Law Reform Commission Sub-committee Recommends Third Party Funding for Hong Kong Arbitrations

Editor’s note: This article was first published in October 2015. Since then, the consultation period during which comments could be submitted to the Sub‑committee was extended to 1 February 2016. The Sub-committee has not yet published its final recommendations. It is expected that it will do so soon and that draft legislation will be submitted to Hong Kong’s Legislative Council any time after the Legislative Council election on 4 September 2016. 

Recent developments

The Law Reform Commission’s Third Party Funding for Arbitration Sub‑committee (“Sub-committee“) has recommended a reform of Hong Kong arbitration law to expressly permit third party funding (“TPF“) for arbitrations taking place in Hong Kong.

This is an important reform, as it will enhance Hong Kong’s position as an international arbitration centre and provide potential alternative financing options to parties choosing to arbitrate in Hong Kong.

Implications for parties arbitrating in Hong Kong

In its Consultation Paper of 19 October 2015, the Sub-committee confirms that TPF for arbitrations in Hong Kong can benefit parties in a number of ways. In particular, TPF may:

• Enable parties who may otherwise not have sufficient financial means to pursue their legal rights and valid claims through arbitration;
• Provide parties with an alternative form of financing for the efficient allocation and management of their financial resources;
• Allow funded parties to mitigate the risks of conducting arbitration proceedings by passing this risk of non-recovery to the funder;
• Help to give parties an objective view of the merits of their claims as a result of the funder’s due diligence.

The Sub-committee acknowledges that TPF does not come without challenges. These include:

• Protecting the funded party’s right to confidentiality and preserving legal professional privilege;
• Ensuring that the funded party retains control over the arbitration proceedings;
• Providing for safeguards against potential conflicts of interest between the funded party, its legal team and the funder; and
• Ensuring that the funder has sufficient capital adequacy.

However, the Sub-committee is of the view that the benefits of TPF outweigh the risks, and that the risks can be managed by appropriate safeguards.

The Consultation Paper

In Hong Kong, the doctrines of maintenance and champerty have been held by the courts to prohibit TPF of litigation both as a tort and criminal offence, save in certain exceptional areas. However, in its leading decision (Unruh v Seeberger, (2007) 10 HKCFAR 31), the Court of Final Appeal expressly left open the question of whether these doctrines also apply to TPF for arbitrations taking place in Hong Kong.

Due to this uncertainty, the Sub-committee was asked “[t]o review the current position relating to Third Party Funding for arbitration for the purposes of considering whether reform is needed, and if so, to make such recommendations for reform as appropriate.”

After a review of  the legal position on TPF in Hong Kong and the law and regulation for TPF in other jurisdictions (including England, USA, Australia, China and Singapore), the Sub-committee has made the following recommendations:

1. To amend the Arbitration Ordinance to expressly permit TPF for arbitration taking place in Hong Kong.
2. To develop clear ethical and financial standards for third party funders providing TPF to parties to arbitrations taking place in Hong Kong. Notably, the Sub-committee takes the view that Hong Kong should develop its own model of regulation to suit its culture and needs.
3. To invite submissions as to whether the development and supervision of applicable ethical and financial standards should be conducted by a statutory or governmental body, or a self-regulatory body, how the standards should be enforced and how they should address matters that pose potential risks, such as conflicts of interest, breach of confidentiality and privilege, and disclosure of TPF to the arbitral tribunal.
4. To invite submissions on the possibility of adverse costs orders against third party funders and the provision of security for costs by third party funders. The Sub-committee noted it sees little reason to permit third party funders to enjoy the proceeds of a successful claim, but not to be liable for costs if they have funded an unmeritorious claim.

The Sub-committee has said that it welcomes views, comments and suggestions on any of the issues during the consultation period which will end on 18 January 2016. We are happy to discuss this development with clients, and will continue to monitor its progress and provide updates in this area of much anticipated reform.

Conclusion

Hong Kong maintains a pro-arbitration regime and its courts have adopted a pro-arbitration approach. According to the 2015 International Arbitration Survey conducted by Queen Mary University of London, arbitration remains the preferred method of resolving cross-border disputes, with Hong Kong being the third most popular arbitral seat worldwide. It remains to be seen how TPF will be regulated in Hong Kong and how quickly the reform can be implemented. Once permitted under Hong Kong law, TPF will, among other things, provide parties with additional financing options to pursue their claims through arbitration and allow parties to mitigate the risk of non-recovery with third party funders.