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 to infringe 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:

  • •‘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 litigation.

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 cases. 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, 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).

Until recently, it had been unclear whether champerty and maintenance applied to arbitration proceedings in Hong Kong. In Cannonway Consultants Ltd v Kenworth Engineering Ltd [1995] 1 HKC 179, the Hong Kong Court of First Instance held that champerty and maintenance do not apply to arbitration proceedings, but are confined to the public justice system (ie, court litigation). However, a later decision of the Hong Kong Court of Final Appeal created confusion about the applicability of champerty and maintenance to arbitral proceedings. In Unruh v Seeberger, the Court of Final Appeal held that it had no objection to third-party funding of a claim that was arbitrated outside Hong Kong, in a jurisdiction (the Netherlands) that had no legal principle equivalent to champerty and maintenance. However, the Court left open whether champerty and maintenance applied to arbitrations in Hong Kong, because the question did not arise in that case. The judge indicated that it was for the Hong Kong legislature to clarify the position, should it so wish. The court in Winnie Lo v HKSAR [2012] 15 HKCFAR 16 made a similar statement.

Consequently, the Hong Kong Law Reform Commission formed a subcommittee (LRC Subcommittee) to conduct a public consultation on third-party funding of arbitration in Hong Kong. Following the consultation, the LRC Subcommittee recommended that the Arbitration Ordinance be amended to permit third-party funding for arbitrations taking place in Hong Kong. It also recommended that ‘clear ethical and financial standards’ be developed for third-party funders providing funding to parties to arbitrations in Hong Kong.

On 14 June 2017, Hong Kong’s Legislative Council passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (Funding Ordinance). The Funding Ordinance amends the Arbitration Ordinance to provide that third-party funding of arbitration and related mediation and court proceedings is not prohibited on grounds of champerty and maintenance. It makes similar amendments to the Mediation Ordinance.

As at September 2018, not all amendments are in force, but it is hoped that they will be effective soon. Sections 98E to 98J (definitions and interpretation) and 98P to 98X (code of practice) of the Arbitration Ordinance were gazetted on 23 June 2017 and are now in force. Sections 98K to 98O (third-party funding of arbitration not prohibited by champerty and maintenance; application to work done on arbitration outside Hong Kong and prohibition on lawyers funding arbitrations in which they act for any party) are not yet in force.

Hong Kong’s Department of Justice recently issued a draft Code of Practice, which is subject to public consultation until 30 October 2018 (see question 5). It is hoped that the remaining provisions of the Funding Ordinance will be brought into force as soon as possible after the end of the consultation period.

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, and we expect this to increase significantly as soon as 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?

Once the amendments enacted by the Funding Ordinance come into force, Part 10A of the Arbitration Ordinance will permit 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.

Law firms are prevented from funding cases by the Legal Practitioners’ Ordinance and by professional conduct rules (see question 11). Section 98NA of the Arbitration Ordinance (once in force) will expressly prohibit 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?

Sections 98P and 98X of the Arbitration Ordinance (introduced by the Funding Ordinance) empower 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 sections authorise 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 30 August 2018, the Secretary for Justice issued a draft code of practice for public consultation. The consultation period will end on 30 October 2018.

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.

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 UK’s Association of Litigation Funders, they will typically adhere to that regulator’s requirements when funding proceedings in Hong Kong.