Abdul has written on this topic for Law360, published 28 June 2017, which can be read here.

A new law concerning the third party funding of arbitration, recently adopted by the Hong Kong Legislative Council (LegCo), comes as a welcome development: it will bring Hong Kong into line with other common law jurisdictions, ensuring that it keeps pace with its international rivals, and strengthen the position of the Hong Kong International Arbitration Centre (HKIAC).

A survey conducted in 2015 by Queen Mary University of London revealed that Hong Kong and Singapore are the third and fourth most preferred venues for international arbitration respectively, behind London and Paris. Nevertheless, third party funding has historically been regarded with suspicion in much of Asia. This development will allow Hong Kong to match Singapore, which also passed a law allowing third party funding or arbitration earlier this year, as the two centres compete for the position of leading Asian venue of arbitration.

The Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 allows third party funding for arbitrations seated in Hong Kong. It will apply equally to domestic and international arbitrations following their unification into a single regime in 2011. The funded party will be under an obligation to disclose the existence of the funding agreement as well as the identity of the funder to the other party and the tribunal or court hearing the case.

This represents a major step for Hong Kong as an international arbitration hub. As a result of the legislation, parties involved in arbitrations seated in the jurisdiction should be able to access a much wider spectrum of funding arrangements. An appropriate Third Party Funding for Arbitration Code of Practice in Hong Kong is to be drawn up and will take effect later this year.

The term ‘third party funder’ has a notably broad meaning under the new guidelines for Hong Kong. Not limited exclusively to professional funders, it can also include any party with no personal interest in the proceedings.

The adoption of the bill by LegCo follows the Final Report of Hong Kong’s Law Reform Commission (LRC) Sub-Committee, published last October, which showed that express authorisation of third party funding in arbitration had overwhelming support in the territory. A remarkable 97% of those who took part in the consultation process – arbitrators, barristers, solicitors, government bodies and arbitral institutions – were in favour of legislative amendments as recommended by the Commission, namely that the somewhat archaic common law torts of champerty and maintenance should not apply to arbitration, mediation and proceedings before the court connected to the arbitration.

The Hong Kong Bar Association (HKBA) noted in its response to the consultation: ‘Hong Kong can be better placed to compete with other international commercial arbitration centres, like London where legal practitioners (save in class actions) are now allowed to practise on a contingency basis. The same is allowable in the US and Mainland China.’

The HKBA also noted that ‘the HKSAR government with the objective of maintaining and consolidating its premier position as an international dispute resolution centre, proposed the reform of the current arbitration legislation regime by expressly allowing third party funding.’

Arguably, the territory has not invested as much in promoting itself as some regional arbitration centres, particularly Singapore. There is therefore some catching up to do if it is to maintain a competitive position.

There is potential for some arbitrage, and conceivably some parties will be interested in the point that arbitration proceedings can be funded when making choices about jurisdiction in negotiating their contractual arrangements. This may encourage parties involved in a Hong Kong centred dispute to choose arbitration rather than litigation, if they think the potential for obtaining funding is a decisive factor.

In overall terms, this development in Hong Kong can only be good for those involved in arbitration, and especially for any kind of transaction involving China, Hong Kong is seen as an attractive arbitration centre. It will also deliver even greater prominence and status for arbitration as a viable alternative to litigation. More disputes are likely to go through the arbitration process because they can be funded by readily available sources of investment, so we can expect to see an increase in the volume and scope of arbitrations which will be heard.

According to the LegCo report, the bill will not apply to litigation in Hong Kong courts: its funding by third parties will remain prohibited, except for any court proceedings which specifically relate to arbitration – for example enforcement and challenges. Longer term, it may still provide a test bed for the potential extension of third-party funding to include court proceedings – assuming such further reform is deemed desirable by LegCo.

Third party funding has the potential to have a significant impact on the local dispute resolution market in Hong Kong. Over the last decade, third party funding has become increasingly common in much of Europe, Australia and the United States. Judging by the recent experience of London, we have seen claims being advanced with the help of funders which would not previously have been possible. This applies particularly to group litigation against large institutions, with a blend of claimants, institutional and retail, coming together to advance proceedings. It is difficult to imagine those sorts of cases being maintained without funding. Even parties which are able to fund their own litigation are increasingly looking at third party funding as an attractive financial and risk management tool.

It will be interesting to see the progress towards the wider admission of litigation funders to fund domestic commercial litigation – particularly in the area of securities litigation. Given the very active securities markets in Hong Kong, there would be some interesting angles for litigation funders to put together group actions of the type we are increasingly seeing in Europe. If that path is opened up, it will be a significant adjustment for the Hong Kong legal profession, as the involvement of litigation funders changes the approach to case management significantly.