15 March, 2017
In Beijing Tong Gang Da Sheng Trade Co., Ltd (as assignee of Greater Beijing Region Expressways Limited) v Allen & Overy & Anor, FACV 2, 3, 4 and 5 of 2016, the Court of Final Appeal held that the addition or substitution of a party to an action amounts to a “new claim”, as defined in section 35(2) of the Limitation Ordinance (Cap 347)) and would not therefore be permitted after the relevant limitation period had expired, unless it came within the rules of court as required under Section 35(3) and (5) of the Limitation Ordinance (Cap 347).
Background
By a Writ issued in 2011, Greater Beijing Region Expressways Limited (GBRE) claimed damages in the sum of US$400 million for professional negligence against its solicitors (Allen & Overy) and counsel (the Defendants). Deacons acted for Allen & Overy.
In 2010, prior to the Writ being issued, GBRE had entered into a Litigation Funding Agreement (LFA) with Beijing Tong Gang Da Sheng Trade Co., Ltd (Beijing Tong Gang), under which Beijing Tong Gang agreed to lend HK$3.4 million to GBRE to fund the litigation against the Defendants, at an interest rate of 25% for a term of 2 years. The guarantee for the loan was stated to be the proceeds that GBRE would recover from the litigation with the Defendants. In addition to interest, Beijing Tong Gang was entitled to 20% of any proceeds recovered in the litigation against the Defendants.
By a Deed of Assignment made in 2012, GBRE assigned its causes of action against the Defendants to Beijing Tong Gang (the Assignment) for a consideration of HK$100,000 and 10% of the net proceeds arising from the action (i.e. US$40 million, the Plaintiff having valued the claim at US$400 million) The Writ, which had not been served, was then amended so that Beijing Tong Gang became the Plaintiff in place of GBRE, which ceased to be a party.
In 2013, the Defendants applied to strike out Beijing Tong Gang’s claim on the ground that the LFA and Assignment were champertous and void. In response, Beijing Tong Gang, applied to add GBRE as a Plaintiff (the joinder application) as, by that time, the limitation period had expired and it would have been too late for a new action to have been brought by GBRE against the Defendants.
In Hong Kong, the common law doctrines of maintenance and champerty prohibit third party funding for litigation, except in three limited circumstances, namely, (i) where the third party funder has a legitimate interest in the outcome of the litigation; (ii) where access to justice considerations apply; and (iii) in a miscellaneous category of proceedings, including insolvency litigation, not applicable here.
Decision of the lower Courts
Court of First Instance
Beijing Tong Gang argued that it was a major creditor of GBRE and a controlling shareholder of it and so had a genuine commercial interest in the enforcement of the action. It also asserted that GBRE had been relying on Beijing Tong Gang to finance the action and that the Assignment and LFA were necessary to give GBRE access to justice.
In relation to the LFA, the Court found that it made no sense whatsoever for GBRE to incur the debt, when it apparently had no other substantial debts, and to agree to repay the loan (with substantial interest) two years later, when it was in no position to issue a writ until 14 months afterthe date of the loan. Further, the potential return for the loan (interest at 25% plus 20% of the future recovery) was so vastly disproportionate to Beijing Tong Gang’s entitlement as creditor of GBRE, that it called into question the genuineness of Beijing Tong Gang’s alleged commercial interest in GBRE as at the date of the LFA. Absent any credible evidence of a pre-existing commercial relationship between Beijing Tong Gang and GBRE at the date of the LFA, the Court said, the inescapable conclusion was that the LFA was conceived as a means of converting Beijing Tong Gang into a creditor of GBRE.
As regards the Assignment, again the Court found that the vastly disproportionate potential return (Beijing Tong Gang stood to retain 90% of the net proceeds i.e. US$360 million, which applying an exchange rate of 7.8 would yield HK$2.8 billion) seriously called into question the genuineness of the interest asserted.
The Court said that where the totality of the facts makes it plain and obvious that the transaction makes no or little commercial sense and gaps in the challenged party’s evidence are intentionally unfilled (as here), the Court could draw the appropriate inferences and conclude that the transaction in question was champertous.
The Court of First Instance therefore held both the LFA and Assignment champertous and struck out the action.
As regards the joinder application to add GBRE back as a Plaintiff to the action (after the limitation period), Beijing Tong Gang argued that no limitation issues arose because the action had been commenced by GBRE within the limitation period and the Assignment by GBRE did not create any new cause of action. However, the Court held that when the Writ had been amended, GBRE ceased to be a party to the proceedings and as a result of the Court having found that the Assignment was void and of no effect, it did not operate to transfer anything to Being Tong Gang, who had neither title or locus to be a party to the action. As from the date the Writ was amended, the Court said, GBRE became a stranger to the action and had abandoned it.
Accordingly, the Court held that the proceedings could only be resuscitated if the joinder application was made within the original limitation period, which was not the case here.
The Court also ruled against Beijing Tong Gang on its alternative argument that the Court had power under RHC Order 20, rule 5(3) to “correct” the name of a party if shown that there had been a genuine mistake. The Court held that where there is no mistake as to the name of the plaintiff or identity of the party intending to sue, but only an error as to the rights of the correctly identified party, RHC Order 20, rule 5(3) does not apply. The Court said that in any event it was not just to allow the amendment, given GBRE’s conduct in unjustifiably incurring a debt as a means of converting Beijing Tong Gang into GBRE’s creditor for the purpose of the Assignment.
Court of Appeal
The Court of Appeal upheld the finding of champerty, but allowed the Plaintiff’s joinder application, holding that the joinder application did not involve a new cause of action and so no limitation issue arose.
Court of Final Appeal Ruling
The issues before the CFA were:
- whether the joinder application involved a new claim which was caught by the limitation period having already expired; and
- if so, whether leave should be granted on the alternative basis under RHC Order 20, rule 5(3), which allows the court to amend a writ to correct the name of a party, notwithstanding that such amendment will be to substitute a new party (even where the limitation period has expired) if satisfied that there had been a genuine mistake.
Limitation
Under Section 4 of the Limitation Ordinance, no actions founded on simple contract or tort can be brought after the expiration of six years from the date on which the cause of action accrued. It was not disputed that by the time of the joinder application, the limitation period had expired and it was therefore too late for a new action to be brought against the Defendants.
In respect of actions commenced within time, Section 35 of the Limitation Ordinance allows new claims to be made in a pending action if certain conditions are satisfied, so that any new claim made in the course of any action is deemed to have been commenced on the same date as the original action.
A new claim is defined in Section 35(2) of the Limitation Ordinance as “…any claim … involving either:
(a) the addition or substitution of a new cause of action; or
(b) the addition or substitution of a new party.”
Section 35(3) of the Limitation Ordinance provides that “Except as provided by … rules of court, the court shall not allow a new claim…, to be made in the course of any action after the expiry of any time limit under this Ordinance which would affect a new action to enforce that claim.”
The Defendants argued that the addition of GBRE or substitution of the Plaintiff by GBRE plainly fell within the definition of a “new claim”. The Plaintiff argued that only where the addition or substitution of a new party involves the addition of a new cause of action will this constitute a “new claim” for the purposes of Section 35(2)(b) and thereby be subject to the time bar in Section 35(3).
The joinder, the Plaintiff argued, did not give rise to a new claim because it did not involve a new cause of action and the limitation provisions in Section 35 did not therefore apply. The Plaintiff further argued that GBRE was in any event not a new party.
The CFA held that an application to add or substitute a party would result in a “new claim”, as defined in Section 35(2) of the Limitation Ordinance. Therefore, if the application is made after the expiration of the limitation period current at the time of the commencement of the action, it must come within the rules of court, as required under section 35(3) and (5) of Limitation Ordinance, which it did not in this case.
The Court of Appeal had therefore been wrong to conclude, the CFA said, that because no new cause of action was involved in the joinder application, the limitation provisions of Section 35 of the Limitation Ordinance did not apply.
The fact that GBRE was once a party did not make any difference, the CFA said, as it had ceased to be a party altogether as a result of the writ being amended in 2012. GBRE was as much a new party as if the original writ was issued in the Plaintiff’s name after the impugned Assignment, and the issue of limitation arose on the joinder application.
Mistake
The Plaintiff’s alternative argument was that the joinder was in effect an application to correct the name of a party which could be permitted under RHC Order 20 rule 5(3). However, the CFA held that the authorities clearly showed that the mistake had to be a mistake as to the name rather than the identity of the party or as to legal rights. Here, there was no mistake in the relevant sense, as the Plaintiff wished to sue as the assignee, sued as such and was correctly named. The mistake was in the belief that the Assignment was valid and effective, and Order 20 rule 5(3) did not therefore apply.
For further information, please contact:
Robert Clark, Partner, Deacons
robert. lark@deacons.com.hk
