Russell-Davison v Mario Igor Prosin (In his capacity as Executor of the Will and Estate of Lilli Margareta Prosin)
[2000] WADC 20
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: RUSSELL-DAVISON -v- MARIO IGOR PROSIN (In his capacity as Executor of the Will and Estate of LILLI MARGARETA PROSIN) & ORS [2000] WADC 20
CORAM: COMMISSIONER STAVRIANOU
HEARD: 22 DECEMBER 1999
DELIVERED : 2 FEBRUARY 2000
FILE NO/S: CIV 37 of 1999
BETWEEN: BRIAN DOUGLAS RUSSELL-DAVISON
Plaintiff
AND
MARIO IGOR PROSIN (In his capacity as Executor of the Will and Estate of LILLI MARGARETA PROSIN)
First DefendantMARIO IGOR PROSIN
Second DefendantPROSIN INVESTMENTS PTY LTD
Third Defendant
Catchwords:
Contract - Illegality - Champerty - Agreement to pay share of proceeds of action - Whether agreement champertous or otherwise unlawful - Knowledge of solicitor - Imputation of knowledge to client.
Catchwords Continued:
Contract - Severance - Whether clause requiring payment of share of proceeds severable.
Unjust enrichment - Receipt by solicitor of money on behalf of client.
Legislation:
Supreme Court Act 1935
Result:
Judgment for plaintiff for $100,000 and interest.
Representation:
Counsel:
Plaintiff: Mr G J O'Hara
First Defendant : Mr A R Beech
Second Defendant : Mr A R Beech
Third Defendant : Mr A R Beech
Solicitors:
Plaintiff: Kott Gunning
First Defendant : Murfett & Co
Second Defendant : Murfett & Co
Third Defendant : Murfett & Co
Case(s) referred to in judgment(s):
Giles v Thompson [1994] 1 AC 142
Magic Menu Systems Pty Ltd and Another v AFA Facilitation Pty Ltd and Others (1997) 142 ALR 198
Newton v Gapes (1910) 12 WAR 86
Re Trepca Mines (No 2) [1963] 1 Ch 199
Sargent v ASL Developments Ltd (1974) 131 CLR 634
Spector v Ageda [1973] 1 Ch 30
Case(s) also cited:
Carney v Herbert [1985] 1 AC 301
Cole v Booker (1913) 29 TLR 295
DJE Constructions v Maddocks (1982) 1 NSWLR 5
Donaldson v Freeson (1934) 51 CLR 598
Electric Acceptance Pty Ltd v Doug Thorley [1981] VR 799
Gray v Pastorelli (1987) WAR 174
Humphries v Proprietors "Surface Palms North" Group Titles Plan 1955 (1993-1994) 179 CLR 597
Hurst v Vestcorp Ltd (1988) 12 NSWLR 394
Payne v McDonald (1908) 6 CLR 208
Re Movitor Pty Ltd (1996) 136 ALR 643
Re Tosich Construction Pty Ltd (1997) 143 ALR 18
The Perpetual Executors and Trustees Association of Australia v Wright (1917) 23 CLR 185
Thomas Brown and Sons Ltd v Fazal Deen (1962) 108 CLR 391
Tinsley v Milligan (1993) 3 All ER 65
Trendtex Trading Corporation v Credit Suisse [1982] AC 679
UTSA v Ultra Tune [1997] 1 VR 667
Whitlock v Brew (1968) 118 CLR 445
Yango Pastoral Company v First Chicago Australia (1978) 139 CLR 411
COMMISSIONER STAVRIANOU:
Introduction
In or about August 1996 the second and third defendants and Lilli Margarita Prosin were contemplating litigation involving a Mr Brian James Dennis Conway and associated entities. A solicitor was engaged and requested money on account of his professional fees. The defendants were unable to raise the funds and the solicitor was then requested to assist with the provision of finance. A loan of $100,000 was arranged by the solicitor from another client on terms that there be a repayment of $200,000 within 12 months together with a percentage of the proceeds of the contemplated litigation. A loan agreement and mortgage debenture were prepared and executed and pursuant thereto an advance of $100,000 was made in early September 1996 by the plaintiff. No payment was made on the due date and accordingly in this action the plaintiff seeks to recover the sum of $200,000 and interest pursuant to the loan agreement and mortgage.
The defendants assert that the agreement and mortgage are champertous and for that reason unenforceable.
The plaintiff pleads in the alternative that if the loan agreement and mortgage are unenforceable that he is entitled to claim the sum of $100,000 on the basis that the defendants have been unjustly enriched. The second and third defendants admit that they are each bound to repay the plaintiff the sum of $100,000 on restitutionary principles. The first defendant is the Executor of the Will of Lilli Margareta Prosin ("Mrs Prosin") and puts in issue the receipt of the sum of $100,000 and therefore denies the plaintiff’s claim.
The issues to be determined as identified by the parties are as follows:
1.Whether the plaintiff's contractual entitlement to a share of the proceeds was champertous;
2.If the term was champertous whether it is severable;
3.If the term was champertous and it is not severable whether the defendants are obliged to pay any amount, and if so what amount, to the plaintiff;
4.Whether the first defendant received the sum of $100,000.
The Loan Agreement and Debenture
The loan agreement is dated 1 September 1996 and has been executed by the plaintiff as lender and the second and third defendants as borrowers. Whilst Mrs Prosin is named as a borrower she did not sign the agreement. Pursuant to the loan agreement the plaintiff was to provide a facility to the defendants to enable advances up to the sum of $100,000 to be made to them for a period of 12 months from 1 September 1996. The relevant provisions of the loan agreement are as follows:
1.Clause 3 - Repayment of advances. The borrower agrees to repay the advances on the dates and in the manner specified in Item 10 of the First Schedule.
2.Item 10 of the First Schedule: Lump sum of $200,000 on or before termination date.
3.Termination date: 1 September 1997.
4.Clause 6 - Fees. In consideration of the lender agreeing to make advances to the borrower hereunder, the borrower covenants with the lender to pay to the lender on the date hereof a facility fee (if any) as specified in item 12 of the First Schedule.
5.Item 12 of the First Schedule:
Facility Fee
In addition to the interest payment, the borrower shall pay to the lender 2 per cent of all gross receipts obtained from legal action and contractual rights derived from:
i.Brian James Dennis Conway ("Conway")
ii.Penale Pty Ltd ("Penale")
iii.Cambridge Gulf Holdings NL ("CGH")
iv.Cambridge Gulf Exploration NL ("CGE")
This amount is due and payable once the gross receipts are in the control of the borrowers’ solicitor's trust account and may be taken at the discretion of the lender in a cash amount in Australian Dollars or an equivalent amount of CGE shares at a discount value of twenty five cents (A $0.25) providing the actual share price does not exceed 0.35C but guaranteeing a minimum of 0.25C. If the shares exceed 0.35C share market value applies or a combination of cash and shares to be advised in writing by the lender prior to receipt of the facility fee.
The words appearing in italics were a handwritten amendment made to the loan agreement prior to its execution. Whilst the loan agreement refers to payment of the facility fee upon execution of the document it clearly could not have been the case that that was required. This is because the fee could not be calculated at the time the agreement was signed.
6.Clause 11(21). In the event of any part of this agreement being or becoming void or unenforceable then that part shall be severed from this agreement to the intent that all parts that shall not be or become void or unenforceable shall remain in full force and effect and unaffected by any severance.
The loan agreement does not provide that the funds advanced by the plaintiff were to be used by the defendants in funding litigation. It does not in any way seek to limit the manner in which the advance is to be used.
The mortgage debenture is dated 3 September 1996 and has been executed by Mrs Prosin, the second defendant and the third defendant as mortgagors. The debenture refers to the amount then being due of $200,000 and that that sum was repayable on 1 September 1997. The mortgage debenture was given to better secure the loan agreement.
The Evidence
Brian Douglas Russell-Davison
The plaintiff gave evidence that in or about July or August 1996 Mr Margaretic approached him to find out whether he would be interested in lending the sum of $100,000 to one of his clients. Mr Margaretic told the plaintiff that his clients required the loan for a period of 12 months and were offering to pay an interest rate of 100 per cent per annum. It was the plaintiff's evidence that Mr Margaretic told him that his clients had offered to provide security in the form of a written loan agreement and a mortgage debenture. Shortly thereafter the plaintiff advised Mr Margaretic that he was prepared to lend the sum of $100,000. Mr Margaretic then prepared the GRQ No 1 Trust which was to be used to lend the money. At all material times the plaintiff was the trustee of the trust. Following the execution by the plaintiff of the loan agreement and the mortgage debenture he drew a cheque in the sum of $100,000 made payable to Mr Margaretic’s trust account and thereafter presented it to him. The plaintiff told me that he borrowed the sum of $100,000 from the National Australia Bank Ltd to enable the loan to be made to the defendants.
The plaintiff in cross-examination said that he did not know that the borrowers or some of them were involved in litigation. He testified that Mr Margaretic told him that he knew someone who needed funds on a short-term basis. He acknowledged that a person wishing to borrow $100,000 on terms that they would repay $200,000 12 months later was not able to offer a bank equity against which they could borrow. The plaintiff subsequently told me that he was aware of the provision for the facility fee and that he was aware when he signed the document that there was litigation involving Mr Conway and Penale Pty Ltd. He denied that he knew that the sum of the money to be lent was to be used for the purpose of funding the litigation. He told me that the facility fee offered by the defendants was a bonus and that it had nothing to do with the $100,000 that had been lent. He was unable to clearly recall whether Mr Margaretic had discussed the handwritten amendment to item 12 of the First Schedule with him. He testified that by the time he signed the agreement he knew that the borrower was involved in or contemplating legal action as referred to in item 12 of the First Schedule. He accepted that Mr Margaretic acted in relation to the transaction on his behalf.
Luka Anthony Margaretic
Luka Anthony Margaretic is a Barrister and Solicitor of the Supreme Court of Western Australia. He gave evidence that in or about July/August 1996 the second defendant approached him to see whether he would act on his behalf and on behalf of Mrs Prosin and the third defendant in relation to proceedings to be commenced in the Supreme Court. Mr Margaretic considered that the litigation would be complex and lengthy and for that reason he told the second defendant that it would be necessary to brief counsel and that he required the sum of $50,000 to be paid on account of costs and expenses.
Mr Margaretic told me that shortly after requesting the money to be paid on account the second defendant advised him that he was having difficulty in borrowing and asked whether he was able to assist him in obtaining finance. The second defendant told him that he wanted to borrow the sum of $50,000 to be paid on account of legal services (the litigation) to be provided and that he wanted to borrow a further $50,000 for personal reasons. The second defendant told Mr Margaretic that he wanted to borrow the sum of $100,000 for a 12 month term at the end of which the lender would be paid the sum of $200,000. He said that this term, and the other terms upon which he was offering to borrow the sum of $100,000, were similar to the terms of a proposed arrangement with Equity Alliance Pty Ltd which had not eventuated. The proposed agreement with Equity Alliance Pty Ltd provided that it would be engaged by the second and third defendants as a consultant. The services to be provided by it included arranging and providing funds for legal and ongoing costs to the third defendant. The remuneration payable to the consultant was a fee equal to 3 per cent of the total net value of monies, shares, or other real or personal property of whatsoever nature received or obtained by the company as a result, directly or indirectly, partially or wholly, by the efforts of the consultant. No litigation was identified in the agreement. He testified that he directly transposed the Equity Alliance Pty Ltd terms into the loan agreement. In cross-examination he accepted that it was only the percentage which he utilised from the Equity Alliance Pty Ltd document.
Mr Margaretic told me that in discussions with the plaintiff he did not at any time tell him that the funds were to be used for litigation. He said he went through the Equity Alliance Pty Ltd agreement with the plaintiff and explained to him what was in it. In relation to the amendment made to the terms of the facility fee he told me that he discussed the amendment with the plaintiff prior to execution. He denied that he at any time told the second defendant that the intended litigation would be concluded in a period of around six months.
Mr Margaretic prepared a deed of trust for a trust known as the GRQ No 1 Trust of which the plaintiff was the trustee. The trust was prepared so that the plaintiff as trustee of the trust could lend the sum of $100,000 to the defendants. Mr Margaretic prepared the loan agreement and the mortgage debenture.
Mr Margaretic requested the plaintiff to make the cheque for $100,000 payable to his trust account and on 4 September 1996 he received from the plaintiff a cheque in that sum which was paid into his trust account. $50,000 was applied to costs, expenses and counsel fees and the balance was dealt with in accordance with directions provided by the second defendant.
By 1 September 1997 the defendants had not made payment of $200,000 or any sum to the plaintiff. On 2 September 1997 the plaintiff wrote to each of the second and third defendants and to Lilli Margareta Prosin giving notice of default. By letter dated 7 October 1997 the solicitors then acting for the defendants wrote to the plaintiff asserting that the loan agreement was void and that as a result the plaintiff was unable to maintain any rights pursuant to the agreement or any document entered into collaterally to it. The basis of the assertion was that the plaintiff had committed the torts of maintenance and champerty.
Maintenance and Champerty
In Magic Menu Systems Pty Ltd and Another v AFA Facilitation Pty Ltd and Others (1997) 142 ALR 198, the Full Court of the Federal Court considered the history of the torts of maintenance and champerty and in a joint judgment observed at page 205:
"Maintenance, which consisted of the assistance or encouragement of a party to an action in which the maintainor had no interest, was regarded by the English law, from an early time, as a crime punishable by fine or imprisonment. It later became recognised as a civil wrong: see generally Blackstone's Commentaries, 5th ed, Book IV, p 134). Champerty was a species of maintenance, on terms that the maintainor and the plaintiff would share in the outcome of the action. It may be said that public policy considerations shaped the attitude. It was especially feared because the champertor's financial stake in the litigation provided a strong temptation to suborn witnesses and pursue worthless claims (see Discussion Paper 36 'Barratry, Maintenance and Champerty' New South Wales Law Reform Commission, May 1994) ..."
I would respectfully adopt the above and approach the matter on the basis that champerty consists of the unlawful maintenance of an action aggravated by an agreement to have part of the thing in dispute. (Newton v Gapes (1910) 12 WAR 86 at 89). For champerty there must be the notion of a division of the spoils. (Giles v Thompson [1994] 1 AC 142).
The provision of financial assistance by the lending of money is an example of conduct which may constitute maintenance. The making of a loan in circumstances where it is contemplated that the money will be used to fund litigation and on terms that the lender receives a share of the proceeds of litigation is a clear instance of champerty. (Newton v Gapes (1910) 12 WAR 86; Re Trepca Mines (No 2) [1963] 1 Ch 199).
Whilst it may in some circumstances be possible to justify the maintenance of litigation that issue does not arise in this case. The plaintiff had no interest independent of the loan agreement in any of the contemplated litigation. His interest was not separate from the benefit sought to be derived from the support of the litigation.
Findings and Conclusions
I accept and find that on or about 3 September 1996 the plaintiff advanced the sum of $100,000 to the defendants. $50,000 of that sum was applied in payment of Mr Margaretic’s costs, expenses and counsel fees. He knew the purpose of the loan namely to obtain funds to enable the contemplated litigation to be conducted. The defendants have not repaid any part of that amount to the plaintiff. So much is clear from the evidence of the plaintiff and Mr Margaretic.
There was no evidence adduced on behalf of the defendants. There are a number of factors relevant to the terms of and completion of the transaction which require examination. The loan agreement required repayment of interest of $100,000 within 12 months being an effective simple rate of interest of 100 per cent. In addition the defendants were required to pay what is described in the loan agreement as a facility fee. The plaintiff described the facility fee as a bonus. The benefit which the plaintiff was to receive in the event of performance of the contract was exceptional and outside what might be expected in an ordinary commercial transaction. The transaction was not based upon the document presented by the defendants from Equity Alliance Pty Ltd.
The loan agreement and mortgage debenture were part of the one transaction with the mortgage being put in place to better secure performance of the covenants under the loan agreement. Accordingly if the loan agreement is determined to be unenforceable then the mortgage will likewise be unenforceable.
The plaintiff did not impress me as a witness. Before being taken to the schedule to the loan agreement the plaintiff denied knowledge of the litigation. When his attention was drawn to item 12 he accepted that he knew of the litigation. Item 12 was specifically amended in handwriting and initialled by the plaintiff. The plaintiff was unconvincing when he told me that the facility fee was a bonus and in the context of unrelated parties to a commercial transaction, I consider it extremely improbable that a bonus would be provided particularly when interest calculated at the rate of 100 per cent per annum was to be paid.
I do not accept the plaintiff’s evidence that he was not particularly concerned as to the purpose for which the funds were applied. He was borrowing money to make the advance in circumstances where he knew that a bank would not have lent the plaintiff money. Whilst the arrangement may have proven to be financially very advantageous to him there clearly would have been some concern as to whether the defendants would perform. For that reason the purpose for which the funds were to be utilised would have been important to enable an assessment of risk to be made.
The plaintiff knew of the litigation before he executed the loan agreement and the debenture. The handwritten amendment to item 12 of the Schedule was discussed by Mr Margaretic with the plaintiff. This was the plaintiff’s evidence. There clearly was a discussion about the loan between the plaintiff and Mr Margaretic. It was not limited as suggested by the plaintiff in his evidence. I do not consider it at all probable that in the circumstances the plaintiff was not told of the purpose of the loan. To that extent I am not prepared to accept the evidence of the plaintiff or the solicitor. The agreement the solicitor prepared clearly required some drafting and it was not simply a copy of the Equity Alliance Pty Ltd draft. I do not accept that the solicitor would not have made known to the plaintiff the purpose of the loan. This was a matter that clearly was relevant to his client, the borrower. I do not accept the plaintiff’s evidence as to lack of knowledge of the purpose for which loan funds were to be used. I find that the plaintiff was well aware that part of the money advanced was to be used to conduct the litigation. In consideration of the advance of $100,000, as well as receiving an exorbitant interest rate, the plaintiff was to receive a sum of money calculated as a percentage of the proceeds of the actions. I do not accept the plaintiff’s evidence that the $100,000 and the facility fee were unrelated.
In order to recover the $200,000 the plaintiff pleads and relies upon the loan agreement and mortgage debenture. The money has clearly been advanced as intended, received by Mr Margaretic and part of it applied in payment of the costs of the proceedings. In my view the entire loan agreement was and is contrary to public policy and void.
It was submitted in the alternative that if the plaintiff did not have actual knowledge then the solicitor's knowledge could be imputed to the plaintiff. Whilst I have found actual knowledge, and therefore unnecessary for me to decide, I also consider this is a case in which knowledge can be imputed.
Mr Margaretic was aware that the money advanced was to be used to fund the defendants' litigation. He had been requested to arrange the loan for that purpose. At all material times he was acting for the plaintiff and the defendants in relation to the loan transaction. By so acting he placed himself in an extremely difficult position particularly because of the knowledge that he had. However it is not open for an agent to deny a duty to communicate on the basis of a conflicting duty to another principal. (Spector v Ageda [1973] 1 Ch 30). The knowledge the solicitor obtained became that of the plaintiff. (Sargent v ASL Developments Ltd (1974) 131 CLR 634). In my view his knowledge as to the purpose for which the loan funds were to be used is to be imputed to the plaintiff.
The plaintiff’s counsel submitted that if it was determined that the plaintiff's contractual entitlement to a share of the proceeds was shown to be champertous then the obligation was severable. Reliance was placed upon Clause 11(21) of the loan agreement. It was submitted that the fee payable by the defendants to the plaintiff consisted of interest and a share in the proceeds of litigation and if the latter was invalid then it altered the amount of consideration but did not affect the essence of the agreement. I do not accept that submission. Clause 11(21) cannot operate in relation to the loan agreement because of the nature of the transaction. In my view it would be artificial to sever the defendants' promise to pay a share of the proceeds of the litigation from the promise to repay the loan. It was the combination of the loan together with the obligation in relation to the share of the proceeds of the action which rendered the transaction illegal. That was the context in which the transaction proceeded. The obligations were in my view interdependent and connected and cannot be severed.
The entire transaction was champertous and tainted with illegality. Accordingly I refuse any relief based upon the loan agreement or the debenture.
The plaintiff in the alternative sought to recover the sum of $100,000 on the basis that the defendants had received that sum from the plaintiff. In this respect the claim was pleaded as being "by way of restitution or unjust enrichment". The defendants accept that the second and third defendants are liable to repay the monies received by them. The statement of claim pleads in paragraph 5 that the plaintiff advanced the sum of $100,000 to Mr Margaretic. That allegation is denied in the defence. I am satisfied that at all material times Mr Margaretic was acting for all of the defendants. When he received the money he did so as agent for all of the defendants. Mrs Prosin executed the mortgage debenture which described her as one of the mortgagors and contained an acknowledgment that money was advanced by the plaintiff to the mortgagor. I am satisfied that the money was received by the solicitor on behalf of all defendants. Accordingly I consider that the plaintiff is entitled to judgment in the sum of $100,000 against all defendants together with interest pursuant to s32 of the Supreme Court Act 1935 at the rate of 6 per centum per annum from the date of the advance.
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