Penale Pty Ltd ACN 009 071 523 & Anor v McLernon Group Ltd ACN 009 399 099 & Anor [1997] FCA 1249 (17 November 1997)

FEDERAL COURT OF AUSTRALIA

PRACTICE AND PROCEDURE - pleadings - motion for summary dismissal - allegation of champerty - requirements for cause of action including special damage - whether champerty arguable where action succeeds - claim against solicitors - absence of lawful authority - no adequate pleading - security for costs - claim not strong - impecunious corporation - prompt application - security ordered.

Federal Court Rules 1979 O 20 r 2, O 4 r 14(2)

Neville v London "Express" Newspaper Ltd [1919] AC 368 considered

Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1997) 142 ALR 198 considered

PENALE PTY LTD ACN 009 071 523 and BRIAN JAMES DENNIS CONWAY v MCLERNON GROUP LIMITED ACN 009 399 099 and WILLIAMS AND HUGHES (A FIRM)

WAG 98 of 1997

FRENCH J

PERTH

17 NOVEMBER 1997

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	wg 98 of 1997

BETWEEN:	PENALE PTY LTD ACN 009 071 523 First Applicant BRIAN JAMES DENNIS CONWAY Second Applicant
AND:	McLERNON GROUP LIMITED ACN 009 399 099 First Respondent WILLIAMS AND HUGHES (A Firm) Second Respondent
JUDGE:	FRENCH J
DATE OF ORDER:	17 NOVEMBER 1997
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

A. On the Respondents' Motion filed 27 October 1997:

1. The application is dismissed pursuant to O 20 r 2 as against the Second Respondent.

2. The First Applicant is, on or before 17 December 1997, to provide security for the Respondents' costs of the action in the sum of $20000 by bank guarantee or otherwise in a form acceptable to the Registrar or as agreed between the parties.

3. The proceedings are stayed pending the provision of security for costs.

4. Leave to the First Applicant to file an amended statement of claim upon the provision of security for costs.

5. The motion is otherwise dismissed.

6. The First Applicant is to pay two thirds of the Respondents' costs of the Motion in any event.

7. Liberty to apply.

B. Liberty for Penale Pty Ltd to be represented in these proceedings by its Managing Director, Adam Conway.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	wg 98 of 1997

BETWEEN:	PENALE PTY LTD ACN 009 071 523 First Applicant BRIAN JAMES DENNIS CONWAY Second Applicant
AND:	McLERNON GROUP LIMITED acn 009 399 099 First Respondent WILLIAMS AND HUGHES (A Firm) Second Respondent

JUDGE:	FRENCH J
DATE:	17 NOVEMBER 1997
PLACE:	PERTH

REASONS FOR JUDGMENT

On 2 September 1997 Penale Pty Ltd ("Penale") and its then Managing Director, Brian James Dennis Conway ("Brian Conway"), issued proceedings against the McLernon Group Limited ("McLernon Group") and Williams and Hughes, a firm of solicitors. Penale is trustee of the Conway Family Trust. The McLernon Group describes itself as carrying on the business of assisting companies and individuals to enforce obligations owing to them by other parties. Their work is said to involve the investigation of facts, collection of documentation, taking of witness statements, preparation of reports, negotiation and performance of the obligation and, in some cases, briefing of solicitors to take legal action. They also describe themselves as "monitoring the litigation process and assisting the solicitors where appropriate".

The present proceedings against the McLernon Group and Williams and Hughes arises out of litigation which was commenced in the Federal Court on 12 June 1996 ("the CLC action"). CLC Corporation was the applicant, the respondents were Cambridge Gulf Holdings NL, Penale and Brian Conway.

The CLC action went to trial before Carr J. Before judgment was delivered Brian Conway died on 22 September 1997.

On 24 October 1997, Carr J delivered judgment awarding damages of $5.6 million for breach of contract against Cambridge Gulf Enterprises and Penale. Brian Conway, having died, the question whether any orders ought to be made in respect of claims involving him was reserved to a date to be fixed.

On 27 October 1997, the motion presently before me was filed by the respondents. They seek an order dismissing the action pursuant to O 20 r 2 of the Federal Court Rules and, alternatively, an order that Penale provide security for costs.

The statement of claim which is attached to the application, was filed by Brian Conway in person and on behalf of Penale. There is no solicitor on the record for the applicants.

The statement of claim recites that the CLC action was commenced in the Federal Court on 12 June 1996 in which CLC Corporation was named as applicant and Penale and Brian Conway were second and third respondents. Penale, it is said, incurred solicitor and counsel costs of $173947 in defending the CLC proceedings while Brian Conway incurred costs of $62790. Williams and Hughes were solicitors on the record in the CLC action at all times. It is also pleaded that an officer of the McLernon Group, namely Hugh McLernon, has identified the McLernon Group as the "West Australian agent of CLC Corporation". Paragraph 12 of the statement of claim says that McLernon made admissions to the effect that:

1 The McLernon Group carries on no business with CLC other than the conduct of the CLC action.

2. Williams and Hughes are the solicitors for the McLernon Group.

3. The McLernon Group instructed Williams and Hughes to institute the CLC action.

4. The McLernon Group's interest in the CLC action was a share of the subject matter in dispute in the CLC action.

The pleading referred, by way of particulars, to evidence given by McLernon at the trial of the CLC action on 19 August 1997. It is said that the McLernon Group controlled the conduct of the CLC action from the beginning, the CLC Corporation was "an ostensible applicant", the McLernon Group being the true moving party to that action and that the agency relationship was "contrived in maintenance and champerty and is void". It is said that Williams and Hughes had "no lawful authority to conduct the CLC action in the Federal Court" and that the action "is void ab initio".

This is the sum of the factual allegations relating to the conduct of the McLernon Group and Williams and Hughes of which complaint is made in the statement of claim. The other aspects of the statement of claim go to the loss said to have been suffered by Penale and Brian Conway.

Penale is said to have been a majority shareholder of Cambridge Gulf Holdings, having 1.2 million fully paid shares, representing 51.2 per cent of the issued shares in that company. Cambridge Gulf Holdings was a majority shareholder of Cambridge Gulf Exploration NL with a 61 per cent interest. On this basis, it is said, Penale had a beneficial interest equivalent to 51.2 per cent of 38 million fully paid shares in Cambridge Gulf Exploration at a value of 65 cents each as listed on that day in the Australian Stock Exchange and 51.2 per cent of 28 million partly paid shares in Cambridge Gulf Exploration at a value of 46 cents each, deducting an unpaid balance per share as 19 cents. The value of its beneficial interest in Cambridge Gulf Exploration at the date of the commencement of the action is said to have been $19240960. The subject matter in dispute in the action was the title to 10 million shares in Cambridge Gulf Exploration. The progress of the proceedings in the CLC action was reported in major circulation newspapers and the trial ended on 19 August 1997. On that day shares in Cambridge Gulf Exploration are said to have been listed on the Australian Stock Exchange at 15 cents each and the value of Penale's beneficial interest reduced to $4440221.

As to Brian Conway himself, he was employed by Cambridge Gulf Exploration on a salary of $280000 per annum prior to the commencement of the CLC action.

Penale asserts, in its statement of claim, that the McLernon Group unlawfully and publicly maintained the CLC action against Penale and Brian Conway causing damage to the share price of Cambridge Gulf Exploration and therefore to Penale's beneficial interest in it. The reduction in the value of its holding being $14800739.

It was further asserted that Williams and Hughes had impliedly warranted to Brian Conway that they had lawful instructions to conduct the CLC action when no such instructions actually existed. This is said to have caused Brian Conway to lose earnings in the amount of $5385.

The relief claimed in the application includes an order declaring action WAG 74 of 1996 void ab initio, and an order that Williams and Hughes pay the costs that Penale had thrown away in defending the CLC action on an indemnity basis. Also claimed was an order that Williams and Hughes pay the costs that Brian Conway had thrown away as a result of defending the CLC action and that they be paid on an indemnity basis. Damages are claimed by Penale against the McLernon Group in the sum of $14800739 and by Brian Conway against Williams and Hughes in the sum of $5385.

Brian Conway's son, Adam Conway, sought an adjournment of the motion by letter dated 28 October with an accompanying affidavit made in the CLC action on 24 October 1997. He works in Melbourne and was not present when the motion came on for hearing on 29 October. However I decided to hear the submissions from counsel for the respondents and to give him leave to file further submissions on the merits of the motion prior to delivery of this judgment. Submissions were sent by fax on 12 November 1997.

The test on an application for summary dismissal of a proceeding in court is that the action is manifestly untenable. It has been expressed in various ways on various occasions by different Courts and Judges, but the core of the test is as stated. In dealing with an attack upon a statement of claim all factual allegations should be assumed in favour of the applicant for the purpose of determining whether a cause of action is disclosed.

In his submission, Adam Conway first sought leave pursuant to O 4 r 14(2) to represent Penale. The assets of the company are subject to mareva orders made in the CLC action. Without a variation of those orders the company is unable to retain solicitors. It is a family company and Mr Conway, who is an articled law clerk, has been its Managing Director since 17 October 1997.

A statement of the assets and liabilities of Penale, verified by Brian Conway in the CLC action indicated that, as at 13 March 1997, total assets of the company as trustee of the Conway Family Trust were $3043103 and its total liabilities $3270466. This represented an excess of liabilities over assets in the amount of $227363. Since that time, of course, the company has suffered the judgment in the CLC action in the amount of $5.6 million.

In my opinion it is appropriate for the orderly disposition of these proceedings that the company be represented. It is obvious that it cannot pay for a legal practitioner. Adam Conway, who is an articled law clerk and Managing Director of the company, is an appropriate person to represent the company. In the event, I will order accordingly.

As to Brian Conway, Letters of Administration have issued in relation to his estate and, according to his son, it is likely that an application will be made under O 6 r 10 for the substitution of a party.

I have considered the request for an adjournment made by Adam Conway but given the comprehensive submissions lodged by him on behalf of the applicants, I consider that it is appropriate to proceed to deal with the motion on its merits.

The applicants', as against the McLernon Group, rely entirely upon the proposition that its only business with CLC was the conduct of the CLC action, that it instructed Williams and Hughes to conduct the action and that it had a share of the subject matter in dispute in the action (par 12). The factual base for this allegation was identified in the particulars to par 12 as testimony given by Hugh McLernon at the CLC action. This testimony was exhibited to an affidavit sworn 2 September 1997 and filed in these proceedings by Brian Conway. In his evidence, McLernon had accepted that his organisation acted as agent for CLC in the litigation. He was instructing the solicitors in relation to the action until CLC's representatives came to Australia. The McLernon Group had been appointed as agent by a Mr Oxenham of CLC, which appointment was evidenced by exchange of correspondence.

McLernon indicated in that evidence that he had introduced Mr Oxenham to Williams and Hughes and recommended that CLC use their services. He agreed also that he had carried out some investigation of the facts, collected documentation, spoken to previous solicitors, Herbert Geer and Rundle and then recommended to Mr Oxenham that CLC use a West Australian firm, not an out-of-State firm. In examination by Brian Conway, McLernon agreed that the McLernon Group's fee as Australian agent for CLC was contingent upon the success of the CLC action. He also accepted that the McLernon Group's fee would be a proportion of the subject matter in dispute if the CLC action were to succeed.

Although not referred to in the statement of claim, there was also before the Court the affidavit of Norman Leighton, a director of CLC Corporation, which affidavit was filed in the CLC action on 23 September 1997. Exhibited to that affidavit was a letter from CLC to the McLernon Group dated 23 April 1996 in which the McLernon Group was appointed to act on behalf of CLC in relation to any and all claims it had against Cambridge Golf Exploration and any of its officers or associated and related corporations. The McLernon Group was appointed to research and document all claims, collect any relevant statements and documents in support of those claims, appoint all necessary solicitors and counsel to pursue the claims, manage the litigation and monitor and instruct solicitors, counsel and agents and negotiate an acceptable settlement of the claims.

The McLernon Group was asked, if it were necessary to appoint solicitors, to provide a monthly accounting of the costs thereof. CLC retained the right to withdraw its instructions in relation to settlement or litigation at any time. If it did withdraw its instructions then it would consider an assignment of the claim to the McLernon Group. It undertook during the period of the appointment not to pursue the claims themselves or communicate with the "obligor or accept any payment without reference to the McLernon Group". The letter went on:

"We understand that a third party is prepared to pursue similar claims against the parties referred to above. We accept as appropriate a joint action by ourselves and the third party in general negotiations and if litigation is necessary. We will pay 75% of all costs on the basis that the other party will pay 25% of those costs. If a settlement is reached prior to any judgment upon our claim by a court of competent jurisdiction, then we will be entitled to 75% of the moneys available from the settlement after costs have been repaid and the other party will be entitled to 25% of the moneys available after costs.

Because of our senior position we retain the right to make the final decision on any settlement and we have your acknowledgment that the other party will abide by our decision.

We hereby assign to you our beneficial interest in 20% of all claims, rights and courses (sic) of action against the parties referred to above. In order to put the matter beyond doubt we will not assign the legal title and we do not expect you to give notice of this equitable assignment to the obligors.

As remuneration for your work we will pay an amount equivalent to 20% of the net recovery. We will also pay 75% of your actual out-of-pocket expenses. By this we mean the amount which would otherwise flow to us after repayment of all expenses. You have no interest in any judgment sum other than by virtue of the equitable assignment referred to above.

The amount paid to you will be in consideration of both your 20% beneficial interest and any and all remunerations due to you."

The above letter was also referred to in an affidavit sworn on 19 September 1997 by McLernon in the CLC action. Subsequently as he pointed out, Williams and Hughes entered into a written retainer agreement with CLC, advised it on its legal position, invoiced CLC for its legal work and received payment upon those invoices. The McLernon Group did not pay or offer to pay any part of the legal fees. No invoices were rendered to the McLernon Group by Williams and Hughes.

Nowhere in the statement of claim is this contention contradicted. All that is said is that the McLernon Group was the agent of CLC, that it instructed Williams and Hughes to commence the CLC action and that its interest in the CLC action was a share of the subject matter.

Adam Conway submits for the applicants that the McLernon Group and Williams and Hughes "do not anywhere suggest that they did not actively encourage litigation, otherwise than by way of financial assistance". It is submitted that "on the contrary, the taking by the McLernon Group of an actual interest in the outcome of the CLC proceedings raises a clear inference to the opposite effect."

He also submits that the question of what assistance, financial or otherwise, has been provided to CLC Corporation in the CLC action will be a substantial area of factual inquiry in the present proceeding.

Although no allegation of financial assistance is made, in its origins the tort did not necessarily require financial assistance. In Neville v London "Express" Newspaper Ltd [1919] AC 368 at 378, Lord Finlay LC said:

"Maintenance in a court of justice is defined in Hawkins Pleas of the Crown (8th Ed, published in 1824, Vol 1 c27(6), s3 at p 454) as being "where one officiously intermeddles in a suit depending in any such court which no way belongs to him, by assisting either party with money, or otherwise, in the prosecution or defence of any such suit."

It is arguable that financial assistance is not an essential element of the cause of action. But it would seem that some form of promotion of the litigation is necessary not merely the employing of the services of an agent to carry out work for the litigant for a proportion of the recovery.

It is clear from the authorities that special damage is an essential element of the torts of maintenance and champerty - Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1997) 142 ALR 198. It is at least arguable, however, that the fact that the litigation is successful is not a sufficient answer to the contention that the applicant has suffered special damage - see Neville v London "Express" Newspaper Ltd (supra).

As to whether the applicants suffered loss as shareholders, there is factual material to contradict that proposition which has been put before me in an affidavit sworn by McLernon in the CLC action. It is suggested in the affidavit that the timing and incidence of other matters affecting fluctuations in the share values indicate that neither Penale nor Mr Brian Conway had suffered any damage as a result of the CLC action. I do not however, consider that I can rely upon what may be factually contentious issues involving difficult questions of causation to dispose of these proceedings in a summary way.

In my opinion, the claim as against the McLernon Group is not particularly strong, but is not so manifestly untenable that I should summarily dispose of it. The statement of claim as it presently stands, however, requires amendment to set out with greater particularity the conduct relied upon. The merits of the claim however are a factor which I will take into account in dealing with the motion for security for costs.

In relation to the action against the solicitors, there is affidavit material which is uncontradicted to indicate that they were instructed by CLC Corporation and that there accounts were rendered to and were paid by CLC. The statement of claim asserts, in par 25, that they had no lawful instructions to act on behalf of CLC. There is no factual basis for that plea. Paragraph 27, which rests upon that same contention, lies at the heart of the action against the solicitors. In my opinion the claim as against the solicitors is manifestly untenable and should be struck out.

On the matter of security for costs, it is plain that quite independent of the judgments in the CLC action Penale is unlikely to be able to pay the costs of these proceedings if unsuccessful. The application for security has been made promptly and while Penale's current financial position is attributable in part to the judgment against it, the position prior to that judgment was one in which the trust assets were considerably exceeded by liabilities.

There is no indication of the financial standing of the parties behind Penale and, in my opinion, the cause of action as against the McLernon Group does not appear to be particularly strong even though not so manifestly untenable as to justify it being struck out.

Having regard to the draft bill of costs prepared by Mr Bouman, whose affidavit was filed in these proceedings in support of the application for security, which indicates costs of $31923 all told, I consider that an order for security for costs in the amount of $20,000 in reasonable in the circumstances. Orders will be made accordingly.

I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice French

Associate:

Dated: 17 November 1997

No appearance for the Applicants.
Counsel for the Respondents:	Mr D. Stone
Solicitor for the Respondents:	Williams and Hughes
Date of Hearing:	29 October 1997
Date of Judgment:	17 November 1997