Litigation financing has found favour in developed markets, but Asian jurisdictions remain guarded. With Hong Kong and Singapore leading the way, will others follow? Putro Harnowo reports

Earlier this year, the Cayman Islands gazetted its long awaited Private Funding of Legal Services Act, 2020, which allows Cayman lawyers to offer contingency fees, and endorses the use of funding. The law came into force in May, bringing Cayman in line with other jurisdictions where funding has been permitted for a number of years.

It’s a late move, as its rival, the British Virgin Islands (BVI), has allowed third-party funding for disputes since 1997. In other common law jurisdictions, Australia has also permitted third-party funding for litigation since the late 1990s, and the US has done the same since the mid-2000s.

In England and Wales, the history goes back further, to the 1967 Criminal Law Act that decriminalised maintenance and champerty, two archaic laws that had long served as legal bars to third-party funding. Litigation funding in England and Wales really took off in the late 1990s.

Litigation funding has grown since then. A 2020 study by Reynolds Porter Chamberlain estimated investments in cases by UK litigation funders reached £1.9 billion (US$2.7 billion) in 2018-2019, up 46% from £1.3 billion in 2017-2018.

In Asia, two key financial hubs are making moves to welcome the funding industry. Singapore has allowed third-party funding for international arbitration and associated proceedings, including enforcement and mediation, since 2017. Hong Kong allowed the same in 2019, and in the following year, the Hong Kong Court of First Instance, through the “insolvency exception”, clarified that liquidators do not require court approval for litigation funding agreements. Apart from some exceptions, any third-party funding in court proceedings may still attract the potential tortious, or even criminal, liability of champerty or maintenance.

Susan Dunn, founder of London-based litigation and arbitration funder Harbour Litigation Funding, sees more and more large corporates, banks, sovereign wealth funds and even governments using funding as the pressure on legal budgets increases and they seek alternatives to pay their legal bills.

“Litigation funding is very straightforward,” she says. “The funder pays all the costs of a dispute, whether that be litigation or arbitration, including lawyers’ fees, arbitration fees, expert fees, and also covers the other side’s costs if the case is lost. That’s incredibly attractive to businesses.”


There is no guarantee on the outcome of any dispute, Dunn explains, and that’s why businesses like funding, because they only have to pay the funder if the case is successful and the money is recovered. The funder, whose primary business is funding lawsuits on behalf of claimants, receives an agreed share of the proceeds of the claim. If no money is recovered, the funder is the one who bears the costs. This simple concept, however, comes with complications. As the funder’s reward is tied to the success of the case, funders seek only cases with good prospects.

Still, litigation funding offers many investors an alternative strategy to diversify their portfolios outside of traditional asset classes. These investors, whether private equity firms, family offices or pension funds, will only look for a funder with a solid track record and significant experience.

As the pandemic has left businesses cash-strapped and companies seeking new ways to enhance cash flow, while also bringing new claims, litigation funding is increasingly sought after. In Hong Kong, Tanner De Witt’s insolvency and restructuring partner, Robin Darton, says the interest from funders has grown significantly in recent years, particularly in insolvency matters, which tend to increase after a crisis such as that caused by the pandemic, and which often give rise to large-scale frauds or breach of duty claims.

“We have already this year received a number of enquiries from funders looking for cases to fund,” says Darton. “This is as a result of there being more players entering the funding market, the expectation of increased contentious work arising from the pandemic, changes to Hong Kong legislation permitting funding in respect of arbitrations, and increased knowledge and comfort among insolvency practitioners and funders.”


Confidence and concerns

Looking at developments in the past few years, the City University of Hong Kong’s professor of law, Julien Chaisse, who has expertise in international dispute resolution, believes such progress will continue to accelerate as Asian jurisdictions see the increasing importance of litigation funding.

“I believe this is a fundamental change from strict into more flexible regulations on case financing,” he says. “Driven by Singapore and Hong Kong, Asia is emerging as a place where litigation funders want to be.”


As third-party funding becomes a more important and effective tool for litigants and lawyers in funding their cases, Professor Chaisse says local regulators in Asia need to consider expanding the scope of litigation financing.

“It will take several more years, especially in the bigger markets like China,” he says. “It is a matter of market maturity that has not yet been reached in Asia, but the trend is here.”

Antony Sassi, a commercial disputes lawyer and the managing partner, Asia, at Reynolds Porter Chamberlain in Hong Kong, also notes that litigation funding is gaining momentum in the region. However, success rates depend on the funder understanding the jurisdiction in which it operates – each jurisdiction having its own idiosyncrasies on conflict resolution.

“In Asia, the unpredictable nature of the jurisdictions means that there is also a degree of uncertainty,” says Sassi. “Judicial intricacies will have an impact on the ability to predict the outcome. Overseas funders might not understand the local dynamic, assuming Asian jurisdictions operate in the same way as in Western countries, when this is not the case.”

The duration of litigation can also differ from one jurisdiction to another. Sassi suggests plaintiffs should consult with litigation funders early in their case to ensure a greater likelihood of securing funding. Any applicant for funding needs to provide good quality information about the value, merits, costs and enforceability of the claim for which they are seeking funding.

There are many ways to obtain funding. Corporate, institutional and individual claimants can reach out directly to the funder. Law firms, lawyers and insolvency practitioners can also work closely with funders to obtain capital facilities for their cases and clients.

“We have seen a few cases where they [the funders] can be quite cautious and will want to get almost every angle covered – and understandably so – but there also comes the point where the process is far down the track and parties still have not agreed on terms,” he says.

Robert Rhoda, a partner in Dentons’ litigation and dispute resolution group in Hong Kong, sees litigation funding as an attractive asset class for investors due to potentially high returns and its counter-cyclical nature, meaning that there may be more opportunities when the economy, and possibly other investments, are suffering. But as with any financial investment, there are many challenges for the inexperienced.

“There are always risks associated with litigating, even for the cases with seemingly unimpeachable merit,” says Rhoda. “Witnesses can perform badly under the pressure of cross-examination, and assets may be difficult to enforce against, or may not exist.”


However, Rhoda adds that major funders have impressive investment committees who will almost certainly have considered these issues when making recommendations on whether to invest.

Despite recent developments and expressed interest from funders, Darton, of Tanner De Witt, sees interest from arbitration participants remaining lukewarm. The main issue in Hong Kong is that maintenance and champerty remain grounds for invalidating litigation financing contracts, and champerty remains a crime in Hong Kong.

“There is now a statutory exception for arbitration, and there is an established common law exception for insolvency matters,” he says. “However, a recent attempt to extend permissible financing to family matters failed.”

Darton anticipates that companies are likely to be less engaged in third-party funding, given that normal commercial disputes will not fall within statutory exceptions unless subject to arbitration. For insolvency practitioners, one challenge is whether the cases are of sufficient size – most funders look for a minimum claim value of US$10 million. Many claims in liquidation do not reach that size, even if their legal merits are strong, because the costs involved are not proportionate to the claim value.

“Ironically, the cost of litigation in Hong Kong makes this a difficult balancing exercise, as legal costs here remain high,” says Darton. “A successful claim is worthless unless any judgment can be enforced. In insolvency matters, it will often be the case that there is less certainty on enforceability.”

Funders want a detailed budget of costs, but lawyers find it challenging, and this is more difficult in an insolvency situation where there is often less visibility about the merits and enforceability of the claim. The cost of funding can also be a concern. Because a funder could lose its entire investment on a loss, the charges it has to make can seem high. A solvent corporate would perhaps look to a funder to help with cash flow, but if the cost of funding follows the model that has developed in insolvency matters, this could put them off. Solvent corporates also do not always understand the extent of the risk involved, and therefore expect lower rates than funders are prepared to offer.

“In insolvency matters, the traditional model of a funder charging X% of any recovery made is less common now, with funders instead seeking X-times the amount they have spent on a case,” Darton explains. “If funders seek to extend this practice, the cost may be too high for corporates to offset the cash flow advantages offered by a funder being in place.”

Check out your funder

Having been funding dispute cases for nearly 20 years, Dunn, of Harbour Litigation Funding, suggests applicants for funding should consider: (1) the extent the funder is seeking to control the litigation; and (2) whether the funder can prove it has funds available and that it is not committing those funds to more than one case at a time.

“It should be the case that the client and the lawyer run the case exactly as they would if the clients were paying the bills,” she says. “The funders will be interested in how the case is going, but should neither control it nor dictate settlement.”

As to whether the funder really has the funds, Dunn says that some companies claim to be funders but in fact look for money on a case-by-case basis, which can be a cause for frustration for the party seeking funding, as delay inevitably flows from such unpredictability.

“The funder might also be using the same money for multiple cases, hoping that one case will come in to pay for another,” says Dunn. “That’s just going to lead to a world of problems because, inevitably, the case that they hoped would come in as a success is delayed or loses, and then they’ve run out of funds to pay for the other cases.”

She emphasises that the entire budget should always to be ring-fenced from day one. Applicants should also be sure to ask the funder about their process and timing for approving funding.

Sherina Petit, Norton Rose Fulbright’s head of international arbitration practice for Asia, Europe and the Middle East in London, advises that law firms and companies seeking litigation financing should conduct due diligence about potential conflicts of interest between the funder and litigant.

“If not handled correctly, this could result in the litigant’s legitimate interests being subordinated to those of the funder, or even being ignored altogether,” says Petit. “This misalignment of interests has sometimes led to an unwanted and unmerited settlement that may only favour the funder.”

Before receiving any funding, claimants should investigate aspects of the potential funders’ financial health and management, including their sources of capital, the level of capital adequacy, and if and how funds are ring-fenced for particular claims. Generally, Petit says bills should be paid on a rolling basis, so claimants must be confident that the money will be available to them when needed.

The terms of funding should also be carefully negotiated to ensure funding can and will deliver the relief a company needs. For example, a funded party must understand how and when payment of the funder’s fee and investment will be made. The funder and funded party must agree on an appropriate level of involvement for the funder – legally and practically – throughout the matter, including any settlement discussions.

“Parties seeking financing should also be aware of the often low chances of success in receiving this funding in the first place,” she says. “More applications for third-party funding are rejected than accepted. In the present period of economic uncertainty and disruption, this seems unlikely to change.”

On top of the above-mentioned consideration, third-party funding might come with a hidden cost. Petit explains that the funded party should make very clear who is going to be liable for adverse costs if the case is not successful. These rules vary by jurisdiction and arbitration forum. The funded party wants to be sure the full amount of its own side and adverse costs are included in the budget, if that is what they are looking for.

Information sharing is also important, as the funder will want to be confident the claim is being well run. Common interest privilege covers the exchange of information with funders in most jurisdictions, but it is important to check the rules on privilege and any other confidentiality provisions that might be relevant in an arbitration agreement.

“It is therefore important for potential funders to carry out as much due diligence into the case as possible themselves, in order to minimise impacts that withheld information may bring to the funder’s investment,” says Petit.

Potential funders should also anticipate future trends before deciding on whether to make investments. Although the pandemic could present opportunities via a rise in litigation case numbers, a subsequent issue from court closures, temporary shutdowns and growing backlogs of cases has meant that funders’ capital will be tied up for long periods without receiving any return.

Petit explains that litigants are less prepared to take litigation risk lately with the added costs and financial uncertainty across the globe, and turn instead to the settlement. The current decrease in economic performance has many businesses reconsidering their negotiating positions.

“Interestingly, the court closures have caused a number of litigants to turn to arbitration,” she says.

“The pandemic has, surprisingly perhaps, had minimal impacts on arbitration timetables, due to the significant developments and expansive uptake of video-conferencing technology, which has disproportionally benefited arbitration as a dispute resolution option. This may lead funders to focus on more funding of arbitrations rather than litigation.”


The silver lining

After the swathe of legislative reforms across Singapore and Hong Kong, there remain some gaps in the availability of funding for all litigation. Amid the race for providing the most favourable place for arbitration, many experts have faith solutions might come from various channels. Rhoda, of Dentons, sees the changes in the landscape will come in funding surrounding a “second generation” of reform in Hong Kong. A public consultation is currently ongoing on law and professional regulatory changes that would allow outcome-related fee structures (ORFS), better known as conditional or contingency fees, which are charged for a lawyer’s services and payable only if a lawsuit is successful, or results in a favourable settlement.

Hong Kong currently prohibits lawyers from using ORFS, including “no-win, no-fee” arrangements, for arbitrations and other contentious matters. This looks set to change for arbitrations, following the publication in December last year of a consultation paper by the Law Reform Commission of Hong Kong.

“Clients in international arbitration are demanding pricing flexibility, and a thriving international arbitration venue needs to be able to provide these risk-based solutions,” says Rhoda. “Put simply, if outcome-related fee structures aren’t allowed, parties will go to arbitration venues where they are. Given how seriously Hong Kong and Singapore pursue their objectives of being leading global arbitration centres, we can expect to see reform in this area.”

Dunn agrees that many jurisdictions are thinking about how to compete, and what they can offer. Jurisdictions that have a clearer approach to the ability to use funding are more likely to be the winners in securing the conduct of disputes. “You don’t always have the choice, but if you have choices, people will go where the maximum funding solutions are available,” she says.

Dunn points to the Cayman Islands, where many Asian businesses have set up their companies. The significant shift in the legal framework for third-party funding there means Cayman lawyers have more to offer their clients, and are therefore likely to secure more instructions.

“They were slightly frustrated seeing the foreign lawyers coming and ‘eating their lunch’, because the American lawyers were able to offer contingency fees to their clients, even if they weren’t experts in Cayman law,” says Dunn. “Clients engaged US lawyers simply because they didn’t have to pay them, even though they weren’t actually experts in that jurisdiction, which is not going to lead to a good outcome for the client.”

It might also lead to clients engaging the offshore lawyers to do their work in Hong Kong, simply because they can act on a contingency fee or offer funding. This could see work moving away from Hong Kong lawyers to offshore lawyers.

Sassi, of RPC, expects more jurisdictions in Asia to introduce or relax the restrictions on litigation funding, possibly combined with collective redress reform. “With collective redress, where a group of claimants come together to pursue a claim, you have got to find a way to enable them to be able to pay for their lawyers, as the individual claimants cannot afford to do so,” he says.

Petit, of Norton Rose Fulbright, expects countries like Malaysia and India in particular to follow suit. Singapore and Hong Kong provide other nations with a blueprint for the statutory reform required to enable litigation funding, and have demonstrated the significant benefits that it can bring in widening access to justice and promoting risk-cost-efficient dispute resolution.

“It remains the case that only a small number of litigation funders currently operate in Singapore and Hong Kong as compared to their Western counterparts – this makes the business case for more funders in Asia even more compelling, especially if funding options are further increased,” she says.


However, Petit also acknowledges that it will take time for third-party funding to shape the landscape of contentious matters due to differing structures, cultures and norms already in place. Recoverability also seems to restrict litigation funding opportunities across jurisdictions such as China, India and Indonesia. Many funders often do not feel comfortable with enforcement prospects against parties with assets in these jurisdictions, the time to resolution of claims can be very long, and local laws can be challenging in achieving recovery.

“Litigation financing in Asia also presents different opportunities depending on the sector of the dispute,” says Petit. “The insolvency sector, for example, has seen an increase in applications to courts for approval on third-party funding.”

With all these considerations in mind, Rhoda says that lawyer can go the extra mile by informing their clients of third-party funding options, as many businesses are still not aware such funding exists.

“It’s always worth presenting these options to our clients when disputes arise,” he says. “After all, funding is a valuable tool, not only for the impecunious claimant but for any litigant who wants to take litigation costs off their balance sheet.”