New Zealand: Supreme Court clarifies when litigation funding amounts to an abuse of process

Last Updated: 18 October 2017
Article by Shane Campbell

Introduction

No one needs to be told litigation is expensive. The cost of access to the courts is commonly seen as one of, if not the most, significant barriers to access justice. This is true even for corporates. The decision in PriceWaterhouseCoopers v Walker (PwC v Walker) was concerned with the validity of a litigation funding agreement between a company called SPF No. 10 Limited (SPF), the liquidators of Property Ventures Limited (PVL) and related companies, Messrs Robert Walker and John Marshall.1

SPF was funding litigation by the liquidators against PriceWaterhouseCoopers (PwC) and certain directors of PVL for breach of various obligations. The case against PwC alleged tortious and contractual liability for various failings in discharging its role as auditor of, and adviser to, the PVL Group.2

PwC had made an application for a stay of that proceeding on the grounds that the combined effect of the litigation funding agreement, and the fact that SPF had also taken assignment of a general security agreement over the assets and undertakings of PVL (Allied Assignment) and other respondents, amounted to an abuse of process. In essence, PwC's position was that SPF had effectively taken an assignment of PVL's cause of action against PwC. This application failed in the High Court and Court of Appeal, and was now being advanced in the Supreme Court.3

After the hearing was argued in the Supreme Court, the parties settled. The Court (with the exception of Elias CJ) nonetheless considered it appropriate to deliver judgment on the basis the "appeal involves important issues, on which the court heard full argument".4

Background

Mr David Henderson is a well-known, perhaps infamous, property developer. PVL and other companies Mr Henderson was involved with were developing a large site in Queenstown.5 The development failed.6 The remainder of the relevant facts can be stated succinctly:

  • Five Mile Holdings Limited (FMH) was a company associated with PVL.
  • FMH had borrowed large amounts of money from Hanover Finance Limited (Hanover). This borrowing was secured by a general security agreement over the assets of FML, including the land on which the development was to occur (FML GSA).
  • PVL had guaranteed FMH's obligations to Hanover, which were secured by a general security agreement over the assets and undertakings of PVL (PVL GSA).
  • In 2009 Hanover assigned the PVL GSA to Allied Farmers Investments Limited (Allied). At this time FML was in receivership and owed approximately $98,000,000 to Hanover. After the sale of assets, approximately $39,000,000 was owed to Allied (after the assignment of the PVL GSA).
  • In March 2010 Allied appointed receivers to PVL and in July 2010 it was placed into liquidation owing approximately $69,300,000.
  • In October 2012 SPF and PVL entered into the funding agreement. This agreement was conditional upon SPF entering into an arrangement with Allied and the receiver appointed by Allied. The nature of this arrangement was to provide SPF with a first ranking security interest over PVL's assets and undertaking.
  • In November 2012 and April 2013 the proceedings were filed.
  • In March 2013 the Allied Assignment was executed. In exchange for receiving an upfront sum of $100,000 and five per cent of any payment made to SPF by PVL in the event of a successful claim. SPF's stated rationale for this acquisition was to prevent Mr Henderson taking control of the litigation as he was making efforts to acquire the rights.

The relevant documents

Funding agreement

Under the funding agreement SPF will provide various services to PVL in exchange for a fee which is calculated by reference to formulae and events provided in the agreement. In terms of the degree of control SPF had over the proceeding, the following clauses of the agreement are relevant:

  • Clause 2.3: all final decisions are matters for PVL and not SPF, except for settlement decisions and proposed discontinuance to which clause 14 applies.
  • Clause 14: SPF can request that PVL make or accept an offer of settlement, but PVL is not obliged to act on such a request. PVL cannot accept an offer of settlement or discontinue proceedings without SPF's proper written consent. If agreement cannot be reached there is a procedure for resolving that dispute.
  • Clause 2.1: SPF has access to certain documents, and is authorised to obtain access to documents.

SPF also has full consultation rights under the agreement. It is also entitled to advance notice if PVL intends to meet or communicate with any other party in respect of the settlement. SPF also has a significant degree of control over the appointment of lawyers to act for PVL.

The agreement was conditional upon SPF undertaking satisfactory due diligence and on SPF entering into an arrangement with Allied by which it obtained a first ranking security interest over PVL's property. Both conditions were satisfied in due course.

Allied Assignment

Under the terms of the Allied Assignment, Allied assigned all of its "rights" against PVL, its subsidiaries, and Mr Henderson, to SPF. "Rights" was defined in a very broad manner to include all rights of action to SPF. In substance it had the effect of assigning the PVL GSA to SPF.

Allied GSA (referred to as the PVL GSA here)

Clause 6.3 of the PVL GSA provided an enforcement power that Hanover could "bring, defend, submit to arbitration, negotiation, compromise, abandon or settle any claim or proceeding, or make any arrangement or compromise, in relation to the Secured Property". SPF acquired this power under the terms of the Allied Assignment. It is not subject to the control provisions in the funding agreement, including settlement and discontinuance.

Under the PLV GSA and as the first ranking creditor, SPF became entitled to the proceeds of any successful claim up to the amount of its indebtedness. This would result in SPF receiving the lion's share of any judgment sum.

Dominion assignment – post Court of Appeal

Under a deed of transfer of debt and securities, SPF acquired all of Dominion Finance Group Limited's (Dominion) rights in relation to certain debts and securities, including those arising from a general security agreement. This agreement was not before the Court.

Undertakings – post Court of Appeal

In written submissions, counsel for SPF provided confirmations that:

  • SPF has not at any point sought to rely on its powers of enforcement under cl 6.3 of the PVL GSA.
  • SPF considers itself bound by its contractual obligations under the funding agreement.
  • If SPF were to assert its power of enforcement under cl 6.3 of the PVL GSA in those circumstances, it would be a breach of good faith.

SPF agreed it would not rely on cl 6.3. In an affidavit, evidence was given about the liquidators' fees to be recovered in the event the claim was successful.

Decision

Waterhouse v Contractors Bonding Ltd

PwC did not seek to argue that litigation funding by itself is an abuse of process, and conceded that it was permissible under the decision of the Supreme Court in Waterhouse v Contractors Bonding Ltd.7

In that decision, the Court decided it was not its role to regulate litigation funding, but stated that it has jurisdiction to stay a proceeding for abuse of process. Such proceedings include those that:8

  • deceive the court, are fictitious or a mere sham;
  • use processes of the court in an unfair or dishonest way or for some ulterior or improper purpose or in an improper way;
  • are manifestly groundless, without foundation or serve no useful purpose; and
  • are vexatious or oppressive.

The Court also found that if a funding agreement "effectively assigns the cause of action in circumstances where that is impermissible, that would also be an abuse of process".9

Was there assignment of a bare cause of action?

The Court started its analysis by noting that the assignment of a debt is no problematic event where it is foreseen that litigation will be necessary to effect a recovery, and the assignment of a distressed debt is not unusual.10 Even the assignment of a debt secured by a GSA can be uncontroversial, event where it allows the secured party to pursue claims if enforcement of the security becomes necessary.11 This is what happened in the present case.

What distinguishes this case is the fact that the assignment of the PVL GSA from Allied to SPF satisfied a condition of the litigation funding agreement.12 As such, without the assignment the funding agreement could not be effective. The Court took the view that it would not be "realistic to view the Funding Agreement and the Allied Assignment as separate transactions that have happened in parallel with each other".13 The Court accepted that the two agreements must be looked at alongside each other.14 The Court also considered the following two aspects of the case to be important:15

  • First, the current proceedings were already on foot and being funded by SPF when the assignment occurred.
  • Secondly, all realisable assets of PVL and the PVL Group had been realised prior to the assignment.

When viewed and contextualised in this way, the Court considered it was "arguable that the SPF transaction constitutes assignment of the bare cause of action pursued by the liquidator against PwC and the other defendants".16 The basis for that argument rested upon two factors:

  • legal control of the liquidator's claim against PwC (Legal Control Issue); and
  • entitlement to all or substantially all the proceeds of a successful claim (Proceeds Issue).

Legal Control Issue

The Court accepted that the powers in cl 6.3 of the PVL GSA could not be considered in isolation; it must be viewed in the context of the GSA itself (including any requirements of good faith) and the Funding Agreement, the latter of which could constrain the power under cl 6.3.17 Clause 6.3 is an empowering provision, but importantly it does not compel any action. Like any contractual power, it may be waived.18

Under the funding agreement, it is PVL that instructs lawyers, not SPF. This may have been sufficient to temper SPF's power under the GSA. However, because SPF confirmed it would not rely on cl 6.3, it was not necessary for the Court to reach a concluded view on this point.19

Proceeds Issue

Under the bare terms of the GSA, SPF would be entitled to all proceeds of a claim, up to the considerable and ever-increasing (via interest) amount secured by that GSA.20 This is because SPF undertook to pay a proportion of the proceeds to the liquidator for the benefit of the unsecured creditors.21

Conclusion on bare assignment

Because of the undertakings that SPF gave in relation to the utilisation of cl 6.3, and agreeing to pay a portion of the proceeds of any claim to the liquidator, the "concern that the SPF transaction may amount to an assignment of a bare cause of action is removed".22 This conclusion meant that the Court did not need to consider whether any of the exceptions to an impermissible assignment of a bare cause of action were available.23

Comment

The Supreme Court has once more confirmed that litigation funding agreements are not themselves objectionable. There remain the traditional categories where they may amount to an abuse of process including those that:

  • deceive the court, are fictitious or a mere sham;
  • use processes of the court in an unfair or dishonest way or for some ulterior or improper purpose or in an improper way;
  • are manifestly groundless, without foundation or serve no useful purpose; and
  • are vexatious or oppressive.

The focus of this case was on the circumstances in which an impermissible assignment of a bare cause of action would render a proceeding an abuse of process. This was a case close to the line. Key points emerging from the judgment include:

  • Courts will look to the substance of a transaction to ascertain whether it amounts to a bare cause of action. The form of the transaction is not determinative, and may not be persuasive.
  • The timing of the impugned transaction will be relevant. In this case the assignment occurred after the litigation had commenced.
  • The utility of the transaction will also be the subject of scrutiny. In the instant proceeding, at the time of the assignment all realisable assets had been realised.§ The level of control that the funder can exert is a highly cogent consideration.
  • The amount of the potential judgment sum, including the proportionate amount, will be relevant in assessing whether the assignment is permissible.

Download article in PDF format

Footnotes

1 PriceWaterhouseCoopers v Walker [2017] NZSC 151 [PwC v Walker].

2 At [1] and [14].

3 At [2].

4 At [4].

5 At [6].

6 At [6].

7 Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91.

8 At [31].

9 At [57].

10 PwC v Walker at [78].

11 At [78].

12 At [80].

13 At [80].

14 At [81].

15 At [81].

16 At [82].

17 At [84].

18 At [85].

19 At [88].

20 At [89].

21 At [90].

22 At [91].

23 At [92].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Shane Campbell
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions