Hong Kong allows third party funding for arbitration and mediation

Hong Kong's Legislative Council has passed a law allowing third parties to fund arbitrations seated in the territory, as well as work done in Hong Kong for arbitrations seated elsewhere, and for mediations. This development has been long anticipated, and will be widely welcomed by Hong Kong's thriving arbitration community, which views it as essential to Hong Kong maintaining its status as one of the world's most popular arbitral seats.

The new law, in the form of amendments to the Arbitration Ordinance (Cap. 609), abolishes the doctrines of champerty and maintenance for arbitration, clearing the way for parties with no legitimate interest in the proceedings to fund them, in return for a share in any award or settlement. Third parties can include lawyers and law firms, although not if they act for any party to the proceedings. Similar amendments are made to the Mediation Ordinance (Cap. 620).

The amendments are expected to take effect later this year, to allow time for development of an appropriate funder code of conduct.

Background

In 2013, Hong Kong's Law Reform Commission launched a public consultation on whether to permit third party funding for arbitration in Hong Kong. The process culminated in October 2016, with a recommendation to allow third party funding, subject to developing an appropriate regulatory regime within the first three years of its being permitted  (see here for more detail). Singapore, Asia's other leading seat, changed its own laws to permit third party funding earlier this year.

The new law

Following approval of the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2017, a new Part 10A (ss.98E – 98W) is added to the Arbitration Ordinance, and a new s.7A to the Mediation Ordinance.

The amendments provide that the common law tort and offence of champerty and maintenance no longer apply to third party funding of arbitration and mediation. This is the case both for proceedings in Hong Kong, and for work done – typically by lawyers – in Hong Kong on arbitrations and mediations outside the territory.

The law relies on a complex series of definitions. In summary, it allows a "third party funder" to provide "arbitration funding" to a "funded party" under a "funding agreement", in return for a financial benefit only if the arbitration is "successful within the meaning of the funding agreement". Arbitration funding can be in the form of money or any other financial assistance in relation to any costs of the arbitration. The funding agreement must be in writing and made after the amended law takes effect.

Helpfully, the definition of "arbitration" includes related proceedings under the Arbitration Ordinance, including court proceedings, emergency arbitrations and mediations.

Lawyer-funders

Unlike Singapore, Hong Kong's definition of "third party funder" is not limited to professional funders, but extends to any "person who is a party to a funding agreement…and who does not have an interest recognized by law in the arbitration other than under the funding agreement" (s.98J).

This includes lawyers and law firms, as a result of an amendment to the Bill during the Committee Stage of its progress through LegCo. In principle, Hong Kong law firms can now establish their own funding arms, a practice that is increasingly frequent in other jurisdictions, including mainland China and the USA.

However, lawyers and firms who act for any party in relation to the arbitration may not fund those proceedings (s.98NA). This reflects Hong Kong's longstanding ban on lawyers accepting conditional or contingency fees (both of which fall within the law's definition of "third party funding").

Regulation

The new law does not include regulations to which third party funders must adhere. Instead, it proposes that a "code of practice" be issued, and empowers the Secretary for Justice to appoint an "advisory body" to draw up such a code, and to monitor funders' compliance. Section 98P sets out a number of suggested practices and standards that the advisory body might wish to include in the code of practice. These include capital adequacy requirements, as well as provisions on confidentiality, disclosure, privilege, conflicts of interest, degree of the funder's control of the arbitration, and grounds for termination of the funding agreement.

Failure to comply with the code of practice does not, of itself, render any person liable to judicial or other proceedings. However, the code is admissible in evidence in court or arbitral proceedings, and any compliance or failure to comply may be taken into account, if relevant to a question being decided by the court or arbitral tribunal (s.98R).

Disclosure requirements

The new law requires a funded party to disclose to each other party to the arbitration, and to the relevant court or tribunal, (i) the fact of a funding agreement, (ii) the name of the funder; (iii) the end of the funding agreement (other than because the arbitration has ended).

Hong Kong is one of the few jurisdictions with statutory confidentiality obligations for arbitrations (s.18 Arbitration Ordinance). Section 98S of the new law expressly carves out of those obligations disclosure of information for the purpose of "having or seeking" third party funding. It limits any further communication of that information, unless the communication is made "to protect or pursue a legal right or interest", to enforce or challenge the arbitral award, to comply with a legal or regulatory requirement, or to obtain professional advice in connection with the third party funding of arbitration.

Comment

The introduction of third party funding for arbitration and mediation is both welcome and essential if Hong Kong is to maintain its status as a leading seat. Many of the world's top funders are already active in the territory, and we anticipate significant activity in this space, now that long-standing legal obstacles to third party funding have been removed. This can only be a good thing for all the stakeholders in Hong Kong arbitration, most importantly the parties who choose to seat and conduct their arbitrations here.