The Law Reform Commission of Hong Kong (LRC) has today released its much anticipated consultation paper recommending that third party funding for arbitrations taking place in Hong Kong should be permitted.

Set out below are answers to some frequently asked questions.

What is third party funding?

In general, third party funding is a situation where a party, other than the claimant, agrees to pay some or all of the claimant’s legal fees and expenses to pursue a claim, in return for a financial benefit.  The financial benefit may include a share of any sums recovered by the claimant.  In international arbitrations, third party funding has been used in a number of situations overseas, with funding provided by specialist funds, the largest of which have total funding budgets in excess of USD100m. 

Why use third party funding?

Third party funding allows claimants with legitimate claims but limited financial resources to bring claims that they otherwise may not be able to afford.  In other cases, third party funding also gives parties more flexibility, such as the ability to control or spread out legal costs more effectively.

What restrictions are there on third party funding in Hong Kong?

The common law offences of maintenance and champerty have not been abolished in Hong Kong and continue to be prosecuted.  As recently as March 2014, the Hong Kong government considered the issue of whether to abolish the offences of maintenance and champerty.2   It was decided that the offences should be preserved for the time being, as their abolition would raise broader legal and policy concerns.  As such, various restrictions on third party funding of litigation continue to apply in Hong Kong.

The position on third party funding for arbitration is less clear; the current consultation is therefore welcomed, in helping to clarify the position. 

What is the role of a third party funder?

The Hong Kong court has sanctioned the use of third party funding in a number of reported cases in the insolvency context.  These arrangement were considered acceptable where the third party funder provided funds at arm’s length to the funded party.  Importantly, the funded party retains control of the proceedings.  The third party funder, however, assumes liability for costs and adverse costs orders, if so ordered by the court.

The scope of the third party funder’s involvement in the proceedings, as well as various details of the funding, is typically included in a negotiated third party funding agreement. 

What are the concerns with third party funding of arbitrations?

A number of reservations have been raised, including the concern that this will promote unnecessary arbitration proceedings, third party funders may exercise too high a level of control over the arbitrations, and the costs of third party funding (ie, the third party funder's share of the proceeds) may be excessive. 

It is unlikely that allowing third party funding would encourage a sudden expansion in unmeritorious claims: Major third party funders typically have their own litigation counsel and take advice from external law firms, in evaluating the merits of a potential claim against their own investment criteria.  Funders are likely to be prepared to invest in a claim only if it is meritorious and the prospects of recovery are reasonably good. 

How does this compare with the position in Singapore?

The status of third party funding in Singapore is also unclear.3  In 2011, the Singapore Ministry of Law commenced public consultations for proposed amendments to the International Arbitration Act. Apart from the provisions set out in the draft amendment bill (which was eventually passed in 2012), in its 2011 consultation paper the Ministry also sought views on other proposed amendments to the international arbitration regime that it was considering. These included the proposal to allow third party funding for arbitration, accompanied by safeguards to minimise potential abuse.  It is understood that consultations on allowing third party funding in arbitration and other legal proceedings are still ongoing.

What does the LRC consultation paper recommend?

The LRC consultation paper recommends that the Arbitration Ordinance be amended to provide that third party funding for arbitration be permitted. It also recommends that clear ethical and financial standards for third party funders providing third party funding to parties to arbitrations taking place in Hong Kong should be developed. 

To that end, the LRC has invited submissions on a number of issues, including the following:

  1. whether the development and supervision of applicable ethical and financial standards should be conducted by a statutory or governmental body, or a self-regulatory body;
  2. how the applicable ethical and financial standards should address other matters such as conflicts of interest, confidentiality and privilege, control of the arbitration by the third party funder, and disclosure of third party funding;
  3. whether a third party funder should be directly liable for adverse costs orders in a matter it has funded.

 The consultation period will end on 18 January 2016.