July 10, 2017
On 23 June 2017, the landmark Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (“Amendment Ordinance“) was published in the Government Gazette.
The Amendment Ordinance sets out the framework for third party funding (“TPF“) for arbitrations and mediations in Hong Kong. It does this through the introduction of a new Part 10A to the Arbitration Ordinance (Cap. 609). This will open the way for third party funders (“Funders“) to fund arbitration proceedings in Hong Kong in return for a financial benefit if the arbitration is successful within the meaning of the relevant funding agreement. Funders will also be allowed to fund services provided in Hong Kong concerning arbitrations seated outside Hong Kong. While the provisions of Part 10A of the general framework are already in effect, the express permission of TPF for arbitrations and provisions on individual measures and safeguards will only come into effect on a date to be announced.
Implications for parties arbitrating in Hong Kong
Corporate and individual parties face continuing costs pressure. It is therefore not surprising that TPF has become increasingly common for arbitrations in numerous jurisdictions such as Australia, England and Wales, and the US. A major benefit of TPF is that it provides parties, irrespective of their financial position, with an additional financing option to pursue their claims and allows them to share the risk of non-recovery with Funders. This takes any potential financial outlay and exposure off the balance books and enables parties to focus their resources on more key areas such as running and growing the business. In the short term, this allows the parties to improve their cash flow.
Amendments to the Arbitration Ordinance
The Amendment Ordinance clarifies that TPF for arbitrations in Hong Kong will be permitted. This is necessary as it was uncertain whether the common law doctrines of maintenance and champerty continued to apply to render TPF a tort and criminal offence in Hong Kong. Such reform is the culmination of a comprehensive review on TPF and recommendations that were put forward by the Hong Kong Law Reform Commission.
The key features of the Amendment Ordinance are as follows:
- The doctrines of champerty and maintenance will no longer apply to Hong Kong seated arbitrations and arbitration-related proceedings falling under the Arbitration Ordinance, such as emergency arbitrator proceedings or arbitration-related court proceedings. They will also not apply to TPF for services provided in Hong Kong in relation to offshore arbitrations.
- There will be ‘light-touch’ regulation. The Secretary for Justice will monitor compliance by Funders with a Code of Practice (“Code“) that will be drawn up in due course by an authorised body appointed by the Secretary for Justice. The amendments propose various standards and practices which may be included in the Code, such as provisions relating to confidentiality, conflicts of interest, privilege, degree of control by Funders over proceedings, complaints procedures, and capital adequacy requirements for Funders.
- TPF can be in the form of money or any other financial assistance with any costs of the arbitration. The funding agreement between a funded party and a Funder must be in writing.
- Unlike in Singapore, where TPF legislation has also just been enacted, the amendments allow lawyers in Hong Kong (including solicitors, barristers, and registered foreign lawyers) to act as Funders, provided, however, they do not act for a party in relation to the arbitration. Lawyers in Hong Kong continue to be prohibited from funding a party for whom they act in arbitration by entering into conditional or contingency fee arrangements.
- Importantly, the funded party will be required to disclose in writing to the other party and the arbitral tribunal (or emergency arbitrator or court) that a funding agreement has been made, the name of the funder, and that a funding agreement has ended.
- The Arbitration Ordinance expressly provides for the obligation of confidentiality for parties in arbitrations, subject to exceptions in limited situations (e.g., disclosure to a professional adviser). This will be amended, so as to allow a party in an arbitration to communicate confidential information to potential or existing Funders. Funders will also be subject to such confidentiality obligations.
- Notably, the Amendment Ordinance does not expressly give arbitral tribunals the power to order security for costs against Funders. It was accepted that the existing provisions and powers of the Arbitration Ordinance are sufficient to allow a party to seek this and other relief from the tribunals.
The Amendment Ordinance is a key development for Hong Kong. The availability of TPF for arbitrations will become an increasingly important factor and tool for businesses to take into account, both in terms of choosing Hong Kong as a seat of arbitration, and how they fund and conduct arbitrations. A number of leading Funders have ramped up their presence and set up offices in Hong Kong in anticipation of this much anticipated reform. This will allow Hong Kong to maintain and cement its position as one of the leading arbitration hubs globally.
We will provide further updates relating to the implementation of the Amendment Ordinance and further information about the Code once it has been introduced. Please feel free to contact our Hong Kong Arbitration team if you would like discuss this development and explore funding options in your case.