For the past decade or so, there has been an enduring debate as to whether conditional or contingency fees should be made available to arbitrations taking place in Hong Kong.
One school of thought advocates a complete freedom of contract between lawyers and clients. Applying the famous economic theory from Adam Smith to this context means that the “invisible hand” will guide how legal fee should be structured; the legal profession and their clients have absolute flexibility in negotiating their fee agreements.
Another school of thought advocates that the arbitral regime should stick with the conventional doctrine of maintenance and champerty, prohibiting all kinds of conditional or contingency fees, protecting the sanctity of the profession and clients from, the rare, but ever existing, less scrupulous portion of the legal field.
In Unruh v Seeberger [2007] 2 HKC 609, the Court of Final Appeal, while tackling this issue, refused to take a stance on whether this should apply to arbitration and has been criticized by some for not taking the opportunity to make ally any uncertainty.
In June 2017, the Arbitration Ordinance (Cap 609) was amended to prohibit almost all sorts of litigation funding in a broad manner even covering most outcome related fee structures (“ORFSs”).
While such an amendment clarified Hong Kong’s position, it in effect was a move retreating from shaping Hong Kong into a leading international arbitration centre compared to other arbitration hubs which allow ORFs. Currently, aside from Singapore, all major arbitration hubs have allowed parties to enter some sort of ORFSs.
In light of the fast-paced development of arbitration in the international arena, the Law Reform Commission published a report (“Law Reform Report”) in December 2021 recommending that prohibitions on the use of ORFSs should be lifted.
What are ORFSs?
Briefly, ORFS can be generally categorised into: (a) conditional fee agreements (“CFA”), damages-based agreements (“DBAs”) and hybrid damages-based agreements (“Hybrid DBAs”).
CFA
In a CFA, legal fees are calcualted by reference to a “benchmark” fee, which is usually measured based on an hourly rate basis. If the client is successful an additional success fee is charged on top of the hourly rate which can either be a fixed fee or a certain percentage pegged to the “benchmark” rates.
Legal fee charged (for winning party) = benchmark fee + success fee
It is recommended that lawyers cannot charge an amount of success fee that is larger than the amount of benchmark fee. In addition, the success fee has to be paid out of the client’s own pocket and cannot be recovered from the losing party.
On the other hand, if the party loses in arbitration proceedings; only the “benchmark” hourly rates are payable and at a discount. Hence, CFA is also known as a “no win, low fee” arrangement.
Legal fee charged (for losing party) = benchmark fee x discount rate
DBA
In relation to a DBA, the fee is charged with regard to the financial benefit granted under the arbitral award. It is usually known as, “no win, no fee” arrangement or contingency fee such as a percentage of amount awarded or if acting for a respondent, based on the amount of damages dismissed or reduced.
There is a discussion as to whether the Ontario model or success fee model should be adopted in a DBA arrangement. Ontario model means that the claimant’s recoverable costs will be measured based on the conventional hourly rate method. If the contingency fee is higher than the recoverable costs, the claimant will be required to pay the shortfall out of the damages.
By way of illustration, a claimant has agreed to pay a contingency fee of 25% to his lawyer and was awarded HK$1 million in damages and HK$200,000 in recoverable costs. According to the Ontario model, the claimant has to pay its lawyers HK$50,000 from damages and not from the losing party. Which means the losing party may stand to gain a windfall as part of the costs ordered is recoverable from the claimant directly.
The Law Reform Report recommends that the success fee model is preferred to the Ontario model to avoid such a windfall which can be perceived to be unfair with the contingency fee capped at less than 50% of the financial benefit.
Hybrid DBAs
Under a Hybrid DBA, fees are charged at different stages of the arbitration proceedings. Should financial benefit be awarded, the lawyer can also receive a contingency fee.
Relying on Lord Justice Jackson’s Review of Civil Litigation Costs: Final Report (2009), the Law Reform Report recommended that Hybrid DBAs should be permitted in addition to CFA and pure DBA for, amongst other things, the following reasons :-
- In long-running and complex cases, hybrid DBAs can alleviate the cash flow problems that law firms may encounter; which is common in complex, high-value arbitrations;
- Allowing more funding options to parties can enhance access to justice; and
- Hybrid DBAs will unlikely open a floodgates of frivolous and speculative cases because lawyers will not have incentives to commit to cases with little prospect of success.
Our short opinion on the matter
The law reform of ORFSs for arbitration has received overwhelming support from the legal profession, but the matter is not without pitfalls. When preparing or negotiating legal fee agreements with potential clients, regards should be given to the following safeguards as mentioned in the Law Reform Report :-
- The fee agreements must be clear about the circumstances in which the lawyer’s fees and expenses (or any part of them) will be payable;
- Clients should be given all information relevant to the fee agreement, including disbursements and barristers’ fees;
- Clients should be encouraged to seek independent legal advice before signing the fee agreement;
- The termination clause must be carefully drafted, in particular the mechanism of how legal fee should be charged upon termination must be clearly stated.
This article was first published in the April 2022 issue of the Hong Kong Lawyer, the official journal of The Law Society of Hong Kong.
