In October 2015, the Law Reform Commission of Hong Kong released its much anticipated Consultation Paper on Third Party Funding for Arbitration, recommending that third party funding should be permissible for arbitration proceedings taking place in Hong Kong.

Background

The 700 year old doctrines of maintenance and champerty still form part of Hong Kong law, operating to prohibit the third party funding of litigation in the jurisdiction both as a tort and as a criminal offence. The rationale behind the prohibition dates back to medieval England, when there was seen to be a need to prevent oppression of the poor by the rich through the “wanton and officious” intermeddling in the disputes of others, thereby subverting the course of justice.

Despite abolition of the criminal offences in England in 1967, champerty and maintenance remain a common law criminal offence in Hong Kong.

There are only three scenarios in which litigation funding is permitted in Hong Kong, as follows:

  1. Where the third party funding the litigation has a legitimate interest in the outcome of the litigation.
  2. Where there are access to justice issues.
  3. As part of insolvency proceedings.

The types of funding arrangements that have been accepted by the Hong Kong courts as exceptions to the prohibition on third party funding have generally involved the provision of funding for arm’s length commercial terms, on the basis that if a claimant makes a successful recovery the funder receives a financial benefit. The funded party retains sole and exclusive control of the substantive dispute and conduct of the proceedings.

Hong Kong is one of the major international hubs for arbitration, however the question of whether the doctrines of maintenance and champerty apply to arbitration proceedings in the jurisdiction has yet to be definitively determined by the courts. In 2007, the question was left open by the Court of Final Appeal in the case of Unruh v Seeberger1.

The Sub-Committee’s recommendations

Although maintenance and champerty still form part of Hong Kong law, recent case law has shown increasing flexibility by the courts. The access to justice exception should not be considered static, but rather as having the potential to evolve to better suit modern requirements.

The Sub-Committee conducted a comprehensive study of the third party funding industry, looking at case law and legal regimes in a number of overseas jurisdictions. Following their review, the Sub-Committee made the following recommendations:

  • The Arbitration Ordinance in Hong Kong should be amended to allow third party funding of arbitration in Hong Kong.
  • Clear ethical and financial standards for third party funders should be developed.
  • Submissions should be invited from the public on a number of issues, including whether:
  • Regulation should be by oversight from a government or statutory body, or self-regulating.
  • A funder should be liable for an adverse costs order (as in the case in other jurisdictions e.g. England).
  • The Arbitration Ordinance should give an arbitral tribunal power to award security for costs against a third party funder.

The Sub-Committee consultation runs until January 2016.

HFW perspective

Third party funding is still at a relatively early stage of development in Hong Kong, as compared with other common law jurisdictions. The jurisdiction is undergoing a slow but conscious liberalisation of the historical position. The Law Reform Commission’s recommendation that third party funding for arbitrations should be permitted, will, if implemented, help ensure that Hong Kong remains competitive as an international arbitration centre.