The Law Reform Commission of Hong Kong recently published a Consultation Paper recommending that the Arbitration Ordinance should be amended to expressly permit third party arbitration funding along with appropriate ethical and financial standards for funders.

Third party funding arrangements are usually motivated by a party's lack of financial resources to pursue its own claims in arbitration or litigation.  A third party funding contract commonly provides that the third party funder will pay for the funded party’s costs of arbitration or litigation proceedings in return for a percentage of the judgment or award or some other financial benefit from any proceeds recovered by the funded party from such funded proceedings.  If there is no recovery from the proceedings, the third party funder will not receive any repayment or return on the funds it has advanced to the funded party.

The Consultation Paper was prepared by a six-person subcommittee in response to current uncertainty as to whether third party arbitration funding is permitted in Hong Kong.  The issue has gathered attention because of the risk that such uncertainty is damaging Hong Kong’s competitiveness as an international arbitration centre considering its increasing popularity in numerous jurisdictions including Australia, England and Wales, various European jurisdictions and the United States.

The Consultation Paper invites submissions during a consultation period that will end on 18 January 2016, which it states will greatly assist the subcommittee to reach its final conclusions.  In particular, it invites submissions on whether third party funders should be directly liable for adverse costs orders.

In addition, the Consultation Paper acknowledged the requirement for ethical and financial safeguards and called for submissions on the issue including whether the development and supervision of the applicable ethical and financial standards should be conducted by: (a) a statutory or governmental body, whether existing or to be established, and if so, what type of body; or (b) a self-regulatory body, whether for a trial period or permanently and how any ethical and financial standards should be enforced.  It also asked for submission regarding how the applicable ethical or financial standards should address:

  • capital adequacy;
  • conflicts of interest;
  • confidentiality and privilege;
  • extent of extra-territorial application;
  • control of the arbitration by the Third Party Funder;
  • disclosure of Third Party Funding to the Tribunal and other party/parties to the arbitration;
  • grounds for termination of Third Party Funding; and
  • a complaint procedure and enforcement.

The Consultation Paper lists out a number of benefits and risks associated with third party funding.  It concludes that:

“ethical and financial safeguards can be placed on Third Party Funding in Hong Kong to protect against potential abuse.  Compliance with these safeguards should enable Third Party Funding of arbitrations to take place in Hong Kong with all the benefits such funding can provide, while minimising the risk of possible adverse consequences.”

The Consultation Paper is yet another sign of Hong Kong’s pro arbitration stance and ambition to attract the international arbitration community to continue to use Hong Kong as a seat in international arbitrations.

A summary of the Consultation Paper can be found here.