Hong Kong’s Law Reform Commission recommends Third Party Funding for Arbitrations

In our March 2016 newsletter, we reported that the Third Party Funding for Arbitration Sub-Committee (Sub-Committee) of Hong Kong’s Law Reform Commission had published a consultation paper recommending that Third Party Funding Agreements be permitted for arbitrations in Hong Kong.

On 12 October 2016, following the consultation period, the Law Reform Commission published a report (Report) recommending that the Arbitration Ordinance (Cap.609) be amended to state that Third Party Funding in arbitration and associated proceedings under the Arbitration Ordinance is permitted and should also apply to funding of services provided in Hong Kong in relation to arbitration taking place outside Hong Kong.

The Report recommends the following:

(1)   The Arbitration Ordinance should be amended (the Proposed AO Amendment) to state that the common law doctrines of maintenance and champerty (both as to civil and criminal liability) do not apply to arbitration to which the Arbitration Ordinance applies, to proceedings before Emergency Arbitrators, and to mediation and court proceedings under the Arbitration Ordinance.

(2)   Consideration should be given as to whether non-application of the common law doctrines of maintenance and champerty (both as to civil and criminal liability) should be extended to mediation within the scope of the Mediation Ordinance.

(3)   The Proposed AO Amendment should apply to Funding Agreements for Third Party Funding of arbitration made on or after the coming into effect of the proposed AO Amendment.

(4)   The Proposed AO Amendment should also apply to funding of services provided in Hong Kong in relation to arbitration taking place outside Hong Kong.

(5)   Third Party Funding provided either directly or indirectly by a person practising law or providing legal services (whether in Hong Kong or elsewhere) should not be permitted.

(6)   The professional conduct rules applicable to barristers, solicitors, and foreign registered lawyers should be amended to expressly state the terms and conditions upon which such lawyers may represent parties in arbitrations and related court proceedings funded by a Third Party Funder.

(7)   The Arbitration Ordinance should be amended to allow the communication of information relating to arbitral proceedings and awards to a Third Party Funder or its professional adviser.

(8)   A Funded Party must give written notice of the Funding Agreement and identity of the Third Party Funder to every other party to the arbitration and the relevant arbitration body, within prescribed time limits.

(9)   A “light touch” approach to regulation of Third Party Funding for arbitration be adopted in the initial 3 years, whereby Third Party Funders be required to comply with a Code of Practice (Code), setting out the standards and practices (financial and ethical) with which Third Party Funders will be expected to comply.

(10) After the Proposed AO Amendment has come into effect, the Advisory Committee on the Promotion of Arbitration should monitor the conduct of Third Party Funding for arbitration and liaise with stakeholders.

(11) After the first three years of operation of the Code, the Advisory Body should issue a report reviewing its operation and make recommendations for any necessary updates to the Code.

(12) The Code should include the following provisions and Third Party Funders should be required to include these terms in any Third Party Funding Agreement:

(a)   A Third Party Funder shall accept responsibility for compliance with the Code on its own behalf and by its subsidiary or an associated entity.

(b)   The promotional literature of a Third Party Funder in connection with Third Party Funding of Arbitration must be clear and not misleading.

(c)    As to the Funding Agreement, the Third Party Funder must:-

• • take reasonable steps to ensure that the Funded Party has received independent legal advice on the terms of the Funding Agreement before signing it.

• • 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, including as to:-

• • • capital adequacy requirements;
    • conflicts of interest;
    • confidentiality and privilege;
    • control;
    • disclosure;
    • liability for adverse costs;
    • grounds for termination; and
    • complaints procedure.

(13) It is too early to amend the Arbitration Ordinance to give a Tribunal power to award costs against a Third Party Funder, but the Advisory Body should, in the initial three year period, give further consideration to allowing such in appropriate circumstances.

(14) There is no need to give a Tribunal the power to order Security for Costs against a Third Party Funder, as the powers of a Tribunal under the Arbitration Ordinance to order a party to give Security for Costs afford adequate protection.

The Report concludes that such reform is in the interests of arbitration users and the Hong Kong public and that a party with a good case in law should not be deprived of the financial support it needs to pursue arbitration and associated proceedings under the Arbitration Ordinance.

Key Contacts

Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427