To enhance Hong Kong’s status as one of the leading international arbitration centres for cross-border commercial and financial disputes, new outcome related fee structures for arbitration (“ORFSA”) are now allowed in order to motivate clients to choose Hong Kong as the seat to resolve their disputes or engage Hong Kong practitioners for arbitration seated elsewhere. The Arbitration (Outcome Related Fee Structures for Arbitration) Rules, Cap. 609D (“ORFSA Rules”) was gazetted and the new rules came into effect in Hong Kong on 16 December 2022, removing the long-standing prohibition on contingency fee arrangements in arbitration cases.
Background
Historically in Hong Kong, outcome related fees were prohibited in litigation proceedings to prevent third parties from funding an unconnected party’s litigation in acts of maintenance and champerty, which are common law torts and offences. Gradually, other jurisdictions such as England and Wales, Australia and Singapore have allowed outcome related fee arrangements for arbitration in answer to parties’ needs for alternative ways to determine legal fees and give more access to justice. Hong Kong has now followed suit and allows an ORFS arrangement whereby a lawyer (solicitor, barrister or registered foreign lawyer) and a client can enter into an arrangement under which the lawyer who advises on contentious proceedings is allowed to receive a financial benefit in the event the case is successful. The new ORFSA apply to arbitration proceedings as well as related court or mediation proceedings.
However, the outcome related fees of any kind for litigation proceedings are still prohibited in Hong Kong.
Types of ORFSA arrangements available in Hong Kong
Clients may choose from the following three types of fee arrangements with their lawyer before engagement :-
Conditional Fee Agreement (“CFA”)
The client agrees to pay the legal fee of the lawyer only if the outcome is successful. This is known as the “no win, no fee” (i.e. receive no fees) or “no win, less fee” (i.e. receive reduced fees) arrangement if the outcome is not successful. The legal fees to be paid if the proceedings are successful are known as success fee. The success fee is calculated as a percentage of the benchmark fee (i.e. the fee that would have been charged if no CFA had been made in the matter). The uplift element of the success fee must not exceed 100% of the benchmark fee. It is also important to note that what constitutes “successful outcome” must be defined in the CFA between the client and the lawyer.
Damages Based Agreement (“DBA”)
The client agrees to pay the legal fees only if the client obtains a financial benefit in the matter. A financial benefit typically is the money awarded to the client or paid to the client in settlement of the claim in the matter. The legal fees of the lawyer in a DBA arrangement (“DBA Payment”) would be calculated by reference to the financial benefit obtained by the client and must not exceed 50% of the said financial benefit in addition to any recoverable lawyer’s costs. “Financial benefit” must be defined in the DBA between the client and the lawyer along with the basis of calculation of the DBA Payment, when the DBA Payment is payable and whether barrister’s fees are included in the DBA Payment.
Hybrid Damages Based Agreed (“Hybrid DBA”)
The client agrees to pay the legal fee usually (at a discount) for legal services rendered during the course of the matter plus a DBA Payment only if the client obtains a financial benefit in the matter. In the event no financial benefit is obtained by the client, the fees will be capped at 50% of irrevocable costs. In the event the client obtains financial benefit, the DBA Payment will be capped at 50% of the financial benefit obtained.
Additional points to note for ORFSA agreements
In order to protect both the client and the lawyer, in addition to the above specific conditions of the ORFSA arrangements, the ORFSA Rules provides the following general conditions for ORFS agreements to be valid and effective :-
1. The agreement must be in writing;
2. The agreement must be signed by the lawyer and the client;
3. The agreement must state :-
a. The matter to which the agreement relates, which is the arbitration or any part of it;
b. The circumstances in which the lawyer’s fees and expenses are payable;
c. That the lawyer has informed the client of the right to seek independent legal advice before entering into the agreement;
d. That the client has a 7-day cooling period after making the agreement in which the client may terminate the agreement by written notice without incurring liability;
e. The grounds on which the agreement may be terminated before the conclusion of the matter and the alternative basis on which the lawyer is to be paid by the client in such an event;
f. Whether disbursements and barristers’ fees are to be paid by the client irrespective of the outcome of the matter.
Conclusion
The ORFSA will provide more flexible funding options for clients in addition to third party funding which has been allowed since February 2019. The new rules should allow meritorious claims to proceed and allow clients to better manage cash flow for costly arbitration. Hong Kong lawyers can also benefit from pricing flexibility and thus be more competitive amongst other arbitration practitioners regionally. With the new fee system settling into place, both clients and lawyers should take note to carefully consider their legal fee payment options and define the terms of engagement before beginning the arbitration process.
Our Litigation and Dispute Resolution team has extensive experience handling complex corporate, contractual and commercial disputes in the Greater China region especially those of a cross border nature. If you have any questions on the above eNews or relating to litigation and / or arbitration matters, experienced dispute resolution lawyers in our firm would be happy to assist you.