Opinion: Hong Kong’s dated laws re funding legal cases may block access to justice

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Time to Review Third Party Funding and Increase Access to Justice in Hong Kong.

Champerty and the third party funding of lawsuits, are legal finance options people often consider taboo. Visions of American style ambulance chasers has led to ‘taking a cut’ or a getting a ‘piece of the action’ being heavily frowned upon by our traditional legal  establishment.

But sticking blindly to old ideas may put Hong Kong behind the global legal industry and even throw up a roadblock to justice for the poor.  Third party funding is, in fact, legal in Hong Kong under three circumstances – but more can be done to promote Hong Kong as a global legal and arbitration centre – and help the poor and downtrodden.

Third party funding is…

Third party funding refers to a contractual agreement between a third party, often a commercial funder, and a claimant who is seeking to pursue a cause of action.  The funder finances all or part of the costs of the litigation or arbitration which, in arbitrations, would include the institutional and arbitration panel fees. The funder does not control the way litigation is conducted. In the event of the case succeeding and monies being recovered, the funder receives a share of the proceeds. Litigation funding is not a loan;  if the claim is unsuccessful, the funder loses the amount it has invested in the case. There is no obligation for the monies provided to the claimant to be repaid.

Third party funding gives claimants the opportunity to pursue meritorious claims that, without those funds, they might not otherwise be able to pursue. It also provides a powerful hedging tool for corporate claimants seeking to remove the financial downside of the costs of litigation.

Third party funding is not…

Historically, common law doctrines and policy makers have regarded third party funding with a degree of suspicion. A perception existed that third party funding could corrupt the dispute resolution process by allowing a party that was unconnected with the merits of the dispute, was not an officer of the court and whose only motive was profit, to participate in the litigation. It was also thought that the practice could encourage frivolous and vexatious claims. Said to be based on the public interest in protecting the purity of justice, and having the added benefit of easing a clogged English court system, 19th century common law doctrines of maintenance and champerty prohibited ‘strangers’ from funding litigation. ‘Maintenance’ is the assistance and encouragement of a party in litigation by a person who has neither an interest in the litigation nor lawful justification. Champerty is a form of maintenance where the maintaining party receives consideration for the maintenance out of the proceeds of successful litigation.

There has been widespread recognition across many jurisdictions, supported by case law and public policy, that these criticisms are misconceived in the 21st century. Third party funding does not ‘open the floodgates’ for frivolous and vexatious claims. Funding a commercial claim is an expensive, risky and protracted undertaking. During the course of proceedings a funder will spend substantial sums on legal fees and other expenses and may also incur significant exposure to adverse costs. Given these risks, there is little commercial incentive to fund weak or speculative claims. It isn’t idle low-end lawyers taking a chance with their free time – it is committed professionals who carefully weigh the merits of a case before making a significant risk-bearing investment.

Nor does third party funding corrupt the dispute resolution process. In fact, it does the opposite and provides a defendant with a route to payment of its costs if it successfully defends a case which is funded. Judicial attitudes in many countries have relaxed and policymakers are generally expressing support for a more accommodating and flexible approach to the third party funding because of its importance in facilitating access to justice. Legal rights under contracts or treaties are effectively useless if they cannot be enforced. Parties with meritorious claims, but with limited financial resources, or a desire to manage scarce resources, can use third party funding to enable the enforcement of their rights in circumstances where the financial risks of the dispute resolution process are shared.

This is why third party funding of litigation and arbitration claims is now an established feature of the legal landscape in much of the common law world. Hong Kong however, traditionally a frontrunner in promoting legal and commercial development, has been slower to adopt such practices.

As recently as 2007, the Hong Kong Court of Final Appeal confirmed, in Siegfried Adalbert Unruh v Hans-Joerg Seeberger [2007] HKCFA 9, that the doctrines of maintenance and champerty still apply. The Court did however also specifically discuss three exceptions where they would not.

Three valuable exceptions

Firstly, the Court recognised a ‘common interest’ category of cases where the operation of the common law doctrines is excluded. Such an interest will exist where parties have a legitimate common interest in the outcome of the litigation that is sufficient to justify openly supporting the litigation conducted by another. Groups and associations pursuing legitimate objectives were mentioned as persons who may possess a sufficient common interest in related litigation to warrant their benefit from the exclusion. Martell v Consett Iron Co Ltd [1955] Ch 363 was provided as a salient example. That case involved an association formed to protect fisheries and to prevent the pollution of rivers, which was held to have a sufficient common interest for it to lawfully support an action brought by members who claimed that their fishery was being polluted by effluents from the defendant’s ironworks.

The second category of excluded cases where third party funding is permissible includes cases involving ‘access to justice’ considerations. Article 85 of the Basic Law of Hong Kong recognises access to the courts as a fundamental right. So in circumstances where there is a good legal claim which would otherwise be stifled for lack of funds to pursue it, the Court of Appeal has determined that such cases should be excluded from the operation of the two doctrines.

A third, so-called miscellaneous, category was also recognised by the Court to cover cases involving practices which have been accepted as lawful, such as, for example, the sale and assignment by a trustee in bankruptcy of an action commenced in the bankruptcy to a purchaser for value or the development of the doctrine of subrogation as applied to contracts of insurance.

In 2010, Re Cyberworks Audio Video Technology Limited [2010] 2 HKLRD 1137 provided the first publicly available, written endorsement of the lawfulness of third party funding in the context of claims by insolvent companies in Hong Kong. In that case the Court upheld the legality a liquidator accepting funding for certain proceedings in return for an option to take an assignment of those proceedings and the cause of action on which they were founded.

Change is needed – and coming

Since the decision in Siegfried Adalbert Unruh v Hans-Joerg Seeberger, Hong Kong courts have begun to adopt a more liberal approach to funding and are enforcing the existing rules of maintenance and champerty more flexibly, showing greater sensitivity to the totality of the facts of individual cases, and, in particular, paying greater attention to the interests of the parties and their access to justice. In that case the Court of Final Appeal itself noted that “[i]t is … obvious that [the] access to justice category is not static. The development of policies and measures to promote such access is likely to enlarge the category and to result in further shrinkage in the scope of maintenance and champerty.”

As well as a demonstrable change in judicial approach, moves towards legislative reform in Hong Kong are  afoot. In 2013 the Law Reform Commission established a subcommittee to review the position of third party funding in arbitration and make recommendations for its codification. The Committee, in consultation with the local legal community, has reviewed the current state of the law and, as foreshadowed in a speech by the Secretary of Justice in mid-June 2015, is expected to make recommendations for reform shortly.

In July’s edition of the Hong Kong Lawyer, Stephen Hung Wan-Shun, President of the Hong Kong Law Society wrote “[w]ith the growing prevalence of private litigation funding in other jurisdictions, there is concern that Hong Kong may lose out on its competitiveness as a venue for international dispute resolution and arbitration to those common law jurisdictions that allow litigation funding.” His statement coincided with the announcement of the establishment of a working group to gather members’ views on litigation funding.

For claimants, a combination of the increasing expense of pursuing high value, complex claims and continuing uncertain economic conditions, make third-party funding an attractive and often necessary option.

Getting ahead of Singapore

For Hong Kong, the adoption of a legal regime friendly to third party funding will enhance its attractiveness as an international centre for dispute resolution. As Hong Kong and Singapore continue to joust for recognition as Asia’s premier dispute resolution centre, allowing third party funding could provide a critical edge. Only very recently did Singaporean courts recognise the legality of third party funding in insolvency proceedings though it remains prohibited in arbitration involving Singapore parties.

The availability of third party funding in commercial cases should therefore be embraced in Hong Kong. Not only does it allow financially distressed parties to have access to justice which they would otherwise be denied, it provides options for commercial parties to strategically manage the financial risk associated with participation in proceedings. It would thereby strengthen Hong Kong’s position as the leading venue for international dispute resolution in the Asia Pacific region.

Now is the time  for government representatives and the local legal profession to engage meaningfully to shape the reform process and bring the benefits of third party funding to a broader range of cases.

Harbour Litigation Funding Limited has recently opened an office in Hong Kong in its role as an exclusive sub-advisor to the Harbour Investment Funds whose capital commitments are now in excess of GBP410 million. As a hub for the Asia-Pacific Region, the new office will help expand the fast growing Australasian portfolio of Harbour Funds, which already includes investment in claims in Hong Kong, Singapore, Australia and New Zealand. Harbour Litigation Funding professionals aim to contribute to the debate about expanding the role of third party funding to make justice more accessible in Hong Kong.