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Third party funding for arbitration - closer to reality

October 2016

The current position regarding third party funding for arbitration in Hong Kong is unclear. At the heart of the uncertainty lies the seven century old doctrines of maintenance and champerty, which prohibits third party funding for litigation. 

In order to clarify the law concerning third party funding for arbitration, the Law Reform Commission (the "Commission") published a consultation paper in October 2015. This consultation paper sets out the Commission's proposals to clarify the law by expressly permitting third party funding for arbitration. In response to the consultation paper, the Commission received a total of 73 submissions from groups in the public and private sector.

Having considered the submissions, the Commission published its final Report on Third Party Funding for Arbitration (the "Report") on 12 October 2016. The recommendations made in the Report are summarised in the sections below.

   

Recommendation 1: The common law doctrines of maintenance and champerty shall not apply to arbitrations under the Arbitration Ordinance

It was firstly recommended that the Arbitration Ordinance be amended to permit third party funding for arbitration, and to provide that the common law doctrines of maintenance and champerty do not apply in respect of arbitration.

Despite the differentiation contained in Section 5 of the Arbitration Ordinance between arbitrations seated in Hong Kong and those seated abroad, the Commission stated that third party funding for services performed in Hong Kong in relation to arbitration should be allowed regardless of whether the arbitration is seated in Hong Kong.

The Commission also recommended restrictions on the persons who are permitted to provide third party funding. For example, any person practising law or providing legal services, whether in Hong Kong or elsewhere, will be prohibited from providing funding i.e. on a contingency fee basis.

Recommendations 2 and 3: Develop clear ethical and financial standards for third party funders

The second and third recommendation concerns the development of clear ethical and financial standards for third party funders. It is recommended that a "Third Party Funding for Arbitration Code of Practice" (the "Code") be issued by an advisory body.

The Code will set out ethical and financial standards/practices that third party funders will ordinarily be expected to comply with, and include provisions requiring third party funders to:

 a.   accept responsibility for compliance with the Code; 
 b.  ensure that its promotional literature in connection with third party funding of arbitration be clear and not misleading;
 c.  take reasonable steps to ensure that the funded party has received independent legal advice on the terms of the funding agreement;

 d.  set out and explain the key features, risks and terms of the funding agreement; and

 e.  provide a Hong Kong address for service.

A "light touch" approach to regulation is to be adopted for an initial period of three years (the "Initial Period"). A breach of the Code within the Initial Period would not therefore render a person liable to any judicial or other proceedings. At the end of the Initial Period, the advisory body will issue a report reviewing the Code's operation and effectiveness.

Recommendation 4: Make third party funders directly liable for adverse costs orders in matters they have funded

In principle, the Commission considered that Tribunals should be given power under the Arbitration Ordinance to award costs against a third party funder, i.e. an adverse costs order.

However, the Commission noted that the Arbitration Ordinance applies only to parties to an arbitration agreement. In order for a Tribunal to award costs against a non-party, i.e. the third party funder, it would be necessary for the third party funder to be joined into the arbitration. Alternatively, it was proposed that a deed of submission be provided by the third party funder to the Tribunal so that it will be bound by the Tribunal's decisions. Both approaches, as acknowledged by the Commission, could potentially lead to practical difficulties and also increase the cost of arbitration.

Given the above, the Commission stopped short of recommending an amendment to the Arbitration Ordinance to provide Tribunals with the power to make an adverse costs order against a non-party. Instead, its preference was to recommend that a review be conducted after the Initial Period to determine whether an amendment would be necessary.

Concluding thoughts

The availability of third party funding is a welcome development for arbitrations seated in Hong Kong.  Third party funding allows for access to justice, it levels the playing field for settlement discussions, it allows for companies to manage financial risk, and allows for an objective assessment of the claim.  It will only add to Hong Kong's attractiveness as a seat of arbitration.  Singapore is also proposing to enact new laws that would allow for third party funding in international arbitration and related proceedings in the Singapore courts (including enforcement proceedings). 

Although the recommendations are not binding, they provide some welcome indications of the direction that Hong Kong will take in respect of third party funding for arbitration. Subject to the final decision of the Administration, we expect the Commission's recommendations to be tabled before the Legislative Council for debate in the near future. The full report can be accessed at http://www.hkreform.gov.hk/en/docs/rtpf_e.pdf.

Contacts

Anita Lee

Anita Lee

Registered Foreign Lawyer
Hong Kong

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