Hong Kong arbitration success fee regime fully in force

Lawyers can now offer success-based fee arrangements for work in Hong Kong on arbitrations and related proceedings. On 16 December 2022, Hong Kong enacted the outstanding sections of Part 10B Arbitration Ordinance, together with sub-legislation to regulate the new agreements. As a result, Hong Kong now boasts one of the world's broadest legal success fee regimes for arbitration, giving parties the flexibility to cover legal costs while mitigating risk, aiding cash flow, and enhancing budget control.

What has changed?

From today, Hong Kong-based lawyers can charge success fees for arbitrations seated in or outside the territory, as well as related court and mediation proceedings. Lawyers and clients based outside Hong Kong can also take advantage of the new rules when working on a Hong Kong-seated case. Before now, such agreements were prohibited by Hong Kong law and professional conduct regulations.

Hong Kong's new regime permits a broad range of fee options, including:

·       Conditional fee agreements (CFAs)

·       Damages-based agreements (DBAs)

·       Hybrid DBAs

Click here to learn how these agreements- known collectively as "Outcome related fee structures for arbitration" (ORFSA) - work.

What does this mean for you?

The ORFSA regime offers alternatives to the basic hourly rate, giving you greater flexibility to find a fee agreement that suits the needs of your dispute, your business and your budget. It also allows your lawyers to share the risk inherent in running an arbitration. While not every arbitration is suitable for a success-based engagement, it is always worth discussing with your lawyers what options they can offer under the new fee regime.

Success fees remain prohibited for Hong Kong court proceedings (civil and criminal), and for personal injuries arbitrations.

How is the ORFSA regime regulated?

Part 10B of Hong Kong’s Arbitration Ordinance (Cap. 609) removes the prohibition on success fees for arbitration and related court or mediation proceedings, and expressly permits CFAs, DBAs and Hybrid DBAs, so long as they meet certain conditions. Those conditions are set out in the Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Rules). Among other things, they include requirements that an ORFSA agreement:

·       be in writing and signed;

·       set out the arbitration to which it relates;

·       state when the success fee and expenses will be payable, including a clear explanation of how the success fee is calculated;

·       stipulate grounds for termination before the end of the arbitration, and the alternative basis for paying the lawyer in the event of such termination; and

·       include a brief "cooling off" period in which the client can cancel the agreement after signing.

Lawyers must also inform clients that they can seek independent advice before entering an ORFSA agreement, and check that clients have understood how the success fee agreement will work.

Finally, the Rules impose caps on the level of success fee that can be agreed. For a CFA, the success fee "uplift" cannot exceed 100% of the "benchmark" fee the lawyer would have charged were there no CFA in place.  Under a DBA, the lawyer cannot take more than 50% of the financial benefit (e.g. damages) that the client obtains if it wins the arbitration. Within those caps, clients are free to negotiate the uplift or DBA payment with their lawyers.  The specific fee arrangements on offer will depend on the lawyers’ assessment of the dispute and both client's and lawyers’ attitude to risk and reward.

There is generally no downside for parties whose opponents have instructed their lawyers on an ORFSA basis. Barring exceptional circumstances, the arbitrator cannot order a losing party to pay any costs of its successful opponent that exceed the costs it would have paid if the successful party had no ORFSA agreement.

The ORFSA regime is overseen by an advisory body appointed by Hong Kong's Secretary for Justice. Herbert Smith Freehills partner Kathryn Sanger is a member of the Advisory Body, alongside Briana Young and barrister Benny Lo. Kathryn is also a member of Hong Kong's Advisory Body on Third Party Funding of Arbitration and Mediation, and is one of the territory's leading experts on alternative fee arrangements.

How can we help your business?

Herbert Smith Freehills is a market leader in disputes pricing. Our Pricing and Analytics Team works with our lawyers and clients to achieve optimal pricing and commercial arrangements that work for everyone. We offer a variety of innovative and bespoke solutions, including CFAs, DBAs, Hybrid DBAs and other alternative fee arrangements.

Our Litigation Funding and Risk Transfer Insurance practice for dispute resolution is a unique offering in the global market. We are well versed in the opportunities and risks of funding disputes. Our clients benefit from our knowledge and experience in managing third-party funded disputes and our deep and long-running relationships with all the major funders.

To learn more about the alternative fee arrangements we can offer or the different funding regimes, including in Hong Kong, email Kathryn Sanger, John O’Donoghue or your usual Herbert Smith Freehills contact.

For more information, please contact Kathryn Sanger, Partner, John O'Donoghue, Head of Legal Operations – UK, US & EMEA, or your usual Herbert Smith Freehills contact.