Pays to win – Hong Kong arbitrations set for success fee shake-up

Key Asia hub moves to match other major arbitration seats in allowing contingency fees

In a widely-welcomed move, Hong Kong has published a bill that would allow lawyers to agree results-based fees for arbitration work in the territory. It is expected the bill will pass into law later this year, allowing 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 which has traditionally prohibited such risk-sharing fee arrangements.

The bill is the next stage in 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, parties would benefit from a range of alternative fee options, including:

• conditional fee agreements (CFAs);
• damages-based agreements (DBAs); and
• hybrid DBAs

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

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

However, 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?

CFAs

Under a CFA, the client agrees to pay the lawyer an additional fee, known as a success fee, 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 fee (what 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.

DBAs

Under a damages-based agreement, the lawyer charges no fees during the life of the arbitration but receives payment 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 other forms of financial benefit, such as a physical asset, debt or reduction in a sum claimed against the client.

Hybrid DBAs

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.

Regulatory implications

The bill opens the door for detailed regulation in the outcome-related fee regime. It also empowers the Secretary for Justice to authorise a watchdog to oversee the regime and allows an appointed advisory body to issue a code of practice. This structure reflects the rules regulating third-party funding of arbitrations in Hong Kong, as a client will have to disclose during the arbitration 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.

However, barring exceptional circumstances, an arbitrator cannot order a losing party to pay the costs of its successful counterpart if those costs 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 overwhelmingly felt it was unfair to penalise an unsuccessful party for a fee arrangement over which it has no control.

Conclusion

The suggested measures would strengthen Hong Kong's position as one of the world’s top seats by responding to clients’ desire for alternatives to the hourly fee and allowing lawyers to share risk with the parties who instruct them.

For more information about available alternative fee arrangements, contact Kathryn Sanger, Briana Young, John O’Donoghue or your usual Herbert Smith Freehills contact.

This article first appeared on our blog, Arbitration Notes