AUCKLAND CITY COUNCIL AS ASSIGNEE OF BODY CORPORATE NO 16113, PAUL BORNE BROWNE & ORS V AUCKLAND CITY COUNCIL AND ORS HC AK CIV 2003-404-6422

AUCKLAND CITY COUNCIL AS ASSIGNEE OF BODY CORPORATE NO 16113, PAUL BORNE BROWNE & ORS V AUCKLAND CITY COUNCIL AND ORS HC AK CIV 2003-404-6422 10 December 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2003-404-6422BETWEEN AUCKLAND CITY COUNCIL AS ASSIGNEE OF BODY CORPORATE NO 16113, PAUL BORNE BROWNE & ORS Plaintiffs AND AUCKLAND CITY COUNCIL First Defendant AND BRENT FRANCIS HULENA AND ROBERT FANG SANG Second Defendants AND LAKE ENGINEERING CONSULTANTS LTD Third Defendant AND CHRISTOPHER FARRAR SMITH Fourth Defendant AND PILCHERS WATERPROOFING LTD Fifth Defendant Hearing: 4 December 2007 Counsel: D Goddard QC and C E Weaver for Plaintiffs and First Defendant P Rzepecky and A Wedekind for Second Defendant D McGill for Third Defendant No appearance by or on behalf of Fourth or Fifth Defendant Judgment: 10 December 2007JUDGMENT OF HEATH JThis judgment was delivered by me on 10 December 2007 at 4.00pm pursuant to Rule 540(4) of the High Court Rules. Registrar/ Deputy RegistrarSolicitors: Heaney & Co, Auckland Morgan Coakle, AucklandIntroduction[1] The Body Corporate and individual unit owners (the original plaintiffs) of a high rise residential complex in central Auckland seek damages against a number of defendants in respect of losses caused by severe water ingress. The original plaintiffs had sought judgment in the sum of (approximately) $6.5 million. [2] The original plaintiffs sued: a) Auckland City Council (the Council), as the relevant territorial authority; b) Messrs Hulena and Sang (the designers), who were responsible for designing the residential complex, c) Lake Engineering Ltd (the project manager), which was responsible for co-ordinating work on site; d) Mr Smith (a director of the developer) and e) Pilchers Waterproofing Ltd, a waterproofing specialist. Tauran Construction Ltd, the developer was not sued because it was placed in liquidation shortly after the project was completed. Pilchers Waterproofing Ltd is also in liquidation. [3] Auckland City Council (the Council) elected to settle with the original plaintiffs for an agreed sum of $3 million. In consideration of that payment the Council has taken an assignment of the original plaintiffs' causes of action against remaining defendants, save for their cause of action under the Fair Trading Act 1986. The Council accepts that the Fair Trading Act claim is personal to the original plaintiffs and cannot be assigned to it.[4] The purpose of the settlement is articulated in Recital F to the amended settlement agreement of November 2007, which states:The overriding intention of the parties to the [September] Settlement Agreement was that in consideration of the Council negotiating a settlement which reflected the collective liability of all defendants (without the Claimants accepting that the agreed payment fully compensated with [sic] them for all losses suffered by them as a consequence of the defendant's alleged negligence) the Claimants would assign to the Council all of their causes of action and rights in the litigation and the Council would (in its own name and/or in their names) be able to carry on with the litigation against the remaining defendants as if it were an insurer exercising a right of subrogation on terms that: (i) The Council would receive the first $3,000,000 of any recovery made together with its costs in carrying on the litigation against the remaining defendants; and (ii) The Claimants would receive any amount in excess of that payable to the Council in accordance with (i) above.[5] The Council's advisors were mindful of the possibility of an allegation that it stood to profit from taking an assignment of a cause of action. It was well aware that any suggestion of profit might render the settlement arrangements champertous in nature. The settlement agreement is structured in such a way that the Council's liability has been limited to $3 million plus associated costs and any recovery over those sums is retained by the original plaintiffs. That leaves the other defendants exposed to the original claim for approximately $6.5 million. [6] Following the assignment to the Council, the proceeding remains alive against the designers and the project managers. They apply to strike out the proceeding on the grounds that the Council's arrangements with the original plaintiffs are champertous and, as such, are contrary to public policy. The issue on the present application is whether that is so.The present applications[7] There are two applications before the Court. The first seeks an order striking out the Sixth Amended Statement of Claim. The second is an application by the Council for leave to file and serve a Seventh Amended Statement of Claim.[8] Counsel are agreed that it is more appropriate to focus on the proposed Seventh Amended Statement of Claim. They agree that, if I were to reject the designers' and project manager's application for strike-out, leave should be granted for the Seventh Amended Statement of Claim to be filed and served. [9] The principles applicable on a strike out application are clear. In South Pacific Manufacturing Co Ltd v NZ Security Consultants and Investigations Ltd[1992] 2 NZLR 282 (CA) at 305, Richardson J said that an applicant must demonstrate "on the material before the Court and in light of the present state of evolution of the common law that the cause of action sought to be relied on is so clearly untenable that it cannot possibly succeed". See also, Takaro Properties Ltd v Rowling [1978] 2 NZLR 314 (CA) at 317 and Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA) at 267. [10] An application to strike out a claim proceeds on the assumption that the facts pleaded in the Statement of Claim are capable of being proved at trial. That assumption is made because it would be wrong to prevent a claim from being tried when findings of fact have not been made and, indeed, cannot be made until the evidence of witnesses has been tested at trial. [11] While, the jurisdiction to strike out is one to be exercised sparingly (seeGartside v Sheffield Young & Ellis [1983] NZLR 37 (CA) at 45 and Electricity Corporation Ltd v Geotherm Energy Ltd [1992] 2 NZLR 641 (CA)), the fact that an application raises difficult questions of law and requires extensive argument does not exclude the exercise of the jurisdiction (Gartside at 45).Analysis(a) Maintenance and champerty[12] Maintenance of a cause of action involves a person with no interest in a dispute paying or contributing to the cost of another in instituting or continuing to prosecute civil proceedings. Maintenance may not operate to prevent litigation beingpursued to its conclusion, but can give rise to a counterclaim based on the tort of maintenance. [13] On the other hand, champerty relates to the situation in which, as a quid pro quo for the maintainer's support, the maintainer is to share in the fruits of the litigation: something once described by Lord Denning MR as "a particularly obnoxious form of [maintenance]": Trendtex Trading Corporation v Credit Suisse[1980] QB 629 (CA) at 654. [14] The twin concepts of maintenance and champerty were developed in medieval England at a time when the "mechanisms of justice lacked the internal strength to resist the oppression of private individuals through suits fomented and sustained by unscrupulous men of power": Giles v Thompson [1994] AC 142 (HL) at 153 per Lord Mustill, with whom the other Law Lords agreed. Later, Lord Mustill described champerty as "particularly vicious" because the "purchase of a share in litigation presented an obvious temptation to the suborning of justices and witnesses and the exploitation of worthless claims which have lacked the resources of influence to withstand". However, as the centuries passed the Courts became stronger, their mechanisms more consistent and their participants more self-reliant. Therefore, abuses could, Lord Mustill said, be "more easily detected and foreshadowed and litigation more easily determined in accordance with the admissions of justice, without recourse to separate proceedings against those who trafficked in litigation". [15] The origin of maintenance and champerty is detailed in Winfield, The History of Maintenance and Champerty (1919) 35 LQR 50 and in his subsequent note aboutNeville v London Express Newspaper Ltd [1919] AC 368 (HL) at (1919) 35 LQR 233. [16] In more recent times, the rules relating to maintenance and champerty have undergone reconsideration in a number of jurisdictions, including New Zealand. Both the Courts and law reform bodies have questioned the benefits of continuing the ancient rules in a different and more complex modern world. The need for (or scope of) the rules were considered in Giles v Thompson and Campbells Cash andCarry Pty Ltd v Fostif Pty Ltd (2006) 229 ALR 58 (HCA); see also, the Law Commission's report, Subsidising Litigation (NZLC, R72, May 2001). [17] Access to justice is one reason for reconsideration of the public policy based rules. I regard the desirability of promoting settlement of litigation as another. If the old rules continue to have any place in modern society, it is to protect the vulnerable from exploitation by those with means to their legitimate claims: eg, see Giles v Thompson at 164.(b) Competing submissions[18] Notwithstanding that shift in emphasis, Mr Rzepecky, for both applicants, based his argument on the proposition that the Council intended to use the claims of the original plaintiffs for its own benefit by seeking judgment in the full amount of their claims (approximately $6.5 million) in preference to seeking contribution, quadefendant, for a sum of $3 million, plus costs. [19] Mr Rzepecky's complaint is that the designers and the project manager are now forced to take the lead in claims against the Council, rather than relying on the original plaintiffs' evidence of Council negligence. That, he submits, is exploitative conduct. [20] Mr Rzepecky also expressed concern that the Council's action created an illegitimate financial advantage which had the effect of bypassing the rules for contribution as among defendants set out in s 17 of the Law Reform Act 1936. That, he portended, could lead to an undesirable result of defendants engaging in a "bidding war" for causes of action pleaded against them, to the detriment of financially weaker defendants. [21] Mr Goddard QC, for the Council, submits that the Council had a genuine commercial interest in obtaining the assignment of causes of action and funding the Fair Trading Act claim; ie to limit its liability and to seek redress for the money it has paid out. He also submits that the effect of a successful application will be, ineffect, to require the original plaintiffs to continue their claims, because the settlement will be an illegal contract and void. [22] Mr Goddard submits that there are no public policy reasons that support the applications, contending also that the concerns expressed about the contribution issues are misplaced.(c) The relevant authorities[23] There is no binding authority on this Court on the point in issue. Indeed, there is a sharp difference of opinion in views expressed in Australia and England in the most analogous cases. [24] In Australia, Lindgren J, in National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514 (FCA), held that an assignment similar to that taken by the Council in this case was void for champerty. On the other hand, in Brownton Ltd v Edward Moore Inbucon Ltd [1985] 3 All ER 499 (CA), the Court of Appeal took the view that a not dissimilar arrangement was valid. [25] Other authorities cited tend to reflect policy considerations at play in determining whether an assignment is valid or invalid. In my view, they are relevant only to the extent that they provide guidance as to the direction various common law countries are taking on issues of this type. [26] Before discussing Brownton and Citibank, I refer to the only New Zealand decision that appears to have touched significantly on this topic: First City Corporation Ltd v Downsview Nominees Ltd [1989] 3 NZLR 710 (HC). Although that judgment was, subsequently, appealed to both the Court of Appeal and the Privy Council (see [1990] 3 NZLR 265 (CA) and [1993] 1 NZLR 513 (PC) those appellate decisions do not address the point in issue in this case. [27] In First City Finance, Gault J was concerned with an assignment of rights of action conferred on a secured creditor by a debenture. Gault J observed that the "essence of champerty is maintenance coupled with an agreement that the maintainershall have a share of the amount recovered in the action maintained": at 754. Continuing, Gault J confirmed the general rule that, even in equity, a bare right of action was not assignable, on the principle that the law would not recognise any transaction savouring of maintenance or champerty. [28] After discussing a number of authorities on the topic (including Trendtex Trading Corporation v Credit Suisse [1982] AC 679 (HL)), Gault J took the view that if there were a sufficient commercial interest in taking the assignment, "no risk of encouraging speculation for profit in bare rights to litigate" and no public policy reason to justify Court intervention on the grounds of champerty, the Court should not intervene: see 756-758. The Judge also said, at 755, that, in the twentieth century, "the law relating to maintenance has undergone considerable liberalisation . [i]n response to changing commercial circumstances". He cited the judgment of Danckwerts J in Martell v Consett Iron Co Ltd [1955] Ch 363 at 382, where His Lordship said:. . . unless the law of maintenance is capable of keeping up with modern thought, it must die in a lingering and discredited old age.[29] Both Brownton and Citibank refer to and rely upon the House of Lord's decision in Trendtex Trading Corporation v Credit Suisse. Delivering the principal speech, Lord Roskill said, at 703: The court should look at the totality of the transaction. If the assignment is of a property right or interest and the cause of action is ancillary to that right or interest, or if the assignee had a genuine commercial interest in taking the assignment and in enforcing it for his own benefit, I see no reason why the assignment should be struck down as an assignment of a bare cause of action or as savouring of maintenance. (my emphasis)Lord Wilberforce delivered a separate opinion. His Lordship's opinion demonstrates that the case was dealt with primarily on the proper law of the agreement and the need for a Swiss Court to determine it. [30] Lord Edmund-Davies, Lord Fraser of Tullybelton and Lord Keith of Kinkel agreed with the speeches delivered by both Lord Wilberforce and Lord Roskill.[31] Citibank was a case involving the assignment of rights to sue in consequence of a settlement. Lindgren J identified three reasons why the assignments were champertous: at 540-541. He concluded that "there are present the twin evils of maintenance and champerty at which the rule against assignment to bare causes of action is directed". [32] First, the Judge did not consider that the assignee had a "genuine commercial interest" in acquiring the litigation in consideration for an overall settlement. Lindgren J said that the type of "genuine commercial interest" contemplated byTrendtex was "not a nebulous notion of the general commercial advantage of the assignee but something more specific and limited", not embracing "an interest arising from an arrangement voluntarily entered into by the assignee of which the impugned assignment is an essential part". Instead, the Judge considered the expression was limited to "a commercial interest which exists already or by reason of other matters, and which receives ancillary support from the assignment". This view is at odds with the more liberal interpretation of the phrase in Brownton.[33] Second, the Judge said that the assignments were taken in the belief that they offered an advantage not available under the New South Wales or Victorian equivalents of s 17 of the Law Reform Act 1936 because the assignee would not need to prove its own liability but, importantly (subject to any claim by Citibank under the contribution legislation) it would be entitled as of right to indemnity. His Honour considered that, while not seeking to make a profit from the assignments, the assignee was seeking to ensure that it recovered the whole of those amounts irrespective of whether Citibank should be held liable to contribute at all, or if so, in what proportions. [34] Third, if the settlement moneys had not been paid it was unlikely that many of the original claimants would have sued because of "the relative modesty of the individual amounts at stake". Therefore, the conduct was directed to the encouragement of litigation, the proceeds of which would go to the assignee. [35] Mr Rzepecky relies on the first and second reasons to support his argument. He accepts that the third does not apply in this case.[36] I observe, with regard to the third, that it cannot be right (as a matter of principle) to hold an assignment champertous on the grounds that, in the absence of funding, the claims would not have been continued. Such a holding puts in issue the very existence of legal aid and other acceptable methods of third party funding of the type discussed in Campbells Cash and Carry Pty Ltd at [253], per Callinan and Heydon JJ. Lindgren J's view also runs counter to more recent authorities which have emphasised the public policy factor of access to justice as telling against the use of champerty and maintenance to prevent (otherwise) justifiable claims from proceeding. [37] Brownton does not appear to have been cited in Citibank. Yet, the Court of Appeal, in Brownton, held that an assignment was not champertous and the assignee was permitted to sue. [38] Giving the principal judgment in Brownton, Sir John Megaw referred to the speeches of both Lord Wilberforce and Lord Roskill in Trendtex. Sir John took the view that Lord Wilberforce did not say, or imply, that an assignee who had a genuine and substantial interest in the subject matter of the action assigned could not make a profit out of the assignment. Nor did he consider that Lord Wilberforce would have condemned the assignment if one of several heads of damages arose from something in which the assignee did not previously have a genuine and special interest. Sir John Megaw also expressed the view that circumscription of the ability to take an assignment of a cause of action in that way was not intended by Lord Roskill. Sir John Megaw emphasised the statement of principle by Lord Roskill, at 703, to which I have already referred: see para [29] above. [39] Sir John Megaw continued, at 505:Even these clear and relatively simple words were the subject of analysis in the argument before us. Thus it was suggested that, where the cause of action assigned is a breach of contract, the 'genuine commercial interest' is limited so as to apply only to a party to the contract or, if the assignee is not himself a party to the contract, then the interest has to be the interest of a creditor, as assignee, securing himself in respect of the debt by taking an assignment of a cause of action possessed by his debtor. That was the position in Trendtex; but there is nothing in the speeches in Trendtex which suggest that the 'genuine and substantial interest' or the 'genuine commercial interest' whichis sufficient to render an assignment lawful is so narrowly limited. Nor is there any apparent reason why it should be so.[40] Lloyd LJ took a similar view about the application of Trendtex. In particular, the Lord Justice did not consider that Trendtex should only be applied to invalidate an assignment in cases "where there is no genuine commercial interest". In saying that, at 507, His Lordship expressed the view that: the rule against assigning a bare right to litigate is now much narrower than it originally was, since the validity of the assignment no longer depends on the cause of action being ancillary to the transfer of a property right or interest.[41] At 509, Lloyd LJ summarised the Trendtex principles as follows:I now attempt to summarise in my own words the principles established by the House of Lords in Trendtex, as follows. (i) Maintenance is justified, inter alia, if the maintainer has a genuine commercial interest in the result of the litigation. (ii) There is no difference between the interest required to justify maintenance of an action and the interest required to justify the taking of a share in the proceeds, or the interest required to support an out-and-out assignment. (iii) A bare right to litigate, the assignment of which is still prohibited, is a cause of action, whether in tort or contract, in the outcome of which the assignee has no genuine commercial interest. (iv) In judging whether the assignee has a genuine commercial interest for the purpose of (i) to (iii) above, you must look at the transaction as a whole. (v) If an assignee has a genuine commercial interest in enforcing the cause of action it is not fatal that the assignee may make a profit out of the assignment. (vi) It is an open question whether, if the assignee does make such a profit, he is answerable to the assignor for the difference. (my emphasis)[42] Sir John Donaldson MR agreed with both Lloyd LJ and Sir John Megaw that the assignee "had a genuine commercial interest" in taking an assignment and that the transaction should not be "struck down as savouring of maintenance and champerty": at 511. [43] The judgments in Brownton reflect a trend, seen more recently in decisions of high authority such as Giles v Thompson and Campbells Cash and Carry Pty Ltd v Fostis Pty Ltd in which the Courts have declined to use the ancient mechanism of champerty or maintenance to prevent claims from being pursued where there was no powerful public policy factor justifying that course. Those authorities, with which I respectfully agree, make it clear that any rule of law that has its origins in publicpolicy should only continue to operate in cases where there is some modern public policy reason to apply it. [44] In Giles v Thompson, the House of Lords considered that maintenance and champerty was best confined to the origins of the principle of public policy designed "to protect the purity of justice and the interests of vulnerable litigants": at 164. InCampbells Cash and Carry Pty Ltd, Gummow, Hayne and Crennan JJ, went further, at [91], stating that neither purity of justice or the interests of vulnerable litigants warranted "formulation of an over arching rule of public policy that either would, in effect, bar the prosecution of an action where any agreement has been made to provide money to a party to institute or prosecute the litigation in return for a share of the proceeds or would bar the prosecution of some actions according to whether the funding arrangement met some standard fixing the nature or degree of control or reward the funder may have under the agreement". Their Honours considered that to "meet these fears by adopting a rule in either form would take "too broad an axe to the problems that may be seen to lay behind the fears". Callinan and Heydon JJ also doubted the continuing application of the rules: at [250]-[254]. [45] I agree with Gault J, in First City Finance, that there was "considerable liberalisation" of this area of law in the twentieth century. That trend is directly opposed to the narrow view of the recognised exception of a "genuine commercial interest" in Citibank. Based on the authority supporting that trend, I can see no reason to justify continued use of these defences in modern conditions. The Court has ample jurisdiction to prevent an abuse of its processes to address perceived exploitation of the vulnerable, without recourse to such ancient remedies: see, generally, Lai v Chamberlains [2007] 2 NZLR 7 (SCNZ) at [61-[64] (Elias CJ, Gault and Keith JJ), [162]-[167] (Tipping J) and [219-[221] (Thomas J) and Goldsmith v Sperring [1977] 2 All ER 566 (CA) at 574 (Lord Denning MR), 582 (Scarman LJ) and 586 (Bridge LJ). [46] To let maintenance and champerty fall into disuse on that basis would in my opinion, be desirable. However, if I were wrong in that approach, I would prefer the wider notion of "genuine commercial interest" described in Brownton to those ofLindgren J in Citibank and the more narrow scope ("purity of justice" and "interests of vulnerable litigants") of the defences formulated in Giles v Thompson.(d) Application of law to facts[47] For the reasons given by Lloyd LJ and Sir John Megaw in Brownton, I consider that the Council did have a "genuine commercial interest" in completing settlement and in taking an assignment of the claims. It was faced with a claim for approximately $6.5 million. Ratepayers were at risk in respect of such a claim. Sensibly, the Council elected to settle. That settlement was advantageous both to it and to the original plaintiffs. [48] From the Council's perspective, it limited its liability at $3 million plus costs. The original plaintiffs received funds in settlement of their claims and removed the inevitable costs and risks of proceeding to trial. [49] If the assignment were set aside, the litigation would not cease; rather, the original plaintiffs would be denied their settlement funds and would be forced to litigate. That cannot be in the interests of justice. No rule of public policy ought to prevent a genuine settlement of that type. [50] Second, under New Zealand contribution legislation there is no prejudice to the designers and project manager. The inherent flexibility of the contribution rules was emphasised by Cooke P in both Day v Mead [1987] 2 NZLR 443 (CA) at 541- 542 and Mouat v Clark Boyce [1992] 2 NZLR 559 (CA) 563-564. The lack of prejudice can be tested by considering what would have happened if the settlement agreement had been structured differently. If the original plaintiffs had settled with the Council for $3 million, the designers and the project manager would have remained at risk of a claim for approximately $6.5 million. The original plaintiffs could have continued to sue for $3.5 million and the Council could have sought contribution for $3 million. [51] Because any assignee takes property "subject to equities" (see Laws NZ,Choses in Action, at para 49 and the authorities cited in fn 1 and 2) the designers andproject manager can plead contributory negligence against the Council (in relation to any such negligence by the original plaintiffs) as well as seeking contribution against the Council, qua defendant. [52] Mr Rzepecky was able to point only to the possibility of prejudice arising from the need for the designers and project manager to initiate evidence in support of a claim against the council, as opposed to relying on the original plaintiffs' evidence. He also placed reliance on the problems inherent in contribution issues because of the apparent insolvency of some parties. [53] Those contribution considerations cannot make something that is not contrary to public policy into something that is. That view accords with the authorities cited by Mr Goddard, particularly Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 (HL) and Fisher v CHT Ltd [1966] 2 QC 475 (CA). In Dubai, at 384, para 52, Lord Nicholls of Birkenhead (giving the principal speech) said:I cannot accept this submission. It is based on a misconception of the essential nature of contribution proceedings. The object of contribution proceedings under the Contribution Act is to ensure that each party responsible for the damage makes an appropriate contribution to the cost of compensating the plaintiff, regardless of where that cost has fallen in the first instance. The burden of liability is being redistributed. But, of necessity, the extent to which it is just and equitable to redistribute this financial burden cannot be decided without seeing where the burden already lies. The court needs to have regard to the known or likely financial consequences of orders already made and to the likely financial consequences of any contribution order the court may make. For example, if one of three defendants equally responsible is insolvent, the court will have regard to this fact when directing contribution between the two solvent defendants. The court will do so, even though insolvency has nothing to do with responsibility. An instance of this everyday situation can be found in Fisher v C H T Ltd (No 2)[1966] 2 QB 475, 481, per Lord Denning MR. (my emphasis)Result[54] The designers' and the project manager's applications to strike out the existing Statement of Claim cannot succeed. Those applications are dismissed. [55] Leave is granted for the Council to file and serve a Seventh Amended Statement of Claim, in the form proposed.[56] One set of costs is awarded in favour of the Council, on both applications. Costs are awarded on a 2B basis together with reasonable disbursements. Both costs and disbursements are to be fixed by the Registrar. I certify for second counsel. [57] The proceeding is adjourned for a case management conference before Venning J at 10am on 17 December 2007. Directions for that conference were given on 4 December 2007. [58] I thank counsel for the quality of their arguments. __________________________ P R Heath J Delivered at 4.00pm on 10 December 2007