FEDERAL COURT OF AUSTRALIA

Capital Webworks Pty Ltd v Adultshop.com Limited [2005] FCA 438

PROCEDURE – application to stay or dismiss action – five years since action instituted
– whether action an abuse of process due to maintenance and champerty – need for direction to establish relevant circumstances – whether action a failure to prosecute the proceeding with due diligence – motion held over pending direction to obtain further evidence

Federal Court Rules O 20 r 2(b), O 20 r 2(c), O 35A r 3, O 35A r 2(1)(f)

Abraham v Thompson [1997] 4 All ER 362 referred to

Bandwill Pty Ltd v Spencer-Laitt (2000) 23 WAR 390 considered

Carob Industries Pty Ltd (in liq) v Simto Pty Ltd (1997) 18 WAR 1 cited

Carob Industries Pty Ltd (in liq) v Simto Pty Ltd (unreported, Supreme Court of Western Australia, Anderson J, 11 December 1997) cited

Clairs Keeley (a firm) v Treacy (2003) 28 WAR 139 cited

Condliffe v Hislop [1996] 1 All ER 431 referred to

Elfic Ltd v Macks [2003] 2 Qd R 125 considered

Faryab v Smyth [1998] EWCA Civ 1416 cited

Gore v Justice Corporation Pty Ltd (2002) 119 FCR 429 cited

Grovewood Holdings PLC v James Capel and Co Ltd [1995] Ch 80 cited

Idoport Pty Ltd v National Australia Bank Ltd [2004] NSWSC 695 considered

Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1996) 72 FCR 261 considered

Marston v Statewide Independent Wholesalers Ltd (2003) 54 ATR 75 cited

Oasis Merchandising Services Ltd, Re [1998] Ch 170 cited

Stocznia Gdanska Sa v Latreefers Inc [2000] EWCA Civ 36 referred to

Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd (2004) 51 ACSR 129 cited

CAPITAL WEBWORKS PTY LTD v ADULTSHOP.COM LIMITED, MALCOLM DAY and MELBOURNE INFORMATION TECHNOLOGIES AUSTRALIA PTY LTD

WAD 49 of 2000

NICHOLSON J

15 APRIL 2005

PERTH

THE COURT ORDERS THAT:

1.                  Within 10 days the applicant file and serve an affidavit setting out in full the circumstances pertaining to the beneficial ownership of its cause of action.

2.                  The notice of motion of the first and second respondents dated 14 December 2004 be held over until the expiration of the time for compliance with the direction and then stand reserved for judgment. 

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

REASONS FOR JUDGMENT

1                     The first and second respondents bring a motion for orders that pursuant to O 20 r 2(b) and O 20 r 2(c) of the Federal Court Rules (‘FCR’) the proceeding be stayed or, in the alternative, be dismissed. 

2                     The relevant facts are set out in the affidavit of the second respondent sworn on 14 December 2004 (supplemented by an affidavit of Mr Brown sworn on 1 April 2005) and later affidavits of the second respondent sworn 19 January 2005 and 7 February 2005. 

3                     This action was commenced on 5 April 2000.  The first and second respondents contend that the applicant has made no effort to have the matter advanced to trial.  Therefore, it is said, the action is an abuse of process and should be stayed or dismissed. 

4                     Reliance is also placed on FCR O 35A r 3 and O 35A r 2(1)(f) to support stay or dismissal. 

background circumstances

3.5                 On 5 April 2000, the applicant commenced these proceedings following the removal (on 29 March 2000) of the applicant from the register of the third respondent disentitling the applicant from using the domain name adultshop.com.au (‘the domain name’).

4.6                 The first respondent became the registered owner of the domain name on 30 March 2000.

5.7                 On the same day as it commenced these proceedings, the applicant sought urgent interlocutory relief, inter alia, to restrain the first respondent from carrying on in any manner or by any means whatsoever, the business of selling or offering for sale adult leisure products by or through the internet using the domain name or from directing internet inquiries from the domain name to the first respondent’s business.

6.8                 On 5 April 2000, I dismissed the application for injunctive relief.

7.9                 On 6 July 2000, the applicant filed a notice of motion seeking, inter alia, a further interlocutory injunction against first and second respondents. 

8.10              On 13 July 2000, and before the application for the further interlocutory injunction came on for hearing, the third respondent was joined as a party to the proceedings by the applicant.

9.11              On 23 August 2000, the applicant was ordered to provide security for the costs of each of the respondents. The proceedings were stayed pending the provision of security by the applicant.

10.12           The applicant failed to provide security within the timeframe stipulated by the Court’s orders and took no further steps in the proceedings whatsoever for over 7 months. 

13                  At the instigation of the Court, this matter was brought back for directions on 3 April 2001.  At that hearing the applicant was directed to provide security by no later than 10 April 2001, which it duly did.

14                  At a subsequent directions hearing on 3 May 2001, the applicant indicated through its legal advisors that it was not proceeding with its motion for interlocutory injunction. 

15                  Consequently, on 29 May 2001, I ordered that the applicant’s motion for an interlocutory injunction filed on 6 July 2000 be dismissed and awarded costs to the respondents’ favour. 

16                  On 29 May 2001, the applicant filed and served an amended statement of claim.

17                  On 17 October 2001, I made a series of programming orders by consent dealing with the provision of verified discovery (‘Discovery Orders’) from the parties to the proceedings. 

18                  On 26 November 2001, the applicant filed and served its verified list of documents.

19                  On 9 January 2002, the solicitors for the first and second respondents wrote to the solicitor for the applicant with respect to the adequacy of their client’s discovery. 

20                  On 31 January 2002, the first and second respondents’ solicitors filed a notice of motion seeking further and better discovery against the applicant.

21                  On 8 February 2002, solicitors for the applicant filed and served an affidavit on behalf of the applicant in opposition to the notice of motion for further and better discovery.

22                  In the affidavit, it was deposed that Mr Edward Justin Sweeney, a former director of the applicant had stated that the applicant had no further documents in its possession, custody or power relating to categories of documents found at pars 1.2, 1.4, 1.5, 1.6 and 1.7 of the Discovery Orders. These categories included, inter alia, the applicant’s end-of-year financial statements including profit and loss statements, balance sheet details, management reports, quarterly financial statements, trading ledgers and cash books for the financial years ending 30 June 1998, 1999 and 2000.

23                  In support of the first application for interlocutory injunctive relief filed on 5 April 2000, the applicant filed an affidavit of Mr Edward Justin Sweeney sworn on 5 April 2000.  In par 7 of that affidavit Mr Sweeney deposed that the applicant commenced trading adult products from its website at the domain name on or about 6 July 1999 and that the applicant continued to trade from this website until 31 March 2000.

24                  On 25 February 2002, the solicitors for the first and second respondents filed a notice of motion seeking additional security for costs on behalf of the first and second respondents. As it happened, this motion was not heard by the Court until April of the following year as the proceedings were stayed in late February 2002 following an application for further security for costs by the third respondent on 4 February 2002.  

25                  Following the lifting of the stay of proceedings, on 3 April 2003, I ordered the applicant to provide additional security for both the first and second respondents’ costs in the amount of $35 000.  The applicant was ordered to pay the costs of that notice of motion including any reserved costs in any event.

26                  On 20 June 2003, the applicant paid the additional security into the Court. The payment of the additional security was only made after the solicitors for the first and second respondents had filed a notice of motion seeking orders for judgment owing to the non‑compliance by the applicant of the Court’s orders of 3 April 2003.  On 23 June 2003, I dismissed that notice of motion, the costs of which were also awarded against the applicant.

27                  On 1 October 2003, at a subsequent directions hearing a number of directions were made dealing with, inter alia, a foreshadowed application by the applicant for further and better discovery.  Included amongst the directions were orders dealing with the hearing of the first and second respondents’ notice of motion for further and better discovery that had been filed in January 2002.

28                  The two motions for further and better discovery were heard in late November 2003. On 29 January 2004, I made orders relating to the provision of further and better discovery by the applicant and the first and second respondents. 

29                  On 7 September 2004, the Court wrote to all of the parties indicating that the matter was listed for directions on 23 September 2004.

30                  By letter dated 17 September 2004, the applicant served on the first and second respondents’ solicitors an affidavit from its sole director, Ms Geraldine Sweeney, in which she deposed that the applicant had no further documents in its possession the subject of the first and second respondents’ notice of motion for further and better discovery.  Ms Sweeney also deposed that she had no knowledge or information that the applicant had previously had any such documents in its possession. 

31                 On 21 March 2003, in an affidavit sworn on behalf of the applicant (in opposition to the first and second respondents’ application for further security for costs), Mr Edward Sweeney deposed inter alia:

(a)                Neither he, nor his brother Charles, had any assets upon which they could raise funds;

(b)               Mr Sweeney was a full-time university student and his brother (at the time of swearing the affidavit) was looking for employment;

(c)                The applicant had no current assets other than the cause of action against the respondents;

(d)               The applicant had no debts other than the funds borrowed to pay the security into the Court;

(e)                The shareholders of the applicant are professional trustees (one an accountant and one a solicitor) who have no beneficial interest in the applicant or in the cause of action; and

(f)                 The applicant was impecunious and financially embarrassed.

32                  Despite these matters, the applicant has been able to pay $65 000 into this Court by way of security for the costs of both the first and second respondents.  It is believed that the same sum has also been paid with respect to the third respondent’s costs.  

33                  The identity of the party (or parties) from whom the funds have been obtained has never been disclosed. 

34                  It is not in dispute that the only director of the applicant is Mrs Geraldine Sweeney.  Nor is it in dispute that the applicant has provided instructions in this matter through Mr Edward Charles Sweeney. 

35                  From an affidavit of his sworn on 21 March 2003, it appears that the shares in the applicant are held by the shareholders on trust for undisclosed beneficiaries.  Furthermore, the applicant and the shareholders of the applicant have consistently refused to disclose the identity of the person or entity on whose behalf the action is being maintained. 

abuse of process

36                  For the applicant it is contended that issues of abuse before Australian courts have become manifest in actions that are unlawfully maintained or champertous.  It is said this has been seen in a number of decisions:  see (for instance) Carob Industries Pty Ltd (in liq) v Simto Pty Ltd (unreported, Supreme Court of Western Australia, Anderson J, 11 December 1997) especially at 19, Carob Industries Pty Ltd (in liq) v Simto Pty Ltd (1997) 18 WAR 1, Grovewood Holdings PLC v James Capel and Co Ltd [1995] Ch 80 (per Lightman J), Re Oasis Merchandising Services Ltd [1998] Ch 170, Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1996) 72 FCR 261, Faryab v Smyth [1998] EWCA Civ 1416, Stocznia Gdanska Sa v Latreefers Inc [2000] EWCA Civ 36, Clairs Keeley (a firm) v Treacy (2003) 28 WAR 139, Marston v Statewide Independent Wholesalers Ltd (2003) 54 ATR 75 at [39]-[59], Idoport Pty Ltd v National Australia Bank Ltd [2004] NSWSC 695, Gore v Justice Corporation Pty Ltd (2002) 119 FCR 429 at [18], Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd (2004) 51 ACSR 129 at [32].

37                  In Elfic Ltd v Macks [2003] 2 Qd R 125, McMurdo P said:

‘[67]   The mere fact that proceedings are financed by third parties with no interest in the outcome other than repayment and profit from the litigation is not itself sufficient to invoke the jurisdiction of the Court.  Courts should be careful not to use that power to deny access to justice to a party who has sought to fund bona fide proceedings in a way which may be contrary to public policy unless that which has been done amounts to an abuse of the court’s own process:  Abraham v Thompson [1997] 4 All ER 364 at 372-374, Faryab v Smyth [1998] EWCA Civ 1416, and most recently in Sa v Latreefers Inc [2000] EWCA Civ 36 where the Court of Appeal of England and Wales noted: (at [59]-[61])

            “There are many commonplace and unobjectionable circumstances in which modern litigation is funded by those who are not the nominal parties to it.  Obvious examples of this are funding by insurers, trade unions or lawyers engaged on legitimate conditional fee arrangements.  If an agreement of this general kind is held to be contrary to public policy, it may be unenforceable.  That may have a variety of consequences.  A claim which depends on the assignment of a bare right of action may fail because the assignment is ineffective.  A person who has funded an action champertously may fail to enforce recovery of the agreed proportion of the spoils.  A person who has secured a champertous agreement to fund his litigation may be unable to enforce payment of the agreed funds.  But the fact that a funding agreement may be against public policy and therefore unenforceable as between the parties to it is by itself no reason for regarding the proceedings to which it relates or their conduct as an abuse.

                        … the question whether the courts’ process is affected or threatened by an agreement for the division of spoils is one to be considered in the light of the facts in each case.

                        …

                        Abuse of the courts’ process can take many forms and may include a combination of two or more strands of abuse which might not individually result in a stay.  Trafficking in litigation is, by the very use of the word “trafficking”, something which is objectionable and may amount to or contribute to an abuse of the process.  We think that it is undesirable to try to define in different words what would constitute trafficking in litigation.  It seems to us to connote unjustified buying and selling of rights to litigation where the purchaser has no proper reason to be concerned with the litigation.  ‘Wanton and officious intermeddling with the disputes of others in which they [the funders] have no interest and where that assistance is without justification or excuse’ may be a form of trafficking in litigation. …  A large mathematical disproportion between any pre-existing financial interest and the potential profit of funders may in particular cases contribute to a finding of abuse but is not bound to do so.”’

38                  The Full Court of this Court in Magic Menu Systems Pty Ltd at 267-268 had noted that public policy considerations have continued to shape the law as it is concerned with maintenance and champerty, gradually alleviating its strictness.  At 268, the Court (Lockhart, Cooper and Kiefel JJ) said:

‘The New South Wales Law Reform Commission concluded, in its Discussion Paper, with the observation that further consideration as to the remedies which might be provided to the other party with respect to interference in litigation, was necessary.  These will concern costs but may extend to other aspects of compliance with procedures.  Where more is involved, and where there may be the real potential for an abuse of the Courts’ processes it seems to us that a stay might, in some cases, be justified. Whilst it had been said in Martell v Consett Iron (388-389)(referred to in this respect in Hodges v New South Wales (1988) 62 ALJR 190 at 193) that it would not be right to stay a maintained action, that was with respect to an action brought on the tort and which had not been determined.  It could not then have been concluded that there was unlawful conduct and the stay was, for that reason, premature.  But that is different from the position where an abuse of process has occurred, or is likely to.’(emphasis added)

39                  The underlying principles in relation to abuse concerning maintenance and champerty, are also addressed in Idoport Pty Ltd by Einstein J in the following paragraphs:

‘84.      In Condliffe v Hislop [1996] 1 All ER 431 Kennedy LJ stated at 440:

                        “… the court is entitled to protect its own procedures and as Sir Thomas Bingham MR said in Roache v News Group Newspapers Ltd , Times, 23 November 1992, [1992] CA Transcript 1120 the principle that in the ordinary way costs follow the event ‘is of fundamental importance in deterring plaintiffs from bringing and defendants from defending actions they are likely to lose’.  If that principle is threatened, as for example if an insurer or a trade union were known to be giving financial support to a party without accepting liability for the costs of the other side if the supported party were to lose, then, as it seems to me, the court might, at least in some cases, be prepared to order that the action be stayed …  Normally the better course will be to let the action proceed to trial and then, if need be, consider the powers of the court under s51 of the Supreme Court Act 1981 (as in McFarlane’s case) but if the circumstances suggest that the litigating party or the maintainer may not be bona fide, or that if that party were to lose, an order for costs would be difficult to enforce against the maintainer then, as it seems to me, a stay could be imposed.’ (emphasis added)

85.               As noted by Potter LJ in Abraham v Thompson [1997] 4 All ER 362 at 375, Kennedy LJ’s reference to the entitlement of the court to protect its own procedures was a reference to the inherent power of the court to prevent abuse of its process.  In the same case, Millett LJ found, at 378, that the presence of unlawful maintenance was not of itself an abuse, but that the real mischief was that the proceedings might be financed by a person who was immune from liability for costs.  He noted that this was the mischief that concerned Lord Denning MR in Hill v Archbold [1968] 1 QB 686 and that it had also now been remedied by the UK Supreme Court Act 1981 allowing a costs order to be made against a maintainer.

86.               In the Canadian case 155569 Canada Limited v 248524 Alberta Limited (1999) 176 DLR (4^th) 479, Veit J, sitting in the Court of Queen’s Bench of Alberta, stated (at para [50]):

            “In recent years, however, the courts have not been so concerned about maintenance either as a crime or as a tort:  Shah.  However, courts are still concerned about maintenance as an abuse of the court’s process:  it is an abuse because a person who should be taking the risk of the lawsuit is not explicitly recognising that it is liable for the successful party’s costs, and, to the extent that it seeks to avoid that result, it seeks to avoid bringing itself within the framework of the discipline of costs.” (emphasis added)

87.               The National Parties submitted and I accept that these cases illustrate the application of two fundamental propositions:

·          the role of the court is to quell controversy (as to which see Gummow J in Hill (t/as RF Hill & Associates) v Van Erp (1997) 188 CLR 159 at 229) not to provide an opportunity for substantial commercial gain for a person who has no pre-existing interest in litigation;

·          that for reasons of fairness and policy, a successful party in litigation is entitled, subject to certain limited exceptions, to an award of costs to indemnify it against expense it has incurred:  Oshlack at 97 [67]-[68].’

40                  It is clear from these authorities that the presence of unlawful maintenance will not of itself be an abuse of process.  However, the courts must also consider whether the nature of the maintenance in respect of a particular proceeding is such that it is likely to be an abuse of process. 

41                  It follows that the Court will not grant a stay or dismissal only upon the presence of maintenance and champerty.  However, the Court is entitled to be informed of the circumstances relating to maintenance and champerty, if they exist, so that the Court may judge whether or not stay or dismissal on the grounds of an abuse of process is appropriate.  The fundamental justification for this is that the Court must be the guardian of the right of a successful party in litigation to an award of costs to indemnify it against expense it has incurred. 

42                  In Bandwill Pty Ltd v Spencer-Laitt (2000) 23 WAR 390, Templeman J emphasised that the observations of the Full Court of this Court in Magic Menu Systems were directed to the possibility that ‘there may be’ the ‘real potential’ for abuse of the court’s processes.  This carries with it the necessity for the Court to be informed, by way of evidence, of the circumstances that will enable it to judge whether or not there has been an abuse of process. 

43                  Templeman J also referred (at 98) to Halsbury’s Laws of England, 4^th edn, at 36 par 75, where it was stated:

‘The Court also has an inherent jurisdiction to stay or dismiss proceedings which are an abuse of its process.  The jurisdiction may properly be exercised where facts are proved by affidavit which show an abuse of the process of the  court, but the jurisdiction should be sparingly exercised, and only in very exceptional circumstances.’

This Court is not yet in the position where an affidavit is before it giving it the requisite facts in order to consider whether its jurisdiction to grant stay or dismissal may be properly exercised in the circumstances.  To exercise that inherent jurisdiction it is necessary that it gives directions to the party concerned to bring before the Court the requisite evidence. 

44                  Accordingly, I consider that the application for a stay or dismissal should be held over and a direction should issue to the applicant to bring before the Court affidavit evidence disclosing fully the persons beneficially entitled to the cause of action which it brings. 

failure to discover relevant documents

45                  As appears from the evidence, the applicant states that it does not have in its possession any of its financial statements for financial years 1998, 1999 or 2000.  The first and second respondents submit that the issue has been raised on many occasions and the applicant has done nothing to produce those records.  It is said, those records are ones it is obliged to maintain pursuant to s 286 of the Corporations Act  and their non-maintenance has the consequence of denying those respondents the opportunity of contesting the applicant’s allegation in the statement of claim that it has suffered loss and damage. 

46                  The first and second respondents rely on the failure to prepare the financial records in support of the contention that the applicant has failed to prosecute the action with due diligence.  In circumstances where the action seeks an account of profit from the first respondent, it is said there can be no prospect whatsoever of this relief being ordered where the applicant has not prepared an account.  The action having now been on foot for exactly five years, it is said that the conditions of FCR O 35A r 2(4) are satisfied and that it should be dismissed pursuant to FCR O 35A r 3. 

47                  I do not consider it is necessary or appropriate at this point in time to consider the application of O 35A r 3 on the basis of a default occurring in accordance with O 35A r 2(1)(f).  The possible application of that rule either on that ground or any other within its compass should be held over pending a response to the direction. 

48                  For these reasons the notice of motion of the first and second respondents will be held over and the direction for disclosure made.

Associate:

Dated:              15 April 2005