Effective from 16 December 2022, lawyers in Hong Kong are permitted to fund clients for whom they act in an arbitration by entering into outcome-related fee structures (ORFS), such as conditional and contingency fee arrangements.
The new regime answers an increasing client demand for more flexible fee arrangements and is an important step in maintaining and promoting Hong Kong’s competitiveness with other major arbitral seats where similar fee arrangements are allowed.
The new regime permits three types of ORFS for arbitration: (1) conditional fee agreements (CFAs), (2) damages-based agreements (DBAs), and (3) hybrid damages-based agreements (hybrid DBAs).
In essence, lawyers are paid:
- A success fee if they achieve a successful outcome (but otherwise no/low fee) under CFAs;
- A percentage of their clients’ financial benefit obtained from the arbitration under DBAs; or
- A combination of both under hybrid DBAs. Under CFAs, clients will be free to agree with their lawyers on the circumstances that constitute a “successful outcome” of the matter.
Such arrangements were previously prohibited under the common law offences of champerty and maintenance. Following a series of consultation and enactments, 16 December 2022 marked the first day of the full implementation of the ORFS regime for arbitration (including related court or mediation proceedings and proceedings before an emergency arbitrator) seated in Hong Kong, and arbitration seated elsewhere but in which Hong Kong practitioners are engaged.
ORFS provides lawyers and clients with greater flexibility when agreeing on retainers, and increases funding options for clients wishing to arbitrate disputes. It promotes financial management as clients may have a better idea of the costs to be incurred for budgeting purposes. It also helps clients to mitigate their risk by sharing the risk with their lawyers.
Notably, the new regime in Hong Kong offers a broader range of ORFS than its Singapore counterpart, which offers CFAs only. This new development will no doubt enhance Hong Kong’s status as a leading arbitral hub in the world, and is expected to bolster the number of funded claims and arbitrations in Hong Kong.
The new ORFS regime for arbitration was incorporated into Hong Kong law by amendments to the Arbitration Ordinance (cap. 609) and the Legal Practitioners Ordinance (cap. 159), as well as the making of the Arbitration (Outcome Related Fee Structures for Arbitration) Rules (cap. 609D).
Except for personal injury claims, lawyers may now enter into the following types of ORFS for arbitration:
- CFA: Lawyers are paid a success fee if their client achieves a “successful outcome” in the arbitration. If the outcome is unsuccessful, then the lawyers receive either no legal fees or reduced legal fees. The payable success fee must be expressed as a percentage of the “benchmark fee” (i.e., the fee that the lawyer would have charged the client if there were no ORFS arrangement).
What constitutes a successful outcome is a matter to be agreed, and must be stated in CFAs. A successful outcome typically includes any financial benefit the client may obtain. A financial benefit is broadly defined to include money or money’s worth, i.e., any consideration reducible to a monetary value. It includes an amount owed under the award or settlement agreement, as well as any avoidance or reduction of a potential liability (where a claim is successfully defended).
The “uplift” component of a success fee cannot exceed 100% of the benchmark fee. In other words, the most lawyers can be paid under a CFA is double their usual fees.
- DBA: No fees are charged in the course of the arbitration, but the lawyers are paid a DBA payment, i.e., a portion of the financial benefit received by the client in the arbitration. It must be calculated by reference to the financial benefit and is payable by the client in addition to any recoverable lawyer’s costs. The DBA payment is capped at 50% of the financial benefit.
The DBA must state details relating to: the financial benefit; the basis for calculating the DBA payment; when the DBA payment becomes payable; and any arrangements with respect to barrister’s fees.
- Hybrid DBA: The client pays a fee in any event (capped at 50% of the irrecoverable costs – the “fee cap”) for the legal services rendered. If the client obtains a financial benefit, then the client also pays a DBA payment capped at 50% of the financial benefit obtained by the client.
If the payable DBA payment is less than the fee cap, the lawyers may elect to be paid the fee cap in place of the DBA payment.
Apart from satisfying the requirements for a DBA, the hybrid DBA must also state the fees applicable in the course of the arbitration and the benchmark fee.
The abovementioned rules also specify the general requirements with respect to all types of ORFS agreements. For instance, such agreements must:
- Be in writing and signed by the lawyer and the client;
- State the matter to which the agreement relates;
- State in what circumstances the lawyer’s fees and expenses, and whether disbursements, are payable;
- State that the lawyer has informed the client of the right to seek independent legal advice;
- State that the client may terminate the agreement within a cooling-off period of not less than seven days by written notice without incurring liability; and
- State the grounds on which the agreement may be terminated and how lawyers’ fees are to be paid in such circumstances.
The legislation also contains various safeguards including a limitation on the recovery of costs by the successful party. The default position is that arbitral tribunals may not order the uplift component of a success fee to be paid to the winning party. However, they may still order those costs to be paid if there are exceptional circumstances justifying the ordering of those costs.
The ORFS regime is a welcome development and can facilitate access to justice, as clients who have legitimate claims but lack the financial resources may now pursue those claims.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at email@example.com