Could we see a class action regime in Hong Kong?

On 28 May 2012, the Law Reform Commission of Hong Kong (“LRC”) released its Report on Class Actions (“the Report”), recommending that a class action scheme be implemented in Hong Kong. The report can be found here.

The Report is the work of a sub-committee established to specifically consider whether a mechanism for class actions should be implemented in Hong Kong. It followed the release of a Consultation Paper in November 2009 and a public consultation period which resulted in 61 responses being submitted to the sub-committee.

The recommendations

The sub-committee considered the pros and cons for introducing a class action scheme and also the terms on which one should be implemented. As part of that process they considered the procedures in place in other jurisdictions and put forward a series of recommendations as to what would be the most appropriate regime in Hong Kong.

Certification requirement

A common feature of class action regime in other jurisdictions is a requirement that they be certified by the Court at an early stage before they are allowed to continue. The Report recommends that approach be adopted in Hong Kong to ensure unsuitable cases are not allowed to proceed. The Report proposes the following as factors that should be considered in the certification process:

1. A minimum number of identifiable class members;
2. Existence of a genuine cause of action, which has legal merit;
3. Members of the class share a sufficient commonality of interest;
4. A class action is the most appropriate vehicle to resolve the claim; and
5. The representative plaintiff has the standing and ability to represent the class.

Opt-out vs opt-in

The Report proposes an opt-out procedure be adopted, which would mean that all potential class members are bound by the decision in the action, unless they actively decide to opt-out of the class by a prescribed date. This follows the approach in other jurisdictions including, Australia, Canada and the US. The use of the opt-out procedure would be subject to the overriding discretion of the Court to decide that the opt-in procedure is more appropriate for a particular action.

It is also recommended that the default opt-out position be reversed where members of the class are resident overseas. The rationale for this is that class members in Hong Kong class actions are likely to come from other jurisdictions (for example, mainland China) and it could result in greater uncertainty as to the class, if foreign residents are automatically included. This would again be subject to the Court’s overriding discretion to adopt an opt-in procedure.

Further, to address potential abuse by foreign resident class members, the Report adopted a suggestion from one of the responses received during the consultation period, that foreign residents who choose to opt-in should be required to give an undertaking to be bound by the judgment or settlement in the class action. This is designed to prevent them commencing an action, in relation to the same issue, out of the jurisdiction.

Funding

Recognising that access to funding is a critical element of any class action regime, the Report considered the question of funding in detail, including the following options:

1. Extension of legal aid to cover class actions. This was rejected as the restrictions that are necessarily placed on the granting of legal aid would significantly constrain the effectiveness of the class action regime. The Report does recommend that legal aid should still be available to individuals within a class that would otherwise have been entitled to it, but that funding would only be provided to the extent that it would have been had the individual pursued the claim on a personal basis, rather than as part of a class action.
2. Establishing a Class Action Fund, which would be publicly funded initially and ideally self-funding thereafter. The Report recommends that such a fund should be set up in the long term, but does not suggest a time frame for its establishment.
3. Litigation funding companies. Although other jurisdictions that were considered by the Report have permitted the operation of litigation funders, the sub-committee formed the view that support for this does not exist in Hong Kong and there were still obstacles to be over-come before they could operate, for example the abolition of the offences of maintenance and champerty in Hong Kong.
4. Use of the already existing Consumer Legal Action Fund. It is this option that the Report recommends should be used in the short term.

The use of the Consumer Legal Action Fund was recommended on the basis that it was already in place and, with an increase in resources, could be used to trial a class action regime in respect of consumer matters. The sub-committee were of the view that this would cover the majority of situation where class actions are likely to be run. We discuss further below the recommendation that class actions should, initially, be limited to consumer claims.

Another funding option that was considered in the Consultation Paper, but withdrawn by the sub-committee in the Report was conditional fee arrangements. Whilst not all of the responses received by the sub-committee addressed this option many of those that did were strongly opposed and the sub-committee considered that this option was unlikely to be feasible in the face of that strong opposition.

Security for costs

The good news for potential defendants to class actions is that the Report recommends that the regime should include a provision for the Court to order security for costs in appropriate cases. The recommendation is that this should follow the position in Australia, which is that the general discretion of the Court to award security remains unchanged in class action proceedings. Further, the Report suggests that the likelihood of the representative plaintiff being able to meet an adverse costs order is one of the factors that should be considered by the Court when they are certifying the class action.

However, given the proposals in relation to the establishment of a class action fund and the availability of legal aid it seems that there will still be situations in which security for costs is not feasible, even though there are grave concerns about the ability of the representative plaintiff to meet an adverse costs order. It is not clear from the Report how those issues might be addressed in any class action regime.

Incremental approach

The sub-committee’s proposal is for the regime to be implemented on an incremental basis so that it can be tested before it is widely available. The suggestion is that it should be initially limited to “consumer actions”, which are said to include claims based on tort and contract in relation to goods, services and immovable property. It is not clear whether that recommendation will be implemented and if it is exactly how the new legislation would address that proposed limitation, but the Report does recommend a definition of “consumer”, based on the definition in section 3 of the Unconscionable Contracts Ordinance (Cap 458) and an approach to the determination of what a “consumer claim” will cover, based on section 4 of the Consumer Council Ordinance (Cap 216).

In addition, the Report proposes limiting class actions to the Court of First Instance for the first five years and then extending them to the District Court, if that is considered appropriate.

What does this all mean?

If the recommendations in the Report are adopted then it seems likely that any regime in Hong Kong would be closer to the Australian or Canadian systems, than to the US one. In particular, the approach to funding and costs tends away from US style class actions, which do not allow the recovery of costs by the successful party and allow conditional fee arrangements to be agreed with class members.

What this means for the development of a class action regime in Hong Kong is still undetermined. The sub-committee recommended that the regime be implemented by primary legislation and it is standard procedure for the Department of Justice to take up to six months to consider recommendations for new laws. Given the magnitude of this proposal, a period of six months or even more would not be out of the question here. The sub-committee also suggested that further study is necessary to determine the appropriate design of the legislation so there is a lot of work to be done before a class action regime will become a reality in Hong Kong.

We will monitor developments in relation to this and keep clients updated on significant developments.