1.1 The costs of litigation in courts and tribunals are met from a number of different sources. The principal sources of finance for litigation are discussed below.[1]

1.2 Insurance – Insurance companies are major participants in litigation, particularly in personal injury cases, where the dispute usually concerns the amount of damages rather than liability. In cases where the courts order the defendant to pay the plaintiff’s costs pursuant to the cost indemnity rule,[2] these costs are often paid by the defendant’s insurance company in accordance with the insurance policy. In some jurisdictions, litigation costs are paid out of legal expense insurance schemes. These are common in Europe and in the United States, and growing in number in Canada and the United Kingdom.[3] In Sweden, for example, legal expense insurance was introduced in 1961 and is now an obligatory part of householders’ comprehensive insurance. It is reported that 70% of Sweden’s population is protected by legal expense insurance, and 84% of total litigation costs are paid out of insurance. Such schemes provide cover to individuals for the costs of litigation in the courts (but not tribunals) in relation to disputes that arise in their everyday relations, except for divorce proceedings and disputes arising from an occupation for gain other than regular work.[4] The cover indemnifies the litigant for his own costs and the costs of the other party that the litigant might be required to pay.[5]

1.3 Legal aid – The Legal Aid Department in Hong Kong provides assistance to litigants who satisfy the relevant means and merits tests, if their type of case is covered by the legal aid schemes.[6] The legal aid schemes cover both criminal and civil cases, the latter mainly in relation to matrimonial disputes, personal injury and running-down cases. In 2003, 21,643 applications for civil legal aid were received and 10,694 of them were granted. The Legal Aid Department’s expenditure on civil cases was $343 million that year, and $769 million was recovered for the aided persons. As for criminal legal aid, the same year recorded 4,411 applications, with 2,803 of them granted, for an expenditure of $89 million.[7]

1.4 Tax deductions – The Australian Law Reform Commission[8] pointed out that businesses are major users of the court system, and that legal expenses incurred are generally tax deductible. The ALRC’s consultation exercise revealed that many people saw the tax deductions available to business litigants as inherently inequitable because they were not also available to individual litigants. The business litigant who does not have to bear the full cost of litigation can therefore afford to engage more readily in litigation, to prolong the litigation, and to hire more expensive representation. Individuals who qualify for legal aid must undergo a strict merits and means test, whereas business litigants are eligible for tax deductions without any assessment of the merit or reasonableness of the legal expense.[9]

1.5 Legal practitioners – In jurisdictions which allow event-triggered fees, the litigation costs of unsuccessful cases are borne by the legal practitioners. The level of utilisation of contingency or conditional fees differs from jurisdiction to jurisdiction. The Australian Law Reform Commission observed[10] that in Australia speculative and contingency fee arrangements are commonly used by plaintiffs’ lawyers in personal injury cases. They are also used, although less frequently, for other claims for damages. Occasionally they are used where non-monetary relief, such as a declaration or injunction, is sought. In Scotland, by contrast, it is estimated that only about 1% of all cases are charged on a speculative basis.[11] As for the United States, in the absence of legal aid, contingency fees are one of the principal sources of financing for litigation.

1.6 Claims Intermediaries – These are businesses run by non-legally qualified persons that help clients handle their compensation claims, usually those arising from traffic or work-related accidents. They operate on a “no win, no fee” basis, and usually require payment of 20% – 30% of the compensation received if the claim is successful. Claims intermediaries have proliferated in England, and are operating in Hong Kong. Given that the common law offences of maintenance and champerty are still applicable to Hong Kong, in some circumstances the activities of some compensation claims agents might be unlawful. Those claims intermediaries who act within the law offer a convenient service to the public, although the public should be aware that these agents are un-regulated. This issue will be discussed in greater detail later in this paper.

1.7 Litigants – The parties’ own resources are the most obvious source of finance for litigation. The costs rules determine which litigant shall pay how much, and the basis for determination of costs.

Relevant costs rules in Hong Kong

1.8 To assess the impact of the introduction of any event-triggered fees in Hong Kong, it is useful to set out an overview of the relevant costs rules. The word “costs” is sometimes used to denote the remuneration which a party pays to his own solicitor. It also means the sum of money which the court orders one litigant to pay to another to compensate the latter for the expense which he has incurred in litigation. Relevant costs rules in Hong Kong are found in Order 62 of the Rules of the High Court (Cap 4A), which applies to contentious proceedings.[12]

Costs to follow the event[13] - the costs indemnity rule

1.9 If in the exercise of its discretion the Court sees fit to make any order as to the costs of, or incidental to, any proceedings, the Court will order the costs “to follow the event”,[14] except when it appears that some other order should be made as to the whole or any part of the costs. This means that the unsuccessful litigant will usually be ordered to pay the legal costs of the successful party,[15] in addition to paying his own legal costs. This rule is referred to as the “costs indemnity rule”,[16] and is also the basic costs allocation rule for civil proceedings in the United Kingdom, Canada, Japan and most European countries.[17] The principal exception is the United States, where the general rule is that each party must pay his or her own costs, except where the litigation is vexatious or an abuse of process.[18]

1.10 Considerations which justify the costs indemnity rule are that it:

· deters vexatious, frivolous or unmeritorious claims or defences;[19]

· compensates successful litigants for at least some of the costs they incur in litigating;

· encourages settlement of disputes by adding to the amount at stake in the litigation;[20] and

· in jurisdictions which allow event-triggered fees it is regarded as one source for financing litigation, especially where it is certain that the other party has the resources to meet the costs orders.

1.11 Although costs follow the event, the successful litigant seldom recovers his whole outlay. Unless agreed, the costs have to be assessed (or “taxed”) by the court. Unlike the position in England,[21] there are five bases for taxation of costs in Hong Kong under the Rules of the High Court: party and party, common fund, trustee, indemnity, and solicitor and own client.

Bases of taxation in Hong Kong

Costs on the party and party basis

1.12 This is the most common basis for the assessment of costs. On a taxation on this basis, all “costs as were necessary or proper for the attainment of justice or for enforcing or defending the rights of the party whose costs are being taxed” will be allowed.[22] The principle upon which costs are taxed on this basis is that the successful party should be indemnified against the necessary expense to which he has been put in prosecuting or defending the action, although costs incurred in conducting the litigation more conveniently are not included.[23] It has been said that “it is a fiction that taxed costs are the same as costs reasonably incurred”,[24] and in the words of Godfrey J in Wharf Properties Ltd v Eric Cumine Associates,[25] party and party costs are “the bread but not the butter”.

Costs on the common fund basis

1.13 This is a more generous basis than the party and party basis, and “a reasonable amount in respect of all costs reasonably incurred” is allowed.[26] In awarding costs which are to be paid out of any fund, except a fund which the party holds as trustee or personal representative, the court may, if it thinks fit, order that the costs be taxed on the common fund basis. Legal aid costs, for example, are assessed on the common fund basis upon taxation as between the legally aided person and the Director of Legal Aid.[27] Other examples are costs awarded in favour of persons under a disability as a result of a settlement approved by the court, and costs awarded to ensure that the next friend of an infant plaintiff is not out of pocket.[28]

Costs on the indemnity basis

1.14 In awarding costs on an indemnity basis, all costs will be allowed except in so far as they are of an unreasonable amount or have been unreasonably incurred.[29] Any doubts which the taxing master may have as to whether the costs were reasonably incurred or were reasonable in amount must be resolved in favour of the receiving party.[30] Circumstances which justify an award on an indemnity basis include cases which are brought with an ulterior motive or for an improper purpose, cases conducted in an oppressive manner, and cases where there has been some deception or underhand conduct on the part of the litigant.[31] Costs on an indemnity basis have also been awarded in cases “where there has been an abuse of the court’s process, contempt of court, and for failure to make full and frank disclosure in an affidavit in support of an ex parte application.”[32]

Costs as between a solicitor and his own client

1.15 On a taxation of a solicitor’s bill to his own client,[33] all costs must be allowed except in so far as they are of an unreasonable amount or have been unreasonably incurred.[34] Costs incurred with the express or implied approval of the client are conclusively presumed to have been reasonably incurred and; where the amount thereof has been expressly or impliedly approved by the client, it is conclusively presumed to have been reasonable in amount.[35] On the other hand, costs which in the circumstances of the case are of an unusual nature and such that they would not be allowed on a taxation on a party and party basis are presumed to have been unreasonably incurred until the contrary is shown, unless the solicitor expressly informed his client before the costs were incurred that they might not be allowed.[36]

1.16 On occasions, the court has ordered costs as between opposing parties to be taxed on the solicitor and own client basis, and parties are free to contract that costs between them will be assessed on this basis.[37]

Costs on the trustee basis

1.17 In earlier days, trustees and personal representatives were awarded costs on what is now the common fund basis.[38] Now a more generous basis is made available to them. For costs assessed on the trustee basis, no costs will be disallowed except in so far as they, or any part of their amount, should not, in accordance with the duty of the trustee or personal representative as such, have been incurred by him, and should for that reason be borne by him personally.[39]

Other costs aspects

1.18 Having examined the five methods of taxation, we will briefly set out how counsel’s fees and the costs of the litigant in person are assessed.

Counsel’s fees

1.19 Every fee paid to counsel must be allowed in full on taxation unless the taxing master is satisfied that it is excessive or unreasonable. In that case, the taxing master must exercise his discretion having regard to all the relevant circumstances.[40] He must have regard in particular to:

(a) the complexity or novelty of the matter;

(b) the skill, specialised knowledge and responsibility required, and the time and labour expended;

(d) the place and circumstances in which the business is transacted;

(e) the importance of the matter to the client;

(f) the amount or value of the money or property involved; and

(g) any other fees payable to the counsel in respect of other items in the same matter, but only where the work done in relation to those other items has reduced the work which would otherwise have been necessary in relation to the item in question.[41]

Costs of litigant in person

1.20 On a taxation of the costs of a litigant in person, subject to some exceptions, there may “be allowed such costs as would have been allowed if the work and disbursements to which the costs relate had been done or made by a solicitor on the litigant’s behalf.”[42] Except for disbursements, the amount allowed in respect of any item shall be at the taxing master’s discretion and not exceeding two-thirds of the sum which would normally be allowed if the litigant had been represented by a solicitor.[43] The litigant in person would not normally be allowed more than $200 an hour in respect of the time reasonably spent by him on the work.[44]

Legal aid as a source of finance for civil litigation

1.21 Legal aid is available for most types of civil cases[45] before the District Court, the Court of First Instance, the Court of Appeal and the Court of Final Appeal. It is also available for certain landlord and tenant matters[46] in the Lands Tribunal, proceedings before the Mental Health Review Tribunal, and in the Coroner’s Court if the case is of great public concern.[47] The Legal Aid Department is funded by the Government of the Hong Kong SAR, and the provision for legal costs is not subject to an upper limit. In 2003, the Legal Aid Department’s expenditure on civil cases was $343 million, and $769 million was recovered for the aided persons.[48]

The merits test

1.22 To qualify for civil legal aid, the applicant must pass a merits test and a means test. In assessing the merits of an application, the Director of Legal Aid (“the Director”) must be satisfied that the case or defence has a reasonable chance of success. The Director must also be satisfied that it is reasonable that the applicant should be granted aid, and he will take into account all factors which would influence a private client considering taking proceedings.[49] Therefore, legal aid may be refused if, for example, the benefits to be obtained in the proceedings do not justify the likely costs, or it is unlikely that a judgment could be enforced because the opposite party is uninsured or has no valuable asset or cannot be located.[50] For cases where the benefits cannot be measured in purely monetary terms, the Director will make an objective and careful assessment and due weight will be given to the importance of the case to the applicant.[51]

The means test

1.23 The means test evaluates whether an applicant’s financial resources exceed the statutory limit allowed for the relevant legal aid scheme.[52] Financial resources are taken as an applicant’s monthly disposable income multiplied by 12, plus his or her disposable capital.

1.24 Monthly disposable income is the difference between gross monthly income and allowable deductions, which are rent, rates and statutory personal allowances[53] for the living expenses of the applicant or his or her dependants.

1.25 Disposable capital consists of all assets of a capital nature, such as cash, bank savings, jewellery, antiques, stocks and shares and property. Excluded from the calculation of capital are, for example, the applicant’s residence, household furniture, and implements of the applicant’s trade. Negative equity in a real property is treated as having no value in the assessment of disposable capital.[54]

Ordinary Legal Aid Scheme

1.26 To qualify for legal aid for civil proceedings under the Ordinary Legal Aid Scheme, the applicant’s financial resources[55] must not exceed $155,800.[56] The major types of cases covered by the Ordinary Legal Aid Scheme are:

· family and matrimonial disputes 31%[57]

· miscellaneous personal injury claims 23%

· running down actions 8%

· employees’ compensation 8%

· wages claim 4%

· immigration matters 2%

· tenancy matters 1%

· miscellaneous 23%

1.27 Legal aid is not available[58] for certain proceedings, including:

· defamation (other than defending a counter-claim alleging defamation)

· Small Claims Tribunal matters

· Labour Tribunal matters

· Money claims in derivatives of securities, currency futures or other futures contracts

1.28 A person receiving legal aid will be required to contribute towards the legal costs of the proceedings out of his financial resources and/or the money or property recovered or preserved on his behalf. Applicants whose financial resources are assessed as between $20,001 and $155,800 are required to make a contribution on a sliding scale ranging from $1,000 to $38,950 (ie 25% of $155,800).[59] Where no contribution is payable, or the contribution paid does not cover the legal costs incurred on behalf of an aided person (including legal costs which cannot be recovered from the opposite party), the Director has a right to recover the costs or any shortfall from any property recovered or preserved in the proceedings. This right is known as the Director of Legal Aid’s first charge. If the aided person loses the case, he is liable to pay the assessed maximum contribution or the actual legal costs incurred in the proceedings, whichever is lower.

1.29 The Director is required to pay to the counsel and solicitor acting for an aided person the prescribed fees and costs under the Legal Aid (Scale of Fees) Regulations.[60] On taxation of costs in proceedings to which an aided person is a party, costs are taxed according to the ordinary rules applicable as between solicitor and client where the costs are to be paid out of a common fund in which the client and others are interested.[61]

Supplementary Legal Aid Scheme

1.30 The Supplementary Legal Aid Scheme was introduced in 1984[62] to assist members of the so-called “sandwich class” who would otherwise be outside the means test for the ordinary scheme.[63] This scheme is available for applicants whose financial resources exceed $155,800 but do not exceed $432,900. Unlike the Ordinary Legal Aid Scheme, the Supplementary Legal Aid Scheme is self-financing. The costs of the scheme are met from the Supplementary Legal Aid Fund, which is funded by applicants’ contributions and damages or compensation recovered. In 2003, 106 applications for supplementary legal aid were received of which 79 applications were approved. Expenditure was $23 million and $61 million was recovered on behalf of the aided persons.[64]

1.31 Supplementary legal aid is available for a range of cases[65] including personal injury or death, as well as medical, dental or legal professional negligence where the claim for damages is likely to exceed $60,000. The scheme also covers claims under the Employees’ Compensation Ordinance irrespective of the amount of the claim.

1.32 Where legal aid is granted to an applicant under the Supplementary Legal Aid Scheme, he is required to pay an initial application fee[66] and an interim contribution for the benefit of the Fund.[67] If he is successful, he will have to make a final contribution calculated as follows:

All costs and expenses incurred on his account plus ‘percentage deduction’ being, as at July 2004, 12% or 6% of the damages awarded depending on whether the case is settled prior to delivery of a brief to Counsel to attend trial.

less

The interim contribution and application fee already paid, and the costs recovered from the opposite party.

1.33 The contribution payable must not exceed the value of the property recovered or preserved in the proceedings,[68] and the Director may waive, either in whole or in part, his rights to a contribution where he is satisfied that it would cause serious hardship and it is in all the circumstances just and equitable to do so.[69]

Criminal Legal Aid

1.34 For the purpose of this paper, criminal legal aid will be discussed only briefly. Applicants for criminal legal aid have to pass the means test under the same financial resources criteria as for civil cases.[70] An applicant charged with murder, treason or piracy with violence can apply to a judge for exemption from the means test and from legal aid contribution.[71] The Director has a discretion to grant criminal legal aid to an applicant whose financial resources exceed $155,800 if it is in the interests of justice to do so.[72]

1.35 In the interests of justice, legal representation will be provided to an accused for committal proceedings and for trials in the District Court and the Court of First Instance as long as he passes the means test. However, for criminal appeals, the merits test will apply, except for murder, treason or piracy with violence. There is a statutory requirement to grant legal aid in such cases even if there are no meritorious grounds for appeal.[73]

Provisions against conditional or contingency fee arrangements in Hong Kong

1.36 In Hong Kong, a solicitor may not enter into a conditional or contingency fee arrangement to act in contentious business.[74] The restriction stems from legislation, conduct rules, and common law. In Cannonway Consultants Ltd v Kenworth Engineering Ltd,[75] Kaplan J explained that the law of champerty applied in Hong Kong by virtue of section 3(1) of the Application of English Law Ordinance, although the doctrine was of narrow extent. The common law position will be set out in Chapters 3 and 4.

1.37 The Legal Practitioners Ordinance (Cap 159)[76] provides that the power to make agreements as to remuneration and the provisions for the enforcement of these agreements do not give validity to “any agreement by which a solicitor retained or employed to prosecute any action, suit or other contentious proceeding stipulates for payment only in the event of success in that action, suit or proceeding.”[77]

1.38 The Hong Kong Solicitors’ Guide to Professional Conduct issued by the Law Society of Hong Kong stipulates that “A solicitor may not enter into a contingency fee arrangement for acting in contentious proceedings.”[78] The Guide’s commentary defines a contingency fee arrangement as:

“any arrangement whereby a solicitor is to be rewarded only in the event of success in litigation by the payment of any sum (whether fixed, or calculated either as a percentage of the proceeds or otherwise). This is so, even if the agreement further stipulates a minimum fee in any case, win or lose.”

1.39 The commentary further explains that the principle only extends to agreements which involve the institution of proceedings and:

“it would not be unlawful for a solicitor to enter into an agreement on a commission basis to recover debts due to a client, provided that the agreement is limited strictly to debts which are recovered without the institution of legal proceedings.”

1.40 As for barristers, they are under a professional duty to observe the rules of conduct set out in the Code of Conduct for the Bar of Hong Kong,[79] which is published by the Bar Council. Paragraph 124 of the Code of Conduct stipulates that “A barrister may not accept a brief or instructions on terms that payment of fees shall be postponed or shall depend upon or be related to a contingency.”

1.41 Serious failure to comply with the Code of Conduct amounts to professional misconduct and, if so found by a Barristers Disciplinary Tribunal, renders the barrister liable to be punished in accordance with the provisions of the Legal Practitioners Ordinance (Cap 159).[80] A less serious breach of the Code of Conduct which does not, in the opinion of the Bar Council amount to professional misconduct will be regarded as a breach of professional standards, and may render the barrister liable to be admonished in person or by letter, or to be given appropriate advice as to his future conduct.

[1] The categorisation largely follows that of the Australian Law Reform Commission, Costs shifting – who pays for litigation (1995, Report No 75), at 35-40.

[2] The “cost indemnity rule” is discussed later in this chapter.

[3] Law Reform Commission of Victoria, The Cost of Litigation (May 1990), at 39.

[6] Legal aid in Hong Kong will be discussed in greater detail later in this chapter.

[7] Hong Kong Year Book 2003 <www.info.gov.hk/yearbook/2003>.

[8] Report No 75 at 38-40.

[9] In answer to suggestions that individuals too should enjoy tax deduction for legal expenses, the ALRC, however, has rightly pointed out that tax deductions are different in nature from other sources of litigation costs, and that the tax system is designed to meet economic and other objectives. It seems, therefore, the question whether individuals should enjoy tax deduction for legal expenses requires more in-depth consideration.