Litigation and Arbitration Funding in Hong Kong: Will the UK Supreme Court decision in PACCAR Affect Hong Kong Litigation Funding?

In R. (on the Application of PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28 (judgment handed down on 26 July 2023), the UK Supreme Court held that litigation funding agreements with third parties who play no part in the conduct of litigation, but who are to be paid a share of any damages recovered by the claimant, are “damages-based agreements” (or "DBAs”) within the meaning of the relevant UK legislation which regulates such agreements. Such agreements must therefore comply with the relevant regulatory regime and, if they do not, they are unenforceable under English law.

The likely effect of the UK Supreme Court's decision is that most English law-governed third-party litigation funding agreements currently in place will be unenforceable, since participants in the litigation funding market have generally assumed that their agreements are not DBAs and therefore do not have to comply with the relevant regulatory regime. For an in depth coverage of the ruling see a full article by our London team. There is also an episode on this issue on our Commercial Litigation podcast.

What are the practical effects of the PACCAR decision for Hong Kong litigation and arbitration?

Third-party funding and contingency fee arrangements for litigation in Hong Kong

As things stand, Hong Kong lacks a legislative framework which is in any way similar to the English DBA regulations, so the PACCAR decision would seem to be of limited relevance in Hong Kong as far as litigation in the Hong Kong courts is concerned.

Third-party funding is not generally permitted for litigation in the Hong Kong courts with a few exceptions, which we will discuss below.

Champerty and maintenance are torts under Hong Kong law, and are also indictable offences at common law, punishable under section 101I of the Criminal Procedure Ordinance by imprisonment and a fine:

• Maintenance occurs when one "officiously intermeddles" in a legal action by maintaining or assisting a party with money (or otherwise) to prosecute or defend the action, when one has neither an interest in the action nor any other motive recognized by the law justifying such interference.
• Champerty is a particular form of maintenance. It occurs when the person maintaining another takes as his reward for his maintenance a portion of the proceeds of the litigation.

The typical model, where a third-party funder funds litigation in return for a share in the proceeds recovered (or some other financial benefit) if the proceedings are successful, is therefore both maintenance and champerty, and unlawful under Hong Kong.

On a related note, Hong Kong law prohibits legal practitioners (solicitors and barristers) from offering contingency fee arrangements in litigation. Section 64 of the Legal Practitioners Ordinance invalidates any agreement whereby a solicitor retained for any contentious process stipulates payment only in the event of success in that action. The Hong Kong Solicitors' Guide to Professional Conduct also expressly prohibits a solicitor from entering contingency fee arrangements for acting in contentious proceedings.

In Hong Kong, there are three limited exceptions to the general prohibition on funding for litigation in the Hong Kong courts, namely the:

• ‘common interest’ cases, involving third parties with a legitimate interest in the outcome of the litigation;
• where ‘access to justice considerations’ apply; and
• a miscellaneous category, including insolvency proceedings.

Litigation funding is most commonly used in Hong Kong in respect of the third category: insolvency proceedings. Hong Kong courts will permit a funding agreement where it includes an assignment of a cause of action by a liquidator. The liquidator’s right to assign causes of action is conferred by section 199(2)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), which empowers liquidators to ‘sell the real and personal property and things in action of the company by public auction or private auction’. This includes a cause of action. It is common for liquidators to obtain third-party funding for pursuing claims belonging to the insolvent estate. Herbert Smith Freehills have had experience defending similar kinds of funding claims, so we are familiar with the dynamics that drives litigation strategy and decisions in these claims.

Third-party funding and contingency fee arrangements for arbitration in Hong Kong

However, in recent years the legal and regulatory landscape has relaxed significantly for arbitration in Hong Kong.

Since February 2019, third-party funding for arbitration and related mediation and court proceedings have been permitted under Part 10A of the Arbitration Ordinance. Under the rules related to this process, the fact that a party is funded and the name of the third-party funder must be disclosed. There are also regulatory requirements to be met under Part 10A of the Arbitration Ordinance, and under the Code of Practice for Third-Party Funding of Arbitration issued by the Hong Kong Department of Justice.

To the extent the relevant funding agreement in this context is governed by English law, the parties and the third-party funder may well want to consider the impact of the PACCAR decision.

More recently in December 2022, sections in Part 10B were added to the Arbitration Ordinance, which provides for certain "outcome related fee structures for arbitration" ("ORFSA").

Pursuant to Part 10B, Hong Kong-based lawyers can now 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.

The ORFSA regime is overseen by an advisory body appointed by Hong Kong’s Secretary for Justice, which includes Herbert Smith Freehills partner Kathryn Sanger.

You can read more about the ORFSA regime in our earlier blog post here.

For more information, please contact Gareth Thomas, Partner, Rachael Shek, Partner, Jojo Fan, Partner, Peter Ng, Senior Associate, or your usual Herbert Smith Freehills contact.