Hong Kong’s legal community has expressed an overwhelming desire to see the legality of Third Party Funding fully admitted and clarified.

The Final Report of the Hong Kong Law Reform Commission Sub-Committee (the Commission) on Third Party Funding issued on 12 October 2016 has confirmed the desire of the Hong Kong legal community to compete with other major arbitral centres by explicitly authorising the use of Third Party Funding with a pragmatic, light touch approach to regulation.

97% of the participants in the consultation process including arbitrators, users, government bodies, solicitors/barristers and arbitral institutions, expressed their clear desire to see Hong Kong lift any ambiguities as to the legality of Third Party Funding in their legal framework.

In issuing its report and making its recommendations, the Commission has had a particular focus on non-recourse third-party funding as opposed to other providers of funding such as insurers. This focus reflects the fact that the two important aspects to regulators in Hong Kong are:

  • The avoidance of champerty and maintenance, and
  • The prevention of any confusion by lawyers as to who they owe their ethical duties to.

Whilst neither of these points are an issue in practice when utilising non-recourse funding by institutional and professional funders, the arbitral community has generally been focussing the debate on non-recourse funders like Vannin Capital because we are now “personified”, so to speak.

Non-recourse funding from professional third party funders remains a relatively new financial solution in many jurisdictions and it is only right that participants in those jurisdictions raise the questions that they may have. 

However, professional third party funders like Vannin Capital are known members of the arbitration community and we have been involved in the debate about the benefits of non-recourse third-party funding for some time. Even before the debate had started, we had established ethical and professional procedures to address issues such as confidentiality, control, potential conflicts of interest etc. Thankfully, many of the irrational criticisms one used to hear about third party funding, e.g. “it will give rise to frivolous claims” have largely been silenced now.

The highlights of the recommendations are:

  1. No formal regulation should be enacted for a 3-year period to test the practice and to determine whether there is a need for regulation and if so, in what form.

This approach, which mirrors that of most other jurisdictions, is a wise decision as overregulation (especially at the outset) would definitely hinder the use of Third Party Funding in Hong Kong.

  1. Funders should be bound by a Code of Practice ensuring their ethical, financial and professional conduct towards users.

This is naturally a welcome recommendation which will ensure that only professional, reputable funders are able to provide services in the region. We expect to see the implementation of standards similar to those required by members of the Association of Litigation Funders in England and Wales to which Vannin Capital are held.

Specifically, the Commission has recommended that the Code addresses:

  • the capital adequacy of the funder,
  • conflicts of interest,
  • confidentiality and privilege,
  • control of the arbitration by the funder, and
  • grounds for termination of the funding.

and that each of these matters are also dealt with clearly in any funding agreement.

  1. Parties be required to disclose the existence of a funding agreement and the identity of the funder.

This recommendation is clearly comforting for those concerned with potential conflicts of interests despite the fact that such conflicts with a tribunal have not to date arisen in practice because funders take much care to avoid creating a situation of conflict that would endanger their investment.

The requirement to disclose however gives rise to another danger being that such disclosure gives rise to automatic security for costs applications simply because a funder is present in a dispute thus increasing the cost of funding for a claimant when ATE insurance then needs to be provided. Cost is the biggest criticism of arbitration, so implementing a requirement that has the effect of driving up the cost of that litigation or arbitration with systematic provisions of ATE insurance is not rendering a public service.

Vannin Capital works mostly with clients who are well capitalised and are in a position to fund their own cases – however, they recognise that third party funding can support their business as an important part of their financial toolkit either as part of their legal spend strategy and/or to manage their cash flow.

Ignoring cost implications therefore, as a professional third party funder, we are as a general rule, content for the fact of funding and our identity to be disclosed. Whether and when the fact of funding and our identity is disclosed normally comes down to a strategic decision made by the claimant and their lawyers. With that decision being made in the interest of their dispute, the strategy being pursed in respect to it, and whether it advances the broader interests of their organisation.

However, if we look at it from a competition standpoint, the provision to require disclosure of the existence of a funding agreement and the identity of the funder risks putting claimants in Hong Kong at a disadvantage from claimants in other jurisdictions where such automatic disclosure is not required. It is an interesting approach by Hong Kong given that it could give Singapore a clear competitive advantage in any race to become the most prominent arbitration centre of the region, should Singapore not require automatic disclosure.

  1. Finally, and in the same vein, the Commission has expressed a desire to continue to reflect on the need to give a tribunal the power to award security for costs directly against the funder.  It has stated that the existing power to award adverse costs against the party to the arbitration is sufficient.

With these preliminary comments in mind, Vannin Capital warmly welcomes these very positive steps by Hong Kong and we are comforted in our desire to continue showing a deep commitment to the region.