In our previous article of 19 September 2017, we mentioned that a Code of Practice may be issued by an “authorised body” appointed by the Secretary for Justice to set out the practices and standards with which third party funders are ordinarily expected to comply in carrying on activities in connection with third party funding of arbitration. On 30 August 2018, the Department of Justice launched a two-month public consultation to seek views on the draft Code of Practice for Third Party Funding of Arbitration and Mediation (Draft Code).
The Code will apply to any funding agreement commenced or entered into on or after the date of commencement of the Code between a third party funder and a funded party (including a potential funded party) for third party funding of arbitration and/or mediation.
A “third party funder” is a person (a) who is a party to a funding agreement for the provision of arbitration funding for an arbitration to a funded party by the person; and (b) who does not have an interest recognized by law in the arbitration other than under the funding agreement. A “third party funder” includes each of the third party funder’s subsidiaries and associated entities and investment advisors acting as its agents.
We set out below some of the key provisions contained in the Draft Code.
1. The Funding Agreement
The third party funder must take reasonable steps to ensure that the funded party has received independent legal advice on the funding agreement. A reasonable step includes a written confirmation from the funded party that independent legal advice has been taken on the funding agreement before it was entered into: see paragraphs 2.3 and 2.4 of the Code.
Other terms which must be included: Hong Kong address for service, all key features, risks and terms of the proposed funding, name and contact details of the advisory body responsible for monitoring and reviewing the operation of third party funding: see paragraph 2.3 of the Code.
2. Capital Adequacy Requirements
A third party funder has a continuous obligation to ensure that it maintains the capacity to pay all debts when they become due and payable and cover all of its aggregate funding liabilities under all of its funding agreements for a minimum of 36 months. It must also maintain access to a minimum of HK$20 million capital, and provide proof of such in the form of an auditor’s opinion or evidence from a qualified third party: see paragraph 2.5 of the Code.
3. Conflicts of interest
The third party funder must maintain effective procedures for managing any conflict of interest that may arise, and follow the written procedure in paragraph 2.7 of the Draft Code for managing any conflict of interest that may arise. It must also not take any steps that cause or may cause the funded party’s legal representative to act in breach of its professional duties: see paragraph 2.6 of the Code.
The control or conduct of the arbitration or mediation should remain with the funded party or the funded party’s legal representative, and the funding agreement shall make clear that the third party funder will not influence that or cause the funded party’s legal representative to act in breach of professional duties: see paragraph 2.9 of the Code.
5. Liability for adverse costs
The funding agreement must state whether (and if so to what extent) the third party funder is liable to the funded party to: (1) meet any liability for adverse costs; (2) pay any premium (including insurance premium tax) to obtain costs insurance; (3) provide security for costs; and (4) meet any other financial liability: see paragraph 2.12 of the Code.
6. Grounds for termination
The funding agreement must state whether (and if so how) the third party funder may terminate the funding agreement in the event that the third party funder: (1) reasonably ceases to be satisfied about the merits of the arbitration or mediation; (2) reasonably believes that there has been a material adverse change of prospects to the funded party’s success in the arbitration; (3) reasonably believes that there has been a material adverse change of prospects to the funded party’s being able to reach any agreement with the other party(ies) to the mediation to resolve in whole or in part the dispute; or (4) reasonably believes that the funded party has committed a material breach of the funding agreement. The funding agreement must provide that if the third party funder terminates the funding agreement, the third party funder is to remain liable for all funding obligations accrued to the date of termination unless the termination is due to a material breach by the funded party: see paragraphs 2.13-2.16 of the Code.
In addition to the above, the Draft Code also includes provisions on the responsibility for subsidiaries and associated entities, promotional materials, confidentiality and legal professional privilege, disclosure, disputes regarding the funding agreement, complaints procedure and annual returns.
Similar to in England and Wales, third party funding is not regulated in Hong Kong. Non-compliance with the Code of Practice does not render any person liable to any judicial or other proceedings, but it is admissible as evidence in other proceedings (section 98S of Cap. 609).