Third Party Funding for Arbitrations

On 19 October 2015, the Third Party Funding for Arbitration Sub-Committee (Sub-Committee) of Hong Kong’s Law Reform Commission published a consultation paper recommending that Third Party Funding Agreements be permitted for arbitrations in Hong Kong.

What is a Third Party Funding Agreement?

A Third Party Funding Agreement is an agreement whereby a third party (i.e. someone who is not a party to litigation or arbitration proceedings) agrees to fund the proceedings in return for a percentage of the judgment or award or some other financial benefit from any proceeds recovered in the litigation or arbitration.

Third Party Funding of Litigation

The common law doctrines of maintenance and champerty prohibit Third Party Funding of litigation, except in three limited circumstances, namely:

1. where the third party funder has a legitimate interest in the outcome of the litigation;
2. where access to justice considerations apply: and
3. in a miscellaneous category of proceedings, including insolvency litigation.

The rationale behind this prohibition is that the litigation process should not be commercialised and used for the purpose of making a profit, rather than enforcing legal rights. 

Third Party Funding of Arbitration

In Cannonway Consultants Ltd v Kenworth Engineering Ltd, HCCT 5/1994, 25 November 1994, Hong Kong’s High Court held that although champerty did apply to litigation proceedings in Hong Kong, it did not apply to arbitration proceedings, because that would mean extending it from the public justice system to the private consensual system which is arbitration. The Court said that another factor to be taken into account was that in Hong Kong many arbitrations have an international flavour and to subject international parties to a rule of law which is not applicable in many other jurisdictions would make Hong Kong a less desirable venue for international arbitration.

In Cannonway, the Court held that an agreement whereby a claims consultant was to be paid a percentage of the amount recovered by way of negotiation or in arbitration was not champertous and was valid.

In Unruh v Seeberger, FACV 9 & 10/2006, Hong Kong’s Court of Final Appeal held a Third Party Funding Agreement, in respect of an arbitration conducted in a foreign jurisdiction, to be valid on the basis that the court should not strike down an agreement on the grounds of maintenance and champerty in arbitration proceedings in a jurisdiction where no such prohibition exists. However, the Court left open the question of whether the doctrines apply to Third Party Funding Agreements for arbitrations conducted in Hong Kong, despite the ruling in Cannonway. 

Given Hong Kong’s position as a major venue for international arbitration and that parties to arbitration may wish to seek Third Party Funding, the Sub-Committee was asked to consider whether reforms are needed in respect of Third Party Funding for arbitrations in Hong Kong, since it is currently uncertain whether it is permissible.

Sub-Committee’s Conclusions

The Sub-Committee concluded that reform is required or else Hong Kong’s competitiveness as an international arbitration centre is likely to be reduced, given that Third Party Funding in arbitration is permitted in most other international arbitration centres (with the exception of Singapore), notably England and Wales, Australia, France, Germany, The Netherlands, Switzerland, Korea, the PRC, the EU, and the United States.

Sub-Committee’s Recommendations

The Sub-Committee recommends that Hong Kong’s Arbitration Ordinance (Cap 609) be amended to provide that Third Party Funding for arbitration taking place in Hong Kong is permitted. It also recommends that clear ethical and financial standards for Third Party Funders be developed to manage the potential risks arising from Third Party Funding.

The Sub-Committee invited views and comments on various issues raised in its consultation paper to be sent to it by 1 February 2016 and will now make its final conclusions after considering such.

If Third Party Funding is allowed in arbitration, it should be welcomed by many contractors and sub-contractors in construction projects who believe they have a good claim, but are lacking the funds to finance their arbitration. We also receive enquiries from private investors, who have been engaging in the business of Third Party funding in other jurisdictions, about the possibility of doing the same for Hong Kong arbitrations.

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张国杰

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