Legal update: Third Party Funding in Litigation, Doable?

Introduction

Article 35 of the Basic Law provides that all Hong Kong residents shall have the right to access to the courts and choice of lawyers for timely protection of their lawful rights and interests. In some situations, if an intended litigant is unable to afford legal services, he can enter into a funding agreement with a litigation funder where the litigation funder will fund the litigation in exchange of a share in any proceeds derived from the outcome of the case. The issues of maintenance and champerty may come into play in this kind of arrangement.

In Hong Kong, maintenance and champerty are not explicitly prohibited by statutes but by common law. There are, however, instances where where conduct which would otherwise constitute maintenance and champerty has been excluded from the sphere of liability. Typical examples include “common interest” and “access to justice” categories, where litigation funding will not be prohibited given that the funder establish that he has legitimate common interest in the outcome of the litigation or that the litigant will not be able to pursue the claim without the support of the funder. (Click here to read our previous article on the general principles on maintenance and champerty)

There has been much discussion as to whether or not such prohibition should be abolished in the interest of justice and a new choice to get access to the justice system

The issue has recently been raised again in the case of Raafat Imam v Life (China) Company Limited [2018] HKCFI 1852.

Background

The Plaintiff was an Australian and had been in the fashion business for a long period of time. The 1^st and 2^nd Defendants were companies set up by the 3^rd Defendant as corporate vehicles for running his fashion retail business in Hong Kong. The Plaintiff alleged that the Plaintiff and the 1^st and 2^nd Defendants had entered into a consultancy agreement whereby the 1^st and 2^nd Defendants agreed to pay the Plaintiff a consultancy fee as consideration for the consultancy services provided by the Plaintiff. The Plaintiff also alleged that the 3^rd Defendant executed a guarantee where the 3^rd Defendant guaranteed such payment. The Plaintiff commenced the proceedings against the Defendant for consultancy fees he said were owed.

The Plaintiff later claimed that it did not have sufficient financial means to pursue the claims against the Defendants and purported to enter into a funding agreement with IMF Bentham, a professional litigation funder. The Plaintiff filed an application to seek the Court’s approval to enter into the funding agreement and in particular, sought a declaration that the funding agreement did not offend the law prohibiting maintenance and champerty and/or falls within the recognized exception relating to access to justice.

Issues

The Court narrowed the issues into three, namely:-

1. Whether the Court should exercise its discretion to grant the declaration sought;
2. If the answer to Issue 1 is yes, whether the funding agreement falls foul of the prohibitions of maintenance and champerty; and
3. If the answer to Issue 2 is yes, whether the funding agreement falls within the access to justice exception.

Decision

In determining the first issue, the Defendants argued that the Plaintiff was seeking a declaration of non-criminality and this should not be granted by a civil court. Accordingly, they argued that the Plaintiff had failed to show exceptional circumstances to warrant the granting of such a declaration and had failed to join the Director of Public Prosecutions or the Secretary for Justice as parties to the application. Finally they alleged that the application was procedurally defective.

The Plaintiff, on the other hand, submitted that he was not seeking any declaration of non-criminality. Further the Plaintiff alleged that his case fell into the category of exceptional cases and was not subject to any prohibition.

The court found for the Defendants regarding the first issue. It noted that a civil court has the jurisdiction to grant a declaration even if it pertains to criminal proceedings. However, a civil court should, in normal circumstances, be slow to grant a declaration relating to the criminal consequences of conduct. The present case was in the latter category as what the Plaintiff was seeking (in essence) was a declaration that a proposed act is lawful. Once there was a possibility of criminal proceedings, a declaration of innocence relating to conduct which may be the subject matter of the potential criminal proceedings should not be made, and given that maintenance and champerty remains unlawful in Hong Kong, the declaration should not be granted unless exceptional circumstances are demonstrated.

The Plaintiff failed to provide any case in support of his submission that exceptional circumstances were demonstrated to warrant the granting of the declaration. Previous cases have identified only two categories of exceptional circumstances: (a) cases where the integrity of the relevant criminal proceedings is questionable; and (b) cases where a matter of life and death is at stake. Since the Plaintiff’s case did not fall into either category, exceptional circumstances were not demonstrated.

This case reaffirmed that there must be a “proper contradictor” in a proceeding who has a true legal interest in opposing the declaration sought and who thus needs to be bound by the result. In this case, the real fight was not between the Plaintiff and the Defendants, but between the Plaintiff and the Director of Public Prosecutions or the Secretary for Justice since the answer had criminal consequences. Since the Plaintiff had failed to join them as parties to the proceeding, he had failed to fulfil the requirement of finding a proper contradictor.

Even though the Plaintiff referred the court to certain insolvency litigation cases and argued that approval of funding agreements by the court is commonplace, these cases were decided in a different context. Indeed, the issue of third party funding in insolvency proceedings are expressly treated as a special category of proceedings that do not fall foul of the prohibition against maintenance and champerty. (Click here to read our previous article on maintenance and champerty in insolvency context)

The court therefore decided not to grant the declaration sought by the Plaintiff. The court did not provide any answer to issues 2 and 3 as it was unnecessary, but the court made the following general observations:-

1. Access to justice is an important consideration in deciding whether the act of entering into a funding agreement with a litigation funder is unlawful;
2. There remains a public interest in preventing the development of an unlicensed and unregulated market in litigation for fear of abuse by the unscrupulous;
3. In this particular case, there was a real risk that the Plaintiff may easily become a figurehead in the conduct of the litigation and that the litigation may be controlled by some unknown third party as co-funders of the Plaintiff’s action; and
4. The Plaintiff in this case was a solvent individual and there is no evidence suggesting that the Plaintiff had no sufficient financial means to pursue the litigation. The purpose of the access to justice exception is to ensure that a litigant can gain access to justice, not to facilitate access to his ideal or preferred legal representation.

Comment

Maintenance and champerty remain offences in Hong Kong. The court will consider the totality of the facts to see if an agreement poses a genuine risk to the integrity of the court’s process and will consider the countervailing public policies.

However, if an applicant is trying to seek a declaration of non-criminality, it is unlikely that the Court will make such a declaration as this will have a direct impact on any actual or potential criminal proceedings.

Ian De Witt

If you would like to discuss any of the matters raised in this article, please contact:

Ian De Witt
Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

See also our previous articles on the law of champerty and maintenance:

“No win no fee arrangement in Hong Kong – First prosecution in Hong Kong on champerty and maintenance”

“Litigation Funding in Hong Kong – Out of the shadows at last?”