Regulation

Overview

Is third-party litigation funding permitted? Is it commonly used?

Third-party funding is not generally permitted for litigation in the Hong Kong courts. Such funding is considered infringement of the doctrines of champerty and maintenance, which prohibit any party without a legitimate interest in the action from assisting or encouraging a party to that action in return for a share in the proceeds if the claim succeeds. Champerty and maintenance are both torts under Hong Kong law. They are also indictable offences at common law, punishable under section 101I of the Criminal Procedure Ordinance by imprisonment and a fine.

There are three - limited - exceptions to the general prohibition on litigation funding, namely the:

  • ‘common interest’ cases, involving third parties with a legitimate interest in the outcome of the litigation;
  • where ‘access to justice considerations’ apply; and
  • a miscellaneous category, including insolvency proceedings.

These exceptions were set out in Unruh v Seeberger [2007] 10 HKCFAR 31. Where one of the exceptions applies, litigation funding will be permitted.

Litigation funding is most commonly used in Hong Kong in respect of the third category: insolvency proceedings. Hong Kong courts will permit a funding agreement where it includes an assignment of a cause of action by a liquidator (In re Cyberworks Audio Video Technology Ltd [2010] 2 HKLRD 1137). The liquidator’s right to assign causes of action is conferred by section 199(2)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), which empowers liquidators to ‘sell the real and personal property and things in action of the company by public auction or private auction’. This includes a cause of action.

Section 199(2)(a) does not require the liquidator to seek the court’s consent to the funding arrangement. In practice, however, the liquidator may choose to do so (eg, Chu Chi Ho Ian v Yeung Ming Kwong [2014] HKEC 1901).

Even where a claim falls outside the section 199(2)(a) exception to champerty and maintenance, Hong Kong courts have been willing to facilitate litigation funding in the insolvency context, as long as there is a ‘legitimate commercial purpose’ (Jeffrey L Berman v SPF CDO I Ltd [2011] 2 HKLRD 815; In re Po Yuen (To’s) Machine Factory Ltd [2012] 2 HKLRD 752).

As of 1 February 2019, third-party funding is also allowed for arbitration proceedings in Hong Kong. Following a lengthy consultation period and legislative process, the government introduced amendments to the Arbitration Ordinance (Cap. 609) to provide that third-party funding of arbitration and related mediation and court proceedings is not prohibited on grounds of champerty and maintenance. Similar amendments to the Mediation Ordinance have been drawn up, but are not yet in force.

Hong Kong’s Secretary for Justice has also issued a Code of Practice for Third-Party Funding of Arbitration (see question 5).

As funding is only permitted in limited circumstances, it is not commonly used in Hong Kong. However, we are aware of some litigation funding activity, particularly for insolvency proceedings. We anticipate that funding activity will increase significantly in coming years, now that third-party funding of arbitration is permitted.

Restrictions on funding fees

Are there limits on the fees and interest funders can charge?

Fees and interest are matters for agreement between the funder and the funded party. Hong Kong law does not impose specific limitations on the amounts that third-party funders can charge.

Specific rules for litigation funding

Are there any specific legislative or regulatory provisions applicable to third-party litigation funding?

Part 10A of the Arbitration Ordinance permits third-party funding of arbitration and related court and mediation proceedings in Hong Kong, as well as funding of work done in Hong Kong on arbitrations and related proceedings outside Hong Kong.

Third-party funding of mediations that are not related to an arbitration will be permitted under Part 7A of the Mediation Ordinance, but the relevant amendments are not in force as at August 2019.

Law firms are prevented from funding cases by the Legal Practitioners’ Ordinance and by professional conduct rules (see question 11). Section 98O of the Arbitration Ordinance expressly prohibits lawyers and law firms from funding cases in which they act for any party in relation to the arbitration.

Legal advice

Do specific professional or ethical rules apply to lawyers advising clients in relation to third-party litigation funding?

Professional conduct rules prevent Hong Kong lawyers and registered foreign lawyers from entering into conditional or contingency fee arrangements to act in contentious business. This prevents lawyers themselves, or their firms, from funding clients’ claims in litigation or arbitration through such fee arrangements (see question 11). However, we are not aware of any rules that prevent lawyers from advising their clients on using third-party litigation, selecting funders or working with the funders during the proceedings.

Regulators

Do any public bodies have any particular interest in or oversight over third-party litigation funding?

Section 98X of the Arbitration Ordinance empowers the Secretary for Justice to appoint an ‘authorised body’, which may issue a ‘code of practice setting out the practices and standards with which third-party funders are ordinarily expected to comply in carrying on activities in connection with third-party funding of arbitration’. Section 98Q sets out a number of criteria that the code of practice might include.

The same section authorises the Secretary for Justice to appoint an ‘advisory body’ to monitor and review the operation of the Funding Ordinance, including the Code of Practice.

On 18 May 2018, Hong Kong’s Department of Justice appointed Ms Teresa Cheng SC, Secretary for Justice, as the authorised body with a remit to draw up the code of practice.

On 24 August 2018, the advisory body was appointed. It comprises three senior, Hong Kong-based lawyers: Anthony Chow, Robert Pang SC and Victor Dawes SC.

On 7 December 2018, the Secretary for Justice issued the ‘Code of Practice for Third-Party Funding of Arbitration’. The Code applies to any funding agreement commenced or entered into on or after 7 December 2018. Failing to comply with the Code of Practice does not, of itself, give rise to civil or criminal liability. However, the Code is admissible in evidence before a court or arbitral tribunal, which may take into account any failure to comply with it, if such failure is relevant to a question that court or tribunal is deciding (Section 98S of the Arbitration Ordinance).

In addition, to the extent that funders raise capital in Hong Kong, those activities could arguably be regulated by the Securities and Futures Commission, if the sources of funds amount to a ‘collective investment scheme’ under the Securities and Futures Ordinance. If the funds provided by a funder are considered a loan, the funder might be considered a ‘money lender’ under the Money Lenders’ Ordinance and require a licence to conduct business with the funded party. However, most of the funding structures of which we are aware are unlikely to be considered a loan.

Where funders operating in Hong Kong, but based elsewhere, belong to regulatory bodies, such as the United Kingdom’s Association of Litigation Funders, they will typically adhere to that regulator’s requirements when funding proceedings in Hong Kong.