Hong Kong’s Law Reform Commission (LRC) yesterday called for class actions to be adopted in the city. But the move was widely slated by the market as disappointing and too tame. Here’s why.
The LRC has been consulting with the market since November 2009 on the possible introduction of a comprehensive class actions regime in Hong Kong. Under the city’s current law, the sole machinery for dealing with multi-party proceedings is a representative proceedings provision under the Rules of the High Court.
But this has been criticised as restrictive and inadequate by the Chief Justice's Working Party on Civil Justice Reform.
In yesterday’s final report on the topic, the LRC's Class Actions sub-committee chairman, Anthony Neoh, recommended initially restricting the implementation of a class action regime to consumer cases to avoid the risk of unduly encouraging litigation.
“The overwhelming message received through the public consultation of the Sub-Committee was that whilst a class action regime should be welcomed so that there may be increased access to justice, the regime should not be a charter for unnecessary and unmeritorious litigation,” he said. An incremental approach would allow the court system and the community to gain experience in this new type of procedure, before the regime is extended to other types of cases.
But market participants have been left very disappointed by the move.
Hong Kong corporate governance advocate David Webb branded the LRC proposal to allow class actions by consumers but not investors and not to allow assistance from litigation finance companies (LFCs) as very watered down.
“It will act as a deterrent to goods and services’ providers, which is better than nothing but only just,” he said.
“Investors will be able to sue for bad services from financial advisers but not the directors or sponsors of a fraudulent IPO or the issuer of a financial product,” he said. “This is very disappointing; the LRC’s went much further in its initial consultation paper than it has done in its final report.”
A Hong Kong-based investment bank counsel said people in the city had felt frustrated for years over their access to compensation, or lack thereof. “The Lehman minibonds saga only escalated this frustration,” he said.
Sophisticated offshore investors had the ability to pursue grievances in their own jurisdictions. “But the door needs to be opened for retail investors to pursue wrongs more effectively,” he said.
Webb criticised the LRC decision not to abolish ‘champerty and maintenance’ too.
“It’s an archaic law banning third parties from profiting from, or funding, litigation which has been abolished in many other countries,” he said. “The law prevents LFCs from operating.”
The LRC report concludes class actions cannot work without a viable funding mechanism. But it then proposes that the Consumer Council should have a monopoly on funding class actions, beefing up the Council’s legal aid fund which takes up to 50% of the winnings.
“It puts the Consumer Council in an unfair position,” said Webb. “The council consists entirely of government-appointed members, it is hard to envisage them going vigorously after tycoon companies in consumer litigation.”
From March 2009 to March 2010 the legal aid fund spent HK$813,000 funding three consumer class actions. From March 2010 to 2011 the fund spent HK$1,013,000 on two cases. “It’s clearly unrealistic to expect that this fund will just spring into action,” said Webb.
Theoretically an individual with enough cash to finance proceedings themselves can do so but it is unlikely such a situation would arise, because he would be giving a free ride to all the other claimants. He argued mechanisms for transferring the financial cost of litigation from the representative plaintiff to the class lawyers should be provided for in the lawyers' fees.
“Lawyers should be able to decide which cases are worth bringing,” said Webb.
But many are not in favour of such no win-no fee arrangements. In the LRC report, for example, the Bar Association called for a full assessment to be made of the likely economic and other impacts before implementing any reform.
Webb argued conditional legal fees would align the interest of lawyers better than the current pay-by-hour system. Baker & McKenzie agreed that class actions should be privately funded, either by claimants themselves or third party litigation funding.
One lawyer close to the matter said plaintiffs’ law firms, rather than individual investors, provide such funding in the US, and bore the risk of funding the litigation in exchange for the possibility of sharing in the proceeds of the lawsuit, either through the settlement or judgment. “If there is no funding method, it would be difficult for the reform efforts to be successful,” the lawyer said.
“It’s overall a huge disappointment,” Webb said.
It now remains to be seen whether or not the Hong Kong Government will adopt the recommendations. If they do, the process to approve consumer class actions is expected to take up to two years, and up to five years for investor class actions.
“Hong Kong deserves better,” said Webb. “It should be a free market.”
But another in-house counsel based in the city argued the move at least lay the ground work for wider reform. “Yes, it will take time for any changes to be properly adopted and implemented but, from the investment banks’ perspectives, the fact that retail investors don’t have immediate access to the courts is one less thing to worry about,” he said.