International Litigation Partners Pte Ltd v Chameleon Mining NL
[2011] NSWCA 50
•15 March 2011
Court of Appeal
New South Wales
Case Title: International Litigation Partners Pte Ltd v Chameleon Mining NL Medium Neutral Citation: [2011] NSWCA 50 Hearing Date(s): 12 October 2010 Decision Date: 15 March 2011 Jurisdiction: Before: Giles JA at [1]; Hodgson JA at [108]; Young JA at [139]
Decision: Appeal dismissed with costs.
Cross appeal allowed with costs.
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]Catchwords: CONTRACTS- Construction of commercial contracts- Construction of the Early Termination clause of a "Litigation Funding" Agreement- Entitlements of Funder do not continue once obligations have ceased- Construe "immediate payment of the Early Termination Fee" as payment of that fee only and not supplementary fees.
CORPORATIONS- Financial products- Whether a "Litigation Funding" Agreement constitutes a financial product, derivative, credit facility- Corporations Act 2001 (Cth), sections 761D, 762B, 763A, 763E, 765A- Financial services and markets- Financial services providers- Licensing and regulation- rescission of agreement due to lack of licence under Corporations Act 2001 (Cth)- Whether licence required- What constitutes a financial product, derivative, credit facility- When is a financial product only incidental.
Legislation Cited: Corporations Act 2001 (Cth), ss 760A, 761A, 761B, 761D, 761E, 762A, 762B, 762C, 763A, 763B, 763C, 763E, 764A, 765A, 766A, 766C, 911A, 924A, 925A, 925D, 925E
Corporations Regulations 2001 (Cth) Reg 7.1.06
Financial Services Reform Act 2001 (Cth)Cases Cited: Australian Softwood Forests Pty Ltd v Attorney-General (NSW) [1981] HCA 49; 148 CLR 121
Bethlehem Steel Co v Turner Construction Co 141 NE (2d) 590, 593 (CA of NY) (1957)
Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147; 180 FCR 11
Fischer v Finanzamt Burgdorf [2002] QB 704
Keynes v Rural Directions Pty Ltd [2010] FCAFC 100; 186 FCR 281
Poer v Curry 8 So (2d) (Ala) (1942) 418
Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd [1995] FCA 1106; 128 ALR 417Texts Cited: Category: Principal judgment Parties: International Litigation Partners Pte Ltd (Appellant)
Chameleon Mining NL (First Respondent)
Cape Lambert Resources Limited (Second Respondent)Representation - Counsel: Counsel:
B Walker SC and R C Higgins (Appellant)
T Bathurst QC and M A Jones (First Respondent)
C R C Newlinds SC and J C Giles (Second Respondent)- Solicitors: Solicitors:
Blake Dawson (Appellant)
Swaab Attorneys (First Respondent)
Lavan Legal (Second Respondent)File number(s): CA 2010/267410 Decision Under Appeal - Court / Tribunal: Supreme Court of NSW - Before: Hammerschlag J - Date of Decision: 31 August 2010 - Citation: Chameleon Mining NL v International Litigation Partners Pte Limited [2010] NSWSC 972 - Court File Number(s) 2010/267410 Publication Restriction:
HEADNOTE
The appeal concerned the effect and classification of a "Litigation Funding" Agreement. The appellant, International Litigation Partners Pte Ltd (ILP), entered into an agreement to fund litigation commenced by the first respondent, Chameleon Mining NL (CHM), in the Federal Court. The Agreement included an Early Termination clause that specified that when there was a Change in Control of CHM, the agreement could be terminated subject to a fee being paid. In the absence of termination, ILP was entitled to a Funding Fee which consisted of a percentage of any sum awarded upon resolution of the proceedings (the Resolution Sum).
In August 2010, a Change in Control occurred when a third company, Cape Lambert Resources (CLR), signed a "Terms Sheet" with CHM, giving CLR a significant say in their affairs. At the same time, CLR gave notice of rescission of the agreement to ILP according to s925A Corporations Act 2001 (Cth) based upon the assumption that the Funding Agreement was a financial product being issued by a non-licensee (ILP). ILP contested the rescission and claimed the Early Termination Fee as well as the Funding Fee pending the successful resolution of the Federal Court proceedings.
ILP was incorporated in Singapore and at no stage was licensed to deal in financial products. The Corporations Act, particularly s925A, gave a statutory right of rescission when a non-licensed person had agreed to provide a financial product. The definition of "financial product" and the like are convoluted and are summarised hereafter.
At trial, Hammerschlag J rejected the proposition that the Funding Agreement was a financial product and found it could not be rescinded. Thus, according to the Agreement, the trial judge found that ILP was entitled to the Early Termination Fee stipulated in the agreement ($9 000 000) but not the Funding Fee. ILP appealed the second finding, Chameleon cross-appealed on the first question; rescission of the agreement, ILP contended the cross-appeal.
On appeal, two main questions were considered. A number of separate questions of statutory construction arose in the consideration of the first question.
1. Could the Funding Agreement be rescinded?
Whether the Funding Agreement could be rescinded depended on it being a financial product, the salient questions then being:
Did the Agreement involve managing financial risk? (Corporations Act 2001 (Cth) ss763A(1)(b), 763C)
Was its role as a financial product merely incidental and thus excluded? (Corporations Act 2001 (Cth) ss762B, 763E)
Was it a derivative? (Corporations Act 2001 (Cth) s761D)
Was it a credit facility and thus excluded?(Corporations Act 2001 (Cth) s765A(1)(h)(i))
2. If the Agreement could not be rescinded, how much must Chameleon pay ILP?
The Court held, allowing the cross-appeal:
1. As to whether the agreement could be rescinded as a financial product issued by a non-licensee :
According to the Corporations Act 2001(Cth) a 'financial product': manages risk (s763A (1)), that is, it manages the financial consequences of particular circumstances happening (s763C); specifically includes a derivative (s764A(1)(c)); and, if it is a component of a facility with other components, is only covered by the Act to the extent of that component (s762B). In addition, something is not a financial product if it is an incidental component of a facility or a facility incidental to another facility that has a main purpose that is not a financial product purpose (s763E). A credit facility is also not a financial product (s765A(h)(i)).
a. As to whether the Agreement involved managing financial risk:
Young JA (Giles JA and Hodgson JA agreeing): the "Litigation Funding" Agreement could be rescinded (s925A Corporations Act 2001 (Cth)) if it constituted a financial product (s763A Corporations Act 2001 (Cth)). The Agreement is prima facie a financial product under s763A Corporations Act 2001 (Cth) because it is a facility through which financial risk is managed. However this was subject to a number of potential exclusions (ss762B, 763E, 765A(1)(h)(i)).
b. As to whether it was incidental:
Young JA: (Giles JA agreeing, Hodgson JA dissenting) the financial product aspect of the Funding Agreement is not an incidental component of the facility, it is a main purpose of the agreement that is not separable.
Hodgson JA (dissenting): the Funding Agreement has as its main purpose funding litigation and any management of financial risk is incidental. Accordingly, the agreement is not a financial product that manages financial risk.
c. As to whether it was a derivative:
Young JA: the Funding Deed is not a derivative as, in every aspect, it relates to and creates an interest in the Federal Court Proceeding rather than being dependent on "something else". It is also not a contract for the future provision of services which are a specific form of contract where the amount payable is variable according to the time taken to perform such services.
Hodgson JA (agreeing for separate reasons): the Funding Fee is potentially a derivative as in some cases it is determined by the Resolution Sum and in others by the amount of legal costs paid. It is, however, excluded from being a derivative because it is a contract for future provision of services; being a contract where the amount to be paid is determined by the future provision of services, the extent or value of which is presently uncertain.
Giles JA (dissenting): the value of the arrangement is a derivative as it is affected by something else, that is, the Legal Costs or the outcome of the litigation. It is not a contract for the future provision of services as it is a contract for the provision of money not services.
d. As to whether it was a credit facility:
Young JA (Giles JA agreeing, Hodgson JA dissenting): the Litigation Funding Agreement is not a credit facility as it is an agreement to pay costs but includes no loan or advance of money.
2. As to how much Chameleon must pay ILP:
Young JA (Giles JA and Hodgson JA agreeing): when properly construed, the obligations and entitlements of ILP, under the Funding Agreement, cease with the operation of clause 4.1 when there is a Change in Control. Under cl 4.2, ILP is entitled to the Early Termination Fee only.
Judgment
GILES JA: The appeal and cross-appeals are concerned with -
whether a litigation funding agreement ("the agreement") was validly rescinded pursuant to provisions of the Corporations Act 2001 (C'th) ("the Act") because it "constituted or related to the provision of a financial service" by a funder which was not licensed to provide financial services or exempt from being licensed; and
if it was not, whether on the proper construction of the agreement the funder was entitled, in addition to recovery of the legal costs it had funded, only to a fee payable on early termination of the agreement and not to a funding fee.
The trial judge held that the agreement had not been rescinded, and that the funder was entitled only to the fee payable on early termination: Chameleon Mining NL v International Litigation Partners Pte Lt d [2010] NSWSC 972; (2010) 79 ACSR 462. For the reasons which follow, in my opinion the agreement was validly rescinded, but his Honour correctly determined the issue of construction. The cross-appeals on the issue of rescission should be upheld, and the appeal on the issue of construction should be dismissed.
Background
By the agreement International Litigation Partners Pte Ltd ("ILP") agreed with Chameleon Mining NL ("CHM") to fund CHM's litigation in the Federal Court against Murchison Metals Ltd ("Murchison") and others. ILP is a Singapore corporation, and was not licensed to provide financial services or exempt from being licensed.
CHM's proceedings in the Federal Court were commenced in November 2007. The agreement was entered into in October 2008. The litigation came to a hearing in September-October 2009, and judgment was reserved.
Thereafter disputes arose between ILP and CHM, including over possible settlement of the Federal Court proceedings and over legal representation in the proceedings and in any negotiations towards settlement.
In August 2010 CHM and Cape Lambert Resources Ltd ("CLR") signed a Terms Sheet whereby, upon acceptance of the terms, CLR would provide a standby facility of $6.5 million to CHM and would be entitled to appoint 50 per cent of CHM's board of directors. This was a Change in Control within the definition in the agreement, and triggered cl 4.1 of the agreement providing for immediate payment to ILP of an early termination fee.
Perhaps not unconnected with signature of the Terms Sheet, also in August 2010 CHM wrote to ILP pointing out that ILP was not licensed to provide financial services or exempt from being licensed, and giving notice of rescission of the agreement pursuant to s 925A(1) of the Act. CHM invited ILP to explain why it was entitled to any fee for which CHM would otherwise have been liable.
In the proceedings to which this led, CHM contended that it had rescinded the agreement; and while it accepted that ILP was entitled to be repaid the legal costs it had funded, it said that ILP was not entitled to the early termination fee or any funding fee. CHM contended in the alternative that, if the agreement had not been rescinded, on the proper construction of the agreement ILP was entitled only to the early termination fee and not to the funding fee for which it also provided. CLR supported CHM in these contentions. ILP resisted them. There were other issues at first instance concerning charges and receivers, but they did not arise on appeal.
The agreement
The agreement was made purportedly as a deed. It had nineteen operative clauses and, as will become apparent and was common ground, was poorly drafted. The complete agreement may be seen as a schedule to the trial judge's judgment.
The recitals were -
"A. CHM had requested that the Funder provide litigation funding to CHM for its Legal Costs in relation to the Proceedings.
B. CHM has requested that the Funder provide investigative and management expertise to assist it in the Proceedings.
C. The Funder has agreed, on the terms and conditions set out in this DEED, to provide funding, and management and investigation expertise and other related and agreed matters to CHM to assist in investigating the Claims and to prosecute the Proceedings.
D. CHM acknowledges that the Funder has, by virtue of its obligations and entitlements (including to receive a percentage of The Resolution Sum) set out in this DEED, an interest in the Claims and the Proceedings."
The defined terms used in the recitals, and then (together with other defined terms) in the operative clauses, were -
"' Legal Costs ' means all costs associated with procuring the legal files from the previous solicitor on the record for CHM in the Proceedings and all future agreed legal costs and disbursements incurred by CHM and Funder in relation to or incidental to the Proceedings, or any appeal, including without limitation solicitors fees and disbursements, counsel's fees and disbursements and expert witness fees, the provision of $250,000 by way of security for costs for security paid prior to this deed, and the provision of any Security for Costs or monies payable for Adverse Costs Orders arising in the Proceedings or Appeal, unless otherwise agreed between CHM and the Funder."
"' Proceedings ' means Federal Court of Australia proceedings no. NSD 2355 of 2007 and/or any other proceedings which arise from the Claims."
"' Claims ' means the claim or claims CHM has against the Respondent(s)."
"' Resolution Sum' " means the gross amount received by CHM or the Lawyers, whether by way of settlement, judgment or otherwise of the Proceedings, including any interest and Legal Costs recovered pursuant to a Costs Order."
The operative clause providing for funding was cl 2.1 (there was no other sub-clause), by which ILP agreed "to pay the Legal Costs", with provisions for notice by CHM requiring payment, supporting documentation and time of payment.
Clause 8 provided for the appointment of Lawyers to conduct the proceedings, including negotiating any settlement, and the instruction of the Lawyers. The definition of "Lawyers" was "any firm of solicitors appointed by CHM (and agreed by the Funder) to conduct the Proceedings on behalf of CHM". Clause 8 further provided for keeping ILP advised and consulting with it concerning the conduct and progress of the Proceedings. The obscurities of the clause need not be considered, but on one view it gave ultimate control of the conduct of the Federal Court proceedings and any settlement to ILP.
Clause 4 provided -
" 4. Early Termination
4.1 Should there be a Change in Control of CHM, the Funder's obligations pursuant to this Deed terminate effective immediately.
4.2 Should clause 4.1 come into effect the Funder is entitled to immediate payment by CHM of the Early Termination Fee."
The definition of Change in Control was wide, but need not be set out. By its definition, the Early Termination Fee was -
" ... a payment by CHM to the Funder or its nominee of an amount equal to the Legal Costs (including Security for Costs) expended by the funder [sic] up to the date of termination pursuant to clause 4.1 and a further amount equal to the higher of the value of 20% of the share capital of CHM at the strike price of its shares by the acquirer of the Change in Control or the Change in Control [sic] or $9 million."
ILP's entitlement apart from early termination was found in cl 3.1, providing -
"Upon Resolution of the Proceedings the Funder will be entitled to:
(a) Repayment of the Legal Costs paid by it in accordance with clause 2.1;
(b) Payment of the Funding Fee."
"Funding Fee" was defined to mean -
" ... the higher of:
(a) Three (3) times the sum of the Costs [sic: not defined, presumably Legal Costs] incurred by the Funder under cl 2.1; or
(b) The Percentage Payment."
The Percentage Payment was a varying percentage of the Resolution Sum, depending upon when "Resolution agreement" occurred. The percentages ranged from 25 per cent at the earliest of four times to 40 per cent at the latest.
By its definition "Resolution" meant receipt of all or part of the Resolution Sum, and if it was received in parts there was Resolution on each occasion. By cl 3.7 CHM authorised the lawyers to pay ILP the Legal Costs out of the Resolution Sum, and by cl 3.8 it authorised them to pay the Funding Fee. The further sub-clauses of cl 3 made essentially mechanical provisions for payment of the Resolution Sum to the Lawyers and payment by them to ILP. The sub-clauses included provisions for CHM to account for receipt of the Resolution Sum or part of it if received by CHM rather than by the Lawyers (cl 3.4) and for any non-monetary part of the Resolution Sum (cl 3.5), and by cl 3.6 the obligations in cll 3.4 and 3.5 "are continuing obligations and survive any Termination of this DEED save for a Termination pursuant to clause 8.1".
Clause 3.9 provided that CHM was not required to pay to ILP, either as repayment of the Legal Costs or as payment of the Funding Fee, more than the Resolution Sum.
By cl 5 CHM gave ILP a fixed and floating charge. Again the wording was obscure, but presumably the intention was to secure amounts payable to ILP.
Clauses 9 and 10 provided -
" 9. Term
9.1 Subject to the following Termination provisions, this DEED will continue until all obligations by CHM and the Funder pursuant to this DEED have been satisfied, and the Resolution Sum (if any) has been disbursed in accordance with this DEED.
10. Termination
Termination by the Funder
10.1 The Funder is entitled, at its sole discretion, to terminate its obligations under this DEED, other than accrued obligations, by giving 7 days written notice to CHM that the DEED and the Funder's obligations are terminated;
10.2 If the Funder terminates its obligations pursuant to clause 10.1 then it will not be entitled to any payment pursuant to the Funding Fee but it will continue to be entitled to receive payment pursuant to clause 3.7 from any Resolution Sum. CHM will notify the Funder upon receipt of money referred to in this clause. The obligations in this clause survive any Termination of this DEED.
10.3 All obligations of the Funder under this DEED cease on the date the Funder's termination becomes effective, save for obligations accrued to that date;
10.4 The accrued obligations of the Funder referred to above comprise payment of any outstanding Legal Costs incurred up to the date the notice of termination becomes effective.
Termination by CHM
10.5 If the Funder commits a serious breach of this DEED and does not remedy the breach within 30 days after receiving written notice from CHM requiring it to do so, CHM may terminate this DEED forthwith by written notice to the Funder.
If this DEED is terminated by CHM pursuant to the above clause 10.5, then:
(a) the Funder remains liable for the obligations referred to in clause 10.4, and
(b) the funder remains entitled to repayment of Legal Costs incurred up to and including the date of termination pursuant to clause 3.6; and
(c) CHM will not be required to pay the Funding Fee under clause 3.7."
By cl 11, CHM and ILP agreed to keep confidential the existence and terms of the agreement and "all discussions, disclosures and information they have obtained by reason of" the agreement.
Clause 13 was a wide dispute resolution clause, including as to dispute over settlement of the Proceedings. By cl 13.1(e) it "shall not merge upon completion": conveyancing language, but the intent was clear enough.
Other provisions of the agreement not particularly material to the issues on appeal need not be mentioned. It should be noted, however, that the operative clauses said nothing about provision of investigative and management expertise or any related and agreed matters: cf recitals B and C.
Rescission
I do not unnecessarily repeat all the relevant provisions of the Act set out in the reasons of Young JA. Knowledge of those not reproduced below is assumed for what follows.
The starting point is s 924A(1) of the Act. Did the agreement constitute or relate to "the provision of a financial service"? If it did, at least on appeal it was not disputed that the agreement was entered into in the course of a financial services business carried on by ILP.
Confining attention to the limbs on which CHM and CLR relied, a financial service is provided if a person "deal[s] in a financial product" (s 766A(1)(b)), and the person deals in a financial product by "issuing a financial product" (s 766C(1)(b)).
The trail then leads to the general definition of a financial product in s 763A(1), relevantly -
" ... a facility through which, or through the acquisition of which, a person does one or more of the following -
(a) ...
(b) manages financial risk ... "
The definition of "facility" in s 762C includes an arrangement, and is wide. It encompasses the agreement.
The trail then leads also to the specific things that are financial products, relevantly "a derivative" (s 764A(1)(c)).
For the present I pass over the exemptions to being a financial product on which ILP relied (a credit facility (s 765A(1)(h)) and reg 7.1.06(1) and (3) of the Corporations Regulations 2001 (C'th); a contract for the future provision of services (s 761D(3)(b)); and also the questions of an incidental product (s 763E) and a financial product as one component of a facility (s 762B)).
A facility for managing financial risk
This branch of the trail then leads to when a person manages financial risk, relevantly (s 763C) -
" ... if they:
(a) manage the financial consequences to them of particular circumstances happening ... ".
Drawing the provisions together, did the agreement constitute or relate to ILP issuing a facility through which, or through the acquisition of which, CHM managed the financial consequences to it of particular circumstances happening?
The trial judge declined to hold that the agreement fell within s 763C(a) of the Act because -
"83 Whilst in one sense the Deed has the effect of minimising one category of financial risk for CHM (namely, the risk that it will incur expense in pursuit of Murchison which will be wasted if no or an insufficient Resolution Sum is received), on no realistic view can it be said that the Deed is a financial product whereby CHM manages that risk.
84 Rather, the object of the Deed is to enable CHM to prosecute the Proceedings by having the Funder pay Legal Costs and perhaps (as the Recitals describe) provide investigative and management expertise to assist in the Proceedings. The object of the Deed is to facilitate CHM vindicating its claim against Murchison, not to manage the risk of possible failure in that endeavour.
85 What is more, under cl 4 of the Deed, as part of the quid pro quo for the funding, CHM undertakes a risk of a significant payment which is unrelated to the ultimate fate of the Proceedings. As well, under cl 10.1 the Funder may in its sole discretion (and without reference to the outcome of the Proceedings) terminate the Deed. These are not the characteristics of a financial risk management instrument."
CHM submitted that his Honour wrongly confined attention to the financial risk of incurring expense in pursuit of Murchison for which no or an insufficient return in the Resolution Sum might be received. It said that there was also the financial risk of adverse costs orders. "Adverse Costs Orders" were within Legal Costs, the phrase itself being defined and meaning "any costs order made against CHM in the Proceedings ... arising on or after the date of this deed". Adverse Costs Orders were within ILP's funding obligation under cl 2.1, and the risk to CHM was minimised by CHM entering into the agreement. Further, CHM said, the notion of financial consequences extended to the consequences of maintaining expensive litigation, lying in either or both of cost of funds for payment of legal costs and reduction of cash flow, and that those financial consequences were managed by passing the immediate exposure to the payment of Legal Costs to ILP.
Thus CHM submitted that all of insufficiency of return, imposition of Adverse Costs Orders and obtaining money for payment of Legal Costs by borrowing or from cash flow were "particular circumstances" within s 763C(a), and that their financial consequences were managed by CHM by obtaining litigation funding under the agreement. The financial consequences to CHM were managed by transferring the risk and the money burden, initially and perhaps forever, to ILP; that was why ILP was able to command the significant return for which the agreement provided.
CHM submitted that the trial judge departed from applying the legislation when he said that the agreement was not a financial product because its object was to enable prosecution of the Proceedings and facilitate vindication of the claim against Murchison, not "to manage the risk of possible failure in that endeavour" (at [84]). It submitted that management of financial consequences to CHM was not denied by the matters in cll 4 and 10.1 to which the trial judge referred at [85]. The Early Termination Fee, it said, was no more than an obligation CHM was prepared to undertake in return for ILP's obligations whereby the financial consequences were managed. The ability of ILP to terminate the agreement limited the extent of ILP's obligations, but unless and until the agreement was terminated the financial consequences to CHM were managed. CHM drew an analogy with a contract of insurance, which limited the risk to the insured of the financial consequences of the insured events even though there were exclusions or an ability to avoid the policy.
The submissions of CRL were to the same effect, with reference also to the risk that CHM would not be able to proceed with its litigation against Murchison at all and the risk of having to provide security for costs.
The written submissions of ILP were brief, relevantly -
"33. It is contrivance to suggest that the Funding Deed manages the financial risk of Chameleon by managing the financial consequences to it of particular circumstances happening. One clear indication of this is that the Funding Deed does not, in all possible contractual outcomes, avoid the payment by Chameleon of the Legal Costs, being ( ex hypothesi ) a significant risk-transferring aspect of the transaction from its perspective."
In oral submissions ILP suggested that an analogy with insurance was imperfect because, if CHM failed in the Proceedings, ILP would recover nothing (cl 3.9) so that there was no "premium". It submitted that the better analogy was with a joint venture, and that the agreement should be seen as an enterprise designed to produce success in the litigation with the financial risk falling where it may; and that in so far as might fall on ILP, no risk was managed by CHM because CHM had no risk if, without the litigation funding, it was unable to conduct the litigation at all.
Analogy can distract from correct analysis. Whether or not CHM could conduct the litigation in the absence of ILP's funding (and there was no evidence that it could not), the financial consequences to it of the circumstances identified in its submissions happening were in my view managed by passing them, initially and perhaps forever, to ILP. This was done through or through the acquisition of the agreement, which was a facility within the definition in the Act.
This is so not withstanding that a possible outcome is that CHM is left with payment of the Legal Costs. It will pay the Legal Costs if the Resolution Sum is such that the Legal Costs are repaid pursuant to cl 3.1(a). Nonetheless, in the meantime the financial consequences of (to take one circumstance) an Adverse Costs Order have been managed by ILP providing funds. If the litigation is unsuccessful or insufficiently successful, plainly the financial consequences of the lack of success are managed by passing them on to ILP.
It is not correct to categorise the agreement as an enterprise with a purpose exclusory of managing financial risk. The enquiry under the Act is relevantly whether the agreement was a facility through which , or through the acquisition of which, CHM managed financial risk. It is not an inquiry into CHM's purpose in managing financial risk, translated to a purpose of the agreement, and the word "through" calls attention to the operation or effect of the facility and not to the purpose of the person. (See also the question of the purpose of a facility under s 763E, below.)
Subject to the exemptions, in my opinion, the agreement was a financial product as a facility for managing financial risk.
A derivative
This branch of the trail then leads to what is a derivative, the relevant definition of which is (s 761D(1)) -
"Meaning of derivative
(1) For the purposes of this Chapter, subject to subsections (2), (3) and (4), a derivative is an arrangement in relation to which the following conditions are satisfied:
(a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and
(b) that future time is not less than the number of days, prescribed by regulations made for the purposes of this paragraph, after the day on which the arrangement is entered into; and
(c) the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following:
(i) an asset;
(ii) a rate (including an interest rate or exchange rate);
(iii) an index;
(iv) a commodity."
As a matter of words, the agreement was an arrangement under which each of ILP and CHM must or may be required to provide consideration to the other at a future time. The monetary consideration could be -
ILP paying Legal Costs for CHM;
possibly, ILP providing investigative and management expertise to CHM; and
CHM paying the Early Termination Fee, repaying the Legal Costs, or paying the Funding Fee to ILP.
The Court was informed that the prescribed number of days was relevantly one day, and there was no issue that any provision of consideration would be at a future time. The issue concerned determination, derivation or variation of the amount of the consideration or the value of the arrangement. (The value of an arrangement to a party to it is not necessarily the same as the consideration it will receive; for example, the costs of performance by that party must be taken into account.)
The trial judge dealt with this as follows -
"78 In my opinion, the Deed is not a derivative. Section 761D(1)(c) requires the amount of the consideration or the value of the arrangement ultimately to be determined, derived from or vary by reference to (wholly or in part) the value of something else. The word "ultimately" in the subsection plainly qualifies the words "determined, derived from or varies by reference to" (there being no comma before the words which follow the words in parentheses).
79 This is no doubt because it is in the nature of a derivative that the value of the arrangement will (as the word "ultimately" connotes) in every case be affected by (and hence derived from) the value of something else. The Deed does not have this invariable operation, as the facts in the present case demonstrate. The amount of the Early Termination Fee on the particular Change in Control here is not determined or derived from, nor does it vary by reference to the value of, something else.
80 There is, to my mind, a further and fundamental problem with CHM's submission. CHM is the client referred to in s 924A(1), and in that capacity purported to rescind an arrangement whereby it was issued with a financial product. By s 763A, the financial product concerned is a facility through which CHM says it made a financial investment. Section 763B provides for when a person makes a financial investment which in all cases involves an investor giving money or money's worth to another person and envisages that contribution being used or intended to be used in a particular way. That is not this case. Here, it seems to me, if anyone is making a financial investment, it is the Funder, not CHM. The Funder pays Legal Costs and may receive a possible enhanced return. of cl 7.1 of the Charge, and accordingly an Event of Default."
The reasoning in [78]-[79] is that "ultimately" in s 761D(1)(c) required that all possible outcomes in determining or varying the amount of the consideration or the value of the arrangement be by reference to the value or amount of something else; but that was not so for the agreement, because the Early Termination Fee was a fixed $9 million if (as was the case with CLR's involvement) there was no acquisition of CHM's shares at a strike price.
With respect, the part played by [80] in the reasoning is not clear. CHM suggested that it was that the agreement was not a derivative because it was not CHM, but ILP, which was making a financial investment. ILP submitted that it went to who was the "client" in s 925A of the Act with the entitlement to rescind, and that it "further illustrates the artificial operation of [CHM's] contentions". I do not understand this last submission. If [80] should be understood as CHM suggested, the reasoning was erroneous. A derivative is a financial product in its own right, whether or not it is within the general definition (s 762A(2)) and so whether or not anyone makes a financial investment under s 763B.
The parties' submissions went in some detail into matters of grammar and punctuation. The structure of s 761D(1)(c) is difficult, but in my opinion its application in the present case does not turn on "ultimately" or a comma.
A particular difficulty is that para (a) of s 761D(1) refers to provision of consideration, but when one comes to para (c) it refers also to the value of the arrangement as a factor additional to the amount of the consideration, the affectation of which by itself can satisfy the paragraph. Value to whom, and how is it ascertained? One way this can operate is if the value of the arrangement is seen as an extended correlative of the amount of the consideration, although it is not the same as the amount of the consideration; from the point of view of its recipient under the arrangement, the consideration is one of all the elements in the arrangement from which the value of the arrangement to that party is ascertained. Adopting the trial judge's use of "affected by" as shorthand for the determination, derivation or variation to which para (c) refers, in such a case it is not easy to see that the additional factor adds anything to the working of the definition, since if the amount of the consideration is relevantly affected, so is the value of the arrangement likely to be affected.
Putting that aside, in my respectful view the word "ultimately" does not "connote" that the value of the arrangement will in every case be affected by the value (or amount) of something else. It allows the effect of the value (or amount) of the something else to be remote, but says nothing of whether the effect must be such that the value of the arrangement is always affected by the value (or amount) of something else. Similarly, although the trial judge did not refer to this limb of para (c), the word "ultimately" does not "connote" that the amount of the consideration will in every case be affected by the amount (or value) of something else.
Apart from the word "ultimately", the trial judge considered that universal affectation was "in the nature of a derivative". CHM submitted that whether the agreement is a derivative depends on the definition in the Act, not some accepted concept of a derivative, if there be one. I accept that submission.
The better indicator of whether there must be universal affectation lies in para (a) of s 761D(1), whereby a party must or may be required to provide the consideration. An arrangement may call for a party to provide consideration of more than one kind, depending on future events, one of which is affected by the value or amount of something else and another of which is not. The party "may be required" to provide the consideration of the former kind, if the appropriate future events occur, but this will not necessarily be so. It will be sufficient if the amount of that consideration is affected by the value or amount of something else; and if it is, the value of the arrangement will be affected by the value or amount of the something else. It does not matter that in other future events the consideration which is not affected by the value or amount of something else is the consideration which must be provided.
On this analysis, universal affectation is not necessary. It may be added that any other reading of the definition would permit it be avoided by the simple expedient of providing for payment of a fixed $1, no matter what happened in relation to the something else and its effect on the amount of the substantive consideration.
In my view, therefore, the basis on which the trial judge decided that the agreement was not a derivative should not be accepted.
CHM submitted that the trial judge considered only one way in which the agreement could be a derivative, namely, by regard to the amount of the Early Termination Fee. As to that, it submitted, his Honour was in error because although the Early Termination Fee of $9 million was not affected by something else, in other circumstances the Early Termination Fee could turn on the strike price of CHM's shares.
Going beyond the Early Termination Fee, CHM did not rely on provision of investigative and management expertise, no doubt recognising that the operative clauses in the agreement did not extend to it; the substance of its submissions was that -
from the point of view of ILP paying Legal Costs for CHM, the amount of the consideration was affected by the value or amount of the costs incurred, the costs ordered to be provided as security or the costs ordered to be paid, each of which was something else;
from the point of view of CHM receiving the benefit of payment of the Legal Costs, the value of the arrangement to it was ultimately affected by the same something elses;
from the point of view of ILP receiving payment of the Early Termination Fee, or repayment of the Legal Costs and payment of the Funding Fee, the value of the arrangement to it may be affected by the value or amount of the Legal Costs and the strike price of CHM's shares (in the case of the Early Termination Fee) or by the value or amount of the Resolution Sum (in the case of the Funding Fee), each of which was something else; and
from the point of view of CHM repaying the costs and paying the fees, the amount of the consideration may be affected by the same something elses.
In so stating the substance of the submissions, I continue the shorthand of "affected" for ultimate determination, derivation or variation. The amount of the consideration or the value of the arrangement will not always be affected by the something else(s). But it will be affected by the costs amounts and may be affected by the strike price and the Resolution Sum.
CLR made effectively the same submissions as CHM. It submitted also that the value of the arrangement could not be broken down into the elements of consideration which might be paid or received according to another outcome. It was the overall value, in ascertaining which there entered the prospect of one outcome rather than another. Correctly, in my view, it submitted that the trial judge conflated the two statutory criteria of the amount of the consideration and the value of the arrangement, and did not allow for the different operation of the latter concept.
ILP's submissions rather abandoned reliance on "ultimately". It submitted that the affectation might wholly characterise the arrangement or do so only in part, but that it had to be "an essential aspect of the nature of any such arrangement". This, it said, came from seeing the definition "though the functional prism intended by the legislature", and in the case of the agreement all permutations of the amount of the consideration or the value of the arrangement to either party "relates directly to [the Federal Court proceedings], as opposed to derivatively to some secondary something else".
I will return to the legislative intention, and for the present note ILP's explanation of why the value of the agreement was not ultimately determined by reference to the value of something else. The explanation did not similarly address the amount of consideration, but can be extended to it. The explanation was by examples; one where CHM failed in the proceedings so that ILP paid the Legal Costs and CHM did not have to repay them, another where ILP determined the agreement under cl 10.1 and all ILP could get was repayment of the Legal Costs, and the third where there was a Resolution Sum and ILP received repayment of the Legal Costs and payment of the Funding Fee. As to the first two, it was said that the amount of the Legal Costs was "simply a function of itself" and "not a derivative of some other value", and was "self-determining". As to the third, it was said that the value of the Funding Fee was "a function of the outcome of the litigation which is the very subject-matter of the [agreement]", and that ILP realised an interest in the proceedings which was contingent on the damages awarded but there was no something else.
The submissions as to the first two examples were off the point. The point is not whether the Legal Costs were affected by something else, but whether an amount of consideration or a value of the arrangement was affected by something else, viz, the Legal Costs. As to the third example, the outcome of the litigation could be a something else even as, indeed because, something at the heart of the agreement.
The definition of "derivative" is extraordinarily wide, one which could catch many arrangements not ordinarily thought of as derivatives. Returning to ILP's submissions as to the legislative intention, there is no satisfactory basis for reading the words down.
Section 761D was part of the amendments to the Act made by the Financial Services Reform Act 2001. The amendments included introduction of Ch 7, ss 760A and following, amongst which are the provisions concerned with provision of a financial service. By 760A -
" 760A. Object of Chapter
The main object of this Chapter is to promote:
(a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
(b) fairness, honesty and professionalism by those who provide financial services; and
(c) fair, orderly and transparent markets for financial products; and
(d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.
More specifically as to derivatives, there was dissatisfaction with the regulation of financial market instruments so far as through the definition of a futures contract in the Corporations Law , particularly following the decision of the Full Federal Court in Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 128 ALR 417. The Company and Securities Advisory Committee ("CASAC") recommended "core provisions" for regulation of financial markets and financial market instruments, including a definition of derivatives, and that the definition should employ commercial criteria and be by the "deductive" method of "devising a broad general definition to cover all possible derivatives, with a power (by regulation or administrative discretion) to exempt certain agreements, to avoid over-regulation" (CASAC Final Report, "Regulation of On-Exchange and OTC Derivatives Markets", June 1997, paras 3.31, 3.33-3.35).
This was taken up by the legislature. The Explanatory Memorandum to the Financial Services Reform Bill stated in para 6.72 -
"The definition of 'derivative' in proposed section 761D has been formulated to replace the existing definition of 'futures contract' in section 72 of the proposed Corporations Act. As recommended by CASAC in its report entitled "Regulation of On-exchange and OTC Derivatives Markets' the definition focuses on the functions or commercial nature of derivatives rather than trying to identify each product that will be regarded as a derivative. The definition proposed by CASAC in its report has been used in developing the definition in proposed section 761D."
The structure of the definition in s 761D is first to describe an arrangement which satisfies certain conditions (s 761D(1)), and to provide as well for declaration by regulation of things to be derivatives (s 761D(2)); but then to provide that an arrangement in relation to which other conditions are satisfied (s 761D(3)(a)), other specific things (s 761D(3)(b), (c)) and anything declared by regulation not to be a derivative (s 761D(3)(d)) are not derivatives "even if they are covered by the definition in subsection (1)".
This is in accord with the CASAC method of a wide general definition with exceptions. There are quite broad exceptions where what is involved is tangible property (intended to exclude "a range of transactions involving the future delivery of something, including such things as contracts for the sale of land with a three month settlement period": Explanatory Memorandum, para 6.73 seventh dot point), and where the arrangement is "a contract for the future provision of services". There is the control of a power to exclude by regulation. Furthermore, s 761D(4) excludes an arrangement which would otherwise be caught because the consideration for the sale of property varies according to the CPI or a similar general inflation index.
Given this deliberate drafting, there is little warrant for reading down the definition in the inclusory s 761D(1). It was intended to be wide; over-width was to be controlled by the subsequent exclusions, including by regulation. Moreover, a derivative is a particular financial product (s 764A(1)(c)), and so something which is a derivative within the wide definition and not within one of the exceptions may still be taken out of the class of financial products by the numerous exceptions in s 765A - which themselves include anything declared by regulation, or by ASIC, not to be a financial product (s 765A(1)(y), s 765(2)).
The drafting structure has been recognised in Keynes v Rural Directions Pty Ltd [2010] FAFC 100, concerned with contracts for the forward purchase of grain. The Court (Dowsett, Stone and Bennett JJ) said -
"28 The term 'financial product' is critical to the operation of the chapter. The express exclusions contained in s 765A are designed to ameliorate the effect of the very broad language used in the other definition sections which seek to capture many kinds of financial transactions. Section 765A narrows the operation of Ch 7 so as to keep it within the intended bounds. Section 761D(3) is important because it leads to the exclusion of a very large number of everyday transactions, namely sales of tangible property for future delivery. Such transactions are not generally thought to be financial transactions. However it is well-known that there are markets in which contracts for the sale and purchase of "tangible property" are traded. Such markets are more readily seen as being "financial" and therefore appropriately regulated. Where the price of tangible property fluctuates significantly over time, there is always the likelihood that people will seek to profit from such fluctuations. For that reason s 761D(1) catches "arrangements" for the supply of tangible property where the prices are not fixed or the 'values' of the arrangements may fluctuate. However s 761D(3) narrows that effect. Broadly speaking, it does so by excluding from the definition of 'derivative' arrangements for the supply of tangible property where one of the parties is actually expected to deliver the relevant property, and where rights and obligations under such arrangements are not usually traded, or not traded in a recognizable market."
This may not be a desirable way to legislate, quite apart from the difficulty of tracking through the provisions and seeking to apply sometimes imprecise and convoluted language. However, in my opinion CHM's submissions should be accepted. The agreement was within the inclusory definition in s 761D(1).
Subject to the exemptions, in my opinion the agreement was a financial product as a derivative.
The credit facility exemption
Section 765A of the Act provides for things which are not financial products, relevantly "a credit facility within the meaning of the regulations (other than a margin lending facility)" (s 765A(1)(h)(i)). The question of a margin lending facility does not arise. Regulation 7.1.06(1) describes a number of things each being is a credit facility, of which that in para (a) involving "the provision of credit" is presently relevant, and reg 7.1.06(3)(a) and (b) define "credit". The regulations are set out in the reasons of Young JA.
The exception was made because, in the example given in the Explanatory Memorandum, "fixed rate loans could have been regarded as a facility for managing financial risk and credit cards would have been facilities for the making of non-cash payments". At the heart of the provision of credit, on the application of the definition of "credit", is whether under the agreement the payment of a debt owed by one person to another was deferred, or the one person incurred a deferred debt to the other.
The trial judge said -
"86 I do not accept the Funder's submission that the Deed is a credit facility within s 765A(1)(h)(i) and Regulation 7.1.06 (which is set out above) and therefore not a financial product because:
a. the Deed does not operate so as to defer payment of any debt owed by CHM to the Funder or result in CHM incurring a deferred debt to the Funder;
b. CHM does not incur a debt to the Funder as a result of the Funder paying the Legal Costs and it does not incur any personal obligation to repay the amount funded; and
c. the payment by the Funder of the Legal Costs is not an advance and the Deed does not contain provisions under which CHM incurs a personal obligation to repay."
ILP submitted that the agreement was "essentially" an advance of money by ILP to assist CHM in obtaining a financial benefit arising from the loan, under which CHM deferred the debt of repayment of the Legal Costs to ILP.
I do not accept the submission. ILP promised to pay money for the benefit of CHM, but it did not advance money to it and there is no debt owed by CHM payment of which is deferred. There might never be anything payable by CHM to ILP; indeed, if CHM failed in the proceedings, ILP would probably have to pay more money for the benefit of CHM, being the costs payable to Murchison and others, without any recovery from CHM. If anything became payable (upon early termination or Resolution of the Proceedings), there was an immediate debt, not a deferred debt. The trial judge was correct.
The provision of services exemption
ILP relied on the exclusion under s 761D(3)(b), whereby a "contract for the future provision of services" is not a derivative.
There are no relevant definitions assisting in the meaning or application of this collection of words. The CASAC Final Report did not mention such an exclusion, nor did the Explanatory Memorandum explain it.
The trial judge said of this -
"81. I do not consider that the Deed can properly be described as a contract for the future provision of services as contemplated by s 761D(3)(b) of the Act. The Recitals record that the Funder has agreed to provide investigative and management expertise but the Deed does not seem to contain any covenant obliging the Funder to do so. This aspect of the Deed is at best an adjunct to the main object of the arrangement, which is the payment of money."
Given the width of an "arrangement" in s 761D (see its definition in s 761A, and s 761B) and the reference to "consideration of a particular kind or kinds" in the inclusory definition of a derivative, what is excluded is a particular arrangement (a contract) involving particular consideration (provision of services). The agreement was a contract. On no view was CHM providing services, so the question is whether ILP's performance of the agreement would satisfy "for the future provision of services".
ILP submitted that it promised to provide future services, referring to recitals B and C and cll 2.1, 6.2, 8.1(b), 8.1(c), 8.3 and 13.2.
The recitals can be put aside unless matched by relevant promises (including promises found by construction of the operative clauses in light of the recitals). There are funding promises, but no promise of management and investigation expertise.
Some operative clauses to which ILP referred were funding promises, being the general promise in cl 2.1 and a promise to fund an appeal if it so elected (cl 6.2). The other operative clauses to which it referred were -
not a promise by ILP at all, but a promise by CHM to consult with and consider ILP's views "in relation to any material issues arising from the conduct and/or progress of the Proceedings at any Appeal" (cl 8.1(b));
not a promise by ILP at all, but a promise by CHM to provide to ILP "such information as may reasonably be required in relation to the Proceedings and any Appeal" (cl 8.1(c));
not a promise by ILP at all, but a promise by CHM to "make all reasonable efforts, if appropriate to authorise ILP to appoint, instruct and direct the Lawyers (including counsel and experts); to pursue the claim and the Proceedings or any Appeal; and to negotiate an outcome of the Proceedings of any Appeal; on its behalf" (cl 8.3); and
not a promise by ILP to provide services, but promises by CHM and ILP to obtain and act upon the advice of Senior Counsel in the event of disagreement over settlement of the Federal Court proceedings (cl 13.2).
Assuming implied or inferred promises by ILP to the effect that it would maintain oversight so as to seek information from and convey its views to CHM, and that it would appoint Lawyers and pursue the claim if authorised, I do not think the agreement could be described as a contract for the future provision of services by ILP. It was overwhelmingly a contract under which ILP was to pay money, under the funding promises to provide money to pay the Legal Costs. That may in one sense have been provision of a service, the payment of money, but it was not provision of services. Nor in my view was the agreement a contract for the provision of services because the money (or at least a lot of it) would be used to obtain the services of lawyers and experts, and ILP did not submit that it was.
An incidental product or component
Section 763E is set out in the reasons of Young JA, and involves components of a facility (as does s 762B), the purpose of a facility and the concept of a financial product purpose. By its definition (s 762C), facility includes "an arrangement or a term of an arrangement", so separate terms of an arrangement can be separate facilities. If something is a financial product within the general definition (s 763A(1)), which requires that it be a facility, it could be an incidental component of a facility which has other components or incidental to one or more other facilities; likewise a financial product as one of the specific things (s 764A(1)).
ILP did not invoke either s 763E or s 762B in its written submissions. The provisions received some attention in the course of argument, and I understand ILP to have relied on s 763E by the submissions that the "main purpose [of the agreement] is to obtain funding with a view to winning", and that "anything else is ... incidental".
On the analyses in the proceeding paragraphs, the agreement is not a financial product as an incidental component of a facility which also has other components or a facility incidental to other facilities; nor are the relevant terms incidental components or incidental to other terms or another facility. There is no "main purpose" of obtaining funding distinct from the financial product purpose of managing financial risk. The purpose of the agreement is to obtain litigation funding on the terms contained in it, and those terms make it a financial product. In my opinion, the agreement is not an incidental product which is not a financial product, within s 763E.
I do not understand ILP to have relied on s 762B, which is also set out in the reasons of Young JA. As a facility for managing financial risk, or a derivative, so far as the agreement might be a component of a facility that also has other components Ch 7 still applies in relation to it. Section 762B has no relevant exclusory effect.
Conclusion
For the foregoing reasons, in my opinion the agreement constituted or related to the provision of a financial service.
Subject to one matter, in the manner the appeal and cross-appeal were argued it follows that the agreement was validly rescinded by CHM. That matter is a rather obscure reference in ILP's written submissions to whether CHM was a "client" within s 925A(1) of the Act. By s 924A(1)(a) the client is simply the person with whom the unlicensed provider of financial services entered an agreement constituting or relating to the provision of a financial service by that non-licensee. In my opinion, CHM was a client and so entitled to rescind the agreement pursuant to s 925A(1).
Construction
I have earlier outlined or set out relevant provisions of the agreement. If the agreement was validly rescinded, the issue of construction does not arise. I should nonetheless deal with it.
The trial judge did not accept CHM's submission that the effect of cl 4.1 was to terminate the agreement, and therefore to terminate ILP's entitlement under cl 3.1. His Honour held that cl 4.2 meant that ILP was entitled to immediate payment of the Early Termination Fee and only of that fee, and that its entire entitlement was to payment of the Early Termination Fee (at [97]).
The essential reasoning was that ILP's obligations terminated pursuant to cl 4.1, and that it did not retain rights corresponding to obligations which it no longer had. For example, his Honour did not accept that ILP could require that an appeal be brought pursuant to cl 6.2 but would not be obliged to fund the appeal, or more widely would be entitled under cl 3.1 to a significant share of the Resolution Sum although it had not provided the funding for the proceedings bringing that reward, possibly from a very short time after the agreement was entered into. He detailed other anomalies which he considered flowed from ILP's construction of the agreement, including that ILP could recover the Legal Costs twice, once as part of the Early Termination Fee and again under cl 3.1(a). His Honour considered that there were four effective ways in which the funding arrangement came to an end, namely on early termination; on termination by ILP under cl 10.1; on termination by CHM under cl 10.5; and on receipt of the Resolution Sum and distribution in accordance with cl 3.1; each of which had its own consequence for payment to ILP. He considered that the agreement operated sensibly and rationally with cll 3 and 4 as mutually exclusive provisions for payment.
There were four recitals, viz:
" A CHM has requested that the Funder provide litigation funding to CHM for its Legal Costs in relation to the Proceedings.
B CHM has requested that the Funder provide investigative and management expertise to assist in the Proceedings.
C The Funder has agreed, on the terms and conditions set out in this DEED, to provide funding, and management and investigation expertise and other related and agreed matters to CHM to assist in investigating the Claims and to prosecute the Proceedings.
D CHM acknowledges that the Funder has, by virtue of its obligations and entitlements (including to receive a percentage of The Resolution Sum) set out in this DEED, an interest in the Claims and the Proceedings."
The deed then, in clause 1, sets out a series of definitions, the relevant ones being the following:
" " Early Termination Fee " means a payment by CHM to the Funder or its nominee of an amount equal to the Legal Costs (including Security for Costs) expended by the funder up to the date of termination pursuant to clause 4.1 and a further amount equivalent to the higher of the value of 20% of the share capital of CHM at the strike price of its shares by the acquirer of the Charge in Control or the Change in Control or $9 million;
" Lawyers " means any firm of solicitors appointed by CHM (and agreed by the Funder) to conduct the Proceedings on behalf of CHM;
" Legal Costs " means all costs associated with procuring the legal files from the previous Solicitor on the record for CHM in the Proceedings and all future agreed legal costs and disbursements incurred by CHM and Funder in relation to or incidental to the Proceedings, or any Appeal, including without limitation solicitors fees and disbursements, counsel's fees and disbursements and expert witness fees, the provision of $250,000 by way of security for costs for security paid prior to this deed, and the provision of any Security for Costs or monies payable for Adverse Cost Orders arising in the Proceedings, or any Appeal, unless otherwise agreed between CHM and the Funder;
" Percentage Payment " means:
(a) 25% of the Resolution Sum should a Resolution agreement occur at any time prior to the earlier of 1 February 2009 or the third security for costs payment in the Proceedings;
(b) 30% of the Resolution Sum should a Resolution agreement occur at any time thereafter (a) but prior to the earlier of 31 May 2009 or 45 days prior to the hearing date of the Proceedings;
(c) 35% of the Resolution Sum should a Resolution agreement occur at any time thereafter (b) but prior to the earlier of 30 November 2009 or 45 days prior to the hearing date of the Proceedings; and
(d) 40% of the Resolution Sum should a Resolution agreement occur at any time after 31 March 2010;
" Resolution " means when all or any part of the Resolution Sum is received and where the Resolution Sum is received in parts, a "Resolution" occurs each time a part is received;
" Resolution Sum " means the gross amount received by CHM or the Lawyers, whether by way of settlement, judgment or otherwise of the Proceedings, including any interest and Legal Costs recovered pursuant to a Costs Order;"
Clause 2 then set out the obligation of ILP "to pay the Legal Costs, such payment to be made within 28 days of receipt of written notification requiring payment and supported, as and when reasonably required by" ILP.
I need to set out clauses 3 to 11 in full:
" 3. Funding Fee and Legal Costs Entitlement
3.1 Upon Resolution of the Proceedings, the Funder will be entitled to:
(a) Repayment of the Legal Costs paid by it in accordance with clause 2.1;
(b) Payment of the Funding Fee.
3.2 CHM irrevocably directs that:
(a) payment of any Resolution Sum be made to the Lawyers; and
(b) the Lawyers are to immediately pay any Resolution Sum into a separate trust account kept for that purpose.
3.3 CHM irrevocably authorises the Lawyers to hold that part of the Resolution Sum due to the Funder under this DEED on trust for the Funder and the balance on trust for CHM;
3.4 If, notwithstanding clause 3.2, CHM directly or indirectly receives all or any part of the Resolution Sum, CHM will pay it over, together with the reasonable market value of any non monetary component of the Resolution Sum received, to the Lawyers to be paid into the trust account referred to in clause 3.2 and dealt with on the terms of this DEED;
3.5 If any part or all of the Resolution Sum is not money, CHM will, as soon as the part or all of the Resolution Sum is received, pay to the Lawyers an amount equal to the reasonable market value of the non monetary component of the Resolution Sum so received;
3.6 The obligations in clause 3.4 and 3.5 are continuing obligations and survive any Termination of this DEED save for a Termination pursuant to clause 8.1;
3.7 On the Repayment Date, CHM irrevocably authorises the Lawyers to forthwith pay out of the Trust Account referred to in clause 3.2 all amounts, to repay Legal Costs paid by the Funder under clause 2.1 to an account directed by the Funder;
3.8 In addition to any Legal Costs to be repaid to the Funder in accordance with clause 3.6, CHM irrevocably authorises the Lawyers to pay to the Funder the Funding Fee on the Repayment Date, to an account directed by the Funder;
3.9 Notwithstanding clauses 3.7 and 3.8, CHM will not be required to pay any amount to the Funder under either clause in excess of the Resolution Sum;
4. Early Termination
4.1 Should there be a Change in Control of CHM, the Funder's obligations pursuant to this Deed terminate effective immediately.
4.2 Should clause 4.1 come into effect the Funder is entitled to immediate payment by CHM of the Early Termination Fee.
5. Charge over the property of CHM
5.1 In consideration for entering into this Deed CHM grants the Funder a fixed and floating charge on the terms set out in the Fixed and Floating Charge dated x.
5.2 Any debt owed pursuant to this clause 4.1 of the deed is Secure Monies pursuant to the fixed and floating charge dated * 28 October, 2008.
6. Appeal
6.1 If there is a final judgment in the Proceedings which is not in favour of CHM and the Funder wishes an appeal to be lodged, then CHM will instruct the Lawyers to lodge and prosecute the appeal/appeals in the name of CHM. The Funder will pay the Legal Costs and disbursements in connection with the appeal/appeals.
6.2 If there is a final judgment in the Proceedings in favour of CHM and a Respondent appeals, then the Funder may elect to fund the legal Costs and disbursement of the appeal/appeals. If the Funder so elects, CHM will instruct the Lawyers to defend the appeal/appeals in the name of CHM.
6.3 If the Funder funds an appeal/appeals pursuant to clauses 4.1 or 4.2 then an additional 5% will be added to the Percentage Payment in respect of each appeal so funded.
7. Warranties
7.1 CHM warrants that they are the legal and rightful plaintiff in the Proceedings or any Appeal.
7.2 CHM warrants that there is no creditor holding a charge, lien or encumbrance over property of the CHM, including over the Resolution Sum;
7.3 CHM warrants they will not cause, permit or assert any charge, lien or other encumbrance or right over or otherwise attaching to the Resolution Sum after the date of this DEED, except with the prior written consent of the Funder which consent may be withheld by the Funder at its discretion;
7.4 CHM warrants that there is no information in its custody, possession or control materially relevant to the outcome of the Proceedings or any Appeal or the potential for any judgment sum to be recovered, which has not been disclosed to the Funder.
7.5 If, after the date of this DEED, CHM becomes aware of any information which has or may have a material impact on the Claims, the Proceedings, or any Appeal or the potential for any Resolution Sum to be recovered, CHM will immediately inform the Funder of that information;
7.6 CHM warrants that CHM's directors are aware of this Funding Agreement and agree that the Funder can give a written direction to CHM or the Lawyers holding the Resolution Sum in its trust account requiring it to pay directly to the Funder any amounts owing by CHM to the Funder in satisfaction of the Funder's obligations to CHM under this DEED;
7.7 CHM will provide a board resolution, duly passed, with supporting board minutes authorising CHM to enter into this DEED.
7.8 CHM warrants that it has received independent legal advice in connection with this DEED.
8. Representatives and Conduct of Proceedings
8.1 CHM undertakes to and will:
(a) keep the Funder advised of the progress and status of the Proceedings or any Appeal;
(b) consult with and consider the views of the Funder in relation to any material issues arising from the conduct and/or progress of the Proceedings or any Appeal; and
(c) provide such information from time to time to the Funder as may reasonably be required in relation to the Proceedings or any Appeal.
8.2 CHM agrees to disclose to the Funder, upon such information coming to its knowledge, all information received from time to time which may have a material impact on the Proceedings or any Appeal or which relates to any takeover of CHM;
8.3 CHM will make all reasonable efforts, if appropriate, to authorise the Funder to: appoint, instruct and direct the Lawyers (including counsel and experts); to pursue the claim and the Proceedings or any Appeal; and to negotiate an outcome of the Proceedings or any Appeal; on its behalf;
8.4 CHM, at its own cost, will provide to the Lawyers, upon request, all documents and information in the possession, control or power of CHM relevant to the Claims and the Proceedings or any Appeal;
8.5 CHM, and its directors, officers, principals and owners if required, will at its own cost, provide to the Lawyers, upon request, all written statements of evidence in relation to the Claims;
8.6 CHM, and its directors, officers, principals and owners if required will, at its own cost, attend upon the Court to give evidence in relation to the Claims.
9. Term
9.1 Subject to the following Termination provisions, this DEED will continue until all obligations by CHM and the Funder pursuant to this DEED have been satisfied, and the Resolution Sum (if any) has been disbursed in accordance with this DEED.
10. Termination
Termination by the Funder
10.1 The Funder is entitled, at its sole discretion, to terminate its obligations under this DEED, other than accrued obligations, by giving 7 days written notice to CHM that the DEED and the Funder's obligations are terminated;
10.2 If the Funder terminates its obligations pursuant to clause 10.1 then it will not be entitled to any payment pursuant to the Funding Fee but it will continue to be entitled to receive payment pursuant to clause 3.7 from any Resolution Sum. CHM will notify the Funder upon receipt of money referred to in this clause. The obligations in this clause survive any Termination of this DEED;
10.3 All obligations of the Funder under this DEED cease on the date the Funder's termination becomes effective, save for obligations accrued to that date;
10.4 The accrued obligations of the Funder referred to above comprise payment of any outstanding Legal Costs incurred up to the date the notice of termination becomes effective.
Termination by CHM
10.5 If the Funder commits a serious breach of this DEED and does not remedy the breach within 30 days after receiving written notice from CHM requiring it to do so, CHM may terminate this DEED forthwith by written notice to the Funder;
If this DEED is terminated by CHM pursuant to the above clause 10.5, then:(a) the Funder remains liable for the obligations referred to in clause 10.4; and
(b) the Funder remains entitled to repayment of Legal Costs incurred up to and including the date of termination pursuant to clause 3.6; and
(c) CHM will not be required to pay the Funding Fee under clause 3.7.11. Confidentiality
11.1 CHM and the Funder agree to keep confidential the existence and terms of this DEED and will not disclose the existence and terms of this DEED to any person other than their legal and financial advisers or as required by law. CHM and the Funder shall keep confidential all discussions, disclosures and information they have obtained by reason of this DEED."
The cross references are usually incorrect with the correct reference in all but one case clearly being two higher than that cited. However, it is not agreed that the cross reference in cl 3.6 or "8.1" should be read as "10.1": it is clearly not "8.1", it is possible it should be "4.1".
Clause 13, dealing with dispute resolution, provides in cl 13.1(e) that the clause "shall not merge upon completion." It would seem that what was meant was that the clause would continue to apply notwithstanding that all other contractual obligations had ceased.
Clause 13.2 provided for disputes to be dealt with by a member of the inner bar, though the process of selection was left rather incomplete.
Finally, I should set out clause 17:
"17.1 The written terms of this DEED constitute the entire DEED between the parties.
17.2 Neither CHM nor the Funder intend to be partners, joint venturers or fiduciaries with or to each other. Nothing in this DEED shall constitute CHM and the Funder as partners, joint venturers or fiduciaries.
17.3 There will be no variation or amendment to the terms of this DEED except in writing executed by each of CHM and the Funder.
17.4 CHM and the Funder will act in good faith toward each other and be just and faithful in their dealings with each other in all matters arising out of or connected with this DEED, and save as provided for in this DEED, will not do or permit to be done anything likely to deprive any party of the benefit for which the party entered this DEED.
17.5 CHM will use best endeavours to cause any Resolution Sum to be received or recovered as quickly as possible and particularly any settlement or judgment in respect of the claims.
17.6 If this DEED or any part thereof is annulled, avoided or held unenforceable, CHM will forthwith do all things necessary, including without limitation executing any further or other DEED or instrument, to ensure that the Funder receives any remuneration, entitlement or other benefit to which this DEED refers or is contemplated by this DEED. CHM irrevocably agrees that production of a copy of this DEED shall be conclusive evidence of CHM's obligations as set out in this clause.
17.7 CHM will not seek any order from any court that may detrimentally affect the Funder's rights under this DEED other than with the consent of the Funder and other than as arises out of any breach by the Funder.
17.8 If CHM acts in breach of this DEED, clauses 2, 3, and 8 will continue to apply to any payment received by CHM in respect of the Claims."
CHM says that clause 4 is a virtual code that applies if there is a change of control in CHM and that on such an event, ILP's obligations cease and it is entitled only to the Early Termination Fee of $9,000,000 less $6,000,000 already paid.
On the other hand, ILP says that it is entitled to receive both the Early Termination Fee and, upon resolution of the Federal Court proceedings, the Funding Fee as well. The difference between the two points of view may well be some tens of millions of dollars.
The relevant background facts can be shortly stated based on what was stated by the primary judge at [28] and following of his reasons.
CHM and Cape Lambert signed a Terms Sheet on 10 August 2010. The Terms Sheet provided that upon its acceptance by CHM, Cape Lambert would be entitled to appoint directors constituting 50 per cent of the board of CHM. It provided for a facility of $6,500,000 to be made available to CHM to be drawn down as one tranche. The Terms Sheet makes it clear that the facility is to be used to discharge ILP's security and provides for CHM to give Cape Lambert a first-ranking fixed and floating charge over its assets, subject to the discharge of the Charge.
Immediately after the Terms Sheet was signed, CHM notified ILP of the transaction and that a Change in Control of CHM within the meaning of cl 1 (and as contemplated by cl 4) of the Deed had occurred. It asserted that as Cape Lambert had not acquired any shares pursuant to the terms of the transaction, the Early Termination Fee under cl 4.2 of the Deed was $9,000,000.
On 11 August 2010, ILP appointed receivers to CHM under the Charge.
As I noted earlier, whatever construction is put upon clause 4 of the Funding Agreement, it can be said that there is some difficulty in reconciling that construction with all the other provisions of the Funding Agreement.
ILP's basic argument is that its entitlement to the Early Termination Fee does not negate its entitlement to other fees as well. To construe clause 4 otherwise would be to read in the word "only" before entitled which course would not be justified.
In coming to his construction of the Funding Agreement, the primary judge set out quotations from the leading cases on how courts approach the construction of commercial contracts. He then set out the principal contentions of ILP and held that such a construction led to too many anomalies which lead to the result that there would be no congruent operation of the Funding Agreement as a whole.
I will desist from once again regurgitating the learning from the current leading cases as to how one should construe a commercial agreement as there is very little argument about that matter.
In summary, in [97] of his reasons, the primary judge said:
"97 In my view, in saying that the Funder is entitled to immediate payment of the Early Termination Fee, cl 4.2 of the Deed means it is entitled only to that fee. Put another way, the words of cl 4.2 mean that the Funder's entitlement (that is, its entire entitlement), is to payment of the Early Termination Fee."
Mr Walker submitted on the appeal that the primary judge ought to have found that whilst the Funding Agreement provided for ILP's obligations to cease on change of control, its entitlements survived and continued.
Further, there is nothing in the language of clauses 3.1 or 4.1 or otherwise to show that those provisions should operate in a mutually exclusive manner.
Mr Bathurst seeks to uphold the primary judge's construction. He also puts that when one looks at the background circumstances known to both parties and sees the market capitalisation of CHM was 30 million dollars, a break fee of nine million is so large as to suggest that the fee was all inclusive.
Despite Mr Walker's clear submissions, my view is that the construction adopted by the primary judge was correct for the reasons he gave.
Thus I would dismiss ILP's appeal with costs.
It follows from what I said concerning Question A that the cross appeal should be allowed and the orders made as noted in [253] together with an order that ILP pay the costs of the other parties both here and below. Perhaps declarations could also be made. A consequence of the allowance of the cross appeal is, of course, the setting aside the orders made below for payment. It would be best if short minutes could be brought in to cover all the details appropriately.
**********
47
2
3