Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – Reforms ahead for Litigation Funding?

15 March, 2012

 

Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution

 

The cost of civil litigation can be high, and in many jurisdictions the law allows arrangements which can lower the costs risks to litigants. These include contingency fee agreements with litigation lawyers and litigation funding agreements with third parties. In Hong Kong, such arrangements have risked falling foul of the criminal offences and civil torts of maintenance and champerty and this risk has held back the development of more commercial means of paying for the conduct of the proceedings.

 
In the recent case of Winnie Lo v HKSAR (FACC 2/2011), Hong Kong’s highest court ruled that the criminal offences of maintenance and champerty are not unconstitutional and therefore still exist in Hong Kong. That said, comments from members of the court indicated that we may expect reforms in this area. Taken together with other recent developments concerning litigation funding in Hong Kong, there is potential for reform in relation to the laws in respect of maintenance and champerty to move towards a more liberal approach and thus to bring Hong Kong in line with other parts of the common law world in this area. 
 
Introduction
 
Unlawful maintenance is the improper stirring up of litigation by giving aid to one party to bring or defend a claim without just cause or excuse. Champerty is a form of maintenance which occurs where the maintainer acts for a share of the proceeds of the action in question. In Hong Kong, maintenance and champerty are criminal offences as well as civil torts.
 
Winnie Lo v HKSAR
 
In 2009, the District Court found that the appellant solicitor had conspired with a recovery agent unlawfully to maintain a personal injury action. The recovery agent had entered into an agreement with the plaintiff family to bring a claim on a “no win, no fee” basis. The District Court convicted the appellant solicitor of one count of conspiracy to commit maintenance and sentenced her to 15 months’ imprisonment. The recovery agent was also convicted of conspiracy to commit maintenance as well as a further charge of champerty and was sentenced to 16 months’ imprisonment. The appellant’s conviction and sentence were affirmed by the Court of Appeal but leave was granted to appeal to the Court of Final Appeal (“CFA”).
 
The CFA was asked to determine whether the definition of the offence of maintenance was so uncertain in its nature and scope that its prosecution was constitutionally objectionable under Article 39 of the Basic Law, which provides that the rights and freedoms enjoyed by Hong Kong residents “shall not be restricted unless as prescribed by law”. In applying the principles, Ribeiro PJ discussed the offences both of maintenance and champerty.
 
As highlighted in Unruh v Seeberger (2007) 10 HKCFAR 31, the scope of what constitutes maintenance and champerty has narrowed over the years by virtue of various recognised exceptions to reflect changed public policy considerations, such as cases involving third parties with a legitimate interest in the outcome of the litigation or where so-called “access to justice considerations” apply.
 
Ribeiro PJ noted that such developments demonstrated that the court had been prepared to adapt a law with ancient origins to cope with modern requirements and conditions, but this did not mean that the offences should be regarded as constitutionally uncertain. Although various issues remained to be addressed and clarified, such as the extent to which the elements of the offences of maintenance and champerty might differ in the civil context, such issues similarly did not make the criminal offence legally uncertain. Ribeiro PJ therefore held that the offences of maintenance and champerty were sufficiently certain to be constitutional.
 
Bokhary PJ went further, to hold that the torts as well as the crimes of maintenance and champerty were sufficiently certain to be constitutional. Bokhary PJ considered, amongst other things, whether the ingredients of the torts and crimes of maintenance and champerty were consistent with the protection of the fundamental right to access to justice. Bokhary PJ was satisfied that such protection was afforded by the category of exceptions consisting of cases involving access to justice considerations. Further, Bokhary PJ was of the view that the courts will always, in their approach to the scope of maintenance and champerty, take all due care to protect such a fundamental right.
 
The CFA then considered whether the appellant solicitor’s conviction could stand upon an application of the relevant law to the facts. The high evidentiary threshold required to attribute criminal liability to professional advisers was noted (see HKSAR v Egan (2010) 13 HKCFAR 314). A solicitor who acts in his or her ordinary professional capacity in conducting litigation mounted in good faith, does not “officiously intermeddle” in the action and does not commit maintenance. The Court therefore reminded solicitors that, to avoid being tainted with maintenance and champerty, it was important for them not to transgress their proper professional role in conducting litigation and to charge no more than their ordinary fees.
 
On the facts, the Court found that the appellant had been acting in her professional capacity as a solicitor. Ribeiro PJ noted that “[t]he inferences drawn by the Judge and upheld by the Court of Appeal were founded in part on irrelevant materials and in part on matters that ought to have been regarded as exculpatory but were unjustifiably treated as incriminating.” Accordingly, the Court quashed the appellant’s conviction and consequently set aside her sentence. This decision does not mean, however, that “no win, no fee” agreements, or other such agreements where the fee a client is charged is dependent on the outcome of legal proceedings, are lawful or permitted ethically – they are not.
 
Developments in litigation funding
 
In England and Wales, tortious and criminal liability for both maintenance and champerty have long been abolished. Litigation funding, defined as “an arrangement whereby a third party with no direct interest in the proceedings agrees to fund litigation in return for a percentage of the damages if the case is successful”, is commonplace. Please See Consultation Paper CP 13/10 entitled “Proposals for Reform of Civil Litigation Funding and Costs in England and Wales – Implementation of Lord Justice Jackson’s recommendations” (Ministry of Justice, November 2010). In Hong Kong, however, the development of litigation funding has in the past been hindered by the laws prohibiting maintenance and champerty.

 
A recent case, Re Cyberworks Audio Video Technology Ltd [2010] 2 HKLRD 1137, demonstrates a more liberal approach to the issue. In Re Cyberworks, Harris J held that the assignment of a cause of action to a litigation funding company by liquidators under section 199(2)(a) of the Companies Ordinance (which allows a liquidator to sell a cause of action vested in a company over which he has been appointed) was a lawful exception to the prohibition on maintenance and champerty. This was the first time which the Hong Kong Court had made this finding in express terms, though for some time it has approved individual arrangements on a case by case basis.
 
Further, in Berman v SPF CDO I Ltd [2011] 2 HKLRD 815, a US company entered into a Chapter 11 liquidation under US bankruptcy laws. As part of the company’s restructuring plan, a US bankruptcy court had approved the trustee’s proposal to assign to a litigation funder debts owed to the company by two Hong Kong companies and the right to commence proceedings against the Hong Kong companies. In return, the trustee would share in any proceeds of such litigation. This proposal was subject to the approval of the Hong Kong courts. The trustee therefore sought a determination under O.85 of the Rules of the High Court on whether such an assignment would infringe the prohibition against maintenance and champerty.
 
Harris J held that the proposed assignment did not infringe the prohibition. The central question when assessing the assignment of a chose in action was whether there was a proper commercial purpose to the transaction. In the circumstances, there was a legitimate commercial purpose and there was no indication that the assignment would give rise to “trafficking” or “gambling” in litigation. An important consideration that Harris J took into account was that the company would not be able to recover the debts without funding, a consideration based on “access to justice” grounds. In addition, Harris J emphasised that the US bankruptcy court had already approved the proposal.
 
Comments
 
The CFA in Winnie Lo v HKSAR has made it clear that the prohibition on maintenance and champerty is not unconstitutional and remains part of the law in Hong Kong. However, the CFA has also indicated that reform should be considered with regards to this area of law. As Ribeiro PJ stated:
 
“… I wish to raise for consideration the question whether and to what extent criminal liability for maintenance should be retained in Hong Kong… The issues are, however, of some complexity and may involve taking a different view in respect of maintenance as opposed to champerty; and of criminal as opposed to tortious liability. It is in my view a fit topic to be referred to the Law Reform Commission.”
 
The CFA’s comments as to possible reform on the laws of maintenance and champerty, taken together with the recent case law developments in relation to litigation funding (as discussed above), seems to suggest that a more flexible approach to third parties funding litigation (and perhaps sharing in the proceeds) may be forthcoming. We do not expect in any event, however, any change to the rules preventing a litigation solicitor from charging on a contingency fee or conditional fee basis.
 
 
For further information, please contact:
 
Gareth Thomas, Partner, Herbert Smith
gareth.thomas@herbertsmith.com
 
Robert Hunt, Herbert Smith
robert.hunter@herbertsmith.com
 
Michael Withington, Herbert Smith
michael.withington@herbertsmith.com
 

 

Leave a Reply

You must be logged in to post a comment.