One of the hottest topics at the moment is third party funding [TPF], with the demand for TPF growing regionally, and globally. While critics of TPF allege that it has been used to support impecunious parties, it is increasingly used for risk and asset management, and to add value to proceedings.
With Hong Kong becoming the latest country in the Asia-Pacific region to permit TPF, it is a timely occasion to take a closer look at the development of TPF in Hong Kong and its growing prominence in the wider region including Singapore, Australia and New Zealand.
What is TPF?
TPF is an arrangement where a person with no legal interest in the proceedings (other than under the funding agreement) funds the costs and expenses of the proceedings in exchange for an agreed return.
TPF is usually provided by specialist funders. However, the market has now expanded to include other financiers such as insurance companies, investment banks, hedge funds and law firms.
There are many advantages to TPF. For one, it can provide access to justice for parties who would not have otherwise been able to resource proceedings. Further, it can offer a convenient financing structure so that capital is not tied up in proceedings, be used to manage risks associated with bringing or defending proceedings or to add value to proceedings by providing parties with access to otherwise cost prohibitive expertise or technologies in support of their case.
However, TPF is not without its drawbacks. For example, it may result in undisclosed conflicts of interest (e.g. where there is a pre-existing relationship between a funder, party and/or acting law firm), breaches of confidentiality and privilege, and a funder exerting improper influence over proceedings.
Barriers to TPF?
The most significant barrier to TPF in the common law world is the antique English doctrine of maintenance and champerty which prohibits a third party with no legitimate interest in a proceeding from supporting or maintaining the proceedings in exchange for a percentage of the proceeds. The application of this doctrine to the jurisdictions the subject of this article is discussed below.
The Code of Practice for Third Party Funding of Arbitration and Mediation [Code] came into effect on 1 February 2019 setting out the practices and standards that funders are ordinarily expected to comply with in carrying on activities in connection with TPF of arbitration and mediation in Hong Kong including the scope of funding agreements, termination of funding agreements, capital adequacy, conflicts of interest, control of proceedings and liability for adverse costs. 1
This development follows the 2017 amendment to the Arbitration Ordinance [Cap 609] which provided that TPF of arbitrations and related litigation and mediation proceedings are not prohibited by maintenance and champerty. 2 This amendment extends to arbitrations in Hong Kong and outside of Hong Kong for services provided in Hong Kong, and is not limited to specialist funders.3 Funded parties are required to disclose that a funding agreement has been made, the name of the funder and the conclusion of the funding agreement.4
Outside of the above, TPF is generally prohibited in litigation except in: ‘common interest’ cases; where ‘access to justice considerations’ apply; and in limited miscellaneous circumstances including insolvency litigation. 5
In 2017 Singapore passed legislation abolishing maintenance and champerty in international arbitrations and related litigation and mediation proceedings. 6 Unlike Hong Kong, where TPF is guided by a Code and non-compliance does not carry any legal consequences, Singapore prescribes an extensive regulatory framework for TPF. For example, only specialist funders with a minimum ‘paid-up’ capital of SGD $5 million are eligible to provide TPF,7 and solicitors acting for a party receiving funding must disclose the existence of a funding agreement as soon as practicable to the tribunal (or court) and other parties to the proceeding as well as the address and identity of the funder.8 In addition, the Singapore Institute of Arbitrators has issued non-binding guidelines for funders and the Singapore International Arbitration Centre (SIAC) has issued a Practice Note on arbitrator conduct in SIAC cases involving TPF. More recently, Singapore passed the Insolvency, Restructuring and Dissolution Act 2018 empowering liquidators to assign the proceeds of certain actions, for example, unfair preferences, undervalued transactions, extortionate credit transactions, fraudulent and wrongful trading, and delinquent officer’s facilitating TPF, and to engage and increase their access to TPF.9Outside of the above, TPF is generally prohibited in litigation except in limited circumstances, for example, where funding is provided to investigate potential claims in connection with a major corporate collapse.10
TPF emerged in Australia in the 1990s, and it has since grown into one of the most active jurisdictions in the world. Unlike Hong Kong and Singapore, there is no limit on the availability of TPF. Nonetheless, TPF in Australia is not without complexity. Maintenance and champerty have not been abolished in a number of states and territories and therefore there is scope for funding agreements to be set aside in these jurisdictions. There is no specific regulatory framework. Instead, TPF is largely governed by the courts (and their respective rules) in each jurisdiction.
While maintenance and champerty have not been abolished, New Zealand courts have taken a pragmatic, ‘cautiously permissive’ approach to TPF providing parameters for the operation of TPF in New Zealand.
In particular, the courts have recognised a supervisory jurisdiction over funding agreements in representative actions. 11 Further, the courts have recognised an inherent power to prevent an abuse of process arising from funding agreements or claims under funding agreements which amount to impermissible assignment of a cause of action. There are also specific disclosure requirements for representative actions and non-representative actions. Impending reform is likely in New Zealand with the Law Commission announcing last year its intention to review class actions and TPF.12
Impact on the Construction Industry
While historically TPF has not been widely used in construction disputes, we predict that this is likely to change. With arbitration and mediation the primary means of dispute resolution under various standard form construction contracts, and TPF now available in leading arbitral seats of Hong Kong and Singapore, there is likely to be a greater use of TPF in the construction industry.