Litigation Funding Agreements in Hong Kong
Despite many common law jurisdictions permitting litigation funding, except in very limited cases, this remains unlawful in Hong Kong under the doctrine of maintenance and champerty. Maintenance refers to the officious intermeddling in a legal action by a third party, who has no interest in the action or motive recognised by law, by providing assistance to either party to sue or to defend the case. Champerty is basically one kind of maintenance where the third party will obtain a share of the proceeds as a reward.
In the recent case of Raafat Imam v Life (China) Co Ltd  HKEC 2237, the Plaintiff (a Mr. Imam) who was suing for breach of a Consultancy Agreement wished to enter into a litigation funding agreement (“the Funding Agreement”). He therefore applied to the Court for a court declaration that the Funding Agreement was permissible.
The issues that the Court had to address were:
- Whether the Court should exercise its discretion to grant the declaration sought;
- If the answer to Issue 1 is yes, whether the Funding Agreement per se fell foul of the common law prohibitions of maintenance and champerty;
- If the answer to Issue 2 is yes, whether the Funding Agreement fell within the access to justice exception.
Was the Plaintiff seeking a declaration of non-criminality?
Before the Court would exercise its discretion to grant the declaration sought, the Court had to first deal with whether the Plaintiff was effectively seeking a declaration of non-criminality, i.e. that the Funding Agreement was lawful. The Court agreed that the dispute between the parties might be a private one based on breach of a Consultancy Agreement. However, the present application was a request for the Court to declare that the Plaintiff’s and/or the funder’s conduct in entering into the Funding Agreement was not criminal. Given the abundance of modern case law in this area, the court found that there was a real possibility of criminal proceedings against the Plaintiff and/or the funder.
Has the Plaintiff shown exceptional circumstances?
The law provides that, once there is a real possibility of criminal proceedings, a civil court should be slow to make any declaration of innocence, unless exceptional circumstances are shown. To qualify as an exceptional circumstance, the applicant has to show that the relevant criminal proceedings have not been properly brought or are vexatious or constitute an abuse of process in that the facts alleged do not in law prove the offence. The Court found that the present application did not fall within these exceptions.
The Court also paid heed to the Defendant’s submission that if the Court allowed the application, it would open up a floodgate for litigants and potential funders to seek the Court’s legal advice in relation to other funding arrangements.
The Court further ruled that since the application was not a private or a civil law dispute, it was necessary to join the DPP or the SJ to the present proceedings, which the Plaintiff obviously failed to do.
The Court therefore decided that it was not appropriate for the Court to exercise its discretion to grant the declaration sought.
Given that the Court decided not to exercise its discretion, the Court considered it unnecessary to decide on the remaining issues. That said, it made some other observations on this case.
The Court agreed that, in determining whether the Funding Agreement fell foul of the prohibitions of maintenance and champerty, the totality of the facts must be examined asking whether they posed a genuine risk to the integrity of the court’s processes. The Court considered the terms of the Funding Agreement and commented that there was a real risk that i) the Plaintiff may easily become a “figurehead” in the conduct of the litigation; ii) the Plaintiff’s obligations to provide all documents to the funder may conflict with the implied undertaking that the documents obtained would not be used for a collateral or ulterior purpose; and iii) the litigation may be controlled by some unknown third party as co-funders.
The Court also noted that the access to justice exception is intended to avoid a situation whereby, without third party funding, the litigant would be unable to pursue a claim which is perfectly good in law. However, access to justice does not include facilitating the litigant’s access to his ideal or preferred legal representation.
On the facts of the present case, even if the Court was to approach the question of inability with some degree of reasonableness, the Court was of the opinion that the Plaintiff was far from being financially unable to pursue the claim without the Funding Agreement.
The Court refused to exercise its discretion to make the declaration sought and hence dismissed the application.
The Raafat Imam case was seen as a test case for how far the Hong Kong courts would open the doors to litigation funding. The decision suggests that they are wary to do so without further legislative reform in this area.
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