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On 14 June 2017, Hong Kong’s Legislative Council passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016, which introduces changes to the Arbitration Ordinance to permit third party funding for arbitration in Hong Kong. These changes will come into effect once gazetted.
Third party funding is the provision of funding by a third party to a party to legal proceedings under a funding agreement in return for the third party receiving a financial benefit if the legal proceedings are successful. The third party funder will not receive any payment if the proceedings are unsuccessful.
The common law doctrines of maintenance and champerty which originated in England have prohibited third party funding of litigation in Hong Kong except in limited circumstances, such as insolvency proceedings, where the third party has a legitimate interest in the outcome of the litigation or where access to justice considerations apply. In Unruh v Seeberger (2007) 10 HKCFAR31, the Hong Kong Court of Final Appeal upheld a third party funding agreement in respect of an arbitration conducted in The Netherlands, but expressly left open the question of whether the doctrines of maintenance and champerty apply to arbitrations seated in Hong Kong.
Third party funding of arbitration has become increasingly common globally, and is allowed in numerous jurisdictions including Australia, England and Wales, France, Germany, the U.S., and more recently Singapore. As both a major international financial and arbitration centre, Hong Kong has lagged behind other jurisdictions in allowing third party funding for arbitration. The uncertainty in law concerning third party funding for arbitration had the potential to make Hong Kong a less attractive place to conduct arbitration.
Following a consultation paper issued in October 2015, the Law Reform Commission of Hong Kong released a report in October 2016 recommending legislative changes to allow third party funding of arbitration and associated proceedings under the Arbitration Ordinance.
Under the revised Arbitration Ordinance, besides the costs of the arbitration, third party funding is also allowed for pre-arbitration costs and expenses, and costs arising from ancillary court proceedings, emergency arbitrator and mediation proceedings under the Arbitration Ordinance.
Third party funders will be required to comply with a Code of Practice which will set out ethical and financial standards for third party funders, such as ensuring that: (i) promotional material is clear and not misleading, (ii) funding agreements set out their key risks and terms, (iii) funded parties obtain independent legal advice on funding agreements prior to their entry, and (iv) conflicts of interest are effectively addressed. A funded party must also notify the tribunal and every party of the funding agreement. The Code of Practice remains to be issued.
However, the new law expressly states that third party funding of arbitration does not include any direct or indirect provision of arbitration funding by a person practising law, or providing legal services, whether in Hong Kong or elsewhere. Therefore, contingency or conditional fee agreements between barristers or solicitors and their clients to the effect that no fees will be charged if the client’s case is unsuccessful remains prohibited under Hong Kong law.
These amendments, once in force, will enable Hong Kong to maintain its competitiveness as an arbitration centre. Third party funding will be attractive to parties who lack either the financial resources to pursue their claims or are willing to forego part of the award sum in return for reduced risks and costs of the arbitration.
15 June 2017
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