Costs and insurance

Award of costs

May the courts order the unsuccessful party to pay the costs of the successful party in litigation? May the courts order the unsuccessful party to pay the litigation funding costs of the successful party?

Order 62, Rule 6A of the Rules of the High Court and sections 52A and 52B of the High Court Ordinance empower the Hong Kong courts to order costs for or against any party to the proceedings, or a non-party, including a third-party funder. This is usually referred to as an ‘adverse costs order’. The courts also have the discretion to order the extent to which the costs are to be paid. Usually the courts order that costs ‘follow the event’ (ie, that the unsuccessful party must pay to the successful party costs that were necessary to pursue or defend the action). It is exceptionally rare for a successful party to recover all of its costs in litigation. In practice, a party can expect to recover about half of the actual costs incurred by the litigant. It is not clear whether Hong Kong courts will be willing to order an unsuccessful litigant to pay the funding costs of its successful counterparty. English law is no longer binding on Hong Kong courts, although it is persuasive. Hence, it is at least possible that the Hong Kong courts might make such an order in appropriate circumstances, following the English case of Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd [2016] EWHC 2361 (Comm).

Arbitral tribunals sitting in Hong Kong have broad discretion to allocate the costs of the arbitration as they see fit. Section 74(2) of the Arbitration Ordinance (Cap 609) provides that the tribunal may direct in its award ‘to whom and by whom and in what manner the costs [of the arbitral proceedings] are to be paid’. However, the tribunal must only allow costs that are ‘reasonable in all the circumstances’ (section 74(7)(a) of the Arbitration Ordinance). It is most usual for Hong Kong tribunals to order that costs follow the event, but there is no universal practice.

In arbitration-related court proceedings in Hong Kong, the courts have developed a practice of ordering costs on a higher basis (known as the ‘indemnity’ basis) against a party that fails in an arbitration-related application. This has been applied in applications to challenge arbitral agreements, set aside arbitral awards, and resist enforcement of awards (among others). On the ordinary basis, the unsuccessful party will generally pay 50 to 75 per cent of the other side’s actual expenditure. An indemnity costs order requires the unsuccessful party to pay all of the successful party’s costs, except where they are unreasonable in amount or have been unreasonably incurred (Order 62, Rule 28(4A) of the Rules of the High Court).

Liability for costs

Can a third-party litigation funder be held liable for adverse costs?

In Hong Kong litigation, Order 62, Rule 6A of the Rules of the High Court and sections 52A and 52B of the High Court Ordinance empower the courts to order any third-party, including a third-party funder, to pay costs. The court’s order is known as an ‘adverse costs order’. In the recent Hong Kong decision of Re A [2020] HKCFI 493, Marlene Ng J stated that the novelty of commercial litigation funding in Hong Kong means the effectiveness of safeguards against the litigation funders (eg, adverse costs orders) is as yet untested. Even if these measures are applicable in Hong Kong, their vitality turns on whether there is adequate disclosure to the opposing parties and the court about the litigation funding, which is also untested in Hong Kong.

In arbitration, the funder is generally not a party to the arbitration agreement. As a result, the tribunal lacks jurisdiction over the funder and cannot order it to pay adverse costs. Instead, the tribunal may make the adverse costs order against the funded party. Whether the funder will fund (or reimburse) the funded party in respect of any adverse costs paid will depend on the terms of the funding agreement. Paragraph 2.12 of the Code of Practice requires funders to ensure that the funding agreement stipulates whether, and to what extent, the funder will be liable to the funded party for adverse costs orders made against the funded party. Many professional funders routinely accept liability for adverse costs, but approaches among smaller or individual funders may vary.

Security for costs

May the courts order a claimant or a third party to provide security for costs? (Do courts typically order security for funded claims? How is security calculated and deposited?)

Order 23, Rule 1 of the Rules of the High Court provides that the court can order security for costs against the plaintiff only. The court has no power to order security for costs against a third-party funder. However, the funding agreement can provide for the funder to reimburse the plaintiff for any amount paid into court in compliance with a security for costs order. This is a matter for agreement between the funder and the funded party. In Re A [2020] HKCFI 493, Marlene Ng J stated that security for costs against a third-party funder in Hong Kong is arguably not an available procedural safeguard to withstand potential abuse of third-party litigation funding. This lacuna in the Hong Kong procedural rules in fact highlights the importance of regulation over litigation funders' capital adequacy requirements.

In relation to whether courts typically order security for funded claims in Hong Kong, the market in this area is not mature and cases dealing with this issue are rare. The recent decision of Natural Dairy (NZ) Holdings Ltd (in provisional liquidation) v Chen Keen [2020] HKCFI 2491 is the first case in Hong Kong in which an after-the-event (ATE) insurance policy (used to reimburse parties for litigation costs and disbursements) was raised as an answer to an application for security for costs. The plaintiff submitted that its ATE insurance constituted adequate security for the defendant's costs. Several English cases on point were considered. From the analysis, it appears that the answer in each case would depend on the actual terms and conditions of such a policy, in particular the likelihood of the insurance cover being eroded. However, in practice, since insurance policies are voidable by the insurers and subject to cancellation for many reasons (none of which are generally within the control or responsibility of the defendant), it is likely that in most cases an ATE policy is unlikely to provide such good security as a payment into court.

Unless the parties agree otherwise, arbitral tribunals sitting in Hong Kong can order security for costs against a party to the arbitration (section 56(1)(a) of the Arbitration Ordinance). The tribunal has no jurisdiction to make such an order against a third-party funder. In practice, arbitration funding agreements will typically provide that a funder will pay any security for costs order, because, if such order is not paid, the claim will not proceed. Paragraph 2.12 of the Code of Practice requires funders to ensure that the funding agreement stipulates whether, and to what extent, the funder will be liable to the funded party for security for costs orders made against the funded party.

If a claim is funded by a third party, does this influence the court’s decision on security for costs?

As far as we are aware, this question has not arisen in funded litigations in Hong Kong. Arbitral tribunals sitting in Hong Kong may order the claimant to give security for the costs of the arbitration. However, they may not make such an order only on the grounds that the claimant is not based in Hong Kong (section 56(2) of the Arbitration Ordinance). These decisions are usually confidential, so it is not possible to say whether a tribunal is likely to be influenced by the existence of third-party funding in deciding whether to order security for costs.

Insurance

Is after-the-event (ATE) insurance permitted? Is ATE commonly used? Are any other types of insurance commonly used by claimants?

There is no legislative or regulatory prohibition on ATE insurance in Hong Kong. However, third-party funding is a nascent market in Hong Kong. We are not aware that ATE or any other type of insurance are commonly used at present, but this is likely to change.