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Third Party Funding for Arbitration – The Hong Kong Version?
1 June 2017

A Third Party Funder in international commercial arbitration finances part or all of the cost of the proceedings in return for a remuneration dependent on the outcome of the dispute. Following most major arbitral jurisdictions’ footsteps, Hong Kong is proposing to pass legislation directly contemplating Third Party Funding for arbitration. The Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill of 2016 (the “Amendment Bill”) proposes amendments to the Arbitration Ordinance to regulate Third Party Funding in International Commercial Arbitration.

This Update examines the Amendment Bill and provides a brief summary of the amended regulatory scheme. In particular, it highlights the changes proposed in the Amendment Bill and their effects on the market for Third Party Funding in Hong Kong.

The Regulatory Scheme

The Amendment Bill makes four general changes to the Arbitration Ordinance. It :-

I. dis-applies the common law offences of maintenance and champerty in Third Party Funding arrangements (Division 3);

II. provides for the issuance of a code of practice by a regulatory body (Division 4);

III. allows a limited disclosure of confidential information relating to the arbitral proceedings from a party to a funder or prospective funder (Division 5); and,

IV. requires a funder to disclose its identity and other information relating to the funded agreement (Division 5).

I. Dis-applying common law offences

Hong Kong, a common law jurisdiction, retains the English doctrines of Champerty and Maintenance as part of its laws. These doctrines prohibit third party funding in litigation. While the legal question of whether these doctrines could apply to arbitration funding was left open in the case of Unruh v Seeberger (2007) 10 HKCFAR 31, Division 3 of the proposed Bill closes the matter by explicitly providing that “the common law offences of maintenance (including the common law offence of champerty) and of being a common barrator do not apply in relation to third party funding of arbitration (Section 98K).”

Notably, this exclusion does not extend to lawyers and persons providing legal services – such individuals may not engage in third party funding. Section 98G(2) of the proposed Amendment Bill explicitly excluded “the provision of arbitration funding directly or indirectly by a person practising law, or providing legal services”. The Law Reform Commission provided two reasons for this exclusion. Firstly, lawyers engaging in Third Party Funding could place themselves in a conflict of interest position. Secondly, Hong Kong law does not allow Hong Kong lawyers to charge conditional or contingency fees (3.36 of the Law Commission Report).

II. A Code of Practice

Third Party Funders will be required to comply with regulations in the form of a Code of Practice issued by a body authorized under the Arbitration Ordinance (Section 98L) The prospective regulatory regime will be designed to ensure that Third Party Funding in Hong Kong is ‘fair and transparent’ (5.17 of the Law Commission Report). The Amendment Bill makes provisions for the content of the code of practice in 98M of the Bill and includes a slew of possible regulations which include, amongst others, the content of funding arrangements, the requirement that Funded Parties receive independent legal advice and a minimum capital requirement for Third Party Funders.

Importantly, 98M is permissive and non-exhaustive and conceivably allows the regulating authority to pick and choose from the tabled regulations and any practice or standards for Third Party Funders as it sees fit for the purposes of issuing a code of practice. This power, however, is neither absolute nor untrammeled. Prior to publishing or amending the code of practice, the regulating authority must consult the public and publish a notice to inform the public of the proposed code of practice (Section 98N(1)). Finally, the Law Commission Report recommends that regulations should be applied ‘with a light touch’ for an initial period of 3 years (2.10 of the Law Commission Report). If this recommendation is adopted, it will mean that Third Party Funders should be able to draw from international practice and codes of conduct when conducting business in the near future, at least, for a period of three years.

III. Limited disclosure of confidential information to a Third Party Funder

While Section 18 of the Arbitration Ordinance prohibits the communication of information relating to the arbitral proceedings or the arbitral award, 98P carves out an exception to this provision for the purposes of providing information to a Third Party Funder. 98P allows a party to an arbitration to pass such information to a Third Party Funder or prospective Third Party Funder for the purposes of ‘having, or seeking, the third party funding of arbitration from this person.’ While a Funder is generally prohibited from communicating this information, it may do so under three exhaustive circumstances :-

(a) to protect or pursue its legal right or interest or enforce/challenge an award made in the arbitration in legal proceedings before a court or other judicial authority in or outside Hong Kong (Section 98P(3)(a)(i) and 98P(3)(a)(ii)),

(b) to fulfill a legal obligation of disclosure that the funder may be under (Section 98P(3)(b)), or,

(c) to seek the professional advice for the purpose of obtaining advice in connection with the Third Party Funding of Arbitration (Section 98P(3)(c)).

Unfortunately, Section 98P(3)(a)(i) of the Amendment Bill as it stands has far reaching implications on arbitral proceedings that does not seem to have been contemplated by the drafters of the Bill. If the Bill allows a Funder to communicate the information ‘to protect or pursue its legal right or interest’, the language could conceivably cover other arbitrations funded by the Third Party Funder. This is of particular relevance in in situations where a Respondent is engaged in multiple arbitrations with different claimants on legally related matters. A funder may, in reliance on this provision, gather information by funding multiple parties bringing similar claims against a single entity for use against the entity in later arbitrations.

IV. Funder to disclose its identity and other information relating to the funded agreement

A Third Party Funder is required to disclose the existence of a funding agreement and the name of the funder (Section 98T(1)). This is important for two reasons.

Firstly, disclosure ensures that the arbitrators are independent from the Third Party Funder. Notably, General Standard No. 6 of the IBA Guidelines on Conflicts of Interest equates Third Party Funders to the parties to the arbitration for the purposes of a conflict of interest check. If so, an arbitrator may be challenged pursuant to Article11.6 of the HKIAC Rules for circumstances that ‘give rise to justifiable doubts as to the arbitrator’s impartiality or independence’.

Secondly, it allows the opposing party a fair opportunity to seek security for costs. The presence of a Third Party Funder often indicates that the losing party will be unable to meet an adverse cost award. A tribunal, in light of this knowledge, may choose to order Security for Costs against a party under Section 56 of the Arbitration Ordinance. However it must be emphasized that the Law Reform Committee refrained from granting tribunals the power to make Third Party Funders directly liable for Security for Costs, instead recommending that such should be dealt with by the Third Party Funder and the Funded Party in their funding agreement (8.14 of the Law Commission Report).

Troublingly, the Amendment Bill does not seem to contemplate the assignment of a funding agreement. It merely requires disclosure at the point when the funding agreement is made (Section 98Q(1)). This lacuna opens the unfortunate possibility of an undiscovered conflict of interest arising between an arbitrator and an assignee.

Conclusion

The Amendment Bill, if passed in its entirety, will clear the way for Third Party Funders to operate in Hong Kong and would likely make Hong Kong a more attractive arbitration centre. That being said, the present amendments are relatively rudimentary. The anticipated Code of Practice, by contrast, promises to be more substantial and should provide prospective Funders with a greater measure of information in navigating the market for Third Party Funding of Arbitration in Hong Kong.

If you have any queries regarding the above eNews or any other questions relating to the above, experienced lawyers in our Dispute Resolution department will be pleased to assist you.

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