On 14 June 2017, Hong Kong’s Legislative Council passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 (“Third Party Funding Bill“), amending the Arbitration Ordinance (Cap 609) (Ordinance) (“AO”) to permit third party funding of arbitration proceedings seated in Hong Kong.As Hong Kong prepares to implement the reform (which is expected to take effect in late 2017), we take stock of some of the key features of the Third Party Funding Bill and what its passage will mean for users of Hong Kong arbitration. We also make comparisons with third party funding of arbitration in England and Wales to determine what practical lessons can be learned from the reform process in that jurisdiction.

Background in Hong Kong

As a common-law jurisdiction, Hong Kong inherited the medieval English legal doctrines of maintenance and champerty which prohibit the funding of legal proceedings by unrelated third parties. Whilst other common law jurisdictions such as England and Wales and Australia have long since abolished the doctrines by statute, and Singapore has just recently done so, the Hong Kong Courts have continued to resist their outright abrogation.This remained the position until Hong Kong’s Law Reform Commission (“LRC”) recently launched a consultation on whether to permit third party funding of Hong Kong seated arbitration. This process resulted in the recently released “Report on Third Party Funding for Arbitration” (“Report”) in which the LRC recommended that the AO be amended to permit third party funding of arbitrations. The Third Party Bill is the long awaited enactment of the recommendations in the Report, and largely replicates the draft provisions in that Report.

See further detail on this and the potential effects of the reform on the construction industry in our previous article on the topic.

Key features of the reform

All users of Hong Kong seated arbitration stand to gain from the reform, which enhances Hong Kong’s position as a seat of international arbitration. We set out below some of the key features of the law:1. What types of proceedings will soon be fundable?

As Hong Kong’s route to reform has not been to abrogate the doctrines of maintenance and champerty, it will be important for users to understand which types of funding arrangements are permissible under the reform.

Key points to note include:

  • The scope of permissible funding includes not only arbitration proceedings under the AO but also related proceedings such as Court proceedings, mediation and emergency arbitrations;
  • To be a permissible funding arrangement, a funding agreement must be in writing; and
  • A funded party can also include a party who is likely to be a party to arbitration that has not yet commenced.

Importantly, the new law uses a number of definitions to deal with potential conflicts of interest that may arise. For example, the new subsection (1)(b) of section 98J of the AO defines the meaning of “third party funder” as a party under a funding agreement “who does not have an interest recognised by law in the arbitration other than under the funding agreement”.

Further the new section 98NA of the AO (added as a result of an amendment to the bill during its Committee Stage) clarifies that lawyers and law firms can act as third party funders only where they do not act for any party in relation to the arbitration.

2. What is the effect of the reform on the statutory obligation of confidentiality?

Hong Kong is unique in that it has express statutory confidentiality obligations that govern all arbitrations taking place under the AO. Thus, a key development of the reform is that these strict confidentiality obligations are now expressly stated not to apply where a disclosure of information is made for the purpose of “having or seeking” third party funding.

The new section 98S therefore allows parties to communicate to a person information about their arbitration or potential arbitration, for the purpose of obtaining third party funding as a way to pursue or protect their legal interests.

3. What disclosure requirements exist?

Parties now have additional disclosure requirements which have been proposed by the LRC to address concerns over potential conflicts of interest (such as those between funders and arbitrators). Therefore, once a funding agreement is made, the new section 98T of the AO requires that the funded party must give written notice of:

  • the fact of the funding agreement; and
  • the name of the third party funder to the arbitration body and each of the other parties to the arbitration.

Notice must be provided by the commencement of the arbitration, or, if the funding agreement is entered into on a date after commencement, within 15 days after that agreement is made.

4. What further regulations are proposed?

Following the trend towards “light touch” regulation, there is no statutory regulations for third party funders. Rather, the LRC has recommended a three-year period in which a Code of Practice (“Code”) will be developed, establishing clear standards (including ethical and financial standards) for third party funders. At present, the Secretary for Justice has appointed an advisory body to draw up this Code.

Section 98P of the AO sets out a number of suggested standards that the advisory body might wish to include in the Code. A public consultation will be held and the advisory body is set to invite written submissions as to the content and parameters of the Code.

As Hong Kong embarks on the challenge of implementing these new reforms and, in particular, shaping the contours of the new Code, the experience of implementing reform in England and Wales provides useful, practical takeaways.

Comparisons between England & Wales and Hong Kong

Although England and Wales and Hong Kong share a common law background and the legal doctrines of maintenance and champerty, the former jurisdiction has taken a somewhat different path to permitting third party funding of arbitration.Unlike Hong Kong, England and Wales has had a combination of statutory and common law reform to third party funding. The passage of the Criminal Law Act 1967 (“CLA”) abolished the crimes and tortious wrongs of maintenance but did not affect whether third party funding contracts were considered contrary to public policy or illegality. The permissibility of funding agreements remained uncertain until recent, modern decisions[1], which reflect the current position that an arrangement must have an element of impropriety in order for it to amount to maintenance and champerty.

We summarise some of the key differences and commonalities between the two jurisdictions in the table below. Like Hong Kong, England and Wales has also adopted a “light touch” approach to regulation, leaving it up to the parties themselves to determine, according to their respective agreements, the extent of the rights and obligations of the third party funder. England and Wales has also used a “code” model under which there is no full statutory regulation for third party funders, but rather a Code of Conduct (“E&W Code”) which is enforced by the Association of Litigation Funders.

It will therefore be of some interest to Hong Kong arbitration users to note the issues and difficulties that have emerged in England and Wales in implementing this “light touch” approach. In particular:

  • the degree of control to be exercised by a third party funder over the dispute proceedings;
  • the extent to which parties are required to disclose their funding agreement arrangements; and
  • third party liability over adverse costs orders, which have all emerged as difficult territory for arbitration users and funders alike to navigate.

1. Degree of Control of Funders:

The E&W Code expressly states that third party funders should not seek to influence a funded party or their lawyers. Despite this, the extent of a funder’s influence has still caused concern in England and Wales. In the case of Excalibur Ventures LLC v Texas Keystone Inc and other [2014] EWHC 3436, the third party funders themselves were unusually ordered to pay indemnity costs to the defendants (not the funded party).The Court found that the claim had a limited likelihood of success but that the funders had exerted significant influence on continuing the case on the basis of overly bullish merits advice from the litigant’s solicitors. As a result of this decision, many funders have chosen to take a more independent role and to make their “hands off” position obvious.

The case highlights the difficulties in finding a suitable balance between the client and the funder for control of the conduct of the matter.

2. Disclosure:

England and Wales has chosen not to make it a requirement that parties to a funding agreement be required to disclose this arrangement to the Tribunal or other parties involved with the arbitration.

There are a number of potential problems with this. First, if there is a conflict of interest between a party and the arbitral Tribunal, without disclosure, the other party may not be aware of it to be able to raise any challenge on this basis. Second, a respondent may need to understand the claimant’s funding position to assess whether to apply for security for costs.

A Tribunal or Court can, of course, order a party to disclose the fact of and details of its funding. The Tribunal in the case of Muhammet Cap & Sehil Insaat Endustrive Ticaret Ltd. St v Turkemistan (ICSID Case No. ARB/12/6) Procedural Order No. 3 (June 12, 2015) was motivated by concerns over conflicts and the respondents ability to apply for security of costs when requiring the claimant to disclose whether it was being funded by a third party funder, and if so, the funder’s identity and nature of the funding arrangements, including to what extent the funder would share in a favourable award to the claimant. In England & Wales therefore, as it presently stands, failure to disclose a third party arrangement does not automatically render any person liable to judicial or other proceedings. Rather, at most, it can be the subject of an order, which if breached causes the usual consequences. However, unless respondents start to make such applications as a matter of course, relevant issues (or conflicts) may remain hidden by less than scrupulous claimants.

3. Costs:

England and Wales has not introduced any specific statute or regulation dealing with how an arbitrator should deal with adverse costs orders where a third party funder is involved. Rather, the Arbitration Act 1996 allows the Tribunal a wide discretion to make orders as to the arbitrator’s fees and expenses, the fees and expenses of the arbitration institution and the legal or “other costs” of the parties. The power in the Arbitration Act 1996 to cap recoverable costs at the outset of a case is seldom used in England and Wales. The typical approach is for costs to follow the event.

Both England and Hong Kong have chosen to leave the recoverability of costs associated with a third party funding arrangement within the wide ambit of discretion awarded to Tribunal members when making costs orders. Unsurprisingly, the recent decision in the English case of Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd [2016] EWHC 2361 (Comm) (“Essar”) to uphold an ICC award which allowed the claimant to recover indemnity costs including its third party funding costs was influenced by the behaviour of the respondent, who had deliberately set out to force the claimant into expensive litigation. We discuss this case further here.

The decision in Essar, while unsurprising, has raised some issues about how costs as they relate to third party funders should be treated in the future. This discord as it has emerged in the English case law, suggests that perhaps the appropriate course to be adopted in Hong Kong is to treat funding costs as damages to be pleaded by individual parties.

Conclusions

Whilst Hong Kong appears to have already learnt from some of the lessons of the English experience with funding (such as choosing to make disclosure a mandatory requirement), further work will likely need to be done in order to effectively reform areas such as the degree of control of funders and costs.The English examples suggest that, even if the Hong Kong Code goes further than the E&W Code, arbitration users will need to be alive to the potential issues with funding arrangements. It is therefore advisable that independent legal advice be sought before entering into any funding agreement.

 

Note: [1] London & Regional (St George’s Court) Ltd v Ministry of Defence [2008] EWHC 562 TCC