Hong Kong gazettes success fee Bill

Hong Kong has officially published a Bill that would allow lawyers to agree outcome-based fees for arbitration work in the territory.

If, as expected, the Bill passes into law later this year, it will allow lawyers in and outside Hong Kong to agree fees based on their clients’ success in the arbitration. This is a sea-change for a jurisdiction that, until now, has prohibited such fees.

The Bill is the next stage in a process of reforming Hong Kong’s laws and professional conduct rules that began with a public consultation chaired by Herbert Smith Freehills’ Kathryn Sanger and Briana Young.

Under the proposed reforms, which enjoy widespread public backing, parties would benefit from a broad range of fee options, including:

• Conditional fee agreements (CFAs)
• Damages-based agreements (DBAs)
• Hybrid DBAs

The Bill would add a new Part 10B to Hong Kong’s Arbitration Ordinance (Cap. 609), removing the prohibition on success fees for arbitration and related court or mediation proceedings. It would also amend the Legal Practitioners Ordinance (Cap. 159), as well as professional conduct rules, to allow Hong Kong barristers, solicitors, and registered foreign lawyers to accept such fees without breaching ethical obligations.

The new law would allow Hong Kong based lawyers to charge success fees for arbitrations seated in or outside the territory. Lawyers and clients based outside Hong Kong can take advantage of the new rules when working on a Hong Kong-seated case.

The proposed changes would not apply to Hong Kong civil or criminal proceedings, or to an arbitration involving a personal injury claim.

What are outcome related fees?

CFA

Under a CFA, the client agrees to pay the lawyer an additional fee, known as a success fee, only in the event of a successful outcome for the client. The success fee can be an agreed flat fee, or calculated as a percentage uplift on the lawyer’s usual (“benchmark” or “standard”) fee; i.e. the fee that the lawyer would have charged if there were no CFA in place. The client may also pay fees during the life of the matter, typically at a discounted rate. Alternatively, lawyers and clients may agree a “no win, no fee” CFA.

DBA

Under a damages based agreement, the lawyer charges no fees during the life of the arbitration, but receives payment only if the client obtains a “financial benefit” in the matter. The payment, known as the “DBA payment”, is calculated by reference to the financial benefit. Typically, it will be a percentage of money awarded to the client or paid to settle the claim. It can include any other form of financial benefit, such as a physical asset, debt or reduction in a sum claimed against the client.

Hybrid DBA

In a Hybrid DBA, the lawyer charges some (typically discounted) fees during the life of the matter, plus a DBA payment if the client obtains a financial benefit in the arbitration.

Regulation

The Bill paves the way for more detailed regulation of the outcome related fee regime, in the form of subsidiary legislation. It also empowers the Secretary for Justice to appoint an advisory body and an authorised body to oversee the regime, and allows the advisory body to issue a code of practice. This structure reflects the regime that regulates third party funding of arbitrations in Hong Kong (Part 10A Arbitration Ordinance). As with third party funding, a client will have to disclose in the arbitration that it has entered an outcome related fee agreement with its lawyers. The new provisions also contain exceptions to the general confidentiality regime under the Arbitration Ordinance, permitting such disclosure.

Finally – barring exceptional circumstances – an arbitrator cannot order a losing party to pay the costs of its successful opponent that exceed the amount it would have incurred had the successful party not entered an outcome related fee agreement with its lawyers. This adheres to the “indemnity principle” that applies in many common law jurisdictions, under which a court cannot order a losing party to pay more costs than the successful party actually paid to its lawyers. Respondents to the consultation also felt, overwhelmingly, that it was unfair to penalise an unsuccessful party for a fee arrangement over which it has no control at the outset.

Conclusion

The Bill proposes significant, welcome, changes to Hong Kong’s legal fee regime for arbitration. The recommended measures allow Hong Kong to maintain its competitive position as one of the world’s top seats, by responding to clients’ desire for alternatives to the traditional hourly fee, and allowing lawyers to share litigation risk with the parties who instruct them.

To learn more about the alternative fee arrangements we can offer, email Kathryn Sanger, Briana Young, John O’Donoghue or your usual Herbert Smith Freehills contact.