Abuse of process and damages claims

By Legal Eagle

In discussions on the DJs sexual harassment case, I have seen a tendency for people to excuse Fraser-Kirk’s $37M claim for punitive damages. The idea seems to be, “Well, they treated her outrageously; why should she not make an outrageous damages claim against them? After all, it’s small change for them.”

This post is an attempt to answer that question fully, in an expansion of a comment I made at News With Nipples. Here, I am not being critical of Fraser-Kirk herself, but of her lawyers’ tactics.

It’s bad form to run a weak legal claim when you know that it’s likely to fail, but if you’re really using it for the purpose of forcing the other side to settle – it can be an abuse of the process of the court, because you’re not using the law as it is intended to work. You may think that, in the context of the DJ’s case, Fraser-Kirk is on the side of good and thus it’s right for her to use a massive damages claim as a blunt instrument to bludgeon David Jones and McInnes into submission. After all, they are powerful people with many resources, and they ought to have known better if her claims are correct (furthermore, McInnes admitted that at least some of her claims had a basis). However, if you make such a tactic available for a person such as Fraser-Kirk, the danger is that it becomes available for any litigants, not just for those who are on the side of good, or for those who might have less power. Then the powerful can use unmeritorious actions with massive damages claims attached to force less well-resourced people to settle when they ought not to settle (and that happens too much as it is).

First, Fraser-Kirk’s lawyers did her a personal disservice by making her appear greedy in the eyes of the public. Much of the sympathy she would otherwise have gained was lost, and she was seen by some as a gold digger out for the main chance. Secondly, by using a massive damages claim to try to enforce settlement, I think they set a dangerous trend. But, as I will explain, despite the law on abuse of process, I think that the firm were within the law when they took this tactic. Nonetheless, I think it was foolish and dangerous. Most lawyers I know were pretty shocked at the $37M punitive damages claim. Why? Well, there really isn’t a precedent here for that quantum of damages. Even $1M would be a massive claim, let alone $37M. As this piece says:

It is not possible to discern any pattern in the quantum of awards of punitive or exemplary damages in Australia other than that they have never been as inflated as their American counterparts, tending to run at the higher end into the hundreds of thousands rather than into the millions of dollars.

Here I must interpolate to explain a basic legal concept in our legal system. We follow the doctrine of stare decisis. In other words, we have the doctrine of precedent. Courts operate on the general principle that like cases should be treated alike; this is a fundamental part of our justice system. It means that if you make a rule which allows one person to take a particular action, then by use of analogy, other people with similar cases can take that same action. And if you open the gate too wide, there is a danger that you are opening the “floodgates” (creating unintended legal and social consequences as everyone then tries to argue the new principle). So, if a judge says that Fraser-Kirk is allowed to make a massive damages claim because justice is on her side, and because DJs should be forced to settle, then potentially every plaintiff who believes that justice is on his side and who believes that the defendant ought to settle can seek a massive amount in damages. Or every defendant who believes she has justice on her side can make a massive counterclaim.

The general law on abuse of process

For the laypeople among our readership, I’m going to detail a case where someone attempted to use an unmeritorious claim as a means of forcing the other party to settle. The case is White Industries (Qld) Pty Ltd v Flower & Hart (a firm) [1998] FCA 806, and it is noteworthy because it involves criticism of a QC who later became a High Court Judge, and who was called to the witness box to defend his legal advice after he had been appointed as a High Court Judge.

The case arose as follows. White Industries (Qld) Pty Ltd (‘White’) was a construction company. Hersfield Development Corporation Pty Ltd (‘HDC’) and its wholly owned subsidiary, Caboolture Park Shopping Centre Pty Ltd (‘Caboolture Park’) were seeking to develop a shopping centre in Caboolture Park in Queensland. HDC and Caboolture Park invited parties to tender for construction contracts, and White won the tender with its proposal. Initially White estimated that it was able to build the shopping centre for $15,075,000, which was later reduced to $13,375,000 as a result of suggestions by HDC’s representative. White signed a contract with Caboolture Park in which it was agreed that $13,375,000 was the “target contract sum”. However, as so often happens, once construction began, it transpired that the construction cost considerably more than the “target contract sum”. White explained why this had occurred in its demands for payment, and at first, HDC and Carboolture Park paid the increased costs. The principal of HDC and Caboolture Park was Mr Herscu. Mr Herscu was determined not to pay White any more money, and sought legal advice to establish how he could achieve this. He retained a firm named Flower & Hart, who retained a barrister named Ian Callinan QC (later Justice Callinan of the High Court of Australia).

Mr Herscu alleged that White had been misleading and deceptive in the ‘provisional sums’ adopted in the construction contract. Mr Herscu’s lawyers noted that it was difficult to see how White could have been misleading and deceptive in providing these sums as they had in fact been provided by HDC’s representative, and advised him that HDC’s legal position was weak. However, they said that HDC and Caboolture Park could obtain “a temporary bargaining stance” if they commenced an action claiming misleading and deceptive conduct and fraud on the part of White. They noted that there was little basis for such an action, and that HDC and Carboolture Park would be very unlikely to win any litigation if the matter went to trial. The primary reason for arguing such a claim was to try to force White into settling. HDC and Caboolture proceeded to file an action in which they alleged misleading and deceptive conduct and fraud on the part of White. The trial went very badly, and HDC and Carboolture Park were discredited. George Herscu was belittled as a member of the ‘White Shoe Brigade’, with ongoing allegations that he had obtained his fortune dishonestly. It is important to remember this when considering Fraser-Kirk’s situation.

Ultimately, Goldberg J found that the proceedings were initiated for an illegitimate purpose. His Honour said:

I do not consider that it is a legitimate or appropriate purpose for the institution of a proceeding in this Court that the purpose of the proceeding is to postpone, delay or put a barrier in front of a claim of another party and the payment of an amount due in respect of that claim. The purpose of proceedings in a court of law is to vindicate a claimed right whether, for example, that right be a right to positive relief such as a claim for money due or specific performance of an agreement or whether the right be one to be free from unauthorised governmental interference. It is not part of the legal process in this Court that its process and procedures be used as an instrument of oppression so as to frustrate the bringing, and expeditious disposition, of a legitimate claim.

To use the law to try and force the other party to settle rather than to vindicate a legal right is an abuse of process.

However, recent decisions by the New South Wales court suggest that, as long as you have some basis for claiming damages, it doesn’t matter how much you claim. So it doesn’t matter if you claim $100,000,000 for breach of contract when you are only entitled to $100, as long as your claim for breach of contract is not “so lacking in merit or substance as to be not fairly arguable” or “[falling] appreciably short of ‘likely to succeed'” (Degiorgio v Dunn (No 2) [2005] NSWSC 3 at [28]).

NSW law on abuse of process

It was noted by Chris Merritt in The Australian that recent NSW cases indicate that, as long as the basis for the cause of action itself is well-grounded, the quantum of the remedy sought may not matter (there is a distinction between the cause of action and the remedy sought in law). In Momibo Pty Ltd v Adams (Unreported, Neilson J, District Court of New South Wales, 31 August 2004) Neilson J was asked to consider ss 198J, 198K, 198L, 198M and 198N of the Legal Profession Act 1987 (NSW), which were added to the Act deal with “ambulance chasers”. (This Act has since been replaced by the Legal Profession Act 2004 (NSW), but ss 345, 346, 347, 348 and 349 are in substantially similar terms to the sections mentioned above). Section 198J provided:

(1) A solicitor or barrister must not provide legal services on a claim or defence of a claim for damages unless the solicitor or barrister reasonably believes on the basis of provable facts and a reasonably arguable view of the law that the claim or the defence (as appropriate) has reasonable prospects of success.

(2) A fact is provable only if the solicitor or barrister reasonably believes that the material then available to him or her provides a proper basis for alleging that fact.

(3) This Division applies despite any obligation that a solicitor or barrister may have to act in accordance with the instructions or wishes of his or her client.

(4) A claim has reasonable prospects of success if there are reasonable prospects of damages being recovered on the claim. A defence has reasonable prospects of success if there are reasonable prospects of the defence defeating the claim or leading to a reduction in the damages recovered on the claim.

(5) Provision of legal services in contravention of this section constitutes for the purposes of this Division the provision of legal services without reasonable prospects of success.

(bolding added)

As you can see, s 198J(4) stipulates that a claim has reasonable prospects of success if there are reasonable prospects of damages being recovered on the claim. The section does not say anything about the quantum of damages being reasonable.

At [88] in Momibo, Neilson J held as follows:

The fifth element is “reasonable prospects of damages being recovered in the action”. This formulation arises from combining subsections (1) and (4) of section 198J. An important word to note is the word “damages”. It is not qualified by any article or adjective. It does not require that a plaintiff recover “the damages claimed” or “all damages”. It merely requires the recovery of “damages”. One can properly construe “damages” as being “any damages” or “some damages” but not as “all the damages claimed”. At [44] I drew attention to the question of whether the statutory provision was directed to exaggerated or “ramped up” claims or to the more basic question of liability. In my view, nothing in section 198J affects exaggerated claims. There must be merely “reasonable prospects” of recovering “damages”. The applicants’ only remedy, if aggrieved by an exaggerated claim is under section 148E of the District Court Act or under DCR Pt 39A r 14.

Thus, an exaggerated or ramped up claim for damages will not be an abuse of process under the Legal Profession Act. Lakhani notes in a 2006 Bond Law Review article:

When the Momibo court analysed the provisions of s 198J and specifically the element of ‘arguable basis’, it noted that the provision does not affect ‘exaggerated claims’. Thus, from the standpoint of one of the primary negotiating behaviours of the legal professional, s 198J does not purport to control such behaviour and neither does the court’s interpretation of the provisions take away from the legal professional’s power and ability to use such negotiation behaviour as part of their tactical strategy. Thus, in a literal interpretation approach, a plaintiff can claim $6 million on any claim as long as there is a prospect of recovering even $1. In addition, as long as the defence can reasonably expect to argue that the claim is worth $0, the defence’s claim has merit under the literal interpretation approach. The legislature may not be pleased to know that so long as a plaintiff’s lawyer believes that there is a prospect of recovering even $6.00, s/he can claim $6 million. The court’s view of the impact of s198J is further supported by subsequent cases involving Division 5C, Part 11, s198J and its related provisions.

Subsequent cases (Degiorgio v Dunn (No 2) [2005] NSWSC 3 and Lemoto v Able Technical Pty Ltd & 2 Ors [2005] NSWCA 153) have not altered the conclusion in Momibo.

Conclusion: What’s sauce for the goose is sauce for the gander

Despite the above, I think lawyers should be very wary about making inflated damages claims because there is a potential for abuse of process (at least in States other than NSW).

However, even if it is not an abuse of process, I think that lawyers must be very careful about making inflated damages claims for their own sakes and for the sake of their clients. Of course, as I’ve noted in a previous post, there’s always an element of bartering in litigation:

They say when bartering that the seller should start high and the bidder should start low, and ideally, the two meet somewhere in the middle (at a mutually acceptable price). Still, you don’t want to start so high that you put your customer off or convince people that you’re not serious.

I think sometimes litigation runs by the same principle. The plaintiff starts high, the defendant offers a low counter-offer, and hopefully the parties can meet at a happy middle ground.

But there is such a thing as starting too highReuters reports that Dalton Chisholm, a customer of the Bank of America, is suing the bank for “1,784 billion, trillion dollars”. Apparently this is a larger amount than the World Bank’s estimate of the world’s 2008 gross domestic product, which totals $60 trillion.

…[S]tarting out with an exorbitant claim isn’t the best way to get your grievances taken seriously.

You have to measure it carefully. If you set your initial claim too high, then some in the public will not take your grievances seriously. I suggest this is exactly what happened to Fraser-Kirk — her lawyers pitched her initial bid so high that a certain proportion of people stopped taking her claim seriously, and wrote her off as a trouble-making gold digger, but I think that many would have reacted differently had her claim been framed more modestly. I think it was a real tactical error.

More broadly, I do not think it is a good trend for the legal profession. I think that if Fraser-Kirk’s allegations were correct, she did have a good case in trespass to the person. However, to then claim $37M looks like the lawyers were just using it to force the most advantageous settlement, not to advance a legitimate claim. I do not think this is something we ought to encourage in the law. You may think that someone like Fraser-Kirk should be able to use the law like a blunt instrument to force settlement. But what about other plaintiffs? What about other defendants? Do we want corporations trying this tactic on the less powerful? After all, what’s sauce for the goose is sauce for the gander… Personally, I certainly do not want powerful litigants to be able to use these kinds of bullying tactics on the less powerful. It has opened a can of worms which I would rather have seen left sealed shut.

19 Comments

  1. Posted October 26, 2010 at 7:48 am | Permalink

    On bullying, some might be interested in my post “Science journals, commercial censorship, law and social security benefits” which discusses a company threatening a journal, and successfully getting a paper withdrawn.

    The paper cast grave doubts on the reliability of a voice-stress “lie detector”, which was in use by the UK social security system, and causing significant withdrawal of benefits from legitimate claimants.

    (DEM, with her troubles, might like to be aware of the specifics – I don’t know if this charlatanry is still threatening people like her.)

  2. DrPaul
    Posted October 26, 2010 at 7:51 am | Permalink

    Very well-reasoned post. As I was reading it I recalled all the examples of SLAPP suits brought by unscrupulous property developers and other big businesses against local people concerned about a proposed development, and in one case in the US against the husband of such a citizen on the grounds of “failing to keep his wife under control”. We should not be amking this sort of thing any easier than it already is.

  3. derrida derider
    Posted October 26, 2010 at 8:15 am | Permalink

    That excessive quantum claims are a Bad Thing for public policy is obviously true. Unfortunately, I’m not so sure that it’s always a bad thing for the client.

    Ms Fraser-Kirk got $800,000 – tiny by comparison with her claim, but absolutely massive for an Australian sexual harassment suit (let alone with what an ordinary worker would get if they injured themselves at work). The tactic seemed to work very well.

  4. Posted October 26, 2010 at 8:15 am | Permalink

    The paper cast grave doubts on the reliability of a voice-stress “lie detector”, which was in use by the UK social security system, and causing significant withdrawal of benefits from legitimate claimants. (DEM, with her troubles, might like to be aware of the specifics – I don’t know if this charlatanry is still threatening people like her.)

    Funny you should mention this Dave. You wouldn’t believe what I was doing last Friday afternoon…

  5. Posted October 26, 2010 at 8:33 am | Permalink

    [email protected]: Oh noes! If it was the lie-detector-over-the-phone, and the withdrawal of benefits based on that without any proper verification, then perhaps there is some way of using the legal system to get the charlatanry stopped, or at least, used merely as a flag to trigger further investigation using supportable processes before benefits are withdrawn.

    When a threat by a company to sue someone causes significant and very-quantifiable losses to many other folk, especially when the threatened legal action is in another jurisdiction, the abuse of process is wider and more damaging than suggested by LE’s post.

    Best wishes for things working out well.

  6. Jacques Chester
    Posted October 26, 2010 at 11:58 am | Permalink

    Do her lawyers get a cut? If so, there’s a classic principal-agent problem at work. Particularly since to the law firm, the long-term sideeffects on Fraser-Kirk are externalities.

  7. Nick Ferrett
    Posted October 26, 2010 at 12:08 pm | Permalink

    LE, I can’t agree with your view that what the lawyers did was within the law.

    The law prohibits the use of the process of a Court for a purpose other than vindicating a claim or otherwise resolving a dispute. So much is clear from the passage from White Industries quoted in your article.

    There are three possibilities with respect to the amount claimed: (1) the lawyers genuinely considered that there was some prospect of recovering the amount in question or something approaching it; (2) the lawyers did not think that there was any prospect of recovering the amount or something like it; or (3) they didn’t give it much thought and just picked a number.

    Possibility (3) can be excluded on the basis that it is unlikely that the number $37M was picked out of thin air. Indeed, as para 83 of the statement of claim reveals, it was a percentage of DJ’s profit over a particular period.

    Possibility (1) can also be excluded. No Australian lawyer of any ability would seriously believe an award of the amount in question could be awarded. I don’t know what is the highest amount for exemplary damages ever awarded in Australia, but I’d be surprised if it got anywhere near $1M. I wouldn’t mind betting that it’s under $500K. The lawyers who represented Ms FK were experienced lawyers. The likelihood that they seriously believed they would get anything approaching the amount is next to nil.

    That leaves one with possibility (2). One then asks “why ask for that amount when you don’t think there’s any reasonable basis for it”. The most likely answer is that they wanted the publicity as a means to smack DJ’s around the head and get a large settlement quickly. That is an abuse.

    I do not read the Momibon case as inconsistent with this. It is an exercise in interpretation of particular statutory provisions. The judge draws a conclusion about whether a particular set of facts give rise to a contravention of those provisions. The statute is not intended to be exhaustive. There is nothing to suggest that the statute is meant to constitute a codification of the circumstances in which a person (whether litigant or lawyer) may be held to have abused the process of the Court. Indeed, the fact that it applies only to lawyers urging a claim on someone else’s behalf rather than to litigants tends to suggest that it is nothing more than a regime of professional regulation which overlaps the common law with respect to regulation by the Court of its own process.

    Of course, abuses of process are rarely actionable. There is usually no reward in pursuing a party for abuse. The accusation normally arises when someone tries to strike out a pleading or something like that. In this case, there would have been no upside for DJ’s or McInnes in seeking to raise the question in Court. This, no doubt, would have been part of the strategic consideration behind making the claim in the first place.

    As for LE’s comment that the lawyers may have done Ms FK a disservice in making her appear greedy, the disservice would have been all the more egregious if the appearance had been counterfactual.

  8. Nick Ferrett
    Posted October 26, 2010 at 12:09 pm | Permalink

    PS, I hope to receive appropriate credit for managing to insert a hyperlink into my comment. Quite snappy, I feel.

  9. desipis
    Posted October 26, 2010 at 12:59 pm | Permalink

    Nick,

    So much is clear from the passage from White Industries quoted in your article.

    Reading that quote I disagree that it infers the Fraser-Kirk action was not within the law. For that you’d have to argue that including an unreasonably inflated claim actually poses an additional burden on the court system, over and above the reasonable claim on which it is based. That is to say, the White Industries judgement was based on the harm done to the court system and not that done to the defendant.

    And congrats on the successful hyperlink, we’ll have you programming Skynet in no time!

  10. Nick Ferrett
    Posted October 26, 2010 at 2:24 pm | Permalink

    Desipis, it does impose a further burden, because it necessitates separate argument, based on additional evidence, as to whether the exemplary damages are justified, but that is not the point.

    The point is the misuse of the judicial system for a non-judicial purpose. The point is made in the passage from White Industries:

    It is not part of the legal process in this Court that its process and procedures be used as an instrument of oppression so as to frustrate the bringing, and expeditious disposition, of a legitimate claim.

  11. Peter Patton
    Posted October 26, 2010 at 2:32 pm | Permalink

    LE

    Up until now I had been leaning more and more towards supporting contingency fees in Australian litigation. But this case has been a big slap of reality.

  12. Posted October 26, 2010 at 5:37 pm | Permalink

    If we are to have contingency fees (in my view the only way to overcome the huge access to justice problem we currently have), then cases like Momibo will have to be overturned or distinguished on their facts. In that sense, I really hope Nick’s comments (above) indicate how a future case will proceed.

  13. Posted October 27, 2010 at 7:14 am | Permalink

    Didn’t Fraser-Kirk also say that the massive claim was about getting media attention for sexual harrassment claims. She certainly succeeded in that. I suspect otherwise that it would have been brushed under the carpet and McInnes would probably still have his job. At least this way she got something out of it and he was punished for his actions. If it makes someone else think twice before sexually harrassing a staff member than it’s a good thing.

  14. derrida derider
    Posted October 27, 2010 at 9:43 am | Permalink

    Yeah, LE, the claimant lost a lot of public sympathy with that $37m.

    I’m sure she’s crying about that – all the way to the bank.

  15. desipis
    Posted October 27, 2010 at 2:03 pm | Permalink

    LE:

    That is why I vastly prefer my lovely accounts of profits – because they’re limited to the actual profit made in my formulation.

    I’m not sure how that would apply to this case. I mean how much more money did DJs make as a result of allowing the sexual harassment to take place? Could it be argued that McInnes was actually 5% more effective than the other (non-sexually harassing) CEO options DJs had available to them?

    …in that there’s no incentive on the part of the lawyers to look after someone’s long term image.

    In what way are there incentives to do so normally?

  16. kvd
    Posted October 27, 2010 at 2:12 pm | Permalink

    Thanks LE from a lay person; very informative.

    I wonder if any of this will play on the minds of the Scottish lawyers righting the wrongs on behalf of their potentially “fitted up” clients?

    I’m jumping around, but am intrigued by your comment “Of course, abuses of process are rarely actionable”

  17. Nick Ferrett
    Posted October 27, 2010 at 5:14 pm | Permalink

    Desipis, the comment about an abuses of process rarely being actionable was mine. I meant that a person affected by an abuse of the process of a court will usually have no right to sue for damages. This is not to say that there is no eight to any compensation. A court may, for instance, grant a costs order against the delinquent litigant, but that’s a matter of pure discretion.

One Trackback

  1. […] This post was mentioned on Twitter by Legal Eagle, John Hacking. John Hacking said: Abuse of process and damages claims: In discussions on the DJs sexual harassment case, I have seen a tendency for … http://bit.ly/dk565I […]

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*