Greenlight for Third Party Funding for ADR in Hong Kong…Finally!
Note: This is an update to our March 2017 Dispute Resolution Alert. Please see the Alert for more information.
The Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill ("Bill") was passed by the Legislative Council on 14 June 2017. Long-awaited by third party funders and other members of the arbitration and mediation sectors, the passing of the Bill means that it will soon be legal for third parties to fund arbitration and mediation proceedings in Hong Kong.
Changes to the Bill
The final version of the Bill contains two changes compared to its previous version, first introduced in December 2016. Firstly, lawyers are now permitted to fund proceedings as third parties. Secondly, there are now more situations where confidential information can be disclosed in mediation proceedings.
Lawyers as third party funders to arbitration & mediation proceedings
The most notable update to the Bill is that lawyers are now permitted to fund arbitration and mediation proceedings as third parties. In the previous version of the Bill, lawyers were restricted from funding third party proceedings due to concerns about conflicts of interests and other professional conduct issues. Under the final version of the Bill, lawyers and law firms are now permitted to do so. However, it is not permitted for lawyers or law firms to fund proceedings if they are acting for any of the parties in the proceedings.
Permitting disclosure of mediation proceedings to seek funding
The second change to the Bill is that there are now more situations in which information can be disclosed for the purpose of seeking third party funding in mediation proceedings. Under s. 8 of the Mediation Ordinance ("MO"), "Mediation Communications" (as defined under the MO1) are confidential and cannot be disclosed except in circumstances provided for by the MO. The Bill introduces an exception to this rule by allowing a party to mediation to disclose Mediation Communications for the purpose of finding third party funding. In the previous version of the Bill, a party must have agreed to mediation before Mediation Communication could be disclosed. The final version of the Bill will allow any person to disclose Mediation Communication for the purpose of finding third party funding, even before having agreed to mediate.
The updated Bill also allows for the disclosure of Mediation Communication for the purpose of obtaining professional advice in connection with third party funding. In addition, it also allows a funded party, or a third party funder, to disclose Mediation Communication in legal proceedings arising out of the third party funding of mediation. However, leave of the relevant court or tribunal must be obtained before the disclosure.
Code of Practice for Third Party Funding of Arbitration and Mediation Proceedings
Under the Bill, a Code of Practice will be issued by an authorised body for the purpose of regulating the activity of third party funders in Hong Kong. Whilst an authorised body has not yet been appointed, s. 98Q of the Bill provides a number of suggested practices and standards, which includes rules relating to:-
• the content of promotional materials;
• minimum capital requirements for third party funders;
• conflicts of interests, and
• the content of third party funding agreements, including:-
o the degree of control of third party funders;
o liability of third party funders, and
o the withholding or termination of funding.
The Code of Practice will not be legally binding, but should be admissible as evidence in court or in arbitral proceedings. It should also be taken into account by the court or an arbitration tribunal if it is relevant to a question being decided in these proceedings.
No timeline for implementing the Bill
Whilst the Bill has been passed by the Legislative Council, the operative sections are not yet in force. There is currently no specific timetable for the commencement of the operative sections, particularly in view of the fact that both the advisory body and the authorised body will first need to be appointed. Further, the authorised body will need to draft and publish the Code of Conduct before the commencement of the operative sections.
The legalisation of third party funding is expected to bring a number of changes to arbitration and mediation proceedings in Hong Kong. In particular, third party funding should help to promote arbitration as a cost-effective method of resolving disputes and lower the barrier to entry for parties seeking to arbitrate. Further, it should give companies greater flexibility in managing their risks by allowing them to offload the cost of arbitration to third party funders.
Overall, the relaxation of the rules against third party funding puts Hong Kong more in line with other major arbitration centres, and should help to enhance Hong Kong's position as a major centre for international arbitration.
Meanwhile, it remains to be seen how effective the new third party funding regime will be in terms of mediation in Hong Kong. The jury is still out on whether the introduction of the Bill will have any material impact upon the volume and frequency of mediation in Hong Kong, which is a voluntary dispute resolution process with mediators applying a facilitative model to achieve financial and other non-financial settlements - something not necessarily in tune with the commercial objectives of potential third party funders.
As the Bill is not yet in operation, parties concerned should keep a close eye on the upcoming details about the implementation of the Bill, such as the date of commencement of the operative sections. Third party funders should pay particular attention to the Code of Practice which will be issued by the authorised body, and for upcoming details of any compliance obligations.
Defined in s. 2 of the Mediation Ordinance as "anything said or done, any document prepared, or any information provided for the purpose of or in the course of mediation, but does not include an agreement to mediate or a mediated settlement agreement."
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