Third-party funding of arbitration has been in existence for some time in many Western jurisdictions. Up until now, however, it has not been widely used in Asia. Given the popularity of arbitration in Hong Kong and its increasing popularity in the Peoples Republic of China (“PRC”), it may not be long before third-party funders start to look East for claims to fund.

In this article, we explore the legality of third-party funding arrangements in Hong Kong and the PRC, and assess the prospects for third-party funding in those two jurisdictions.

OVERVIEW OF THIRD-PARTY FUNDING

Third-party funding has been described as the “funding of claims by commercial bodies in return for a share of the proceeds”. A third-party funding arrangement usually provides that a third-party funder, who does not otherwise have an interest in the proceedings, pays a party’s legal and other costs of arbitration, in return for a percentage or part of the financial recoveries in arbitration. Normally, the third-party funder will be compensated from the funded party’s net recoveries from the proceedings after deducting agreed costs and expenses. However, if proceedings are unsuccessful, the funded party will not have to pay any amount to the funder.

Third-party funding may be provided by a funder who routinely engages in such third-party funding activity, by banks or financial institutions, by individuals or corporations whose primary business is not third-party funding, by a party’s lawyer, or in the form of after the event (ATE) insurance taken by the party.

THIRD-PARTY FUNDING IN HONG KONG

Under Hong Kong law, the general rule in relation to third-party funding of disputes is that it is not permitted if it amounts to “maintenance and champerty”. Maintenance is the intermeddling of a disinterested party to encourage a lawsuit. Champerty is the “maintenance” of a person (by the third-party funder) in a lawsuit on condition that the subject matter of the action is shared with that person. Traditionally, maintenance and champerty have been prohibited in common law jurisdictions because they are seen as gambling on the outcome of a lawsuit, encouraging frivolous lawsuits and the perversion of justice.

With regard to legal practitioners, Hong Kong law prohibits lawyers from entering into conditional or contingency fee arrangements.

While Hong Kong law prohibits maintenance and champerty, the Hong Kong Courts have, in several cases, upheld third-party funding arrangements provided that there is a proper commercial purpose to the transaction and it does not give rise to a risk of the corruption of the judicial process. The cases where third-party funding arrangements have been considered in Hong Kong appear mostly to have concerned transactions where an insolvent company’s debts have been assigned to a third-party who has funded the litigation against the company’s debtors.

In those cases, the Courts have allowed third-party funding arrangements on the basis that there is a legitimate commercial interest in recovering the company’s debts.

With regard to arbitration, while it is not entirely clear whether third-party funding for arbitration is permitted under Hong Kong law, in principle, there is nothing preventing such transactions, provided that there is a proper commercial purpose to the transaction.

THIRD-PARTY FUNDING IN THE PRC

Unlike the position in Hong Kong, there are no laws or regulations that expressly prohibit third-party funding of arbitration in the PRC. However, such transactions do not appear to have been used in the PRC and legal commentators have noted there do not appear to be any professional funders active in the market, either for litigation or arbitration.

Nonetheless, it appears that the PRC may be open to allowing third-party funding. The “Measures on Lawyers’ Fees” Law passed in 2006 allowed lawyers to charge contingency fees in certain cases, capped at 30% of the proceeds. Further, in a recent Hong Kong case, the Court permitted the liquidators of a Hong Kong registered company to enter into a third-party funding arrangement with a party in the PRC on the basis that it was permitted under PRC law. While that case is not binding in the mainland, it does tend to indicate a more receptive attitude to thirdparty funding in the PRC than one might expect.

With regard to arbitration, similar to the position in Hong Kong, it is unclear whether third-party funding is permitted to fund arbitration claims seated in the PRC, but there is nothing in principle preventing it.

PROSPECTS FOR THIRD-PARTY FUNDING IN HONG KONG AND THE PRC

While it may yet take some time before third-party funding of arbitration proceedings is officially recognised in Hong Kong and the PRC, some tentative steps have been taken in that direction.

A consultation paper released by the Law Reform Commission of Hong Kong in 2015 has recommended that the law be reformed to clearly allow for third-party funding of arbitrations taking place in Hong Kong. The six-member subcommittee responsible for preparing the report unanimously concluded that third-party funding should be written into the law provided that “clear ethical and financial standards” for third-party funders be established and enforced by either a statutory or self-regulatory body.

CONCLUSION

While it is probably too early to say whether third-party funding of arbitration claims will become a feature of the legal landscape the PRC in the near future, if the government of Hong Kong adopts the changes recommended by the Law Reform Commission, it is not unreasonable to assume that the PRC could, in time, follow suit.

In light of these developments, the future of third-party funding in Hong Kong and the PRC looks reasonably bright. Third-party funders and lawyers who are prepared to take on arbitrations on a contingency fee basis may therefore want to “watch this space”.