On 30 December 2016 the Hong Kong Government gazetted the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 (“Bill“). The Bill closely follows the recommendations made by the Law Reform Commission in the Report on Third Party Funding for Arbitration (“Report“) dated 12 October 2016 (see our note here).

The Bill clarifies that the centuries-old doctrines of maintenance and champerty, which prohibit third party funding for litigation, do not apply to funding of arbitration and mediation. It also proposes a new part (Part 10A) to be added to the Arbitration Ordinance (Cap 609) (and cross references to be incorporated into the Mediation Ordinance (Cap. 620)), which provides for a code of practice to be issued and contain other measures and safeguards aimed at preserving integrity if third party funding is used.

The Bill

Key points of the Bill include:

  • The definition of arbitration is extended to include not only arbitrations to which the Arbitration Ordinance applies, but also proceedings before the court, an emergency arbitrator or mediator that is covered by the Arbitration Ordinance.
  • The definition of third party funding of arbitration excludes the direct or indirect provision of arbitration funding by lawyers or those providing legal services, in order to avoid any conflict of interest.
  • The new law will not cover funding agreements made before the commencement of its relevant provisions.
  • Part 10A will also apply where the place of arbitration is outside Hong Kong or there is no place of arbitration to the extent that costs and expenses are provided in Hong Kong in relation to the arbitration – unlike the Arbitration Ordinance, which in general only applies when the place of arbitration is in Hong Kong.
  • An advisory body and an authorized body will be established to facilitate the regulatory framework for third party funding of arbitration in Hong Kong.
  • A code of practice (“Code“) may be issued by the authorized body setting out standards and practices to be observed with respect to, inter alia, funding agreements, internal procedures of third party funders (such as sufficient minimum capital requirements) and monitoring measures. The Code may also specify terms to be included in the funding agreements. A process involving public consultation must be followed prior to issuing the Code. The Code will not have legally binding effect but will be admissible in evidence where failure to comply is in question.
  • Communication of confidential information to an existing or potential third party funder is allowed and any recipient is then subject to confidentiality requirements.
  • Requirements for disclosure of the existence of any third party funding agreement to other parties, in order to avoid conflicts of interest.

The Bill stops short of any amendment to vest in arbitral tribunals the power to make an adverse costs order against a non-party, as recommended in the Report, which instead preferred to recommend that a review be conducted after the Initial Period to determine whether an amendment would be necessary.

Concluding thoughts

The Bill closely follows the recommendations of the earlier Report; as such, only limited, if any, revisions to the Bill are expected before it passes into law.

The availability of third party funding is a welcome development for arbitrations seated in Hong Kong, allowing for access to justice, levelling the playing field for settlement discussions, and allowing for companies to manage financial risk.

It will further consolidate Hong Kong’s attractiveness as a place of arbitration.