Third Party Funding in Hong Kong A New Method of Funding Arbitration Proceedings

Introduction

Financing arbitration proceedings has become a focus for legislators and arbitral institutions all around the world and is causing many legal discussions. Especially in common law jurisdictions such as Hong Kong, financing litigation was traditionally prohibited for a long time and has only recently and gradually become legalised. However, many questions still remain unanswered.

In Hong Kong, a new statute came into force on the 1st of February 2019 which - following a long period of development - finally legalises and regulates litigation funding, also known as third party funding, in-depth. Hong Kong has thereby strengthened its role as an international centre for the settlement of disputes.

Background

Solving multi-jurisdictional contractual arrangements and disputes in arbitration proceedings is particularly common in trade disputes and - for many companies - has become nearly mundane. As the costs of international arbitration proceedings are generally very high and the payable advance at the beginning of a trial must usually be made at least half in half, many companies have the understandable wish to be able to resort to financial support by third parties. Third party funding allows a third party to take over (part of) the costs of the arbitration proceedings in return for a share in the profits in the case of a positive outcome. If the case is lost, the funder bears the costs. This method of litigation financing therefore offers the parties the advantage of minimising the risk of litigation costs while simultaneously maintaining liquidity.

In June 2017, the amending regulation “Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance” that deals with the possibility of litigation funding was passed in Hong Kong. Following the publication of the “Code of Practice for Third Party Funding of Arbitration” in December 2018, the new regulations finally came in to force on the 1st February 2019. These new comprehensive regulations concerning arbitration proceedings replace the 700-year-old common law champerty and maintenance regulations and legalise third party funding.

Preconditions for Third Party Funding

Essentially, the new statute regulates the conditions upon which a party to an arbitration procedure may obtain financial support for their legal costs from a third party following a contractual agreement between the funded party and the third party. The regulations also apply retroactively to running national and international arbitration proceedings in Hong Kong. The funding must not concern a particular claim or a particular right, however, this will be the general case, as third party funding is not a classic financing method. The third party funder will only profit in the case of a positive outcome to the arbitration proceedings. In the case of a negative outcome to the proceedings, he will make a loss. Thus, third party funding is a form of non-recourse financing. The funder always takes the risk of the funded claim not being successful.

In Hong Kong, in the future, third party Schließenfunders can only be professional funders or parties that have no personal or own legal interest in the arbitration proceedings. Lawyers and law firms may only be third party funders, if they are not representing a party in the respective arbitration procedure. Amongst others, this precondition is settled in the Code of Practice for Third Party Funding of Arbitration, which was published on the 7th December 2018. This code of conduct aims to provide transparency and legal certainty to funders and to parties to arbitration proceedings and lays down certain preconditions and standards for third party funding of arbitration.

Funders’ independence and impartiality are ensured in particular by the legal duty of disclosure of party funding laid down in the Code of Practice. Other regulations concerning the prevention of conflicts of interest further contribute to this objective. For instance, the aforementioned duty of disclosure of party funding simultaneously prevents arbitrators of proceedings in which a funded party is involved from being the representative of a party funded by the same third party in other proceedings.

Furthermore, the Code of Practice contains a set of regulations concerning the whole procedure and the different ways of party funding with their preconditions. For instance, there are regulations concerning the funding agreement. Moreover, there are rules on the general scope of control of the funder over the proceedings, on the funder’s minimum equity capital and his legal duty to present annual reports. The codex also contains reasons for stopping the funding and it provides for the possibility of complaint proceedings.

Take note

The new statute in Hong Kong offers a great extent of clarity and legal certainty concerning third party funding methods in arbitration. Thus, it is to be expected that Hong Kong’s role as a forum for arbitration will be further strengthened. Parties with business relationships and international trade relationships should check in advance whether they know potential funders in Hong Kong, so that arbitration proceedings there impose a lesser financial burden in the future. In conclusion, the new set of rules on third party funding create new possibilities for companies wishing to conduct arbitration proceedings in Hong Kong, allowing even companies with small amounts of capital to reduce their risk of legal costs.