The Year of the Dragon – a litigator’s review of key cases and developments

As the Year of the Dragon draws to a close we summarise in this e-bulletin some key cases and developments which are likely to be of interest to clients. We also provide (in so far as possible) an indication of anticipated future developments in relation to the key areas identified.

Privilege

The legal privilege year began with the Hong Kong Court of Appeal (CoA) judgment in CITIC Pacific Limited v Secretary for Justice. The case involved the voluntary provision by CITIC of privileged legal advice to the Securities and Futures Commission (SFC) in the course of its investigations.  The CoA had to decide whether by providing the privileged documents to the SFC, CITIC had waived privilege generally which meant that the criminal authorities could also obtain copies of the legal advice for their criminal investigations. The CoA held that Hong Kong law recognises the concept of limited waiver of privilege which means that a party may waive privilege for a specific purpose or proceeding without losing privilege for other purposes or in relation to other proceedings. This result brings Hong Kong law back in line with English law, and it also distinguishes and effectively overturns a 2000 Hong Kong CoA ruling in Rockefeller v Secretary for Justice, in which doubts were cast as to whether Hong Kong law recognised a limited waiver of legal privilege.

The year ended with the judgment of the UK Supreme Court in R (on the application of Prudential plc) v Special Commissioner of Income Tax, in which the Supreme Court confirmed that legal advice privilege only applies to legal advice given by qualified lawyers (which include foreign lawyers and in-house lawyers), and does not extend to legal advice provided by members of other professions such as tax law advice provided by accountants. Although the Supreme Court recognised that there were good arguments for extending privilege to legal advice “ordinarily” provided by other professions, it held that it was a matter for legislature to decide whether and to what extent privilege should be extended beyond the legal profession.  Given the tendency for Hong Kong courts to follow English precedents, there is a real likelihood that the same result would be reached if the issue came before the Hong Kong courts.

Key take-away points: In light of the CITIC judgment: where a decision has been made to provide voluntary disclosure of privileged documents, it is advisable to make it very clear in writing that such disclosure is made for the limited purpose of the relevant investigation or proceedings only and that otherwise the confidentiality and privilege in the documents is maintained. 

Assuming that Hong Kong courts will follow the Prudential judgment: it is prudent to consider carefully what to include in written correspondence passing between a client and his non-legal professional advisors.  Where avoidable, strengths and weaknesses of a legal position should not be set out in writing and any discussion of legal advice should be oral (although this would not preclude such oral discussions from being subject to disclosure on a possible cross examination).  These concerns do not apply in situations where litigation is in contemplation and the correspondence with the non-legal advisors is entered into in furtherance of the litigation, as litigation privilege applies to such communications and litigation privilege is wider and also covers communications with non-lawyers.

Security for costs

Security for costs is a procedural mechanism which allows a defendant to seek protection against the risk that a plaintiff company, either resident abroad or financially impecunious, fails to satisfy a costs order made against it when the defendant succeeds at trial. Presently, security for costs may only be sought via two distinct routes – either under RHC Order 23, rule 1 in respect of companies ordinarily resident overseas, or under section 357 of the Companies Ordinance, in respect of companies incorporated in Hong Kong which are financially impecunious. There is therefore a loophole in respect of financially impecunious companies incorporated outside Hong Kong, but which are ordinarily resident within Hong Kong. As the law stands, defendants cannot seek security for costs against such a company. 

The legislature has however addressed this problem – section 905 of the new Companies Ordinance applies to companies incorporated in or outside Hong Kong, and provides that where evidence can be adduced to show that a company will be unable to pay the defendant’s costs if the defendant succeeds in its defence, the court may require sufficient security to be given for those costs. The new provision is expected to come into effect in 2014, with the rest of the new Ordinance. 

Key take-away points: Typically, defendant parties seeking to show that an offshore company is ordinarily resident outside Hong Kong must identify the location of its central management and control, which has involved an often difficult balancing exercise of various factors (such as the provisions of the company’s objects clause, the place of its incorporation, the place where its trade or business is carried on, where its books are kept, the place where the directors are resident and the location of its most significant assets), in order to come within RHC Order 23, rule 1. The introduction of section 905 of the Companies Ordinance will mean that defendants will no longer need to establish this before seeking security for costs, and need only focus on showing the company’s impecuniosity.

Class actions

On 28 May 2012 Hong Kong’s Law Reform Commission (LRC) published its recommendations for the introduction of a new class action procedure. The LRC’s report recommends that class actions initially apply to consumer cases only, ie to tort and contract claims by consumers, with an expectation that the procedure will eventually be made available for other types of claims. The purpose of the reform proposals is to make it easier for multiple plaintiffs to bring a concerted action against a defendant where the individual claims are likely to be too small (or the costs to large) to make individual litigation viable. The recommendations envision an opt-out approach for domestic class actions which means that class members have to opt-out if they do not wish to be bound by the result of the proceedings, and which is likely to result in larger classes and higher value aggregate claims.  Where class actions involve foreign plaintiffs, the proposal is that the default position should be an opt-in approach.

In order to counteract concerns that the class action procedure may be abused by (impecunious) litigants attempting to “blackmail” a defendant into accepting a settlement rather than embark on expensive litigation, the proposals require the representative plaintiff to show that they are able to meet an adverse cost order and, if appropriate, to provide security for costs.  The government has established a working group to consider the proposals, but it is unclear when (and indeed if) the changes are likely to be implemented.  Please see here for our e-bulletin on the reform proposals.

Key take-away points: If changes are implemented along the lines of the proposals this will make it easier for typical mass consumer claims (eg for mis-selling or product liability) to be brought against a defendant and will increase the pressure on defendants to settle potentially expensive and complex actions.  However, in light of the fact that contingency fee arrangements and third party funding continue to be unavailable in Hong Kong and the fact that the unsuccessful party will need to bear the successful party’s costs, considerable financial hurdles are likely to remain in place which would make class actions less attractive than in the US where they are often used in an abusive manner.

The Competition Ordinance

In June 2012, the Hong Kong Legislative Council passed the Competition Ordinance, which introduces a cross-sector competition law regime in Hong Kong. 

Agreements, concerted practices and decisions that have the object or effect of preventing, restricting or distorting competition in Hong Kong are to be prohibited and businesses with “a substantive degree of market power” may have their conduct curtailed if this amounts to an “abuse of power”.

The Government is implementing the Competition Ordinance in phases to provide for a transitional period of at least a year.  The first implementation phase began on 18 January 2013, when several key provisions relating to the establishment, functions and powers of the Competition Commission came into force.  This first phase implementation will be followed by the provisions establishing the Competition Tribunal which come into force on 1 August 2013. After the preparatory/transitional stage, the Competition Ordinance will come into full operation to enable the Competition Commission and Tribunal to investigate and adjudicate competition-related complaints respectively.  Please see here and here for our e-bulletins on the Competition Ordinance and its implementation.

Key take-away points: Businesses are advised to review their current and proposed business arrangements during this crucial transitional period.  Particular attention should be paid to any potential anti-competitive agreements, arrangements with competitors (such as exchange of price information) and involvement in trade associations.  Given the high degree of economic concentration in some sectors in Hong Kong, companies with substantive market power in a sector should also review their practices to avoid any allegations of abuse of market power.  A robust compliance programme comprising an audit, training (especially for front-line business staff) and preparation of handy do’s and don’ts guides will be essential to prevent any inadvertent and potentially costly breaches of the competition law.

 Private Wealth

a. Family disputes

Family disputes are a growing trend in Hong Kong and the offshore structures used have recently generated much publicity. In the case of Re Yung Kee Holdings Ltd, Harris J in the Court of First Instance held that the court lacked jurisdiction to hear a dispute between members of the family who own the well-known Yung Kee restaurant. Although Harris J found that there had been unfair treatment which in principle entitled one brother to a share buyout, the BVI domicile of the company and the lack of a sufficient link to Hong Kong meant that the court was not prepared to grant the relief sought. Please see here for our more detailed e-bulletin on this case.

Key take-away point: As Hong Kong family companies have traditionally shown a preference for using offshore holding companies, the Yung Kee decision was greeted with concern. An appeal is currently underway, but the decision suggests that offshore companies should start to consider how they can demonstrate a sufficient connection to Hong Kong if they wish to avoid resorting to offshore courts.

b. Trust law reform

In March 2012, the Financial Services and the Treasury Bureau launched a consultation to gather feedback on proposals aimed at modernising Hong Kong’s trust law and boosting Hong Kong’s status as an international asset management forum.

Three key proposals which are of particular interest are:

  1. the introduction of a statutory duty of care of trustees, subject to contrary intention stated in the trust instrument;
  2. the imposition of statutory controls on exemption clauses relating to remunerated professional trustees; and
  3. the introduction of provisions designed to disapply forced heirship rules in the case of trust arrangements.

In November 2012, the Bureau published its conclusions. It reported that the proposals had been met with support, and indicated that the draft legislation is expected to be introduced into the Legislative Council in the 2012-13 legislative session.

Whilst this is a sign that things are changing, the reform of trust law is a topic which has been discussed for many years and was subject to a previous consultation process in 2009-10. It therefore remains to be seen whether such reform will materialise in 2013.

Key take-away point: Hong Kong has been considering updating its trusts legislation for some time and some believe there is pressure to do so in light of Singapore’s emphasis on trusts and private wealth. It is hoped that an updated Trustee Ordinance will make Hong Kong a more attractive place for trusts.

Insolvency

The UK Supreme Court held in Rubin v Eurofinance SA and New Cap Reinsurance Corporation (in liquidation) and another v AE Grant and others that judgments obtained in foreign insolvency proceedings are not more easily enforceable than other (non-insolvency) judgments and that the same enforcement rules apply.  The judgments which the liquidators sought to enforce in England were judgments of the insolvency courts (in the US and Australia respectively) avoiding transactions on the basis that they were transactions at an undervalue or constituted a preference.  Although this is an English decision, the Hong Kong, Singapore or Malaysia courts are very likely to take this ruling into account when considering the issue should enforcement of a foreign insolvency judgment be sought in Hong Kong, Singapore or Malaysia. Please see here for our more detailed e-bulletin on the case.

Key take-away point: This judgment (if followed) means that it will be difficult for a foreign liquidator to recoup funds from third parties in Hong Kong, Singapore or Malaysia in situations where such third parties were neither present in the foreign jurisdiction at the time the proceedings for recovery were commenced nor have otherwise submitted to the jurisdiction of the insolvency court, for example by proving in the foreign insolvency.

Employment

The year of the dragon was relatively prosperous for employment
law[yers] with three high profile employment case decisions (almost unheard of in Hong Kong):

In the first of these cases, Cantor Fitzgerald Europe and Cantor Fitzgerald (Hong Kong) Capital Markets Limited -v- Jason Boyer and Others, Cantor Fitzgerald (a capital markets investment bank) failed to win damages in the High Court against four former executives who left on the same day to join a start-up.  This team move judgment has provided us with useful guidance on (1) the scope of fiduciary duties and duties of fidelity (2) the meaning of “acting in concert” in the context of a team move; (3) the enforceability of restrictive covenants; and (4) the conflict of laws in relation to employees on secondment in Hong Kong.

Key take-away point: This judgment (if followed) means that an employer and employee will not be able to contract out of Hong Kong law.  Employees employed under a foreign law governed contract will be entitled to and should be afforded the same rights, benefits and protections that other employees are entitled to under the Employment Ordinance. Any contract term that purports to extinguish or reduce those rights will be void if exercised while the employee is based in Hong Kong.

We also had two Court of Final Appeal (CFA) decisions involving Cathay Pacific:

The first decision (Cathay Pacific Airways Ltd and Ors v Campbell Richard Blakeney-Williams and Ors) involves the calculation of annual leave and holiday pay and impacts numerous employers in Hong Kong particularly those who remunerate their employees by way of commission schemes and cash allowances. 

Key take-away point: If an employer wishes to calculate its contractual annual leave/holiday pay at a different rate from its statutory annual leave/holiday pay, then it must clearly state the rate of contractual annual leave/holiday pay in the contract of employment.

Litigation funding

As a rule, litigation funding both in the form of contingency fee arrangements between clients and their legal advisers (ie where fees are made dependent on the success of a matter) and third party funding (where a third party agrees to fund litigation in exchange for a share of the winnings) continue to be unlawful in Hong Kong both in civil and criminal law. In Winnie Lo v HKSAR the CFA considered a contingency fee arrangement and found that the criminal offences of maintenance and champerty are not unconstitutional and therefore still exist in Hong Kong.  On the other hand the Court of First Instance in Re Po Yuen (To’s) Machine Factory Ltd considered that it was not objectionable for a liquidator to enter into a third party funding arrangement where the creditors of the company were not prepared to fund the liquidator’s attempts to recover funds of the company, and that a contingency fee agreement could be entered into with foreign legal advisers in relation to foreign proceedings where such arrangements were not prohibited in the foreign jurisdiction.

Take-away points: There continues to be very limited scope to enter into alternative funding arrangements in relation to Hong Kong litigation.  Although there are signs that courts may take a more flexible approach to third party funding if a pressing access to justice point can be made out, it is unlikely that there will be any movement on the prohibition preventing lawyers from charging on a contingency or conditional fee basis.

The Mediation Ordinance

The new Mediation Ordinance came into effect on 1 January 2013, and aims to protect the confidentiality of the mediation process. Any communication made for the purpose of or in the course of mediation will be protected from disclosure except in limited circumstances or with the permission of the court. This encompasses all communications between the parties or between a party and the mediator, before, during and after the mediation (but does not include an agreement to mediate or a mediated settlement agreement).

The Ordinance applies to all mediations that are conducted in Hong Kong (except for certain mediations and conciliations under labour and discrimination related legislation), or where the agreement to mediate provides that the laws of Hong Kong will apply. Importantly, the Ordinance has retrospective effect, so an attempt to disclose a mediation communication (or to adduce it in evidence) will be prohibited under the Ordinance, even if the mediation took place before 1 January 2013. The Ordinance has been applied for the first time by the Court of First Instance in Lincoln Air Conditioning & Engineering Co Ltd and another v Chan Ping Fai Ricky and other, where the Court struck out parts of a defence and affidavit evidence on the basis that they contained information protected under the new law.

Key take-away points: Whilst the Ordinance will instil a greater confidence in parties who take part in the mediation process, parties also involved in litigation should take care to avoid referring to or attempting to disclose mediation communications during the course of court proceedings unless one of the limited statutory exemptions apply.

Higher Rights of Audience Rules

This year should see the first batch of Hong Kong solicitors exercising higher rights of audience granted under section 39I of the Legal Practitioners Ordinance. The new legislation allows solicitors of at least 5 years’ post-qualification experience and who have satisfied certain eligibility requirements to apply to the Higher Rights Assessment Board (the “HRAB”) for advocacy rights in civil and/or criminal proceedings in the higher courts. The HRAB accepted its first round of applications in September 2012, and is currently processing these. It is presently hoped that any assessments will be completed by April 2013.

Key take-away points: A key aim of the new legislation is to help reduce litigation costs by avoiding duplication of work between solicitors and barristers. At present, solicitors’ rights of audience are generally restricted to chambers applications up to Court of First Instance level. Once granted higher rights, solicitors may act as advocates in the High Court, the Court of Appeal and the Court of Final Appeal, which have traditionally been the preserve of barristers. It is hoped that the introduction of solicitor advocates in Hong Kong will afford greater choice and flexibility to parties involved in litigation.

Contracts (Rights of Third Parties) Bill

The Department of Justice of Hong Kong has prepared the Contracts (Rights of Third Parties) Bill which, if enacted, will radically change the law of privity and allow a third party who is not a party to the contract to enforce rights under the contract insofar as the contract is meant to benefit the third party. The proposed rules will apply to contracts entered into after the Bill comes into force although it is not clear yet when this is likely to be, although the expectation is that it may be late 2013 or early 2014. The application of the proposed rules may be excluded by providing for an express exclusion in the relevant contract.  Please see here for our e-bulletin on the proposal.

Key take-away points: When (and if) the Bill comes into force parties to a contract will need to consider carefully whether or not to exclude or restrict possible third party rights.  Often third party rights will be unwelcome as they can lead to a multiplicity of proceedings and may mean that the contract cannot be varied without the third party’s consent.  On the other hand there are likely to be certain types of contract where it will be beneficial to take advantage of the new rules.  Likely examples are contracts which provide for an indemnity or exclusion of liability for the benefit of the contracting party and its employees, affiliates etc or contracts for the transfer of a business which provide for warranties or restrictive covenants for the benefit of subsequent transferees.


Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a foreign law practice in Singapore. Where advice on Singapore law is required, we will refer the matter to and work with licensed Singapore law practices where necessary.

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