AB also known as ABW v. MAW

FCMC 6310/2015

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MATRIMONIAL CAUSES

NUMBER 6310 OF 2015

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J U D G M E N T
(Litigation funding)

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Introduction

1. This is an application by a Petitioner wife for litigation funding, pursuant to s 3 Matrimonial Proceedings and Property Ordinance, Cap 192 (MPPO). She seeks the sum of HK$800,000 per month to be backdated to the 1 September 2015. In the alternative she asks that any lump sum provision for litigation costs provided by the husband be without prejudice to either party’s contention at trial concerning how each side’s litigation costs should be treated.  

2. This application raises an interesting point of principle. In the event that a paying party, still more often than not the husband as in this case, chooses to provide an interim lump sum payment to a wife, as opposed to paying a monthly amount for litigation funding, should that be offset against the wife’s final award for ancillary relief as of right? This is especially pertinent when, as here, it is said that the husband is paying for his legal costs from capital, which means that the size of the matrimonial pot is potentially diminishing, but the husband is not likewise required specifically to account for his own legal cost expenditure. The net result theoretically is that the matrimonial pot may be reduced by the husband’s legal costs, which in turn means that the wife’s potential share of the assets is less than it would have been otherwise. This inherent unfairness is then arguably compounded by the fact that the monies advanced to the wife for litigation funding are then to be deducted from her share of the assets as of right. Mr Scott SC for the wife points out that this conundrum does not arise if the wife receives a monthly sum for litigation funding. He accepts that the husband will not be able to pay HK$800,000 per month from income, but that this will most probably need to come from his cash reserves i.e. from capital in any event.  

The central issue

3. Thus the central issue is whether or not an agreement to pay an interim lump sum for litigation funding should always include the words “to be offset against any final award to the Petitioner (receiving party) in the ancillary relief proceedings”. In addition I need to determine the issue of litigation funding generally – i.e. whether the husband should be given an opportunity to pay the wife a lump sum for that purpose and if so on what terms and/or in the alternative what is the appropriate level of maintenance pending suit to be paid as litigation funding if the same is to be paid on a monthly basis.   

Background

4. I have set out the background to the marriage briefly in a short judgment on discovery dated the 9 October 2015 as follows:

Background to the marriage

5. The parties married on the XX March 1994 in New Zealand, which is where they are both from. They have three daughters who are now aged nearly 17, 13 and 10. They are all presently being educated at the X International School in Hong Kong. The parties have resided in the Territory since 1999. The wife still resides here with the children, whereas the husband relocated to London in January 2013 in order to take up a new position with company A2. In May 2014 the wife issued a judicial separation petition based on mild unreasonable behaviour particulars. A fresh divorce petition was later filed based on one year separation with consent. This is dated the 21 May 2015. The decree nisi was pronounced on the 14 September 2015. The parties have joint custody of the children with care and control to the wife and reasonable access to the husband to include holiday access.

6. There are two family trusts – the W trust which was settled on the 11 January 2005 and the W Discretionary Trust which was settled about 18 months later on the 28 June 2006. There are some issues surrounding these trusts.

7. In addition to discovery and the trusts there are also other potential issues concerning inter alia the date of separation and post separation accruals and their treatment by the court.

How has the litigation been funded to date?

5. It seems that there has been an issue with respect to litigation funding and how interim payments generally are to be treated almost from the beginning of this litigation. However in the main the parties were able to reach consensus on the issue. On the 14 October 2014 the parties agreed through mediation as follows:

(11) So that both the husband and the Wife shall have funds available to meet their respective costs in the matrimonial proceedings, they agree as follows -

i. that they shall within 10 days of the date of this agreement arrange to open a separate trust account with their respective solicitors (‘the legal costs trust accounts’) into which the husband shall pay a sum of $1 million into each account, a total of $2 million.  That sum shall be drawn from matrimonial capital under his control.

ii. That the $1 million paid into each legal costs trust account shall be used by each party solely for the purposes of meeting his or her on-going legal costs in the matrimonial proceedings.

iii. That, should the sum standing to the credit of either party in their respective legal costs trust account fall below $200,000 then a further equal sum shall be paid into each account.  Any further sum shall be paid in by the husband from matrimonial capital under his control.  In the event of disagreement as to the amount of any further sum, it shall be such sum as, having regard to the advancement of the matrimonial litigation, is considered necessary to conclude the litigation assuming that it goes to trial.

iv. That, for the purposes of this clause, all attempts at settlement including by way of mediation or private FDRs shall fall under the term ‘on-going legal costs’.

v. That, upon the conclusion of the litigation, any sum held in the husband’s legal costs trust accounts shall be paid to him and in the same manner any sum standing to the credit of the wife shall be paid to her.

6. Unfortunately for reasons that I will not go into here that agreement did not hold. The issue of litigation funding, amongst others, came back before me on the 10 February 2015. On that occasion the husband offered the wife the sum of HK$8 million as litigation funding on the premise that “such sum to be offset against any final award to the Petitioner in ancillary relief proceedings”. The wife asked for HK$2 million only and an order was made in those terms, the intention being that that should be sufficient money to take the case through to the Financial Dispute Resolution hearing. Similarly on the 11 June 2015 the court made a further order by consent in the same terms for a further HK$3 million.     

7. In August 2015 the issue of litigation costs came up again. The husband offered to pay the wife an additional HK$3 million on the same terms as before. However on this occasion the husband’s offer was not accepted.

The law on litigation funding and its interpretation

8. Reference was made by both sides to the leading Court of Appeal decision on the issue of maintenance pending suit and litigation funding namely HJFG v KCY [2012] 1 HKLRD 95, 28 October 2011. Mr Egerton for the husband says that the orders made previously for litigation funding are reflective of the approach taken by The Honourable Mr Justice Hartmann in that judgment. I accept that to be the case. Mr Scott SC for the wife suggests that the case can be distinguished on the facts. He also argues that:

20. The Hong Kong Court of Appeal appeared to adopt the method used in an unreported interlocutory judgment in Charman which dealt with the payment of an interim lump sum.  They referred to the order made by Coleridge J in that case.  He provided that if the husband were to pay £5m, then no maintenance pending suit order would be made.

21. However, the actual approach of Coleridge J is not fully recorded in the judgment in HJFG v. KCY.  From H’s submissions filed for this hearing H seems to be persisting with what we say is a wrong-headed approach in his interpretation and application of HJFG v. KCY.

22. The Order actually made in Charman was that:-

“Unless the Respondent do, on or before 28^th February 2005, pay or cause to be paid to the Petitioner the sum of £5m on account of any sum which the Petitioner is awarded by way of financial settlement and/or costs in these proceedings…”

    The order then went on to provide for substantive maintenance pending suit.

23. However, the expression on account of any sum did not mean that the wife in that case was expected to or required to bring into account as a credit against the eventual lump sum award the full amount of the £5m.  This is apparent from the main judgment in that case: see Charman v. Charman.  The judge there adopted a largely agreed schedule of assets of the parties.  Thus, although that wife had been paid the sum of £5m provided for in the maintenance pending suit order, her cash holdings at the date of trial were the figure of £4,281,387. This obviously represented the payment that the husband had made, less her living expenses and her legal costs that had been expended during the interim period.  That diminished net figure is shown in schedule 1 to the published judgment.

24. The total provision made by the judge for that wife was £48m.  The cash lump sum that she was to receive was £40m, in addition to her present assets and the transfer to her of that H’s interest in their matrimonial home.  In aggregate those assets (the net balance held by that wife and the matrimonial home and other small property held by her) made up the difference between the cash lump sum of £40 m and the total award of $48 m.  All this is plain from the main judgment at paragraph 127.  Thus, what was brought into account was the net sum retained by the wife at trial.

25. This approach is consistent with paragraph 66 of the judgment in HJFG referred to above.

26. In HJFG the Court of Appeal seemed to think that there is a difference in character between living expenses and legal costs.  In Charman (upon which the Court of Appeal was relying) no such distinction was being made.  Nor is it possible sensibly to rationalise such a distinction.

27. The argument by H that the whole amount paid by him should be offset against any ultimate lump sum cannot withstand (a) a principled analysis or (b) the reasoning of paragraphs 66 and 67 of the judgment in HJFG as quoted above.  Nor does it accord with the notion of an interim payment being brought into account in the way in which that was done in Charman. It is not a pound-for-pound adjustment.

As will be seen I largely agree with this analysis.

The Charman MPS judgment/order

9. I asked the parties to provide me with a copy of the maintenance pending suit judgment in Charman. Unfortunately it transpired that the original judgment was unreported and it has not been possible to obtain a copy. A redacted copy of the draft order was however obtained. Mr Scott refers to this above. It is not clear whether or not the Court of Appeal had sight of the maintenance pending suit judgment in Charman when considering HJFG v KCY. However, I accept that Coleridge J does not appear to have deducted the sum of GBP5 million from the wife’s share of the assets in Charman when determining the issue of final ancillary relief. Thus it follows that the term “on account of any sum which the Petitioner is awarded by way of financial settlement and/or costs in these proceedings” may not necessarily be the same thing as saying that such sum shall be deducted as of right from the wife’s final award on ancillary relief.

The Family Proceeding (Amendment) Rules 2010

10. I was not taken to any cases in England and Wales post Charman which might assist in this. I did though ask the parties to provide me with information pertaining to the treatment of costs in ancillary relief proceedings in England and Wales as I was aware that this had changed of late. The information provided confirmed that in accordance with new Rules brought in under the Family Proceeding (Amendment) Rules 2010 the court will not generally make any order requiring one party to pay the other costs following ancillary relief proceedings unless there is a significant issue with respect to conduct. This new approach did not apply to the Charman judgment which predated the new Rules. It is also of note that the new Rules do not apply to maintenance pending suit applications. It is though clear that the intent behind the new Rules is to ensure fairness and to streamline what had become a cumbersome procedure. In their letter to the court dated the 2 November 2015 Withers for the wife refer to an extract from Rayden which summarizes the key points as follows:    

Set out on the second page of the attached extract from Rayden is a further explanation about how the general rule that the court will generally not make one party pay the other party’s costs actually works in practice.  The key sections can be broken down as follows:

· “Costs will become part and parcel of the substantive application and treated as a liability that a party has, ie like any other legitimate debt such as a loan”.

· “Either the judge will leave costs where they fall and treat costs incurred by each side as liabilities that have been paid or will be paid by each side, ….”

· “Or he can make adjustments to the distribution of the assets to reflect costs issues, or he can make an order for costs with the judgment.”

· “As the court will be able to take the costs of the parties into account when considering the most appropriate order for ancillary relief, there is no need for costs to be determined after judgment.”

· “The court will be looking for litigation conduct during the hearing to displace the general rule that there is no order for costs.”

· “Conduct does not have to be censorious and obvious (eg non-disclosure and obfuscation), it can extend to whether or not it was reasonable for a party to have incurred high, disproportionate or unnecessary costs on a particular allegation or issue.”

Can HJFG v KCY [2012] 1 HKLRD 95 be distinguished from the present case?

11. It seems to me that it is possible to distinguish HJFG v KCY from the present case on a couple of fronts. Firstly like Charman HJFG v KCY is a very very big money case. That is not the case here. Secondly it is concerned with an interim lump sum for maintenance and litigation funding. In this instance the two issues have been dealt with separately. There is no overlap. 

Other relevant authorities   

12. In so far as the other authorities are concerned as indicated in HJFG v KCY it is accepted that Currey and Currey [2006] EWCA Civ 1338 applies. The test in Currey is as follows:    

“(1) That the applicant spouse has no assets, or none that can reasonably be deployed (at para [19], [20]).

(2) That she can provide no security for borrowing, or none which can reasonably be offered (at paras [19], [20]).

(3) That she cannot reasonably obtain legal services by offering a charge on the outcome of the litigation (at para [20] and see Sears Tooth, per Wilson J).

(4) That she cannot secure publicly funded legal help ‘at a level of expertise apt to the proceedings’ (at para [20])”

13. There is also a requirement to undertake an overarching enquiry. The relevant factors include the subject matter of the proceedings and the reasonableness of the Applicant’s stance in those proceedings.  

Discussion

Should an agreement to pay a capital lump sum for litigation funding always include the words “to be offset against any final award to the Petitioner (receiving party) in the ancillary relief proceedings?”

14. It almost goes without saying that the court cannot impose such an order. However any proposal sanctioned by the court should be fair and reasonable in the circumstances of that particular case. Thus it does not seem to me that it follows that in every single case where an advanced lump sum payment for litigation funding is suggested, that such sum must be deducted from any final award for ancillary relief as of right. 

15. This issue arose in another case that was originally before this court. In B,L v KWS FCMC 17190 of 2014 unreported dated the 13 April 2015. I accepted the husband’s offer to pay the sum of US$300,000 to the wife as litigation funding. I did not accept that this should be deducted from any lump sum that the wife might receive as of right.

Overarching enquiry

10.  I also accept that in considering this matter overall that it would be entirely reasonable for the husband to provide the wife with litigation funding. Thus the offer of US$300,000 is accepted – but this is not subject to any caveats. This will also be subject to the normal undertaking that the sum of US$300,000 shall be paid directly to the wife’s lawyers. I should add that it is accepted that this sum is likely to take the wife up to and including the Crossley application. Depending on the outcome of that hearing the issue of litigation funding will most probably need to be considered again. 

16. This was because I did not think that in the circumstances of that particular case, which centred on the enforceability of otherwise of a pre nuptial agreement, that such a caveat was either fair or reasonable.

17. As the court cannot impose such an order – only invite a litigant to partake or not, it is also open to the husband to either accept or reject the proposal put by the other side and sanctioned by the court. In this case I accept that it would not be fair or reasonable to expect the wife to agree that any further sums advanced to her as litigation funding should be deducted from her share of the assets as of right. This is especially given the fact that the husband is not similarly asked to account for his litigation costs and where his may be deducted as a debt from the parties’ capital base. To that end it is of note that the husband’s up to date schedule of costs shows that he has spent nearly HK$14 million compared to the wife’s costs of approximately HK$8.3 million.

Should the husband be given a further opportunity to pay the wife an interim lump sum for litigation funding and if so on what terms and/or in the alternative what is the appropriate level of maintenance pending suit to be paid as litigation funding if the same is to be paid on a monthly basis.   

18. In the first instance then I would invite the husband to forward to the wife an additional sum of HK$3 million for her litigation funding on the premise that this sum is without prejudice to either party’s contention at trial concerning how that sum might be treated. In other words it will not be deducted from the wife’s award as of right. This also seems to me to be more in keeping with the approach now advocated in England and Wales on costs in ancillary relief proceedings.  

In the event that the husband chooses not to advance the wife any further sums for that purpose what would be the appropriate figure for litigation funding on a monthly basis?

19. The wife seeks HK$800,000 per month. In a letter from her solicitors updating the court on her current financial position dated the 30 October 2015 I was informed that she had a total of HK$2,137,721 outstanding in legal fees.

20. I accept that the wife prima facie satisfies the Currey test namely that she has no assets or none that can be reasonably deployed for litigation funding. I do not accept that it is reasonable for her to accept the pre condition placed on the offer of the HK$3 million as argued by the husband. I accept that she cannot provide security for borrowings or provide a charge on the outcome of the litigation. She would not be eligible for legal aid – nor would this be a suitable case where an application might be made. Consequently it seems to me that the wife must have appropriate litigation funding to take her up to and including the Financial Dispute Resolution hearing, whereupon the issue may be looked at again. The Financial Dispute Resolution hearing has been set down for the 22 and 23 February 2016.

21. In HJFG v KCY [2012] 1 HKLRD 95 Hartmann JJA reiterated the need to have a sufficiently detailed breakdown of costs. In that judgment he said inter alia as follows:

78. Section 3 of the Ordinance, of course, still required the Judge to be satisfied that any contribution towards the wife’s ongoing legal costs was reasonable.  That meant that he had to be able to conduct some analysis of the nature and extent and purpose of the contributions sought.  On the part of the wife, that required some breakdown of her anticipated costs.

22. In support of this application the wife provided an estimate of costs up until the end of the trial. The difficulty with that is that it is drafted in very general terms. It is said that she has spent just under HK$800,000 per month on litigation costs to date and that she will need a similar amount going forward. Little justification is given for that. The estimate for the FDR hearing is HK$455,400.

23. However what we do know is that the sum of HK$2,137,721 is presently outstanding. Thus it is reasonable to suppose that at the very least the wife will require approximately HK$2.6 million (ie HK$2,137,721 + 455,400 = HK$2,593,121) to cover her litigation costs up to and including the FDR hearing. In such circumstances I will make the order that the wife seeks for a four month period only designed to take her up to that hearing. This includes an element for ongoing case management and seems reasonable in the circumstances. In the event that settlement is not reached then the issue of legal costs may be considered afresh.    

Order

24. Thus in the first instance the Respondent shall be at liberty to pay a further capital sum of HK$3 million as litigation funding to the Petitioner such sum to be paid on the premise that it is without prejudice to either party’s contention at trial concerning how that sum might be treated. In the event that the husband chooses not to make that payment within the next 7 days then I shall make an order that the Respondent do pay HK$800,000 per month to the Petitioner for four months with effect from the 1 December 2015 until the 1 March 2016.

Costs

25. Costs of this application shall be reserved for argument.