Following the recent statutory approval for third party funding (TPF) in relation to arbitration cases in Hong Kong, Damien Laracy believes that given the historical insurance arrangements that is typical of the maritime industry, the TPF will, in the context of many day-to-day maritime disputes, face competition from traditional freight, demurrage, defence (FD&D) and P&I insurance arrangements.

‘The Hong Kong Legislative Council recently passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017. The amending legislation adds a new Part 10A to the Arbitration Ordinance.

‘The purpose of the amendments is to ensure that TPF of arbitration is not prohibited by particular common law doctrines and to provide for measures and safeguards in relation to TPF of arbitration.

‘It must be firmly emphasised that the criminal offences of maintenance and champerty - a form of maintenance involving an illegal agreement where a person with no interest in a lawsuit, finances it with a view to sharing the ‘winnings’ - remain relevant to any attempt to fund general commercial litigation, as opposed to arbitration-related litigation. This is a clear point of difference with the UK position concerning funding.

‘However, when division 3 of Part 10A comes into force it will expressly exclude the application of these offences, which are also torts, to TPF for arbitration.

‘Division 3, together with division 5 (other measures and safeguards) will come into force on a date yet to be gazetted and should at that time give funders the confidence to proceed with funding.

‘Division 4 of Part 10A contemplates the creation of a code of practice for third party funders.

‘It is interesting to contemplate what the TPF legislation might mean for the shipping industry, an industry currently facing severe challenges. One might speculate that due to current economic conditions, ship owners and their insurers would be open to adopting funding arrangements in relation to – for example – charterparty arbitrations, being the most common form of shipping arbitration.

‘There are respectable grounds to consider as to whether TPF will readily become a common feature in charterparty arbitration. There are at least six industry specific reasons for this:

  • Claim values may be too small to attract the interest of commercial funders
  • Most ship owners and charterers carry their own ‘before the event’ (BTE) legal costs insurance, known in the industry as ‘freight, demurrage, defence (FD&D) cover through their P&I Club
  • Prevalence of one-ship owning company structures (with no other assets) as respondent/ defendant
  • Significant variations of admiralty law and processes in different jurisdictions
  • Requirements to provide upfront security for the admiralty bailiff’s costs and expenses if a vessel is arrested as security for an arbitration claim
  • Lack of visibility as to the nature, value, and priority of potential competing claims against a ship or sister ship

‘That said, high value maritime arbitration matters susceptible to TPF arrangements could include ship sale and purchase disputes, and ship building or repair disputes. That is to say, if a ship owner/charterer were to be declined FD&D cover by its club in connection with such a claim (such cover being discretionary), or indeed if the relevant party had not taken out FD&D cover at all, then we see no reason why a funding discussion should not take place with a commercial funder.’