HONG KONG COURT REJECTS AWARD CHALLENGE OVER LAW FIRM SUCCESS FEE

The Hong Kong Court of First Instance has dismissed a challenge to the enforcement of a US$50 million arbitral award rendered in Chicago in favour of a top US law firm for fees due under a contingency fee (also known as a "success fee") arrangement (BB v. KO [2023] HKCFI 2661).

The central issue was whether the contingency fee arrangement related partly to litigation in Hong Kong, such that enforcement of the award would be contrary to public policy.  Although success fees for arbitration have been permitted by Hong Kong law since 16 December 2022 (as reported here), such arrangements continue to be prohibited (with certain limited exceptions) for Hong Kong litigation as a result of the common law rules prohibiting maintenance (the funding of litigation by unconnected third parties) and champerty (a form of maintenance involving the payment of litigation costs in return for a share of any proceeds).

On the evidence before it, the court was not satisfied that the contingency fee arrangement related to litigation in Hong Kong such as to render it champertous.  Moreover, the challenge to the award was more than two years out of time and there was no good reason to grant an extension (taking into account the court's views on the merits along with other factors).  The challenge was therefore dismissed with indemnity costs awarded in favour of the law firm.

Background

The law firm was engaged by a successful businessman to represent him in litigation in the US state of Nevada.  The engagement agreement provided for a flat monthly fee of US$600,000, a trial fee of US$75,000 per day, and a “success bonus” (i.e. a contingency fee) linked to the result of the Nevada litigation.  The agreement also contained a sentence which referred to certain litigation of the client in Hong Kong, stating that the law firm was not being retained as lead counsel in that matter but might provide strategic advice.

Having received no payment after the Nevada litigation was ultimately settled for US$2.6 billion, the law firm commenced arbitration and obtained an award in its favour.  It then successfully applied to enforce the award in Hong Kong and obtained a charging order over the client's assets in Hong Kong as well as a garnishee order over certain dividends declared in favour of the client.  More than two years out of time, the client applied to set aside the enforcement order.

The main ground initially relied upon by the client was that the arbitration and the award were in respect of a contingency agreement which was illegal and not capable of settlement by arbitration in Hong Kong, and that enforcement of the award would therefore be contrary to public policy.

In the written submissions of counsel filed for the hearing, however, the client shifted position and argued for the first time that the contingency fee agreement was champertous because it related partly to litigation in Hong Kong, relying upon the sentence in the engagement agreement referring to the client’s Hong Kong litigation.

Decision

Mimmie Chan J rejected the challenge to the award on the grounds that (i) the client was more than two years out of time to challenge the order for enforcement and there was no good reason to grant an extension, and (ii) on the merits, the client had in any event failed to discharge his burden of proving that enforcement of the award would be contrary to public policy.

Extension of time

The client sought to justify his delay of more than two years in challenging enforcement of the award in Hong Kong on the basis that: (i) he had been focusing on, and awaiting the results of, an application to vacate the award in the USA and challenges to enforcement in the USA and Japan; (ii) he had only recently become aware of the option to challenge enforcement in Hong Kong on public policy grounds, after changing his lawyers in Hong Kong; and (iii) his medical condition during relevant periods had hampered him in giving instructions to his lawyers.

The court rejected all of these arguments, noting that the law was clear that it was open to the client to challenge enforcement in Hong Kong without first seeking to challenge the award in the USA, and it was the client’s “own considered decision” to focus on his challenges to the award in the USA and Japan.  It was “not credible” that his medical condition had made it impossible for him to instruct his lawyers, and the change in his Hong Kong legal team was not a good reason for inactivity, as changes in legal representation have rarely been accepted by the Hong Kong courts as a good excuse for lack of action.

Ultimately, the court noted that these factors “should not be considered in isolation from the merits”.  If the challenge to enforcement had merit, it would be unjust to shut the client out from having it determined by the court.  If the application had no merit, on the other hand, it would be grossly unjust to delay enforcement when the client had sat on his application for two years.

Merits of the challenge

The court noted that, if the contingency fee arrangement was illegal because it related partly to litigation in Hong Kong, this was a highly material and obvious fact which should have been set out clearly in the client’s affidavit.  The relevant facts were within the knowledge of the client and there was "no conceivable reason" why he could not have disclosed them in his application if they existed and were true.  The client had, however, remained "completely silent" in relation to the Hong Kong litigation and had referred only to the Nevada litigation as the subject matter of the engagement.

The client's failure to provide relevant evidence rendered his position “incredible”.  Without the necessary facts as to the Hong Kong litigation (including how it affected or was affected by the Nevada litigation which formed the basis of the contingency fee arrangement), it was simply not possible for the court to determine whether the arrangement was champertous as a matter of Hong Kong law.

Accordingly, the court was not satisfied, on the evidence before it, that grounds existed to justify refusal of enforcement of the award.

Comment

It is important to emphasise that this decision is not a green light for the enforcement of success fees in relation to Hong Kong litigation, which remain prohibited at common law (as noted above).

From a practical perspective, the decision is a reminder that law firms entering success fee arrangements should exercise caution when structuring their engagement documentation.  In particular, where there are disputes in more than one forum, careful consideration should be given to the potential risks of documenting a success fee arrangement in relation to one dispute in an agreement which also covers work (not intended to be covered by the success fee arrangement) on another dispute.  In this case, the law firm argued, as a matter of contractual interpretation, that its entitlement to the contingency fee hinged solely upon the successful outcome of the Nevada litigation and was not linked to the Hong Kong litigation, such that it did not engage the doctrines of maintenance and champerty.  It was ultimately unnecessary for the court to consider this point given its findings on the evidential position, but there might have been less scope for the client to link the contingency fee to the Hong Kong litigation if the engagement in relation to the latter had been documented separately.

The decision also emphasises that award debtors wishing to challenge enforcement of an award in Hong Kong do not need to, and should not, wait for challenges to the award in other jurisdictions to be determined before taking action in Hong Kong.  Although the court has the discretion to extend the time limit for challenging enforcement (as discussed  in our previous blog here, and in contrast to the position in relation to applications to set aside awards, for which the 3 month deadline cannot be extended), the court will not do so without good reason and will carefully consider the merits of the challenge in deciding whether to grant an extension.  It is therefore essential to make an application to set aside an enforcement order as soon as possible, and at the latest within the period stipulated in the order, regardless of whether proceedings to challenge the award are on foot in other jurisdictions.

Finally, this case underlines the requirement for award debtors to set out the legal grounds for challenging enforcement in their application and provide all relevant evidence in their supporting affidavit evidence, on the basis that it should not be necessary for the award creditor and the court to speculate on the precise grounds relied upon.  Failure to comply with this requirement could at worst be fatal to an application, and may at best damage the credibility of the award debtor.  The failure of the client to do so in this case, for example, enabled the law firm to argue that the challenge to enforcement was an abuse of process and that the last-minute reliance by the client on the Hong Kong litigation amounted to an ambush.  The fact that the court expressed sympathy for this view and was clearly unimpressed by the client's failure to adequately set out his case in the application illustrates the perils of default by award debtors on these requirements.