Following the consultation paper issued by the Third Party Funding for Arbitration Sub-Committee of Hong Kong’s Law Reform Commission (LRC) in October 2015 and recommendations made by the LRC in its report dated 12 October 2016, the Legislative Council of Hong Kong passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 on 14 June 2017. (For more information about the Consultation Paper and LRC’s recommendations, please see the articles in our March 2016 and October 2016 newsletters). The Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (The Amendment Ordinance) is expected to come fully into effect later this year.

The Amendment Ordinance amends the Arbitration Ordinance (Cap. 609) to ensure that third party funding of arbitration is not prohibited by the common law doctrines of maintenance and champerty, and provides for related measures and safeguards. Similar amendments are also made to the Mediation Ordinance (Cap. 620).

The key amendments to the Arbitration Ordinance are as follows:-

  1. The new law allows a "third party funder" to provide "arbitration funding" to a "funded party" under a "funding agreement", in return for a financial benefit only if the arbitration is successful within the meaning of the funding agreement.
  2. Arbitration funding can be in the form of money or any other financial assistance in relation to any costs of the arbitration.
  3. Arbitration includes arbitration proceedings as well as any related court proceedings, proceedings before an emergency arbitrator and mediation proceedings under the Arbitration Ordinance.
  4. The funding agreement must be in writing and includes only those made on or after the Amendment Ordinance comes into effect.
  5. A third party funder includes any person who is a party to a funding agreement and who does not have an interest in the arbitration. There is no prohibition against lawyers or law firms funding an arbitration, but they cannot do so if they act for a party in the arbitration.
  6. The common law offence of maintenance (including the common law offence of champerty) and tort of maintenance (including the tort of champerty) does not apply to the third party funding of arbitration.
  7. The Amendment Ordinance also applies to arbitrations outside Hong Kong in relation to costs and expenses of services provided in Hong Kong in relation to the arbitration.
  8. A Code of Practice may be issued by an “authorised body” appointed by the Secretary for Justice to set 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. It will set out, for example, the requirements for funding agreements, the minimum amount of capital a third party funder is required to have, the procedure for addressing conflicts of interest and whether (and to what extent) third party funders will be liable to funded parties for adverse costs, insurance premiums, security for costs and other financial liabilities. Non-compliance with the Code of Practice does not render any person liable to any judicial or other proceedings, but it is admissible as evidence in other proceedings.
  9. The funded party must give written notice to the arbitration body and each other party to the arbitration of (i) the fact that there is a funding agreement, (ii) the name of the funder; and (iii) the end of the funding agreement (other than because the arbitration has ended).

The implementation of the Amendment Ordinance will no doubt further enhance Hong Kong’s position as a leading arbitration hub. The new law has been widely welcomed by the arbitration community and it is anticipated that institutional funders will begin funding arbitrations as soon as the Amendment Ordinance comes fully into force. It is important for parties to arbitration to consider carefully the terms of any funding agreement they are considering entering into and advisable for them to seek professional advice before entering into such. We await the issue of the Code of Practice setting out the practices and standards with which third party funders will need to comply. The Amendment Ordinance states that there must be a public consultation process before the Code is issued and that is therefore likely to be the next step.