Written by Irene Lee [1] Deminor General Counsel Greater China and South East Asia
Introduction
Third party funding is relatively new in Hong Kong compared to a lot of other jurisdictions.
Hong Kong remains one of the few common law jurisdictions that maintains the common law doctrines of maintenance and champerty, which prohibit third party funding of legal proceedings.
It was not until 2017 that the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance Order No. 6 of 2017 (Amendment Ordinance) was passed, legalising third party funding of arbitration, mediation and related proceedings in Hong Kong.[2]
The Amendment Ordinance effectively excludes third party funding of arbitration and mediation proceedings from the doctrines of maintenance and champerty and presents a framework for these funding arrangements.
The new version of the Hong Kong International Arbitration Centre (HKIAC) Administered Arbitration Rules, published in 2018, works to provide further guidance for arbitral tribunals, parties to arbitration and third party funders.[3]
The 2021 Queen Mary International Arbitration Survey ranked Hong Kong among the five most preferred and widely used seats of arbitration, while HKIAC was ranked as one of top five most preferred arbitral institutions.[4]
The report indicates a steady growth in popularity and an established preference for Hong Kong as an arbitration seat in both the Asia-Pacific region and worldwide.
According to statistics released by the HKIAC, in 2022, a total of 344 arbitrations were submitted to HKIAC and parties made disclosure of third party funding in 74 of them.[5]
Demonstrated in Figure 1 (see below), in 2021, 277 arbitrations were submitted to the HKIAC and parties made disclosure of third party funding in six of the arbitrations.[6] In 2020, 318 arbitrations were submitted to the HKIAC. Out of the 318 arbitrations, parties made disclosures of third party funding in three arbitrations.[7]
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According to HKIAC records, there was no disclosure of third party funding in the administered arbitrations submitted to the HKIAC in 2019.[8]The use of third party funding in arbitrations seated in Hong Kong is clearly becoming increasingly common.
Year in review
The Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings
The Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings (Arrangement) was signed between the Supreme People's Court of the People's Republic of China and the Hong Kong Special Administrative Region (HKSAR) on 2 April 2019 and came into force on 1 October 2019.
Pursuant to the Arrangement, any party to an arbitration seated in the HKSAR and administered by designated arbitral institutions[9] may apply to the Intermediate People's Court of the place of residence of the party against whom the application is made or the place where the property or evidence is situated for interim measures.[10]
Similarly, any party to an arbitration administered by a mainland Chinese arbitral institution may apply to the High Court of the HKSAR for interim measures.[11]
The available interim measures include, in the case of mainland China, property preservation, evidence preservation and conduct preservation.
In the case of the HKSAR, they include injunctions and other interim measures for maintaining or restoring the status quo pending determination of the dispute, preserving assets and evidence.[12]
As of 6 September 2023, the HKIAC has issued letters of acceptance in support of applications for interim measures in mainland China in respect of 99 applications since 1 October 2019: 94 applications were made for the preservation of assets, two were for the preservation of evidence and three were for the preservation of conduct.
The total value of assets requested to be preserved amounted to 25 billion yuan.
The HKIAC is aware of 69 decisions issued by mainland courts. The mainland courts granted applications for preservation of assets upon the applicant's provision of security in 65 applications, while rejecting four applications.
The total value of assets preserved by the 65 decisions amounted to 15.8 billion yuan.
The average time taken by mainland courts to issue a decision was 20.5 days from receipt of an application based on the information available in respect of 50 of the 65 decisions.[13]
Legal and regulatory framework
While the common law doctrines of champerty and maintenance have been abolished in a lot of other common law systems around the world, the two doctrines remain actionable as crimes and torts in Hong Kong.
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 recognised by the law justifying such interference.[14]
Champerty is a type of maintenance. It occurs when 'the person maintaining another takes as his reward a portion of the property in dispute'.[15]
As discussed above, it was not until 2017 that the Amendment Ordinance amended the Arbitration Ordinance[16] to expressly provide that the two doctrines no longer apply to arbitration and related court proceedings in Hong Kong.
Third party funding of arbitration and related court proceedings in Hong Kong is thus no longer an offence. However, while the Amendment Ordinance also amends the Mediation Ordinance to allow for third party funding in mediation, the commencement of these new provisions has been deferred to a date to be determined pending further consultation with the mediation community.[17]
Third party funding of most court proceedings continues to be prohibited in Hong Kong, with limited exceptions as discussed below.
i Arbitration and related proceedings
Following the amendment in 2017, the Arbitration Ordinance now permits third party funding of arbitration and related proceedings where the place of arbitration is Hong Kong.
However, funding may not be provided by a lawyer or legal practice acting for a party to the arbitration.[18] It must be provided by a third party.
The Arbitration Ordinance defines the third party funding of arbitration as the 'provision of arbitration funding for an arbitration (1) under a funding agreement; (2) to a funded party; (3) by a third party funder; and (4) in return for the third party funder receiving a financial benefit only if the arbitration is successful within the meaning of the funding agreement'.[19]
A funding agreement is an agreement for third party funding of arbitration that is '(1) in writing; (2) made between a funded party and a third party funder; and (3) made on or after the commencement date of the relevant provisions'.[20]
A third party funder is a person 'who is a party to a funding agreement for the provision of arbitration funding for an arbitration to a funded party by the person; and (b) who does not have an interest recognized by law in the arbitration other than under the funding agreement'.[21]
The Arbitration Ordinance also expressly provides that a code of practice setting out 'the practices and standards with which third party funders are ordinarily expected to comply' may be issued.[22]
ii Code of conduct
The Code of Practice for Third Party Funding of Arbitration (Code) was issued on 7 December 2018 pursuant to Part 10A of the Arbitration Ordinance to assist with the implementation of the new amendments.
It applies to all third party funders within the definition set out above. Section 98S of the Arbitration Ordinance provides that non-compliance with the Code does not, of itself, render any person liable to any judicial or other proceedings.
However, the Code is admissible as evidence in proceedings before any court or arbitral tribunal, and any compliance or non-compliance may be taken into account in the relevant decision-making process of the court or tribunal.[23]
Consistent with other common law jurisdictions, Hong Kong has also adopted a light-touch[24] or self-regulating approach towards third party funding in arbitration.
The Code imposes several requirements on third party funders. The requirements include maintaining access to a minimum of HK$20 million of capital, maintaining the capacity to cover all its aggregate funding liabilities under all its funding agreements for a minimum of 36 months, and setting out in the funding agreement the level of involvement of the funder, etc.
Further guidance is also set out in the code regarding the structure of the funding agreement and the disclosure obligation of the parties, as discussed in further detail below.
iii Advisory body
An advisory body on the third party funding of arbitration and mediation was set up on 24 August 2021 pursuant to Section 98X(1) of Part 10A of the Arbitration Ordinance by the Secretary for Justice.
The advisory body is responsible for monitoring and reviewing the operation of third party funding of arbitration, and the implementation of the Code.
iv Third party funding of court litigation
While the change in rules governing the third party funding of arbitration proceedings has come into force, the funding of court litigation remains restricted in Hong Kong to instances where:
- the claimant and the party providing funding have a legitimate interest in the outcome of the proceedings as a result of certain pre-existing relationships;
- there are legitimate access to justice considerations; and
- there is a miscellaneous category of proceedings including, most notably, insolvency proceedings.[25]
Insolvency has been a long-standing exception to the doctrine of maintenance and champerty.
It has been well established by case law that a party can seek third party funding for proceedings in insolvency cases.[26] Thus, for example, a liquidator may seek funding from a third party to file a negligence liability claim against the previous management of the company for damages.
Similarly, a trustee may seek funding to commence litigation to recover assets of a bankrupt. To do so, the trustee may directly discuss the terms of the funding agreement with the funder, and no approval from the court on the funding terms is needed.
The Hong Kong courts have recently confirmed again in Re Patrick Cowley and Lui Yee Man, Joint and Several Liquidators of the Company[27] that it is within the powers of a liquidator to negotiate the terms of a funding agreement, and court sanction is not required for a liquidator to enter into a third party funding agreement.
The access to justice exception is recognised judicially to help claimants with meritorious claims but insufficient resources to fund a litigation. The legal aid schemes in Hong Kong fall within this exception.
The legal aid schemes provide legal funding to parties that can satisfy their merits and means tests. However, outside of the legal aid schemes, Hong Kong courts have always adopted a restrictive view in their interpretation and application of this exception.
In a recent Hong Kong case, the applicant claimed that he was unable to pursue his matrimonial litigation without third party funding. He sought permission from the court to seek funding under the access to justice exception.[28] The Secretary for Justice granted leave to intervene in the proceedings.
The applicant drew on examples of other common law jurisdictions to argue that Hong Kong's current restrictions on the third party funding of court litigation were falling behind global developments in the field.
The court held that while a civil court has jurisdiction to grant an advisory declaration on the non-criminality of third party funding in a particular case, such a declaration will not bind the prosecuting authority in bringing or stopping any criminal prosecution with regard to maintenance and champerty.
The court also noted that such a declaration would only be granted in very exceptional circumstances.[29]
The court refused to allow third party funding in this case. The court recognised that a balance had to be struck between access to justice and preventing abuses that may result from maintenance and champerty.
It was of the view that the Hong Kong courts are not well-placed to prevent abuses without a statutory or regulatory framework for third party funding in court litigation.
Liberalisation of the laws in this regard should be left to the legislature to develop comprehensive procedural safeguards against abuses before the application of third party funding can be extended.[30]
v Contingency fee
Contingency fee arrangements are generally prohibited in Hong Kong. According to Section 64 of the Legal Practitioner's Ordinance, any agreement by which a solicitor retained for any contentious process stipulates payment only in the event of success in that action shall not be valid.
This position is also reflected in the Hong Kong Solicitors' Guide to Professional Conduct (Solicitors' Guide) issued by the Law Society of Hong Kong.
The Solicitors' Guide expressly prohibits a solicitor from entering contingency fee arrangements for acting in contentious proceedings.[31] However, it is worth noting that this prohibition only extends to agreements that involve the institution of proceedings.
The Solicitors' Guide provides that it would not be unlawful, for example, for a solicitor to enter into an agreement on a commission basis to recover debt for a client provided that the agreement is limited strictly to recovery of debt without the institution of legal proceedings.[32]
Similarly, the Code of Conduct issued by the Hong Kong Bar Association also provides that a practising barrister may not accept a brief or instructions on terms that the payment of fees shall depend upon a contingency.[33]
The Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Ordinance 2022 (ORFS Amendment Ordinance) was issued on 25 March 2022 and came into effect on 16 December 2022 to allow certain types of outcome-related fee structures (ORFS) for arbitration proceedings in Hong Kong.
Although the ORFS regime in Hong Kong has been in force for close to one year and there has been a lot of interest in the new regime, the arrangements are yet to be widely adopted by clients or law firms.
Structuring the agreement
When it comes to the content of a funding agreement, pursuant to Article 2.7(5) of the Code, a third party funder must ensure that the terms of the funding agreement are reviewed to make sure they are consistent with Part 10A of the Arbitration Ordinance and the Code.
While the Code does not set out how a funding agreement should be structured, it requires the funding agreement to set out clearly that the funder will not seek to influence the funded party or the funded party's legal representative to give control or conduct of the arbitration to the funder except to the extent permitted by law; that the funder will not cause the funded party's legal representative to act in breach of professional duties; and that the funder will not seek to influence the arbitration body and any arbitral institution involved.[34]
The funding agreement must also set out the funder's liability for adverse party costs, any premium for adverse costs insurance, security for costs and any other relevant financial liability.[35]
Any grounds for termination of the funding agreement must also be clearly set out and the funding agreement must not establish a discretionary right for a funder to terminate the agreement.
The permitted grounds for termination of the funding agreement are limited under the Code. A funder is only allowed to terminate should it reasonably cease to be satisfied about the merits of the case, if it reasonably believes that there has been a material adverse change in the prospects of success, or if it reasonably believes that the funded party has committed a material breach of the funding agreement.[36]
However, the funder is to remain liable for all funding obligations accrued up to the date of termination unless termination is due to a material breach of the agreement by the funded party.[37]
The funding agreement must also set out the right for the funded party to terminate the agreement if it reasonably believes that the funder has committed a material breach of the Code or the funding agreement that may lead to irreparable damage.[38]
A dispute resolution mechanism for the settlement of disputes arising under the funding agreement must also be included in the funding agreement.[39]
Once these limited requirements set out in the Code are satisfied, the funder and the funded party are free to agree on the remaining terms of the funding agreement subject to, of course, any other requirements of the applicable law.
Disclosure
Section 18 of the Arbitration Ordinance specifies that any disclosure of information relating to the existence of any arbitration proceedings and any subsequent awards made following the arbitration proceedings is prohibited.[40]
However, following developments in third party funding in Hong Kong, Section 97T of the Amendment Ordinance establishes an exception for disclosure in the case of third party funding, stating that information referred to in Section 18(1) can be disclosed to a funder by a party for the purpose of having or obtaining funding from the funder.[41]
Section 97T nevertheless continues to enforce the importance of confidentiality of arbitration proceedings as no further information can be communicated by a person except 'to protect or pursue a legal right or interest of the person' or to 'enforce or challenge an award made in the arbitration' in legal proceedings before any court in or outside Hong Kong.[42]
Section 98T also allows for the disclosure of information 'to any government body, regulatory body, court or tribunal and the person is obliged by law to make the communication'[43] or 'to a professional adviser of the person for the purpose of obtaining advice in connection with the third party funding or arbitration'.[44]
Further specification of the disclosure is provided under Section 98U. The funded party needs to give written notice to each party to the arbitration and the arbitration body of the funding agreement being made and the name of the third party funder.[45]
Notice must be given for funding agreements made on or before the commencement of arbitration proceedings as well as funding agreements entered into after the commencement of the arbitration within 15 days of the funding agreement being made.[46]
These changes in the rules of disclosure for arbitration proceedings aim to balance the parties' confidentiality rights with the need for funders to access relevant information.
The statutory changes are also supported by the HKIAC Rules, which allow for the publication and disclosure of relevant information needed to obtain or maintain a funding agreement with a third party.[47]
The HKIAC Rules similarly support the disclosure procedures in requiring that the funded party discloses the establishment of the funding agreement and the identity of the funder to all other parties to the arbitration, the arbitral tribunal, the emergency arbitrator and the HKIAC, as well as ensuring the notice is made as soon as practicable after the establishment of the agreement or in the notice of arbitration or the answer to the notice of arbitration, depending on which event occurs first.[48]
The current system represents a commitment to a practical application of third party funding while regulating the spread and circulation of sensitive and confidential information.
The disclosure of funder information allows for a better review of the conflicts of interest between the funder and the arbitrator, and ensures the two are separate.
Article 2.8 of the Code requires a third party funder to observe the confidentiality and privilege of all information and documentation relating to the arbitration to the extent the applicable law permits.
The funded party is under an obligation to disclose information about third party funding under Sections 98U and 98V of the Arbitration Ordinance. Section 98U requires the funded party to give written notice of the fact that a funding agreement has been made and the name of the funder to each other party to the arbitration as well as to the arbitration body. Similarly, written notice has to be given when the funding agreement ends.[49] Non-compliance with the disclosure requirement, while it may be taken into account by the arbitral tribunal in its decision-making process, does not of itself render any person liable to any judicial proceedings.[50]
The funder is required to remind the funded party of its disclosure obligation.[51] The funded party, however, is not obliged to disclose details of the funding agreement except as required by the funding agreement, ordered by the arbitration body or required by law.
Costs
Section 98Q of the Amendment Ordinance states that the funding agreement between a party and a third party funder must outline if, and to what extent, the funder will be liable for 'adverse costs, insurance premiums, security for costs and other financial liabilities'.[52]
The Law Review Committee refrained from granting arbitral tribunals the right to assign security for costs to funders. Arbitration agreements function on the basis of consent from all the parties involved. Funders are not parties to such agreements, and so it was deemed inappropriate for arbitrators to make funders liable for costs.
The HKIAC Rules, however, enable the arbitral tribunal to consider any third party funding arrangements when apportioning costs.[53]
Third party funding in mainland China
In recent years, third party funding has attracted more and more attention in mainland China. The market has also seen a handful of local PRC funders being newly established, predominantly by Chinese lawyers who possess extensive expertise in dispute resolution in the market.
There are currently no specific laws or regulations that explicitly prohibit third party funding in mainland China.
In Company A v. Company B,[54] which was decided in May 2022, the Second Intermediate People's Court of Shanghai held that litigation investment agreement in relation to a court litigation was invalid because it violated principles of public policy.
The Court found that the funders of the case were closely tied to the law firm representing the funded party, and that there was no mechanism in place to prevent conflict of interest.
Further, the Court determined that the litigation investment agreement included a confidentiality provision that restricted the sharing of information related to third party funding with the Court.
This provision had the potential to obscure facts that could affect the independence and impartiality of the Court, thereby posing a risk to the fair and proper conduct of the litigation process.
The agreement further restricted the funded party's right to instruct a new law firm and make certain decisions regarding the proceedings. The Court held that the agreement wrongly limited the funded party's freedom of litigation.
In contrast, in Dongrunjintai (Shenzhen) Investment Management Centre LP v. Bangying Internet Technology (Beijing) Holdings Co, Ltd,[55] the Beijing Second Intermediate People's Court ruled that the litigation funding agreement was valid, and the funded party was liable to pay the funder's investment return.
Similarly, in Winfirefly Information Technology (Shanghai) Co, Ltd v. Changzhou Aino Textile Co, Ltd,[56] the Shanghai Songjiang District People's Court had no hesitation in upholding the legality and validity of the litigation funding agreement for funding in an arbitration. In Sunan Ruili Airlines Limited et al v. Silver Aircraft Leasing (Tianjin) Co, Ltd,[57] the Jiangsu court held that the CIETAC arbitral award was enforceable despite the fact that the claimant was being funded by a third party funder.
The Jiangsu court concluded that third party funding did not violate the CIETAC Arbitration Rules (effective as of 1 January 2015) and therefore did not impact the procedural fairness of the hearing.
There are various arbitration rules in Mainland China that contain express provisions regarding third party funding, including the Beijing Arbitration Commission's International Investment Arbitration Rules, the China International Economic and Trade Arbitration Commission's International Economic and Trade Arbitration Rules (Trial) and the Shanghai Arbitration Commission's Arbitration Rules.
Outlook and conclusions
The amendments to the Arbitration Ordinance allowing third party funding in arbitration, and the light touch regulatory approach adopted by the Code, have been welcomed by both the legal profession and parties in Hong Kong.
While the number of funded arbitrations is steadily increasing, it is yet to be seen how third party funding will affect the arbitration landscape in Hong Kong more broadly.
Hong Kong and Singapore are both very popular venues for parties to resolve disputes. Both jurisdictions have maintained the common law doctrines of maintenance and champerty.
The two jurisdictions passed legislation to allow third party funding in arbitration and related proceedings at around the same time.
Singapore is extending the scope of third party funding to proceedings commenced and remaining in the Singapore International Commercial Court (SICC), appeals arising from decisions made in SICC proceedings and mediations relating to these proceedings, from 28 June 2021.
The legal profession in Hong Kong is optimistic that Hong Kong will take steps to investigate extending the third party funding framework to certain types of commercial court proceedings in the near future to maintain Hong Kong's competitiveness as a leading dispute resolution centre.
The ORFS reforms are a very positive development in strengthening Hong Kong's position as a leading arbitration hub. ORFS provide another funding option for parties. From our experience in other jurisdictions, parties in bigger cases are likely to benefit from a combined financial arrangement of ORFS and third party funding to manage the financial risks of arbitrating in Hong Kong.
Together with the special arrangement between Hong Kong and mainland China in relation to interim measures in aid of arbitration, Hong Kong will remain an attractive venue for arbitration.
Footnotes
1 Irene Lee Wing Yun is general counsel at Deminor. She would like to thank Alanna Lau, legal counsel at Deminor, for her assistance in writing this chapter.
2 Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (Amendment Ordinance).
3 Hong Kong International Arbitration Centre, Administered Arbitration Rules (1 November 2018) https://www.hkiac.org/arbitration/rules-practice-notes/hkiac-administered-2018 (HKIAC Rules).
4 White & Case, Queen Mary University of London, 2021 International Arbitration Survey: Adapting Arbitration to a Changing World 12 (2021), http://www.arbitration.qmul.ac.uk/media/arbitration/docs/LON0320037-QMUL-International-Arbitration-Survey-2021_19_WEB.pdf.
5 2022 statistics, HKIAC, https://www.hkiac.org/about-us/statistics.
6 2021 statistics, HKIAC, https://www.hkiac.org/about-us/statistics.
7 2020 statistics, HKIAC, https://www.hkiac.org/about-us/statistics.
8 2019 statistics, HKIAC, https://www.hkiac.org/about-us/statistics.
9 Article 2 of the Arrangement.
10 Article 3 of the Arrangement.
11 Article 7 of the Arrangement.
12 Article 1 of the Arrangement.
14 Unruh v. Seeway [2007] 2 HKC 609.
15 Neville v. London Express Newspaper Ltd [1919] AC 368.
17 The Government of the Hong Kong Special Administrative Region, press release: Code of Practice for Third Party Funding of Arbitration issued (7 December 2018) https://www.info.gov.hk/gia/general/201812/07/P2018120700601.htm.
18 Section 98O of the Arbitration Ordinance.
19 Section 98G of the Arbitration Ordinance.
20 Section 98H of the Arbitration Ordinance.
21 Section 98J of the Arbitration Ordinance.
22 Section 98P of the Arbitration Ordinance.
23 Section 98S of Arbitration Ordinance.
24 Law Reform Commission report, paragraph 4.14.
25 Law Reform Commission of Hong Kong, report: Third Party Funding for Arbitration (October 2016) www.hkreform.gov.hk/en/docs/rtpf_e.pdf (Law Reform Commission Report), paragraph 1.5.
26 Akai Holdings Ltd (in compulsory liquidation) & Ors v. Ho Wing On Christopher & Ors [2009] HKCU 172; Re Cyberworks Audio Video Technology Ltd [2010] 2 HKLRD 1137.
27 [2002] HKCFI 922.
28 Re A (SJ as intervener) HCMP 2728/2017; [2020] HKCFI 493.
29 Paragraphs 113, 117-119 of Re A.
30 Paragraphs 374-379, 392-394, 436-437 of Re A.
31 Principle 4.17 of the Solicitors' Guide.
32 Commentary 2, Principle 4.17 of the Solicitors' Guide.
33 Code 9.9 of the Code of Conduct issued by the Hong Kong Bar Association.
34 Article 2.9 of the Code.
35 Article 2.12 of the Code.
37 Article 2.15 of the Code.
40 Section 18 of the Arbitration Ordinance.
41 Section 98T(1) of the Amendment Ordinance.
42 Section 98T(2)(a) of the Amendment Ordinance.
43 Section 98T(2)(b) of the Amendment Ordinance.
44 Section 98T(2)(c) of the Amendment Ordinance.
45 Section 98U of the Amendment Ordinance.
46 Section 98U of the Amendment Ordinance.
47 Article 45.4(e) of the HKIAC Rules.
48 Article 44 of the HKIAC Rules.
49 Section 98V of the Arbitration Ordinance.
50 Section 98W of the Arbitration Ordinance.
51 Article 2.10 of the Code.
52 Section 98Q of the Amendment Ordinance.
53 Article 34.4 of the HKIAC Rules.
54 Company A v. Company B [2021] Hu 02 Min Zhong No. 10.
55 Dongrunjintai (Shenzhen) Investment Management Centre LP v. Bangying Internet Technology (Beijing) Holdings Co, Ltd [2020] Beijing Second Intermediate People's Court, Jing 02 Min Zhong 807.
56 Winfirefly Information Technology (Shanghai) Co, Ltd v. Changzhou Aino Textile Co, Ltd [2021] Hu 117 Min Chu No. 12,067.
57 Sunan Ruili Airlines Limited et al v. Silver Aircraft Leasing (Tianjin) Co, Ltd [2022] Su 02 Zhi Yi 13 Hao.