintiffs' express instructions, unless it is impossible to do so, in relation to matters which are likely to have a significant impact on the possible result of the litigation or its commercial outcome for the plaintiffs (although, other than in relation to settlement, or settlement proposals, the
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- course to be followed will be that wanted by "a majority of the [overall group of] plaintiffs": cl 4.2 of the letter).
128 Importantly, Solomon Brothers are required to seek instructions from the plaintiffs in respect of any settlement proposal: the decision to accept, reject or make a proposal is left entirely to them (cl 4.4). Also, each retainer agreement with Solomon Brothers, which overrides any contrary provision in the funding agreement, provides that the plaintiffs' instructions prevail over any course of action recommended by IMF (cl 6.2).
129 In our view, it is far from clear how these provisions will work in practice, given that the plaintiffs are only five out of somewhere between 2,500 and 3,000 clients. It is equally unclear how the costs of the actions involving the plaintiffs will be separated from the very substantial costs incurred by IMF in the litigation as a whole.
130 The reality is likely to be that IMF will retain a significant level of control over the litigation, given that it will "organise" the plaintiffs, that it will largely administer and investigate the claims and will make recommendations to Solomon Brothers "as to tactical decisions in the litigation" (cl 6.2). Also, and importantly, IMF has the right to cease funding at any time (although, as discussed above, the magnitude of its investment may militate against large-scale cessation contrary to its view of the merits).
131 It is not the Court's role to advise the plaintiffs: nor should the Court dictate the terms on which the plaintiffs could properly enter into a funding agreement, or who should act as their solicitors.
132 The question for the Court, in conducting the balancing exercise referred to above, is whether the degree of control which IMF is capable of exercising (in law and in fact) is such as to give rise to an unacceptable risk of abuse of the Court's processes, and is therefore, contrary to the public interest.
133 We would have been prepared to accept the risk if it was clear that the plaintiffs had made a fully informed decision to proceed with IMF and Solomon Brothers; and if Solomon Brothers had demonstrated a fuller appreciation of their obligations to the plaintiffs.
134 Regrettably, we are not confident this is so. It is clear that the plaintiffs have not been fully informed about their options or, for that matter, about the decision of the Full Court which closely affected their
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- rights and obligations. Nor is it apparent that Solomon Brothers have themselves understood the consequences of their breach of fiduciary obligations found by the Full Court and their obligations which follow from those consequences.
135 That being so, we would not be prepared to lift the stay unless and until the Court could be satisfied of these matters. That is to say, we would be minded to lift the stay only if satisfied that Solomon Brothers had demonstrated a fuller understanding of their obligations to their clients and that the plaintiffs had been fully informed of their options which follow from the decision of the Full Court (even if it is under challenge), of the shortcomings in the instructions given to Mr McKerracher and of the errors and omissions in the letters from IMF and Solomon Brothers respectively. The plaintiffs should also be told, again, of the importance of obtaining independent advice in respect of these matters. If the plaintiffs were minded, with the benefit of full information and advice, to continue with the present arrangements, we would be prepared to lift the stay, but not otherwise.
136 For all these reasons, we consider that the application should be dismissed.
- AGLC
- Clairs Keeley (a Firm) v Treacy [2004] WASCA 277
- Case
- [2004] WASCA 277
- Decision Date
CaseChat Overview and Summary
In assessing the application, the court examined the potential for abuse of process and the independence of the solicitors from their financiers. The court found that there had been no change in circumstances warranting the lifting of the stay, and that the solicitors were not independent from their financiers, thereby placing them in potential conflict with their clients. Furthermore, the court was of the opinion that the plaintiffs had not been sufficiently advised of their position. Consequently, the court dismissed the application to lift the stay of proceedings.
The court's decision was based on the factors of potential abuse of process, the independence of the solicitors, and the adequacy of advice provided to the plaintiffs. The court found that the applicants had not demonstrated sufficient grounds for lifting the stay of proceedings, and that there was a potential for abuse of process, as well as a conflict of interest between the solicitors and their clients. As a result, the application was dismissed, and the stay of proceedings remained in place.
Orders
Orders of the court
Application dismissed
Background
Background to the litigation
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Evidence
Evidence Before The Court
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Decision
Reasons for decision
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Ratio Decidendi
Legal Principle Established
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