In our previous newsletter entitled “Auditors Shielded from Negligence Claims Over Undiscovered Fraud by One-Man Company”, which is available at https://www.onc.hk/en_US/publication/auditors-shielded-from-negligence-claims-over-undiscovered-fraud-by-one-man-company, we have talked about the landmark negligence claim against auditors in Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009]UKHL 39.  Apart from the scale of the claim, what marks this claim out is that it is the largest to have been filed with the help of independent litigation funding.  One could not help but ask, will it happen in Hong Kong?

The Law Against Maintenance and Champerty

Although maintenance and champerty were abolished as crimes and torts in many jurisdictions, the Court of Final Appeal in Siegfried Adalbert Unruh v. Hans-Joerg Seeberger and Another (2007) 10 HKCFAR 31 affirmed that maintenance and champerty are still torts and crimes in Hong Kong.  Maintenance generally refers to aiding a party to bring or defend a claim without just cause or excuse, while champerty means giving aid in exchange for a promise for a share of proceeds of litigation.  A champterous agreement is unenforceable for public policy reason, namely to stop a person from intermeddling in others’ disputes where he or she has no interest.  In the words of Lord Denning M.R. in Re Trepca Mines (No. 2) [1963] 1 Ch 199, “[t]he common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses.”

Changing Attitude of the Courts

In recent years, the Courts have increasing recognized that public policy must evolve to keep pace with changing times and have been more willing to accept third party litigation funding.  In Siegfried Adalbert Unruh, the Court of Final Appeal identified 3 non-static categories of cases excluded from the ambit of liability for maintenance and champerty, as follows:

1.      the “common interest” category which justifies certain persons with a legitimate common interest in the outcome of litigation in funding it;

2.                cases involving access to justice considerations; and

3.      a miscellaneous category of practices accepted as lawful which include sale and assignment of causes of action by insolvency practitioners and the doctrine of subrogation as applied to contracts of insurance.

In addition, the Court emphasized that in assessing whether an agreement to share proceeds of litigation recovery is void for being contrary to public policy, the Court should consider whether in the particular case the champerty agreement will obstruct or promote justice.  Countervailing public policies must be taken into account, especially policies in favour of ensuring access to justice and of recognizing, where appropriate, legitimate common interests of a social or commercial character in a piece of litigation.  The Court will examine the totality of the facts asking whether they pose a genuine risk to the integrity of the court’s processes.

Can Statutory Cause of Action be Assigned?

In a recent English judgment in Rawnsley v Weatherall [2009] EWHC 2482 (Ch), the Court clarified that while a liquidator may sell a bare cause of action of the insolvent company as a property of the company, he/ she is not permitted to assign actions that are granted to him/ her as a liquidator.  Hence, actions for wrongful/ fraudulent trading and unfair preference are not assignable by a liquidator to a third party funder.

To What Extent is Third Party Litigation Funding Allowed?

Notwithstanding the change in judicial attitude towards third party litigation funding, if funding arrangements go too far, the traditional public policy objections may still have some bites.  Accordingly, funding agreements should be structured carefully to ensure that the funder does not eclipse the claimant.  Therefore, the funder should avoid exerting excessive control over the conduct of the proceedings.  In particular, the claimant, not the funder, should give instructions to the solicitor.  In addition, the funder’s stake in the proceeds should not be disproportionate.