Hong Kong introduces Third Party Funding for Arbitration

The Hong Kong Government has announced that amendments to the Arbitration Ordinance (Chapter 609), allowing for third party funding of arbitration in Hong Kong, will come into effect on 1 February 2019. This is a long awaited and highly anticipated development. In addition, in accordance with the provisions of Division 4 of part 10A of the Arbitration Ordinance, the Hong Kong Government has released a “Code of Practice for Third Party Funding of Arbitration” (“Code”).

The existence of the common law doctrines of maintenance and champerty in Hong Kong led to uncertainty about the legality of third party funding of arbitration in Hong Kong. The introduction of the new provisions and the Code of Practice clarify the situation for those wanting to arbitrate in Hong Kong with third party funding. 

In a press release, a spokesman for the Department of Justice said: “Upon commencement of the New Arbitration Ordinance provisions, there will be greater certainty that third party funding of arbitration in Hong Kong is not prohibited by the common law doctrines of maintenance and champerty. This will add to the attractiveness of Hong Kong as an international arbitration centre. At the same time the Code can play a useful role in setting minimum standards of good practice by third party funders of arbitration and paying down safeguards for funded parties.”

The Code should be read in conjunction with the Arbitration Ordinance, and in the event of uncertainty or inconsistency with the Code, the Ordinance will prevail.

The main obligations which the Code imposes on the funder are:

Capital Adequacy

A funder must maintain the capacity to pay all its debts and cover all its aggregate funding liabilities under all of its funding agreements for a minimum period of 36 months. In addition, a funder must maintain access to a minimum of HK$20 million of capital.

Conflicts of Interest

The funder is required to maintain effective procedures for managing any conflict of interest that may arise in relation to activities undertaken by the third party funder in relation to the funding agreement, for the duration of the funding agreement. 

Confidentiality and Legal Professional Privilege

The funder is required to observe the confidentiality and privilege of all information and documentation relating to the arbitration and the funding agreement to the extent that Hong Kong law or applicable law permits.

Control

The Code makes it clear that the funder must not seek to influence the funded party or the funded party’s legal representative to give control or conduct of the arbitration to the third party funder except to the extent permitted by law. The funder must not do anything that would cause the funded party’s lawyer to act in breach of professional duties, and the third party funder must not seek to influence the arbitration body or arbitral institution involved.

Disclosure

The Code places an obligation on the third party funder to remind the funded party of its obligation to disclose information about the third party funding of arbitration under the Arbitration Ordinance.

Liability for costs

The funding agreement must state whether and to what extent the third party funder is liable to the third party to meet any liability for adverse costs, to pay any premium to obtain costs insurance, to provide security for costs and to meet any other financial liability.

Grounds for termination

The funding agreement must state whether and if so, how, the third party funder may terminate the funding agreement in the event that the third party funder: reasonably ceases to be satisfied about the merits of the arbitration; reasonably believes that there has been a material adverse change of prospects of success in the arbitration or recovery on success; reasonably believes that the funded party has committee a material breach of the funding agreement. The funding agreement must provide a similar right for the funded party to terminate if he reasonably believes that the funder has committed a material breach of the funding agreement. The funding agreement must not allow a discretionary right for the third party to terminate. If the third party does terminate he must remain liable for all funding obligations accrued to the date of the termination. 

Dispute regarding funding agreement

The Code requires that the funding agreement provide for a neutral, independent and effective dispute resolution mechanism for settling disputes arising in connection with the funding agreement.

Complaints procedure

The third party funder must maintain an effective complaints procedure and the Code contains guidance on what this entails.

Annual returns

The third party must submit annual returns to the Department of Justice of any complaints against it by the funded party or any finding by a court or arbitral tribunal of its failure to comply with the Code.
Failure to comply with the Code will not result in judicial or other proceedings. However, the Code is admissible in evidence in proceedings before any court or arbitral tribunal, and compliance with or failure to comply with the Code may be taken into account by any court of arbitral tribunal, if relevant.  

In line with the amendments to the Arbitration Ordinance expressly allowing third party funding of arbitration in Hong Kong, the HKIAC Rules have also recently been amended to: (i) require parties to disclose the existence of any third party funding agreement and the identity of the funder[1], and (ii) entitle the tribunal to take into account any such agreement when deciding questions of costs.[2]     

The introduction of third party funding of arbitration in Hong Kong is a positive development and will be welcomed in Hong Kong. These initiatives bring Hong Kong into line with other leading arbitration seats and will encourage greater use of arbitration in Special Administrative Region.              


[1]           2018 HKIAC Administered Arbitration Rules Article 44

[2]           2018 HKIAC Administered Arbitration Rules Article 34.4