Third Party Funding of Arbitration: Forthcoming Changes
In October 2016, the Law Reform Commission ("LRC") released a report recommending proposed amendments to the current law in Hong Kong to expressly permit third party funding of arbitration and associated proceedings under the Arbitration Ordinance (Cap. 622), with appropriate safeguards and regulations in place to ensure ethical standards are maintained and to prevent abuse.
In a nutshell, third party funding is where a third party (i.e. someone who is not directly involved in or a party to the arbitration or other associated proceedings) provides funds to a party to that arbitration or proceedings in return for an agreed percentage of the arbitral award / judgment / other financial benefit from the recovery in the proceedings (if successful).
Current Position in Hong Kong
Under the common law principles of maintenance and champerty, third party funding of litigation is prohibited (both as a tort and as a criminal offence) except (1) where the third party has a legitimate interest in the outcome of the litigation, (2) where it enables the party to have access to justice and (3) in a miscellaneous recognized category of proceedings (including insolvency proceedings). The underlying rationale is simple: to prevent third parties profiting from litigation in which they have no legitimate interest, which may result in frivolous or vexatious litigation.
Nevertheless, it is currently unclear whether the principles also apply to third party funding for arbitrations taking place in Hong Kong. Indeed, in Unruh v Seeberger (2007) 10 HKCFAR 31, the Court of Final Appeal expressly left open the question of whether third party funding for arbitration is lawful.
Impetus for Change
Over the last decade, third party funding of arbitration has become increasingly prevalent in various jurisdictions including Australia, the United States and England & Wales. More recently, in Singapore (being a major rival competing for the title of Asia's leading international dispute resolution centre), legislation allowing third-party funding for international arbitration and related proceedings before the Singapore courts has been enacted.
Against that backdrop, there have also been sweeping changes in attitudes towards third party funding in Hong Kong. The LRC pointed out that a party with a good case in law should not be deprived of the financial support it needs to pursue its case by arbitration and associated proceedings under the Arbitration Ordinance.
Moreover, the Government also expresses the need to follow suit and "…keep up with the latest development in the dispute resolution sector". The Secretary for Justice, Hon Rimsky Yuen SC, commented that "…we (the Government) believe that the Bill, when enacted, will further enhance Hong Kong's position as a leading centre for international legal and dispute resolution services in the Asia Pacific region."
After an extensive consultation, the LRC made various recommendations, including:-
1. Reform expressly permitting third party funding for arbitration conducted in or outside Hong Kong, so long as the third party-funded legal services are provided in Hong Kong.
2. Clear ethical and financial standards for third party funders operating in Hong Kong should be developed.
3. A "light touch" approach to the regulation of third party funding should be adopted for an initial period of three years of its implementation.
4. Third party funders should be required to comply with a Code of Practice ("Code") issued by an authorized body under the Arbitration Ordinance, which should set out the standards and practices with which they will ordinarily be expected to comply, generally and in their arbitration funding agreements. For instance, the funding agreements should set out and explain the key features, risks and terms of the agreement, and third party funder must take reasonable steps to ensure that the funded party receives independent legal advice on the terms of the funding agreement before signing it.
5. An advisory body should monitor the conduct of third party funding for arbitration and the implementation of the Code, and issue a report reviewing its operation and make recommendations as to the updating of the ethical and financial standards set out in the Code after the conclusion of the initial three years of operation.
6. Consideration should be given as to whether the non-application of common law principles of maintenance and champerty should be extended to mediation within the scope of the Mediation Ordinance (Cap. 620).
7. There is no need at this stage to give an arbitral tribunal the express power to award costs against third party funders or power to order security for costs against a third party funder.
Unsurprisingly, the LRC's proposals have received overwhelming support from the public and the legal profession in Hong Kong. An amendment bill to the Arbitration Ordinance and the Mediation Ordinance was put forward to the Legislative Council for review in January 2017.
With the anticipated legislative reforms on the horizon, parties will soon benefit from a new tool for financing claims and managing risks. These forthcoming (and long overdue) changes will undoubtedly enhance Hong Kong's competitive position as one of the major centres for international arbitration and attract more international arbitration cases to the city. Indeed, this is in line with the spirit of the Civil Justice Reform (which came into effect on 2 April 2009) by encouraging the settlement of disputes and facilitating arbitration. Parties, however, should be reminded to keep a close eye on the details of the legislative amendments to come (in particular, any regulatory requirements imposed) and seek independent legal advice before engaging in third party funding of arbitration.
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