Hong Kong Law Reform Commission recommends reforms to support third-party funding for arbitration
November 3, 2016
BY Kevin Zakreski
The Law Reform Commission of Hong Kong has just published a final report that caps off its project on third-party funding for arbitration. The Report on Third Party Funding for Arbitration (PDF) contains the commission’s final recommendations for reform of Hong Kong’s Arbitration Ordinance. This report covers some topics that are of interest to BCLI’s ongoing Financing Litigation Legal Research Project.
Background on the project
The HKLRC began its project in June 2013 by forming a six-person subcommittee. The subcommittee had a broad mandate “to review the current position relating to [third-party funding] for arbitration for the purposes of considering whether reform is needed, and if so, to make such recommendations for reform as appropriate.” It defined third-party funding as follows:
Third party funding (“TPF”) refers to a contractual agreement between a third party, the funder, and a claimant seeking to pursue a cause of action. TPF arrangements are usually motivated by a lack of financial resources but may also be used to mitigate costs and manage the risk of litigation or arbitration. The contract commonly provides that the funder will pay for the costs of the action in return for a percentage of the award should the action succeed.
As part of the project, the subcommittee released a consultation paper in October 2015.
The main legal obstacle faced in this project was the shadow that two longstanding common-law doctrines cast over contemporary arrangements for third-party litigation (and, by extension, arbitration) financing:
The common law principles of maintenance and champerty have been held by the Hong Kong courts to continue to apply in Hong Kong and to prohibit third party funding of litigation, both as a tort and as a criminal offence, save in three exceptional areas: (1) where a third party has a legitimate interest in the outcome of the litigation; (2) where a party should be permitted to obtain third party funding, so as to enable him/her to have access to justice; and (3) in a miscellaneous recognised category of proceedings including insolvency proceedings. The question of whether the operation of the common law principles of maintenance and champerty also apply to third party funding for arbitration taking place in Hong Kong was expressly left open by the Court of Final Appeal in 2007 in the case of Unruh v Seeberger (2007) 10 HKCFAR 31.
The project’s final recommendations
In response to these concerns, the subcommittee has proposed “that the Arbitration Ordinance (Cap 609) should be amended to state that the common law principles of maintenance and champerty (both as to civil and criminal liability) do not apply to arbitration and associated proceedings under the Arbitration Ordinance.” The subcommittee made this general recommendation for the following reasons:
- “to clarify the law concerning third party funding of arbitration and associated proceedings under the Arbitration Ordinance”;
- to ensure that “appropriate safeguards” are put in place for third-party financing arrangements;
- to improve access to justice by providing that “a party with a good case in law should not be deprived of the financial support it needs to pursue that case by arbitration and associated proceedings under the Arbitration Ordinance”; and
- “to enhance Hong Kong’s competitive position as an international arbitration centre.”
The report contains four primary final recommendations, which go into considerable detail about the content of the proposed amendment to the Arbitration Ordinance. Quotations in the following description of the recommendations are taken from the commission’s executive summary of the report (PDF).
Final recommendation (1): Amending the Arbitration Ordinance
The first of the final recommendations concerned amending the Arbitration Ordinance to expressly state that maintenance and champerty don’t apply to arbitrations under the ordinance. As a transitional rule, the subcommittee recommended that the proposed amendment apply to funding arrangements “made on or after the coming into effect of the Proposed AO Amendment.”
The subcommittee recommended that contingency-fee agreements be carved out of its proposed amendment: “The definition of ‘Third Party Funding’ in the Proposed AO Amendment should not include any funding provided either directly or indirectly by a person practising law or providing legal services (whether in Hong Kong or elsewhere).”
The subcommittee called for an amendment to professional conduct rules for lawyers “to expressly state the terms and conditions upon which such lawyers may represent parties in Arbitrations and related court proceedings funded by Third Party Funder.”
The subcommittee made two recommendations aimed at disclosure and information flow. First, it recommended allowing “the communication of information relating to arbitral proceedings and awards to a Third Party Funder or its professional adviser.” Second, it recommended requiring a “funded party” under a funding agreement to “give written notice of the fact that a Funding Agreement has been made and the identity of the Third Party Funder.” This notice should be “given to each other party to the Arbitration and the Arbitration Body” on or before the start of the arbitration.
Finally, the subcommittee recommended that consideration also “be given to whether to make consequential amendments at the same time to the Mediation Ordinance to extend such non-application of the common law doctrines of maintenance and champerty.”
Final recommendation (2): Standards for third-party funders
The subcommittee recommended that “clear standards (including ethical and financial standards) for Third Party Funders providing Third Party Funding to parties to Arbitration should be developed.”
Final recommendation (3): Regulation of third-party funders
The subcommittee recommended that third-party funding be subject to a newly designed regulatory framework. It had a distinctive idea in mind for the type of framework:
At this first stage of Third Party Funding of Arbitration in Hong Kong, a “light touch” approach to its regulation should be adopted for an initial period of 3 years, in line with international practice and in accordance with Hong Kong’s needs and regulatory culture.
The subcommittee’s vision for this light-touch regulation centred on a proposed Third Party Funding for Arbitration Code of Conduct. The code would be issued by “a body authorized under the Arbitration Ordinance” and would “set out the standards and practices (including financial and ethical standards) with which Third Party Funders will ordinarily be expected to comply in carrying on activities in connection with Third Party Funding of Arbitration.”
The proposed code would require a third-party funder to do the following in connection with a funding agreement:
- take reasonable steps to ensure that the Funded Party shall have received independent legal advice on the terms of the Funding Agreement prior to its execution, which obligation shall be satisfied if the Funded Party confirms in writing to the Third Party Funder that the Funded Party has taken legal advice from the solicitor or barrister instructed in the dispute;
- provide a Hong Kong address for service in the Funding Agreement;
- set out and explain clearly in the Funding Agreement the key features, risks and terms of the Funding Agreement including, without limitation, as to the matters set out in section 98M(1) of the Proposed AO Amendment, including as to:
- capital adequacy requirements;
- conflicts of interest;
- confidentiality and privilege;
- liability for adverse costs;
- grounds for termination; and
- complaints procedure.
The subcommittee recommended that failing to comply with the code
should not, of itself, render a person liable to any judicial or other proceedings. However the Code should be admissible in evidence in proceedings before any court or Tribunal; and any compliance or failure to comply with a provision of the Code may be taken into account by any court or Tribunal if it is relevant to a question being decided by that court or Tribunal.
At the end of this initial three-year, light-touch period, an advisory body formed to monitor third-party funding should
issue a report reviewing [the code’s] operation and make recommendations as to the updating of the ethical and financial standards set out in it. At this time the Advisory Body should also make recommendations on whether a statutory or other form of body is needed, how it could be set up and as to the criteria for selecting members of such a body. In the meantime, the Advisory Body could at the end of each year review whether or not to speed up the process for regulation by an independent statutory or other form of body. The report should also deal with the effectiveness of the Code and make recommendations as to the way forward.
Final recommendation (4): Costs
The subcommittee recommended a measured approach to resolving the issue of whether an award for costs should be available against a third-party funder. “In principle” the subcommittee favoured an arbitration tribunal having this power, but they also “consider that it is premature at this stage to amend the Arbitration Ordinance to provide for this power.” So the subcommittee recommended that “further careful consideration of this issue is warranted bearing in mind the need to preserve the integrity of Hong Kong’s regime for Arbitration, to provide due process to a third party, including a Third Party Funder, where an application for an Adverse Costs Order against it has been made, and to provide for equal treatment, fairness and efficiency for all involved.” In the subcommittee’s view, this consideration should be given by the advisory body discussed in connection with the previous final recommendation. It recommended that the advisory body report at the end of the initial three-year period on “providing for the power of a Tribunal to award Costs against a third party, including a Third Party Funder, in appropriate circumstances, including”:
- considering whether this should be achieved by an amendment of the Arbitration Ordinance to empower a Tribunal to make Costs orders against third parties, including Third Party Funders, without joinder of such a third party to the arbitration (albeit for the sole purposes of the Costs application);
- the formulation of the provisions for the third party’s right to be heard, to equal treatment and to due process;
- the rules of procedure to be applied;
- the consequences of non-participation by a third party in any such Costs application following due notice and a reasonable opportunity to participate; and
- the form of any Adverse Costs Order against a third party that a Tribunal may make, including whether it may form part of a final award.