The Hong Kong Government has just announced that the provisions permitting third party funding in arbitrations will operate from February 1, 2019.

It has also published a Code of Practice for Third Party Funding of Arbitration, issued under the Arbitration Ordinance (Cap. 609).

What this means

Hong Kong is an “arbitration-friendly” jurisdiction and the courts strongly support the independence and enforceability of arbitral awards. As a result, Hong Kong is one of the key and most active centres for arbitration in the Asia Pacific region. Over recent years, Hong Kong’s statutory and rules regimes have been significantly reformed, ensuring a flexible, objective and efficient framework for the resolution of commercial disputes by arbitration.

The old common law offences of maintenance and champerty apply in Hong Kong, and their impact on funding in arbitrations has led to a great deal of uncertainty. These provisions do away with those offences in arbitrations.

Funding means providing financial assistance in relation to the cost of the arbitration. The Hong Kong provisions are not specific to funding claims, but that is overwhelmingly the most common situation. Funding can assist a party responding to or defending a claim where “success” is appropriately defined, but defence funding is much less common.

Funding is not financing in the traditional sense (i.e. with the lender having recourse to the borrower and/or assets). Rather – it is an arrangement by which the funder receives a financial benefit only if the arbitration is successful. So funding is contingent, and the funder takes a risk that the claim will not succeed.

This means that a funded party will have reduced financial risk when pursuing a claim. The bottom line: we’re likely to see more claims pursued where Hong Kong arbitration is the agreed dispute resolution mechanism.

Code of Practice

The Code applies to virtually all funding by a third party that does not have a recognized interest in the arbitration other than the funding agreement; but proscribes lawyers representing a party from funding the claim. Contingent fee arrangements remain proscribed in Hong Kong.

The Code’s objectives are to provide transparency and clarity for funded parties – it sets out the practices and standards expected of funders, e.g. in terms of disclosure and required provisions in the funding agreement, Hong Kong presence, capital requirements, complaint procedures and the like. A funder is not a party to the claim, and so the Code also deals with independent advice, managing conflicts of interest, non-interference by the funder with the party-representative (i.e. the lawyers), liability for adverse costs orders and termination of the funding.

How will it impact our clients?

Hong Kong is still behind many jurisdictions in terms of permitting dispute funding generally. So this isn’t a revolution; more an evolution that brings Hong Kong arbitration further into line with those jurisdictions.

Funders have seen Hong Kong as an important, if constrained, market for some years now. With these changes, we are likely to see ongoing and increased activity from funders; more funded claims; and thus more arbitrations in Hong Kong.

Actions to take

Important: from February, funding will be permitted both in new and in ongoing arbitrations.

Our clients can prepare for these changes by assessing their commercial contracts to identify those under which Hong Kong arbitration is agreed, and by continuing to implement rigorous risk-mitigation and dispute-management strategies.

If a funding agreement is made, the funded party must disclose that fact to the other parties in an arbitration, as they must disclose the fact of any termination of the agreement. Funders vigorously assess prospects and likely outcomes, viewed against timeframes. Understanding these factors is essential to both a funded party and to a counterparty facing a funded claim.

For those contemplating a claim, consider whether a funded model is commercially viable or beneficial. For those resisting funded claims, demonstrating clear merits and a vigorous dispute resolution strategy will be essential to a funder’s ongoing assessment of a prospective action, or an active claim.

 

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