Third Party Funding (TPF) is the funding of costs of legal proceedings by an entity (Funder) that is unconnected to the dispute, in return for financial gain (e.g. a share of the damages awarded or a share of the settlement sum).
TPF provides access to justice for parties that do not have the finances to pursue a meritorious claim. It also opens up commercial choices for parties by enabling them to transfer some or all the financial risks of legal proceedings to the Funder, and to free up capital that may otherwise be tied up in the dispute.
The use of TPF in international commercial arbitration is growing in major arbitration centres around the world, including London, Paris and Geneva. Until now parties interested in using TPF in Singapore and Hong Kong have been hindered by local legal prohibitions. However, in what is a significant development for the region, both jurisdictions are now opening up their arbitration market to TPF.
At present, Singapore law generally prohibits TPF, but this is about to change.
To promote Singapore's growth as one of the top venues for international arbitration, Singapore's Ministry of Law has recently released draft legislation that will permit TPF for international arbitration proceedings. The draft legislation was open for public consultation from 30 June to 29 July 2016, and it is anticipated that the proposed amendments will be implemented before the end of this year.
Singapore law currently prohibits TPF in 2 ways, (i) a TPF contract would be unenforceable on the grounds of illegality or being contrary to public policy; and (ii) funding of legal proceedings has historically been characterised as maintenance and champerty, which are common law torts under Singapore law.
Summary of the Proposed Changes
In summary, the proposed legislative amendments in the draft Civil Law (Amendment) Bill and Civil Law (Third Party Funding) Regulations 2016 will bring about the following changes:
- Abolishing the common law tort of maintenance and champerty in Singapore.
- Providing that in certain prescribed categories of dispute resolution proceedings, TPF contracts are not contrary to public policy or illegal.
- The prescribed categories are, namely, international arbitration proceedings, related litigation or mediation proceedings, stay of proceedings in favour of international arbitration and proceedings for or in connection with the enforcement of an international arbitration award.
- Imposing the conditions on Funders through subsidiary legislation on the basis that Funders who fail to comply will not be able to enforce their rights under the TPF contract. The conditions are as follows:
- the Funder must carry on the principal business of the funding of the costs of dispute resolution proceedings to which it is not a party;
- the Funder must have access to funds immediately within its control (including within a parent corporation or subsidiary) sufficient to fund the dispute resolution proceedings in Singapore;
- the funds must be invested pursuant to a TPF contract to enable a funded party to meet the costs (including pre-action costs) of the prescribed dispute resolution proceedings.
- Providing that lawyers may recommend Funders to their clients or advise clients on TPF contracts so long as they do not receive any direct financial benefit from the recommendation or facilitation.
Duties on Legal practitioners
Singapore's Ministry of Law has also indicated that related amendments will be made to the Legal Profession (Professional Conduct) Rules 2015. These amendments are expected to draw reference from best practices in the revised International Bar Association Guidelines on Conflict of Interest in International Arbitration (October 2014). The changes would include (i) imposing a duty on legal practitioners to disclose the existence of a TPF contract and the identity of the Funder to the Court or tribunal and to every other party to the proceedings as soon as practicable; and (ii) prohibiting legal practitioners and law firms from having interests in relevant Funders and from receiving fees and commissions.
The proposed legislative amendments are a significant development in Singapore's dispute resolution landscape. They will further enhance Singapore's competitiveness as a preferred seat of international arbitration. However, there is room for more liberalisation. As things stand, the proposed changes will only permit TPF for international arbitration and related litigation or mediation proceedings. It remains to be seen if and when Singapore opens the door for TPF in domestic arbitration and pure litigation proceedings.
It is currently unclear whether the common law principles of maintenance and champerty, which prohibit the use of TPF in litigation, also apply to arbitrations in Hong Kong. However, as with Singapore, this is an area of the law that is about to change.
Recommendations from the Law Commission
Following on from a consultation in October 2015 (discussed in our Quarterly Review), which included a comprehensive study of the subject TPF in various jurisdictions in the world, last month the Hong Kong Law Reform Commission (LRC) released a report in which they recommended that the law should be amended to allow TPF for arbitration seated in Hong Kong and associated proceedings. The recommendations from the LRC extend to services provided in Hong Kong for arbitrations taking place outside Hong Kong and to arbitration-related court litigation in the Hong Kong Courts.
The LRC has also made detailed recommendations on how TPF should be operating in Hong Kong, including imposing clear standards on Funders and providing for these standards to be developed further in the future.
Trial period for the development of a code of practice
The LRC has recommended an initial three-year period as a "trial period". During that time, all Funders would be required to comply with a code of practice issued by a body authorized under the ordinance. The code would impose clear standards and "best practice" relating both to ethical and financial issues (including capital adequacy requirements, conflicts of interests, confidentiality and privilege, control of the arbitration by the Funder and grounds for termination). The Hong Kong Advisory Committee on the Promotion of Arbitration would oversee the adoption of the code and after the initial three year period, evaluate the operation of the code of practice. The Committee may thereafter recommend changes to both the standards and practices and decide whether a statutory or a regulatory body is necessary.
Another area which is of considerable interest to legal practitioners is the issue whether an arbitral tribunal should be given the power to make an adverse cost award or security for costs against a Funder. On the issue of adverse costs awards, there are no recommendations from the LRC as the LRC is of the opinion that it is still premature to amend the Arbitration Ordinance at this early stage. Likewise, the LRC makes no recommendations on the issue of security for costs as it is of the opinion that the existing mechanism under the Arbitration Ordinance is adequate.
Duties on legal practitioners
The LRC is of the opinion that the new rules should not allow funding provided either directly or indirectly by a person practising law or providing legal services. This, together with the requirement that the funded party should produce a written notice when a funding agreement is made, is aimed at preventing potential conflicts of interests. Interestingly, Australia is also adopting a similar approach. This is to encourage lawyers to focus on clients' service and to prioritise their clients' interest.
It remains to be seen how TPF in arbitrations in Hong Kong will be regulated in practice. If it is permitted under Hong Kong law, it will provide additional financing options. After all, a party with a good case in law should not be deprived of the financial support it needs to pursue that case by arbitration and seek remedy. Allowing TPF will definitely enhance Hong Kong's competitive position as an international arbitration centre.
As barrister and senior counsel of the LRC's TPF for Arbitration Sub-committee, Robert Pang Yiu-hung has said:
"If Hong Kong doesn't have a clear indication in third party funding, it is likely other countries may not choose Hong Kong as the place for arbitration, so these opportunities would be lost."