By:
Harneshpal Karamjit Singh (Co-Managing Partner) [harnesh@luibhullar.com]
Introduction
In the case of Jacob And Toralf Consulting Sdn Bhd & Ors v Siemens Industry Software GMBH & Co Kg & Ors [2018] 1 LNS 815 (“Siemens”), Su Geok Yiam J referred to four (4) dictionaries namely The New Shorter Oxford English Dictionary On Historical Principles; Concise Oxford English Dictionary; Osborn's Concise Law Dictionary; and Black's Law Dictionary to define champerty.
Reading the definitions provided by the said four (4) dictionaries, champerty can be summarized as an agreement between two parties wherein one party is the party to a legal suit (“litigant”) and the other party has no connection to the legal suit (“third party”), and the third-party finances/assists the legal suit in view of sharing/obtaining the litigation proceeds with the litigant.
The Malaysian position on Champerty
In Amal Bakti Sdn Bhd & Ors v Milan Auto (M) Sdn Bhd & Ors [2009] 6 CLJ 153 (“Amal Bakti”), Hamid Sultan Abu Backer JC held that it is trite that courts will not entertain a champerty agreement or any similar arrangements on grounds of public policy.
Hamid Sultan Abu Backer JC ruled that Malaysia’s Contracts Act 1950 is pari materia to the Indian Contracts Act 1872. In Bhagwat Singh v Debi Dayal Sahu [1908] 35 IA 48, the Privy Council held that a champerty agreement according to English law was not necessarily void in India but it must be against public policy to render it void.
In Amal Bakti, KLCS Asset Management Sdn Bhd (“KLCS”) had purchased 1 million Energro Berhad shares from Milan (M) Sdn Bhd, the 1st Defendant. Later, KLCS assigned all its rights, claims, interests and chose in action vide a deed of assignment to Amal Bakti Sdn Bhd, the 1st Plaintiff after receiving information that the listing exercise of Energro Berhad collapsed, rendering the shares purchased worthless.
Merchant Bank, the 2nd Defendant contended that the 1st Plaintiff’s assigned right is void as there is no assignable cause of action from KLCS to the 1st Plaintiff. Hamid Sultan Abu Backer agreed as the 1st Plaintiff only paid RM1 with a view of obtaining a larger sum through litigation. The 1st Plaintiff was not the original purchaser and suffered no loss. Accordingly, the legal claim by the 1st Plaintiff against the 2nd Defendant cannot be maintained and was in line with Section 24(e) of the Contracts Act 1950 as follows:
“The consideration or object of an agreement is lawful, unless the court regards it as immoral, or opposed to public policy”.
Such assignment was champertous in nature.
Coming back to the case of Siemens, Su Geok Yiam J cited the Singapore Court of Appeal case of Otech Pakistan Pvt Lvt v Clough Engineering Ltd and Another [2007] 1 SLR 98 (“Otech Pakistan”) to best explain why there is a public policy against champerty.
It was held that “champerty exists where one party agrees to aid another to bring a claim on the basis that the person who gives the aid shall receive a share of what may be recovered in the action. Public policy is offended by such an agreement because of its tendency to pervert the due course of justice.”
Su Geok Yiam also cites the English Court of Appeal case of In Re Trepca Mines Ltd (No 2) [1963] Ch 199 where Lord Denning explained why there is a public policy against champerty. This English caselaw was also cited in Otech Pakistan.
Lord Denning held that "the reason why the common law condemns champerty is because of the abuses to which it may give rise. The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses. These fears may be exaggerated; but, be that so or not, the law for centuries has declared champerty to be unlawful, and we cannot do otherwise than enforce the law."
Both the Singapore and English cases were cited by another High Court judgment delivered by Ravinthran Paramaguru JC in the case of Mastika Jaya Timber Sdn Bhd v Shankar Ram Pohumall (No 2) [2010] 10 CLJ 312 (“Mastika Jaya”).
Both Siemens and Mastika Jaya concerned Section 112 of the Legal Profession Act 1976 (“LPA”) vis-vis a champerty agreement.
Section 112(1) of the LPA states as follows:
“(1) Except as expressly provided in any written law, or by rules made under this Act, no advocate and solicitor shall -
(a) purchase or agree to purchase either directly or indirectly an interest or any part of the interest which is the subject matter of his client or that of the other party in the same suit, action or other contentious proceeding brought or to be brought or maintained; or
(b) enter into any agreement by which he is retained or employed to prosecute any suit or action or other contentious proceeding which stipulates for or contemplates payment only in the event of success in such suit, action or proceeding.”
In Mastika Jaya, the Plaintiff contended that there was an oral contract between the Plaintiff (Mastika Jaya Sdn Bhd) and the Defendant (Shankar Ram Pohumall, the Plaintiff’s solicitor in another suit) that the Defendant would refund the retainer fee of RM200,000 if the Defendant was unsuccessful in obtaining the interlocutory injunction that Plaintiff sought.
In considering whether the purported oral agreement was illegal and champertous, Ravinthran Paramaguru JC considered Section 112 of the LPA whereby no advocate shall enter into any agreement which stipulates for or contemplates payment only in the event of success in such suit, action or proceeding. The LPA, however, only applied in West Malaysia and no similar provision is found in the Sarawak Advocate Ordinance.
As such, Ravinthran Paramaguru JC held as follows:
“In Re Attorney And Solicitor Act 1870, [1875] CH 573 (cited in Mokhtar Ngah & Co lwn. Yee Seng Plantations Sdn Bhd [2009] 10 CLJ 348), Jessel MR said that a statutory provision that invalidated any agreement which stipulates for or contemplates payment only in the event of success in such suit, action or proceeding is meant to provide against champerty (see also Aratra Potato Co Ltd v. Taylor Joynson Garrett (a firm) [1995] 4 All ER 695 and Wallersteiner v. Moir (No 2)[1975] QB 373 that were cited by counsel for defendant). Maintenance and champerty are not actionable torts in England since 1997. However they can still be applied to declare an agreement void on the ground of public policy (see the judgment of James Foong FCJ in Quill Construction Sdn Bhd v. Tan Hor Teng & Anor [2006] 2 CLJ 358). As a champertous agreement, the alleged oral agreement is illegal and against public policy. Therefore, the plaintiff in this case cannot maintain this action. On this ground as well it is pointless to allow the case to go to a full trial as the plaintiff would not be able to enforce the so called oral collateral agreement even if it is proved.”
In Siemens, the 2nd, 3rd and 4th Defendants (“the Applicants”) contended that there was an agreement between the 1st, 4th, 5th and 6th Plaintiffs (“the Respondents”) with their Solicitors and the lead counsel which contravened Section 112(1) of the LPA and is against public policy.
The fee agreement was as follows:
“(a) An agreed lump sum fees for the High Court stage divided into two (2) stages with a payment of RM 100,000.00 for each stage. The first stage would be for the filing of the necessary Suits, application in chambers hearing and other matters up to the start of the trial proper. The second stage would be firm the start of the trial proper until the conclusion of the case.
(b) For applications and appeals, the legal fees would be charged on a man-hour basis; and
(c) There would be a payment of 5% of any award from a successful conclusion of the proceedings or of any sum agreed to by way of an out of Court settlement without deduction of any professional fees paid above."
In relation to Section 112(1)(a) of the LPA, there was no evidence to show that the Respondents’ Solicitors or the Respondents’ lead counsel had agreed to purchase an interest or any part of the subject matter of the respondent's action.
As for Section 112(1)(b) of the LPA, there was no evidence that the Respondents’ Solicitors or the Respondents’ lead counsel had agreed to take their professional fee "only" in the event of success in such suit, action or proceedings. It was Su Geok Yiam J’s respectful view that Section 112(1)(b) of the LPA is only contravened if the entire professional fee is to be taken only in the event of success.
This was further reinforced by the case of Lee Mun Keong v. Precise Avenue (M) Sdn Bhd & Anor [2014] 8 CLJ 74 (“Precise Avenue”) which held as follows and was cited by Su Geok Yiam J in Siemens:
“The contention that there must be express stipulation in the agreement to show that such an agreement is champertous in nature was held to be unnecessary as long as there is evidence that the fees to be collected by the solicitor is to be paid only upon a successful legal suit as decided by the Privy Council in the case of Lau Liat Meng v. Disciplinary Committee [1967] 1 LNS 76.”
The status of a Champerty Agreement was discussed in Precise Avenue. Apart from triggering Section 24(e) of the Contracts Act 1950 as held by Hamid Sultan Abu Backer JC in Amal Bakti, Hashim Hamzah JC held that a champerty agreement activates Section 24(a) of the Contracts Act 1950 as follows:
“The consideration or object of an agreement is lawful, unless it is forbidden by a law.”
Accordingly, Section 24 of the Contracts Act 1950 states every agreement of which the object or consideration is unlawful is void. Similarly, it is trite that any contract in which the consideration is forbidden by law is illegal and void ab initio.
Conclusion
In summary, a champerty agreement is a bargain between a party to legal proceedings and another who finances or assists these proceedings, that the latter will take as his reward for the assistance a portion of anything which may be gained because of the proceedings.
It is clear from the authorities above that a champerty agreement is caught by Section 112 of the LPA and Sections 24(a) and 24(e) of the Contracts Act 1950. In common law, an agreement of champertous nature has been held to be against public policy.
Accordingly, by statute and common law, a champerty agreement is void, illegal and forbidden by law.
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