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Funding Declined! – Raafat Imam v Life (China) Co Ltd

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The age-old common law doctrines of maintenance and champerty prohibit third parties from funding an unconnected party’s litigation. Whilst some other common law jurisdictions, such as Australia and Singapore, have abolished the torts and crimes of maintenance and champerty, developments in this area of law have been slow in Hong Kong.

In Unruh v Seeberger [2007] 2 HKC 609, the Court of Final Appeal developed exceptions to the common law doctrines, allowing third party funding in litigation in three narrow areas.  In the more recent case of Raafat Imam v Life (China) Co Ltd [2018] HKCFI 1852, the Court affirmed the narrow exceptions but refused to approve a proposed commercial litigation funding agreement.

Background

The Plaintiff brought an action against the Defendants for breach of a consultancy agreement. The Plaintiff claimed that he did not have the financial means to pursue the action himself without the support of a third party litigation funder. He then applied to the Court for a declaration that a proposed commercial litigation funding agreement to be entered into between the Plaintiff and a commercial third-party funder (the “Funding Agreement”) did not offend the law prohibiting maintenance and champerty and that the Funding Agreement be approved by the Court.

The issues before the Court were:

  1. Whether the Court should exercise its discretion to grant the declaration sought?
  2. Whether the Funding Agreement per se fell foul of the common law prohibitions of maintenance and champerty?
  3. Whether the Funding Agreement fell within the access to justice exception?

Decision

The Court found that the declaration sought by the Plaintiff was essentially a declaration of non-criminality and recognised that a civil court would be slow to grant a declaration relating to the criminal consequences of conduct. The fact that there was no criminal prosecution against the Plaintiff or the funders at the time of the application was of no significance. As long as there was a possibility of prosecution, a civil court should not grant a declaration of innocence with respect to the subject matter of the potential criminal proceedings unless there are exceptional circumstances. The two established exceptions are where the integrity of the relevant criminal proceedings is questionable and where human life is at stake. The Court went on to find that the Plaintiff’s case did not fall under either of the exceptions.

The Court also found that the Plaintiff had failed to join a proper contradictor in the proceeding, i.e. a party who has an interest in opposing the declaration sought by the Plaintiff. The real dispute in the Plaintiff’s application was therefore not between the Plaintiff and the Defendants but between the Plaintiff and the Director of Public Prosecutions or the Secretary for Justice.

Further, though the Plaintiff attempted to support their case by referring the Court to third party funding cases in insolvency contexts, the Court found that such cases did not assist the Plaintiff’s application. In fact, the Court of Final Appeal in Unruh expressly treated insolvency proceedings as a special category which was excluded from the ambit of the prohibition against maintenance and champerty.

In light of the above, the Court refused to grant the declaration sought or to approve the Funding Agreement and considered it unnecessary to rule on issues 2 and 3. Nevertheless, the Court made the following useful observations:

  1. Having considered the terms of the Funding Agreement, the Court expressed its concerns that there was a real risk that the Plaintiff may easily become a figurehead in the conduct of the litigation and that the litigation may be controlled by some unknown third party.
  2. The Court recognised that 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 legal representation and in any event, the Plaintiff’s alleged impecuniosity appeared artificial.

Conclusion

Though Raafat confirms that Hong Kong courts adopt a cautious approach in permitting third party funding in litigation cases, the Court accepted that the totality of facts must be considered when assessing whether a litigation funding agreement poses as a genuine risk to the integrity of the Court’s processes and that countervailing public policies must be taken into account.

Whether the Plaintiff may succeed on appeal (if any) remains to be seen but a successful appeal would open up the possibility for wider litigation funding in Hong Kong.

China’s Legislature Enacts Its New Foreign Investment Law

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After a month-long consultation period, China’s National People’s Congress today passed the country’s new Foreign Investment Law (the “FIL”). The FIL, which comes into effect on January 1, 2020, will abrogate substantial parts of the legal framework that has governed foreign investment in China for the past 40 years.

First introduced as a draft in 2015, the FIL became bogged down but late last year, an amended version was re-released and then fast-tracked for consultation, in an effort to placate concerns in the EU and the United States about unfair trade practices. In particular, China is accused of limiting market access, forcing technology transfer to Chinese partners and doing little to curb theft of intellectual property, all in violation of its WTO commitments.

The FIL clearly aims to address those concerns but it goes further, overhauling a divided system that regulates inbound investment separately from domestic businesses and which imposes significant restrictions on foreign-invested projects. That system will be unified and standardized.

We have summarised below the major details of the draft law for your reference.

Streamlining of Market Entry Procedures & National Treatment

China has been shifting away from an approval-based system to a reporting-based business supervision system since 2015. Foreign investors merely file information with a regulator when they incorporate and thereafter on a periodic basis. The FIL takes this a step further by invoking consistency between filing requirements of foreign-invested enterprises (“FIEs”) versus Chinese-invested businesses.

In late 2018, China’s National Development and Reform Commission implemented a “Negative List” approach like the one used in the Shanghai Pilot Free Trade Zone, permitting foreign investors to invest in any sector that does not appear on the negative list. This has been co-opted by the FIL.

The negative list prohibits foreign investment in some sectors, for national security reasons, while merely imposing restrictions on others. Non-Chinese investors seeking to invest in sectors categorized in the negative list as restricted must first apply to the Ministry of Commerce (“MOC”) for approval and may be subject to other restrictions as well, such as having to partner with a Chinese investor. However, once established, FIEs are meant to be free of arbitrary restrictions or conditions imposed by PRC government agencies (Article 24).  

The key take-away is that foreign investors in sectors that are not on the negative list will be free of all foreign investment restrictions and entitled to ‘national treatment’ in terms of how they are regulated which is no less favourable than what Chinese investors enjoy (Article 4).  In principle, this should level the playing field for both FIEs and domestic businesses in China in all respects including bidding for government procurement projects (Article 16) and obtaining equity or debt financing (Article 17). Article 8 is a grim reminder that a level playing field also means compliance with unwelcome laws and policies.

Protection of Foreign Investment & Intellectual Property 

  • The FIL contains several provisions aimed at promoting foreign investment in China and protecting foreign interests in those investments, including those:
  • affording greater protection to commercial secrets and other intellectual property rights (“IPRs”) of foreign investors and FIEs that rely on those IPRs (Article 22)
  • respecting commercial agreements reached between foreign investors and Chinese partners (Article 22). All pre-existing laws and regulations placing limits on or requiring parties to restructure their commercial agreements are to be repealed (Article 24)
  • abolishing mandatory technology transfers by governmental officials and repeal of all pre-existing laws and regulations in China used to force such technology transfers (Article 22)

Variable Interest Entities (“VIEs”)

The FIL extends China’s existing foreign investment regime to include foreign-controlled entities, where “control” is broadly defined and includes contractual control (Article 2). This reverses the currently-ambiguous legal status of VIEs which Chinese regulators have tacitly permitted for many years.

Taking advantage of a legal loophole, foreign investors seeking access to restricted sectors have frequently used VIEs in the past, using contractual arrangements between their FIEs and Chinese companies, to facilitate foreign investment where investment would otherwise be prohibited or restricted.

The FIL closes the loophole by explicitly designating VIEs as FIEs, subjecting them to regulatory control which is likely to restrict formation of future VIE-type arrangements (Article 28) and may result in existing VIEs having to be unwound (Article 36).

National Security Review Process

Although the FIL only briefly touches on China’s Anti-Monopoly Law and national security review regime processes, the fact that these are mentioned at all implies that they may exert greater influence in regulating foreign investments in the future. The national security review regime, similar to CFIUS in the United States, currently applies to any foreign acquisition or merger deemed “sensitive”. Investors then decide whether or not to voluntarily seek a formal review or wait to respond to demands for one by regulators.

Article 35, when read together with Article 6 and Article 40, appears to widen this scope for national security reviews. Our assessment is as follows:

  • additional rules and structures will likely be added to the existing national security review criteria, through separate implementing legislation, to prohibit foreign investment in key businesses or sectors to avoid “harming the public interest” (Article 6)
  • among the factors considered in any national security review of any proposed foreign investment will be the anticipated economic impact on domestic PRC businesses
  • foreign investment deemed too sensitive will either not be approved or only approved subject to market entry restrictions
  • the FIL prohibits appeals from unfavorable national security review decisions (Article 35).

Criticisms

Although it is tempting to dismiss the FIL as mere window-dressing meant to appease trade officials in the United States and EU, its impact on foreign investors and FIEs over the medium and long-term is likely to be significant. Expect to see regulators redoubling efforts to crack down on theft of IPRs and a sudden influx of global market leaders, in sectors like financial services and civil aviation, as those gates are opened. The simplification of corporate governance requirements will likely

Nevertheless, it’s important to not lose sight of the FIL’s deep flaws; most its provisions are vaguely worded and despite the high-minded statements of principle concerning fair and equal treatment, discrimination against foreign investors and FIEs lies at the very heart of the FIL and China’s foreign investment legal framework as a whole. Most worrying are Articles 6 and 40 which hint at the politicization of China’s national security review regime and its use to keep foreign competition out of consecrated sectors. Hence, foreign investors should not be surprised if they still encounter barriers to entry, or if they remain subjected to unfair disadvantages when bidding for government contracts.

Whether or not the FIL noticeably improves conditions for foreign businesses depends almost entirely on how faithfully the FIL and its implementing regulations are enforced at the local level.

Final Comments

The FIL will not come into force until January 1, 2020. Until then, all inbound investments into China will continue to be governed by China’s current foreign investment regime which has already been slightly liberalised with the revised negative list already in effect. Investors planning to establish new businesses in China, particularly in sectors listed in the Negative List, would be better off waiting until after January 2020, when current market entry approvals and restrictions on corporate governance are lifted.

In the meantime, we will continue to closely monitor all new developments in relation to the FIL and issue updates on how foreign investors will be affected.

Remote Video Link Paving Way for Migrant Workers to Pursue Claims from Abroad

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On 10 Feb 2019, the Labour Tribunal (the “Tribunal”) granted permission to a claimant to testify in the Philippines via video conferencing facilities. The claimant was a foreign domestic helper working in Hong Kong and she is seeking compensation against her employer who allegedly physically assaulted and thereafter summarily dismissed her. Due to financial and family reasons, the claimant left Hong Kong and was unable to give evidence in person at the Tribunal.

The possibility of the use of video link to give testimony in the Tribunal proceedings

The Labour Tribunal Ordinance (“the Ordinance”) requires the claimant to “appear” at all stages of the hearings held in the Tribunal including giving testimony. Although the Tribunal might permit “an office bearer of a registered trade union” to “appear” on behalf of the claimant, this exception is normally confined to hearings without the need to give evidence. As such, prior to this ruling, it is unclear whether giving testimony by means of video link falls under the requirement of “appearance”.

On the other hand, the Ordinance provides that Tribunal proceedings should be conducted in an informal manner with great flexibility in both locations and procedures.  

The Technology Court, a venue that offers facilities, among others, to hear evidence via video link (“video link evidence”) is also made explicitly available to the Tribunal under the law. Thus, theoretically speaking, it is possible to adduce video link evidence in the proceedings at the Tribunal and the ruling affirms this principle.

When should the use of video link to give testimony be allowed in the Tribunal?

Whether the video link evidence is admissible in the proceedings at the Tribunal rests on the Presiding Officer’s discretion. The predominant principle is that giving evidence via video link is a privilege and an exception to the general rule which requires evidence to be given within the courtroom.  Ultimately, the discretion exercised should be the best course calculated to achieve a just result for both parties.

Some factors that the Presiding Officer should consider when exercising his/her discretion are set out in the Practice Direction for the use of the Technology Court (see below). This applies even if the use of video link does not require transferal of proceedings to the Technology Court.

  1. the views of all the parties;
  2. the availability of the Technology Court;
  3. the subject-matter of the proceedings or the relevant part of the proceedings; and
  4. all other material circumstances, including in particular, whether the proposed use of the Technology Court is likely:-
  • to promote the fair and efficient disposal of the proceedings;
  • to save costs; and/or
  • materially to delay disposal of the proceedings.

Previous High Court cases suggest that other circumstances such as:-

  • where if video link evidence is not allowed would result in a denial of access to court by the party;
  • where the witness concerned is a key witness;
  • where it involves considerable costs, expenses, and inconvenience to the party in bringing the witness to Hong Kong for proceedings; and
  • where the party in opposing the video link applications gains a collateral advantage or has ulterior motives,

are all favorable to the Presiding Officer’s discretion to grant permission to adduce video link evidence.

Why does this ruling matter?

Currently, there are nearly 360,000 foreign domestic helpers being employed in Hong Kong annually. Before the ruling, the common perception was that if the helper wished to pursue a claim at the Tribunal, he/she either had to take up a new employment in Hong Kong immediately after the previous employment was terminated or to obtain an extension of stay under a special pass and renew it repeatedly in order to stay in Hong Kong and attend hearings in person.

However, the chances of taking up new employment right away is low while the helper has an ongoing employment related lawsuit and the helper also needs to apply for a new work visa before taking up a new employment, if so obtained.  So commonly, without much financial support and away from home, the helper would have to leave Hong Kong and thereby give up his/her claims against the employer altogether.

This ruling allows the helper to continue pursuing the claim at the Tribunal despite having returned to the home country and thus increases his/her chances of claiming compensation against the employee. 

We anticipate that this ruling might encourage the use of video link to give testimony in Small Claims Tribunal and the Minor Employment Claims Adjudication Board in the near future.

OLN provides a full range of employment related services. If you have any questions regarding the above or any other employment issues, please contact one of the members of our employment team.

Can a compulsory reinstatement or re-engagement order assist an employee being unreasonably and unlawfully dismissed?

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The amendments under the Employment (Amendment) (No.2) Ordinance 2018 (the “Amendment”) to the Employment Ordinance (Cap.57) (“EO”) came into effect on 19 October 2018 which imposes more stringent actions on the employer who unreasonably and unlawfully dismisses its employee.

Some examples of unlawful dismissal are if an employee is dismissed:-

  1. during pregnancy and maternity leave;
  2. during statutory paid sick leave;
  3. after work-related injury and before determination or settlement and/or payment of compensation under the Employees’ Compensation Ordinance (Cap.282);
  4. by reason of the employee exercising trade union rights; or
  5. by reason of the employee giving evidence for the enforcement of relevant labour legislation.

Before the Amendment, if an employee had been unreasonably and unlawfully dismissed, subject to the mutual consent of the employee and the employer, the court or the Labour Tribunal had the power to make an order for reinstatement or re-engagement of the employment of such employee by the relevant employer.

If no reinstatement or re-engagement order was made, the court or Labor Tribunal, might make an award of terminal payments and an additional award of compensation not exceeding $150,000 to the employee. 

The significant part of the Amendment is that the court or Labour Tribunal now no longer needs to seek consent from the employer before making an order of reinstatement or re-engagement if it is of the view that the implementation of such order is reasonably practicable.

If the employer fails to comply with the reinstatement or re-engagement order, the employer shall pay to the employee a further sum on top of the abovementioned monetary awards and such sum can amount up to three times of the employee’s average monthly wages, subject to a cap of HK$72,500.

Irrespective, can a compulsory reinstatement or re-engagement order really assist an employee being unreasonably and unlawfully dismissed?

  1. The likelihood of a compulsory reinstatement or re-engagement order  

Under the Amendment, the court or the Labour Tribunal must make a compulsory order if it finds that reinstatement or re-engagement of the employee by the employer is reasonably practicable provided that the employee has been dismissed both unreasonably and unlawfully (as detailed above). The factors, without limitation, to be taken into account by the court or the Labour Tribunal, when making such a finding include:-

(i)     the circumstances of the employer and the employee;

(ii)    the circumstances surrounding the dismissal;

(iii)   any difficulty that the employer might face in the reinstatement or re-engagement of the employee; and

(iv)  the relationship between the employer and the employee, and between the employee and other persons with whom the employee has connection in relation to the employment.

The Amendment grants the court and the Labour Tribunal the power to request and obtain a report prepared by the Commissioner for Labour containing details of the conciliation between the parties and information relating to the circumstances of the claim with the agreement of the employer and the employee in relation to both the preparation and the content of such report.

It is very likely that the relationship between the employer and the employee has already broken down severely by the time the matter is put forward to the court or the Labour Tribunal.

It is also not uncommon that cases being heard at the Labour Tribunal might not have gone through any or a complete conciliation process between the relevant employer and employee at the Labour Department.

The prospect of obtaining an optimistic report to the effect that the court or Labour Tribunal can rely on and therefore make a finding that the compulsory order is reasonably practicable is plainly low.   

  1. Possible issues that might arise after the reinstatement or re-engagement

Even if a compulsory order is ordered and the employer acts on that, there can be chances that the employer would not be on good terms with the employee and thus issues relating to promotion, job allocation and performance appraisal which is usually in connection with pay rise and are all subject to the discretion of the employer are bound to arise after the reinstatement or re-engagement.

  1. Alternative to reinstatement or re-engagement order

Having said that, the employee (not the employer) can take an application to the court or the Labour Tribunal to vary the first re-engagement order (the “principal order”) under which the employee will be engaged by the successor of the original employer or its associated company (the “alternative employer”) rather than the original employer.  

The application must be accompanied with a written agreement among the original employer, the employee and the alternative employer. Furthermore, the written agreement must expressly state that the varied re-engagement is to be treated as compliance with the principal order and must contain specified terms stipulated in the Amendment. An order of variation may only be made if the court or Labour Tribunal is satisfied with the terms of the written agreement as comparable to the terms of agreement under the principal order. 

To this end, how the employee can liaise with the original employer and through it, with an alternative employer, for a written agreement for the varied re-engagement before the same can be presented to the court or the Labour Tribunal for an application to vary the principal order remains questionable. We believe that directions from the court or the Labour Tribunal to facilitate such liaison may be necessary and the employee is encouraged to seek independent legal advice when negotiating such terms.  

OLN provides a full range of employment related services. If you have any questions regarding the above or any other employment issues, please contact one of the members of our employment team.

Art Jamming with the Kids

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We kicked off OLN’s year of partnership with Changing Young Lives Foundation （ 成長希望基金會）by hosting the 1st event of the year – art jamming with the kids! We love art but we love the smiles on the children’s faces even more.

OLN is a law firm dedicated to fulfilling its corporate social responsibilities.

Stay tuned for more events to come!

OLN has again been highly ranked in Legal 500 Asia Pacific 2019

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We are pleased to announce that OLN has again been highly ranked in Legal 500 Asia Pacific 2019 directory.
 

OLN has been recommended in the following 2 practice areas:
 

Hong Kong

  • Intellectual Property
  • Labour and Employment

The following lawyers are recommended in The Legal 500 Asia Pacific 2019 editorial (listed below)


Intellectual Property

  • Stephan Chan
  • Vera Sung

Labour and Employment

  • Jade Tang

We are also happy to receive below excellent comment from the researchers, please see below:
 

Intellectual Property:

Led by Vera Sung, the IP team at independent Hong Kong firm Oldham, Li & Nie has strong ties with small and medium-sized enterprises as well as larger international businesses, and is active across a range of IP issues including trademarks, patents and copyrights. General litigator Stephen Chan regularly handles IP disputes, including his representation of Korean cosmetics brand Jayjun Cosmetic in a “squatting” case brought against a Hong Kong brand, alleging that it is trading under the name of “Jayjun” without due authority.

Labour and Employment:

Senior associate Jade Tang excels at handling M&A and transaction-based employment work, and recently provided Hong Kong law input advice to an international law firm that was instructed by the seller of a Hong Kong company to a Korean purchaser. Since the seller was still maintaining a minority interest in the company, the documentation had to ensure that its minority rights were protected and that the key employees’ interests were taken care of under the employment contract and the share option agreement.