High Court strident – contract provisions mustn’t meddle with statute or general law

Wednesday 9 July 2014

Authors: Ian Gault and Rebecca Rose

​​In a strident decision (Fleetwood Apartments) criticising an attempt to “meddle” with the law, the High Court has voided a $1.5 million settlement agreement on public policy grounds.1 In doing so, the High Court has made it clear that private contracts cannot be used to obtain better rights or ultimate outcomes than otherwise available under statute or the common law.

Importantly, the Court’s decision also confirms that the torts of maintenance and champerty remain alive and well. Litigation funding arrangements that are fair and facilitate access to justice will be tolerated. But the torts have not been abolished. If parties wish to assign rights in litigation, such assignments must be justified. The High Court’s statement that New Zealand’s common law should align, where possible, with Australia is also encouraging.

What is champerty and maintenance?

Champerty and maintenance each have a long history in the common (court-made) law.

The tort of maintenance arises where a party receives assistance or encouragement in litigation by another person who has no interest in the litigation or motive recognised as justifying interference. The relevant assistance or encouragement usually occurs in the form of paying litigation costs. The tort is actionable by anyone who can show that they have suffered damage by such intermeddling in litigation.

Champerty is a pernicious or aggravated form of maintenance. It most commonly occurs where a maintainer is promised a share of the profits or other gains from litigation but otherwise has no interest in the litigation.

Recent years have seen some relaxing of the champerty rules among common law courts. In particular, in the New Zealand context, it is now possible for class actions and some representative actions to be funded by litigation funders whose fees are set in accordance with the success of the action.2 However, such arrangements must still be in the public interest if they are to be valid.

How does the law of assignment work?

Today, assignment clauses are commonplace in contracts. Such clauses allow the transfer of rights or interests held by one party (the assignor) to another party (the assignee). A valid assignment allows the assignee to do any act within the scope of the assignment agreement in his or her own right, e.g. to take title, or stand in the shoes of the assignor. In some cases though, the assignor can remain liable.

As a general rule, it is only possible to assign rights/interests in tangible property and intangible property (choses in action). Strictly personal rights cannot be assigned. Litigation on foot against another is a chose in action. Current litigation (or rights to the fruits of a future claim) is therefore technically assignable. But the torts of champerty and maintenance mean that the common law is cautious about such assignments, requiring all such assignments to be justified. That is due to the law’s view that:

  • litigation on foot or future causes of action should not be a tradeable commodity, particularly in the case of tortious claims where the relevant damage is to an individual; and

  • claims should generally be brought by the person in respect of whom the law provides rights and damages or other relief.

A different situation would mean that assignees could potentially take advantage of the misfortune of others.

Background to the Fleetwood Apartments case

The Fleetwood Apartments case involved a settlement agreement between Auckland Council and owners of a leaky apartment complex in Auckland. The value of the apartment owner’s total claim exceeded $3 million.

Under the settlement agreement’s terms:

  • Auckland Council agreed to pay the apartment owners $1.5 million in repair costs and admitted that it was liable to pay that sum;

  • the apartment owners agreed not to sue Auckland Council and gave it the right to sue the other parties involved but not to profit from the assignment; and

  • if Auckland Council recovered against any other party involved, the apartment owners would receive the first $200,000, with Auckland Council receiving the next $1.5 million and its solicitor-client costs of pursuing the claim.

The consequence of the settlement agreement was that, if Auckland Council recovered from the other parties involved, the settlement agreement delivered a much lower net litigation cost than would occur under the general law and the contribution rules contained in s 17 of the Law Reform Act 1936.

The case reached the High Court as an application by Auckland Council to file an amended cross-claim against the other parties involved, so that it could take advantage of the settlement agreement’s assignment clause at trial. The other defendants opposed the application on the ground that the assignment was void.

Court’s conclusions

In finding the assignment clause void, the High Court concluded:

  • section 17 of the Law Reform Act 1936 – aimed at achieving “just and equitable” outcomes in contribution cases – was never intended to apply where a tortfeasor purchases a plaintiff’s claims. Parties to a dispute cannot use assignments such as that in Fleetwood Apartments to better their position at law or to isolate a party refusing to settle. (Note that the Law Commission has recently reviewed the apportionment and contribution rules and recommended retaining joint and several liability where multiple defendants are liable but not all are available or solvent – see here);

  • allowing assignments such as that in the Fleetwood Apartments case would:

    • unsatisfactorily alter incentives related to the conduct of trials – a tortfeasor assignee being unlikely to be indifferent as to the relative contribution of others; and

    • at the very least, cause doubt about whether a “just and equitable” final litigation outcome was possible, assuming the assignment was a fair contract;

  • at a minimum, the Fleetwood Apartments assignment “meddled” with the general law and outcomes under s 17 of the Law Reform Act 1936. There was also a real possibility that the assignment frustrated or avoided application of s 17 of the Law Reform Act 1936 entirely;

  • the English Court of Appeal case of Brownton should be confined to its own facts;3

  • New Zealand’s relationship with Australia is important. Where possible, the common law of New Zealand and Australia ought to align; and

  • the “stratagem” of including assignment clauses such as that in the Fleetwood Apartments case lacked sufficient merit to justify extension of relief against the rules of maintenance and champerty to such cases.

Implications

There are six key points to take away from the High Court’s decision in relation to assignment clauses specifically and contract drafting generally:

  • private contracts cannot be used to circumvent outcomes that otherwise would result under the common law or statute. This position applies even if the assignee does not profit from the assignment;

  • in all cases, courts are obliged to give effect to statutory goals. Contracts should be drafted accordingly;

  • where the New Zealand common law position is unclear, other factors being equal, Australia is a good guide;

  • existence of a pre-existing and “genuine commercial interest” (quite independent of the litigation itself) in taking an assignment and in enforcing it for one’s own benefit should render an assignment valid and safeguard against a contract being void for champerty;

  • where no genuine commercial interest exists in an assignment, there is a real risk that such assignments will be found void and unenforceable as contrary to public policy; and

  • courts will treat cautiously clauses or contracts that put an assignee in a better position than they otherwise would be in under the general law or statute. If drafting such clauses, there is a need for extreme care in relation to both the clause’s particular words and ultimate effect.


1Body Corporate 160361 (Fleetwood Apartments) v BC 2004 Ltd and BC 2009 Ltd [2014] NZHC 1514.

2Saunders v Houghton [2010] 3 NZLR 331 (CA), at para [77]; Waterhouse v Contractors Bonding Ltd [2013] NZSC 89.

3 Brownton Ltd v Edward Moore Inbucom[1985] 3 All ER 499 (CA), followed in New Zealand in the “Beresford Street” decision [2008] 1 NZLR 838 (HC).​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Ian Gault

    Partner and Deputy Chair Auckland
  • Rebecca Rose

    Senior Associate Auckland
Related areas of expertise
  • Litigation and dispute resolution