Maintenance, Champerty and Litigation Funding in Hong Kong

Ludwig Ng, Partner ONC Lawyers

Money does not produce justice but it is nonetheless required to fund the process. The author explores here the age-old law of maintenance and champerty, and how significant developments over the past decade might encourage more legitimate funding and promote better access to justice.

What is Maintenance and Champerty?

We all know the limitations of legal aid. Many potential claimants with a meritorious case may have no access to the courts unless funding can be obtained.

“[Maintenance] is directed against wanton and officious intermeddling with the disputes of others in which the defendant has no interest whatever, and where the assistance he renders to the one or the other party is without justification or excuse.” (Unruh v Seeberger (2007) 10 HKCFAR 31, para 84).

“Champerty is a form of maintenance, and occurs when the person maintaining another takes as his reward a portion of the property in dispute.” (Unruh v Seeberger (2007) 10 HKCFAR 31, para 85)

Maintenance and champerty were made criminal offences to combat officious intermeddling in litigation and prevent the subversion of justice during the medieval times. To cite Lord Coleridge CJ in Bradlaugh v Newdegate (1883) 11 QBD 1:

“...the danger of the oppression of poor men by rich men, through the means of legal proceedings, was great and pressing; so that the judges of those days, wisely according to the facts of those days, took strict views on the subject of maintenance.”

In the UK, the Criminal Law Act 1967 abolished the offences and torts of maintenance and champerty, but an agreement falling foul of unlawful maintenance remains unenforceable.

As of today, maintenance and champerty still stand as criminal offences and torts in Hong Kong and would render an agreement unenforceable. However, in recent years, the courts have adopted a more liberal and pragmatic attitude towards these concepts. In Unruh, whilst acknowledging the position in Hong Kong, the Court of Final Appeal rejected a rigid approach in finding liability for maintenance and champerty. It held that an arrangement that seems to involve maintenance or champerty per se is not against the law.

Ribeiro PJ noted that the law against maintenance and champerty is a matter of public policy which involves value judgment that varies in time, and that these concepts have to be weighed against modern public policies.

The Traditional Prohibition and Its Exceptions

In Geoffrey L. Berman v SPF CDO I, Ltd. And Others (HCMP 1321/2010), Harris J, upon reviewing Unruh, summarised the decision in three propositions.

Firstly, the object of the prohibition was to prevent two evils: the attraction by the spoils of litigation may encourage (1) the perversion of justice and endangering the integrity of the judicial processes and (2) the “trafficking” of or “gambling” in the outcome of litigation.

Secondly, the courts considered that the prohibition needs to be balanced against access to justice - it was not the goal of the prohibition against maintenance and champerty to stifle good claims by an impecunious plaintiff.

Thirdly, there are certain arrangements which have long been recognised by the courts as exceptions to the prohibition even though they can be said to be no different from those which are traditionally condemned.

1. Common Interest

Even in the earliest times, the courts have recognised that in certain relationships, the parties involved may have a legitimate common interest in the subject matter of the litigation or genuine commercial interest in the outcome of litigation which would justify one of them to support the conduct of the litigation by another as an exception to the prohibition.

In Unruh, the court held that an agreement in relation to arbitral proceedings in the Netherland which entitled a former director certain special bonus in return for his assistance in the arbitral proceedings was not champertous as the party has a genuine commercial interest in the outcome of the proceedings.

2. Access to Justice

As addressed in Unruh, an attack on an action said to constitute maintenance or champerty could well result in a claim which is perfectly good in law being stifled where the plaintiff, deprived of the support of such arrangement, is unable to pursue it.

Such an outcome would be contrary to the fundamental right of access to courts in Hong Kong (Basic Law, Art. 35). Ribeiro PJ commented that the scope of maintenance and champerty is likely to shrink further, with the development of policies and measures to promote access to justice enlarging the category of exceptions to the prohibition.

Essentially, the totality of facts would be considered in assessing whether a given arrangement, which may be considered as maintenance or champertous, would pose as a genuine risk to the integrity of the court’s processes.

3. Statutory Exceptions in Insolvency Proceedings

Debtors often siphon away assets when insolvent to the prejudice of their creditors. Yet liquidators or trustees in bankruptcy often find themselves without sufficient funds to recover assets or pursue other legitimate claims in the name of the debtor.

In light of this, the law has accepted litigation funding arrangements as a legitimate practice in liquidation proceedings. Such arrangements may include the sale and assignment by a liquidator or trustee in bankruptcy of an action commenced in the bankruptcy to a purchaser for value.

In Re Cyberworks Audio Video Technology Ltd [2010] 2 HKLRD 1137, the Hong Kong Court for the first time explicitly confirmed in a written judgment the legality of an insolvency litigation funding arrangement which involved the assignment of an insolvent company’s right of action to a third party funder. This is permitted under s. 199(2)(a) of the Companies Ordinance, which states that the liquidator has the power to sell the “real and personal property” and things in action” of the company; and also that “property” is defined under s. 3 of the Interpretation and General Clauses Ordinance to include choses in action.

Harris J thus held that a funding agreement which includes an assignment of a cause of action by a liquidator to a litigation funder is permitted under statute, and amounts to a lawful exception to the prohibition on maintenance and champerty.

Assignable claims by a liquidator include the recovery of debts, misfeasance actions for breach of fiduciary duty, actions for recovery of assets. Some English authorities have distinguished these claims from those causes of action that are “vested in the liquidator/trustee”, such that claims for unfair preferences under s. 266 and recovery of void dispositions under s. 182 of the Companies Ordinance are not assignable (See Re Oasis Merchandising Services Ltd [1997] 1 All ER 1009 at 101819).

It is submitted that such distinction is not relevant in Hong Kong in light of the latest developments here. (See the cases below discussed and the case of The Joint and Several Liquidators of QQ Club Limited (in liquidation) v Golden Year Limited, HCCW 245/2011, 9 April 2013, in which Recorder Linda Chan SC commented on the difference between the statutory schemes in Hong Kong and England.)

Expanding the Horizon

The liberalisation trend is further confirmed by the following two cases.

In the case of Geoffrey L. Berman, a trustee appointed by the Delaware Bankruptcy Court applied to the Hong Kong court for sanction of a litigation funding agreement under Order 85 of the Rules of High Court to enable him to pursue actions in Hong Kong.

Harris J found that the funding agreement clearly had a legitimate commercial purpose, namely, the funding of a claim for the benefits of the creditors of the bankrupt that might otherwise be incapable of prosecution for the lack of funds. He considered that the fact that the US bankruptcy court had already sanctioned the assignment was decisive, thus concluding that the assignment of the chose in action did not offend the prohibition against maintenance and champerty.

It was held that the importance of access to justice is to be balanced against the public policy reasons for controlling such arrangements. It should be noted that this case does not concern a bankruptcy in Hong Kong. Hence the court’s sanction of the funding agreement is not based on any Hong Kong statutory provisions, such as s. 199(2)(a) of the Companies Ordinance or s. 60(1)(a) of the Bankruptcy Ordinance, but rather on the general policy considerations as applied to a potentially champertous agreements.

In Re Po Yuen (To’s) Machine Factory [2012] 2 HKLRD 752, Harris J sanctioned a funding arrangement between the liquidators and a third party for asset recovery (including through litigation) for the liquidator to engage an agent (not a qualified lawyer) in China, a jurisdiction where contingency fees are lawful under Art. 58 of the PRC Civil Procedure Law.

Under this arrangement, the agent, who was to bear all the out-of-pocket expenses, would be paid on a contingency fee basis (40 percent of the recovery). Thus, it appears that liquidators may be allowed by the courts in Hong Kong to engage foreign agents on contingency fee arrangement in a jurisdiction where such an arrangement is permitted.

The Approach to the Legal Profession

Despite the relaxed rule of maintenance and champerty in recent judgments, it should be noted that as affirmed in Winnie Lo v HKSAR [2012] HKEC 263 and HKSAR v Mui Kwok Keung [2013] HKEC 610, champertous arrangements between clients and solicitors or counsel are still against the law.

Remuneration on a contingency fee basis remains prohibited. The courts have been emphasising heavily on the paramount importance for legal professions to strictly adhere to professional codes.

In the case of Mui Kwok Keung, the defendant, a barrister, had entered into a number of agreements with his clients in which he would take 2530 percent of the ultimate award. He was convicted of champerty and was sentenced to a three-year imprisonment and liable for HK$1.5 million damages.

On the other hand, the UK case of Morris v Southwark London Borough Council (Law Society intervening) [2011] 2 All ER 240 was cited by the CFA in the case of Winnie Lo.

It was held that it is not champertous to include an indemnity clause in a legitimate conditional fee agreement in the UK for a person ie. solicitors in that case, to agree to run the risk of a loss if the action in question fails, without enjoying any gain if the action succeeds. It was emphasised that all the definitions of champerty envisaged a gain if the action succeeded. Further, an indemnity clause in the case of Murray Lewis v Tennants Distribution Limited [2010] EWHC 90161 (Costs) provides that the solicitors would have to accept liability for adverse costs orders. The court held that it does not amount to a breach of any of the Solicitors Practice Rules.

Echoing with these UK cases, the CFA in the case of Winnie Lo held that it was in fact “laudable” for lawyers to act for impecunious clients in a worthy case, taking the chance whether they would ultimately be paid, as long as they do not obtain a gain over and above their legitimate fees where the action succeeds.

So when does a solicitor’s conduct become champertous? Despite the fact that the law against maintenance and champerty has been greatly relaxed in UK, “the public policy that officer of the court should be inhibited from putting themselves in a position where their own interest may conflict with their duties to the court by agreement, for instance, of so-called “contingency fees” (Morris v Southwark London Borough Council (Law Society intervening)).

Thus, the attitude of litigation funding by legal professionals remains very strict in the UK, not to mention in Hong Kong, where maintenance and champerty remain unlawful.

Recovery Agents

Although in the case of Re Po Yuen, the court allowed a contingency fee arrangement with a PRC agent by reason that such arrangements are lawful in China, it must be stressed that in Hong Kong the business of recovery agents who claim to be able to assist accident victims to recover compensation on a no-win-no-fee basis runs a very high risk of being held unlawful.

Solicitors and counsel should not have any involvement in such business. (See Principle 3.01, Commentary 9 of the Hong Kong Solicitors’ Guide to Professional Conduct, Vol. 1, 3rd ed. and Law Society Circular 12-176.)

Conclusion – The Way Forward

Whilst the prohibition against maintenance and champerty is still a part of Hong Kong law, the courts are no longer enforcing the rules inflexibly and are more sensitive to the totality of the facts of individual cases, balancing the interests of the parties and access to justice against the integrity of the judicial process.

It can be anticipated that third-party funding arrangements would become more prevalent in the future. 

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