Hong Kong Court of First Instance upholds rule against litigation funding agreements

The Court of First Instance upheld the well-established common law rule against maintenance and champerty in the recent test case of Raafat Imam v Life (China) Co Ltd [2018] HKEC 2237. The decision confirms that litigation funding agreements will not be blessed by Hong Kong courts at this moment and that such a significant change of the law is a matter for the legislature rather than the courts.

Hong Kong has though taken a step towards liberalisation in this area by passing the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (Ordinance). This legislation is intended to amend the arbitration and mediation statutes to permit third party funding of arbitration and related court and mediation proceedings, both in and outside Hong Kong (see our earlier blog post).

Not all the provisions of the Ordinance are in force yet. The Department of Justice recently consulted the public on a draft Code of Practice. Following the close of the consultation process on 30 October 2018, it is hoped that the remaining provisions in the Ordinance will be brought into force as soon as possible. This significant change to the disputes landscape in Hong Kong will hopefully pave the way to the expansion of third party funding to Hong Kong court proceedings. In an evolving market where clients are constantly demanding innovative approaches to both pricing and funding, a step towards relaxing the law to allow third party funding in the context of litigation will certainly be more than welcome, provided checks remain to protect the most vulnerable litigants from exploitation.

Background

The Plaintiff brought an action against the Defendants for breach of a consultancy agreement (Action) and claimed that he did not have sufficient financial means to pursue the Action without the benefit of a third party litigation funding agreement. The Plaintiff applied for a court declaration that the litigation funding agreement (Funding Agreement) he wished to enter into with an overseas third party professional litigation funder was permissible, and/or fell within the access to justice exception of the law against champerty.

Decision

The Court of First Instance refused to grant the declaration or to approve the Funding Agreement. The Judge considered that there were 3 issues to be addressed in deciding this case, namely:

1. whether the court should exercise its discretion to grant the declaration sought (Issue 1);
2. if the answer to Issue 1 was yes, whether the Funding Agreement fell foul of the prohibitions of maintenance and champerty (Issue 2); and
3. if the answer to Issue 2 was yes, whether the Funding Agreement fell within the "access to justice" exception (Issue 3).

There were numerous sub-issues which the Judge had to address in relation to Issue 1, but first he had to decide whether the declaration sought by the Plaintiff was, in effect, a declaration of non-criminality.

Issue 1

Upon reviewing the extensive authorities on whether a court could grant a declaration relating to the criminal consequences of conduct in respect of what was plainly a dispute between private parties, the Judge reaffirmed the long-standing common law offence of maintenance and champerty. In coming to this view, the judge reminded the parties that Hong Kong has been moving in a very cautious and prudent manner in abolishing maintenance and champerty, and no such changes made were applicable to litigation proceedings outside of the mediation and arbitration context. As such, the Funding Agreement would no doubt constitute a criminal offence in Hong Kong if pursued and his view was that the Plaintiff was seeking, in substance, a declaration of non-criminality to fend off potential or possible criminal prosecution. The Hong Kong court was not prepared to grant the declaration sought by the Plaintiff save where exceptional circumstances were shown.

Having established that the Plaintiff was indeed seeking a declaration of non-criminality, the court's focus turned to whether the Plaintiff could show exceptional circumstances to warrant the court granting such a declaration. There are three limited exceptions to the general prohibition on litigation funding in Hong Kong and the one that is relevant here is the "access to justice" consideration, which the judge considered to be very narrow. This exception would only be made out where it was shown that the integrity of the relevant proceedings was questionable (i.e. proceedings were not properly brought or were vexatious or constitute an abuse of process), or where a matter of life and death was at stake. The Judge held that the Plaintiff had not made out his case that any exceptional circumstances existed. Permitting such an exception would also be tantamount to allowing litigants or potential funders to seek the court's legal advice in relation to funding arrangements.

Issue 2

Having found that there were no exceptional circumstances to warrant the court's granting of what was effectively a declaration of non-criminality, his Lordship considered it unnecessary to rule on Issues 2 and 3. The Judge nevertheless shared his observations on the landscape and general attitude in Hong Kong towards third party litigation funding agreements, without making any conclusive findings.

With regards to Issue 2, the judge cited Ribeiro PJ's summary of the public policy considerations in an earlier Court of Final Appeal decision (Winnie Lo v HKSAR [2012] 15 HKCFAR 16) in which the court considered a contingency fee arrangement, and found that the criminal offences of maintenance and champerty are not unconstitutional and therefore still exist in Hong Kong. Clearly, the fear of the plaintiff being only a nominal figurehead and the prospects of the litigation being controlled by some unknown third party are still serious concerns of the Hong Kong courts. Agreements such as the Funding Agreement should therefore, in their view, continue to be vitiated and held to be potentially criminal.

Issue 3

Lastly, impecuniosity, an important consideration in relation to Issue 3, was not a live issue because the Plaintiff (being a solvent individual with assets amounting to over HK$8.2 million) did in fact have the means to access the courts and pursue his claim. The Judge made clear that the purpose of the access to justice exception is to ensure that a litigant can gain access to the judicial system, not to facilitate access to his ideal or preferred legal representation.

The way forward

Contrary to the recent liberalisation of third party funding in the context of arbitration (and related mediation and court proceedings), Raafat reconfirmed the firm ban on such funding agreements  respect of litigation proceedings in Hong Kong. Any real change in allowing funding agreements in commercial litigation cases will, therefore, likely take time and will require legislation.

Nonetheless, we believe the way forward is clear. If Hong Kong wishes to remain a competitive hub for international commercial disputes, its government should seriously consider lifting the restrictions for litigation funding which are becoming increasingly prevalent in established jurisdictions around the world. It is perhaps time for the legislature in Hong Kong to start to consider putting in place an appropriate mechanism that would allow litigation funding while at the same time prevent any abuse of its use.

For more information on this, please contact Gareth Thomas, Dominic Geiser, Jojo Fan or your usual Herbert Smith Freehills contact.