By Clifford Smith SC, Sabrina Ho and Tommy Cheung

Litigating in Hong Kong to enforce one’s rights and entitlements can be expensive. Against this backdrop, can a plaintiff of limited financial means enter into a third party civil action funding agreement to fund his civil case? The answer is highly fact sensitive, and therefore uncertain.

Faced with such uncertainty, can that plaintiff ask the Court to grant a declaration that a proposed funding agreement does not offend the law prohibiting maintenance and champerty, and have that agreement approved beforehand? This is what happened in the recent case Raafat Imam v. Life (China) Company Limited and Others [2018] HKCFI 1852.

Deputy High Court Judge Fee, sitting at the Court of First Instance, accepted the persuasive arguments advanced by Clifford Smith SC, leading Sabrina Ho and Tommy Cheung, and held that, on the facts of the case and perhaps generally, the answer is in the negative.

Background

The Plaintiff and the 3rd Defendant were once business partners in the fashion retail industry, and the 1st and 2nd Defendants were the corporate vehicles set up by the 3rd Defendant. The Plaintiff claimed against the 1st and 2nd Defendants for, amongst others, damages for breach of a consultancy agreement dated 6 January 2004, and against the 3rd Defendant for, amongst others, payment of all sums due under the said consultancy agreement pursuant to a guarantee also dated 6 January 2004.

The interesting element of this case is that the Plaintiff claimed that he does not have sufficient financial means to pursue the civil action in Hong Kong without the benefit of a third party litigation funding agreement. The Plaintiff therefore applied for the Court’s approval of a funding agreement into which he proposed entering with a third party funding subject to such approval being given. Legally, the Plaintiff, by way of a summons, applied for the following reliefs from the Court:

(i)A declaration that the proposed litigation funding agreement for the Plaintiff to carry on the said civil action (the Funding Agreement”) would not offend the law prohibiting maintenance and champerty and/or would fall within the recognised exception relating to access to justice; and

(ii) The Funding Agreement be approved.

The Defendants opposed the Plaintiff’s application on the grounds that:

  1. The declaration sought by the Plaintiff is effectively a declaration of non-criminality from a civil Court, where the civil Court would not grant one except in exceptional circumstances as demonstrated by Imperial Tabacco Ltd v. Attorney General [1981] AC 718 and R (Rusbridger) v. Attorney General [2004] 1 AC 357. This is so particularly because the Funding Agreement does not form part of any issue in the dispute between the Plaintiff and the Defendants; further, maintenance or champerty is not a defence or a ground for a stay unless a plaintiff is obliged to found his cause of action on the illegal agreement;
  2. The Plaintiff failed to join the Director of Public Prosecutions (“DPP”) or the Secretary for Justice (“SJ”) as a proper contradictor in the application;
  3. The third party funding cases in the insolvency context would not assist the application;
  4. The application is procedurally defective as declaratory relief has to be sought by originating process and not by a summons; and
  5. The Funding Agreement is per se champertous and it does not fall within the access to justice exception.

Falling foul?

The issues which the Court had to decide were:

  1. Whether the Court should exercise its discretion to grant the declaration sought (“Issue 1”);
  2. If the answer to Issue 1 is yes, whether the Funding Agreement per se falls foul of the prohibitions of maintenance and champerty (“Issue 2”); and
  3. If the answer to Issue 2 is yes, whether the Funding Agreement falls within the access to justice exception (“Issue 3”)

A clear framework going forward

In short, the learned Judge accepted the Defendants’ submissions and held in favour of the Defendants on Issue 1, rendering Issues 2 and 3 academic. The learned Judge’s reasoning in relation to Issue 1 is as follows:

  1. The common law rules making maintenance and champerty criminal offences, torts and a ground of public policy for invalidating tainted contracts were part of Hong Kong law prior to 1997 and remain applicable by virtue of article 8 of the Basic Law.
  2. Contrary to the Plaintiff’s submissions, there is no lack of modern jurisprudence on maintenance and champerty in Hong Kong, such as Winnie Lo v. HKSAR (2002) 15 HKCFAR 16, Unruh v. Seeberger (2007) 10 HKCFAR 31 and HKSAR v. Mui Kwok Keung [2014] 1 HKLRD 116. In this regard, Hong Kong is still moving in a very cautious and prudent manner in abolishing maintenance and champerty as criminal offences. Further, the recent Irish Supreme Court case Persona Digital Telephony Ltd & Another v. The Minister for Public Enterprise, Ireland & Others [2017] IESC 27 showed that, contrary to the Plaintiff’s submissions, the erosion of the ancient prohibition against maintenance and champerty may not have a universal application.
  3. The Plaintiff’s application is for a declaration of non-criminality, which should not be granted save in exceptional circumstances:

(a) The Plaintiff’s reliance on Securities and Futures Commission v. Tiger Asia Management LLC (2013) 16 HKCFAR 324 is misplaced. Even though section 219(5) of the Securities and Futures Ordinance (Cap 571) (“SFO”) concerns the criminal offence of insider dealing, that does not make Tiger Asia the authority for the proposition that the Court would be ready to grant declarations of non-criminality. In Tiger Asia, the Court’s jurisdiction under section 213(1) of the SFO turns on its proper construction, no more no less. Put simply, section 213(1) of the SFO confers statutory jurisdiction on the Court to determine whether or not a person has contravened any of the relevant provisions, including section 291(5) of the SFO.

(b) By contrast, in the present case, like Imperial Tobacco, the Plaintiff is in essence seeking a declaration that a proposed act is lawful. The dispute between the Plaintiff and the Defendants may be a private law dispute; however the effect of the application is to declare whether or not the Plaintiff’s and/or the funder’s conduct in entering into the Funding Agreement is criminal.

(c) The fact that there is no criminal prosecution against the Plaintiff or the funder is of no significance. Once there is a possibility of criminal proceedings, a declaration of innocence vis-à-vis conduct which is the subject matter of the potential criminal proceedings should not be made, save in exceptional circumstances.

(4) The Court went on to find that the present case does not fall within the two established categories of exceptions, namely (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.

(5) Further, the Plaintiff must be able to secure a proper contradictor, namely someone presently existing who has a true interest in opposing the declaration sought. There is no real issue between the Plaintiff and the Defendants in the Plaintiff’s application and hence the DPP or the SJ must be joined. In this connection, the Plaintiff missed the point by relying on Remedy Asia Ltd v. Yick Shing Contractor Ltd HCCT 4/2012 (unreported, 26 June 2014) and Beijing Tong Gang Da Sheng Trading Ltd v. Allen & Overy [2015] 3 HKLRD 247 to argue that the DPP or the SJ does not have to be joined, since there are two material differences between these striking out cases and the present case:

 (a) First, in terms of jurisdiction, a striking-out application is based on Order 18, rule 19 of the Rules of the High Court (Cap 4A) on the ground of an abuse of process, which provided the Court with a statutory jurisdictional basis.

(b) Second, such an application is taken out based on the fact that the relevant action is tainted with maintenance and champerty. There is clearly a live issue between the parties to be resolved by the Court in the sense that the real fight is between the parties.

 (6) The third party funding cases in the insolvency context do not assist the Plaintiff’s application because in the bankruptcy or winding-up context, the trustee in bankruptcy or liquidator can rely on express statutory powers which enable them to apply to the Court for approval of any transactions which might involve funding arrangements or assignment of causes of action that would result in the proceeds of litigation being shared with a funder. In any event, insolvency proceedings are expressly treated by the Court of Final Appeal in Unruh as a special category of proceedings that do not fall foul of the prohibition against maintenance and champerty.

(7) Finally, if the Court accedes to the application by the Plaintiff, it will open up a floodgate for litigants and potential funders to seek the Court’s “legal advice” in relation to other funding arrangements in the light of the particular circumstances of each individual litigant.

As discussed above, since the learned Judge accepted the Defendants’ submissions and held in favour of the Defendants on Issue 1, Issues 2 and 3 have become academic. That said, for completeness, the following points remarked upon by the learned Judge are noteworthy:

  1. On Issue 2, the learned Judge expressed the view that in deciding whether the Funding Agreement would attract criminal liability for champerty, the Court would have to consider a number of facts on top of its terms – and it is impossible to determine such matters in an interlocutory application.
  2. On Issue 3, his Lordship considered that the Plaintiff’s alleged impecuniosity appears artificial, and 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, however that was something the Plaintiff was hoping to achieve. It is after all not the Court’s function to balance litigation power between the Plaintiff and the Defendants.

What this means for you

This decision is significant to both potential plaintiffs, funders, and indeed all Court users. The Court considered that it is generally inappropriate for potential plaintiffs and/or funders to seek the Court’s approval (in effect “legal advice”) on whether or not a proposed funding agreement would offend the law prohibiting maintenance and champerty and/ or fall within the recognised exception relating to access to justice. This means that if any plaintiffs and/or funders wish to enter into a litigation funding agreement, they would have to do it at their own risks. It is advisable that these risks are factored into the commercial terms of the funding agreement itself. If in doubt, legal advice should be sought before executing any funding agreements.

Clifford Smith SC, leading Sabrina Ho and Tommy Cheung, appeared on behalf of the Defendants. Tommy Cheung expanded on this case further in “Controlling Costs”, click here to read the event write up.

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