Hong Kong passes third party funding law

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On 23 June 2017, the landmark Arbitration and Mediation Legislation (third party funding, amendment) Ordinance 2017 was published in the Government Gazette.

The amendment ordinance sets out the framework for third party funding (TPF) for arbitration and mediation in Hong Kong through the introduction of a new part 10A to the Arbitration Ordinance (Cap 609). This opens the way for third party funders to fund arbitration proceedings in Hong Kong in return for a financial benefit, in the event that the arbitration is successful within the meaning of the relevant funding agreement.

Funders will also be allowed to fund services provided in Hong Kong in relation to arbitrations seated outside Hong Kong. While the provisions of part 10A on the general framework are already in effect, the express permission of TPF for arbitrations and provisions on certain measures and safeguards will only come into effect on a date to be announced.

Parties arbitrating in Hong Kong. Corporate and individual parties face continuing cost pressures. 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 fundamental areas such as running and growing the business. In the short term, this allows the parties to improve their cash flow.

Amendments to 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:

  1. 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.
  2. There will be “light touch” regulation. The Secretary for Justice will monitor compliance by funders with a Code of Practice 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 that 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.
  3. TPF can be in the form of money or any other financial assistance in relation to any costs of the arbitration. The funding agreement between a funded party and a funder must be in writing.
  4. 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 an arbitration, by entering into conditional or contingency fee arrangements.
  5. 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.
  6. 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 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.
  7. 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 under the Arbitration Ordinance are sufficient to allow a party to seek this and other relief from the tribunals.

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 Danian Zhang (Shanghai) at: danian.zhang@bakermckenzie.com