On 28 May 2012, Hong Kong moved closer to introducing a class actions regime with the publication of the Report on Class Actions (the "Report") by the Law Reform Commission (the "LRC"). The key recommendation by the LRC is the introduction of a new class action procedure to facilitate multi-party litigation with a view towards expanding access to judicial remedies. The Report recommends that class actions be introduced on an incremental basis, and initially be permitted only with respect to "consumer cases" - tort and contract claims by consumers in relation to goods, services, and property - though the expectation is that the procedural means to form class actions will eventually apply to all claims.

In a class action, a representative plaintiff sues on behalf of a "class" of persons who have a claim in respect of the same alleged wrong or whose claims raise the same questions of law or fact. Generally speaking, class actions provide access to a judicial remedy to groups of individuals who have been adversely affected by another's conduct, but whose individual claims are too small (or the cost of their claims too large) to make individual litigation economically viable. Currently, multi-party litigation in Hong Kong can only be brought by way of "representative proceedings" under Order 15, rule 12 of the Rules of the High Court. However, the LRC took the view that such "representative proceedings" provide an inadequate framework for dealing with large-scale multi-party disputes, as they generally required identical causes of action, legal issues, and remedies among all plaintiffs.

If the Report is followed, the introduction of a class action regime pursuant its terms would remove some of the current barriers to multi-party actions in Hong Kong. First, the Report recommends standards for claims that would give courts greater flexibility in determining the types of claims and remedies that could be grouped under a single action. Additionally, the Report recommends the adoption of an "opt-out" approach for domestic class actions, pursuant to which all class members would be bound by the litigation unless they opted out, an approach that would likely result in larger classes and correspondingly, higher value claims.

However, the LRC's proposed regime, if adopted, would still leave significant barriers in place, potentially discouraging class actions. In particular, the following drivers of the far from perfect class action regime in the US have not been proposed for adoption in Hong Kong:

  • Punitive damages. High damages awards permit high success fees for class action lawyers, which in turn encourage those lawyers to fund the litigation on behalf of their clients.  Paragraph 3.24 of the Report simply compares the position in the US with the position in Hong Kong stating, that "in the US, the courts would frequently award exemplary, punitive or treble damages … in contrast, damages in Hong Kong are always awarded to compensate the actual loss or injury suffered, except in extremely rare cases of egregious tortious activity". The Report does not go on to suggest that exemplary/punitive damages should be awarded in class action cases in Hong Kong, so it appears that the status quo in relation to damages awards will be maintained.
  • Contingency fees. The Report notes at paragraphs 3.26 and 8.27 that lawyers in the US can be compensated by contingency fees, but that Hong Kong does not allow contingency fees. Indeed, a Law Reform Commission report in 2007 on Conditional Fees recommended that contingency fee arrangements should not be adopted in Hong Kong. There is no change to this recommendation in the Report, though it appears to leave the issue open for further research to be conducted.
  • Risk for the representative plaintiff. In the US, the loser in litigation usually does not have exposure to the legal costs of the winner, which dramatically reduces the downside of class actions for plaintiffs. In Hong Kong, however, the usual position in litigation is for costs to "follow the event' and there is no suggestion in the Report that this change going forward. This means that representative plaintiffs in class action cases could be ordered to pay the defendant's costs if they are unsuccessful. The Department for Justice (Legal Policy Division) suggested that the usual costs position be replaced by a 'no costs order' rule for class actions, but this suggestion has not been taken forward. The usual costs position has been maintained despite the fact that the Report itself admits at paragraph 8.4 that "this potential liability for large amount of costs has the practical effect of deterring many individuals from taking legal actions, even though they have meritorious claims."

Further, the Law Reform Commission is clearly concerned that defendants in class action cases could be 'blackmailed' by impecunious representative plaintiffs. The fear is that class members would deliberately choose a 'straw' claimant with no financial means with which to meet an adverse costs order. Therefore, Recommendation 5 in the Report is that a representative of a class should be required to prove to the court's satisfaction that suitable funding and costs protection arrangements are already in place before the class action is certified by the court, and that the courts should also be empowered to order representative plaintiffs to pay security for costs if appropriate. A byproduct of the rule, however, would be to require a class of plaintiffs to locate what is in effect a 'similarly situated rich person' to serve as a representative of the class - a requirement that will likely prove difficult to meet.

Recommendation 5 of the Report also states that "truly impecunious plaintiffs" should have access to discretionary funding. The Report discusses the establishment of a class action fund that would be entitled to make discretionary grants. Paragraph 8.56 of the Report notes that such a fund "would be entitled (although not bound) to assist all class litigants (not only impecunious plaintiffs, as with legal aid) to bring actions for any kind of remedy…". Therefore, it may be possible for wealthier representative plaintiffs to apply for public funding as well, even though the priority would be financial assistance for impecunious plaintiffs. Nevertheless, there are real concerns as to whether the government would endow a fund with sufficient financial means. The Report contemplates that the Consumer Legal Action Fund will provide funding on an interim basis, but the Fund, with an endowment of HK$20,000,000, has provided an annual average of only about HK$900,000 in support of litigation over the last two years. Further, the Report contemplates that Legal Aid be available to eligible impecunious lead plaintiffs but only in an amount equal to the amount of costs that would have been incurred in the pursuit of an individual claim. For such plaintiffs, costs related to the class litigation itself might be unrecoverable. Consequently, government-administered funds may fall short of sufficiently lowering the risk profile of a class action to make it attractive to a prospective lead plaintiff.

We will continue to report on any further developments in this area. For further information on class action reform in Asia, please refer to our e-bulletins of 13 November 2009 and 17 May 2007.