Introduction

The hawks and the airliners that regularly fly over the skies of Hong Kong are not the only things surveying the fertile ground below. Of late, and as the cooler winter season draws near, a number of commercial third party funders are beginning to make homes in Hong Kong, moving eastwards from a European summer and westwards from an Antipodean winter. It was not so long ago that third party funders were something of a rare breed in Hong Kong. However, with litigation funding arrangements being approved by the courts in order to allow court appointed liquidators to pursue certain recoveries on behalf of creditors (subject to conditions) and talk of formalising third party funding for arbitrations taking place in Hong Kong, things are beginning to show some signs of change. This helps explain why certain commercial funders are beginning to appear with offices in the business district of Hong Kong – a leading regional disputes resolution hub.

Background

Pursuing a civil claim in Hong Kong, whether in the courts or in arbitration, can be a costly exercise. The availability of ordinary  or supplementary civil legal aid is limited. In bigger commercial disputes opportunities for financial assistance from a commercial third party funder can help alleviate and  manage the cost and ensure that a party’s lack of financial resources does not prevent their pursuit of a meritorious claim. However, such opportunities are severely limited by, among other things, the crimes and torts (civil wrongs) of maintenance and champerty that continue to survive in Hong Kong (for now)1.

A third party funder does not have an interest in the funded litigation or arbitration, save  for its commercial interest arising from the funding arrangement. If there is a recovery in the proceedings being funded, the third party funder may receive a share of the proceeds or some other financial benefit.

Over the years, in which the prohibition against maintenance and champerty has applied in Hong Kong, exceptions have evolved to try to keep abreast of changing public policy. Third party funding of litigation is permitted in Hong Kong under certain evolving and miscellaneous circumstances. For example:

  • in cases involving third parties with a legitimate commercial interest in the outcome of the litigation (for example, a parent/subsidiary company; insured/insurer);
  • where “access to justice considerations” apply (for example, benevolent “pure” funders); or
  • in a miscellaneous category, including certain insolvency litigation and claims by court appointed liquidators2.

Save in these limited circumstances, the stated public policy concerns surrounding third party funding in litigation remain3.

In the context of arbitration, the significance of the public policy concerns underpinning champerty is considerably diminished. In practice, arbitration typically involves commercial parties, such as: corporations, commercial investors, insurers, governments and sovereign nations and rarely individuals or unrepresented parties. Many disputes involving individuals cannot be arbitrated in Hong Kong; for example, most employees’ statutory compensation claims and matrimonial matters. In contrast, litigants in person are a regular feature of the civil litigation landscape in Hong Kong.

Recent Developments

The “insolvency” exception was recently considered by the High Court in Re Co A4. The judge approved a funding arrangement between the liquidators of a company and a Cayman incorporated closed end fund which was a “stranger” to the proposed litigation. The funding arrangement was solely an investment for the funder. It is important to note that the liquidators maintained control over the litigation, the court was satisfied that the liquidators could not raise funding among the body of general creditors and the funding arrangement provided that the funder would receive no more than a “fair distribution” of the proceeds of any successful recovery.

The availability of third party funding for arbitrations in Hong Kong has been something of a grey area. Some judges have not seen a problem with it5. However, the Court of Final Appeal left open the issue of whether maintenance and champerty applied to agreements concerning arbitrations taking place in Hong Kong6.

This issue was recently addressed by way of a well-received Consultation Paper published  in October 2015 by a Law Reform Commission Sub-committee (“Third Party Funding for Arbitration”). The Sub-committee’s Consultation Paper has come out strongly in favour of legislative amendment to the Arbitration Ordinance (Cap. 609) to make it expressly clear that third party funding is permitted for arbitrations taking place in Hong Kong7. The consultation period ends on 18 January 2016.

The Consultation Paper contains a helpful discussion of the law of maintenance and champerty in the context of litigation and arbitration and an examination of the same issues in various other jurisdictions (including, but not limited to, Singapore, England & Wales, and Australia). To supplement the Sub-committee’s key recommendation that third party funding be expressly allowed for arbitrations taking place in Hong Kong, the Consultation Paper also proposes (among other things) the development of clear ethical and financial standards for third party funders, either by way of statute or regulation (for example, third party funders agreeing to comply with a code of conduct).

Comment

For reasons already noted and commented on by the Law Reform Commission Sub- committee, the twin mischiefs of maintenance and champerty are much less pronounced in arbitration. Arbitration is a private and consensual forum and the UNCITRAL Model Law (which is incorporated into Hong Kong law) gives supremacy to party autonomy and greatly limits the interference of the court in arbitration proceedings in Hong Kong; particularly, with respect to institutional international arbitrations.

As a leading and prominent international arbitration centre, and in the interests of maintaining Hong Kong’s competitiveness, expressly permitting third party funding  for arbitrations taking place in Hong Kong would be an important development. The Law Reform Commission Sub-committee acknowledges this point8. Of all the jurisdictions examined by the Law Reform Commission Sub-committee, Singapore appears to be the only other jurisdiction which does not expressly permit third party funding for arbitration and “intel” suggests she is actively considering the issue in order to keep up9.

In Hong Kong, third party funding for  foreign arbitrations (in jurisdictions where maintenance or champerty does not exist) has already been accepted by the Court of Final Appeal where payment from arbitration proceeds under a funding agreement was enforced10. Moreover, many parties to institutional arbitrations in Hong Kong are foreign parties where third party funding is available in their home jurisdiction. Therefore, so the argument goes, there should be a formal level-playing field for arbitrations taking place in Hong Kong.

There is also the point that formalising the position in Hong Kong would be to recognise what already goes on in some international arbitrations.

The Law Reform Committee Sub-committee is made-up of distinguished practitioners in their field and this is one Consultation Paper that the government will find difficult to ignore given its impact on Hong Kong as a leading financial disputes resolution centre. Commercial third party funders know this; hence, their increased visibility in Hong Kong.