Currently, Hong Kong lawyers are prohibited from charging outcome related fees in arbitration, other than pursuant to third party funding arrangements (for more information about third party funding, please see the article in our September 2017 newsletter). On 17 December 2020, the Outcome Related Fee Structures for Arbitration Sub-committee of the Law Reform Commission (Sub-committee) published a consultation paper proposing changes to Hong Kong law to enable lawyers to use outcome related fee structures (ORFS) for arbitration taking place in and outside Hong Kong, with the objective of maintaining Hong Kong’s status as one of the world’s top arbitral seats and to enable it to compete on an even playing field with other leading arbitral seats which allow some form of ORFS. The Sub-committee’s view is that such fee arrangements are attractive to clients for many reasons, including financial risk management, access to justice, and a general desire that their lawyers share the risks inherent in litigating or arbitrating a claim.
What is an ORFS?
An ORFS is an agreement between a lawyerand client, whereby the lawyer advises on litigation or arbitration proceedings (Proceedings) which are contentious and the lawyer receives a financial benefit if those Proceedings are successful within the meaning of that agreement. For the purposes of the Consultation paper, ORFS include CFAs, DBAs and Hybrid DBAs, which are as follows:
CFA: Conditional Fee Arrangement - An agreement, pursuant to which a lawyer agrees with their client to be paid a success fee in the event of the client’s claim succeeding, where the success fee is not calculated as a proportion of the amount awarded to or recovered by the client. CFAs include arrangements where (a) the lawyer charges no fee during the course of the Proceedings, and is paid only the success fee if the client’s case succeeds (also known as “no win, no fee” agreement); or (b) the lawyer charges a fee during the course of the Proceedings, either at the usual rate or at a discounted rate, plus the success fee if the client's case succeeds (also known as a "no win, low fee" agreement).
DBA: Damages-based Agreement - An agreement between a lawyer and client, whereby the lawyer receives payment only if the client is successful, and where the payment is calculated by reference to the outcome of the Proceedings, for example as a percentage of the sum awarded or recovered.
Hybrid DBA: Hybrid Damages-based Agreement - An agreement between a lawyer and client whereby the lawyer receives both fees for legal services rendered (typically at a discounted hourly rate) and a payment that is calculated by reference to the outcome of the Proceedings, for example as a percentage of the sum awarded or recovered if the client is successful.
As well as recommending permitting the use of ORFS for arbitration for lawyers, the Sub-committee makes recommendations on the operation of CFAs, DBAs and Hybrid DBAs, including the following:
- lawyers should be permitted to use CFAs in arbitration seated both in and outside Hong Kong. "Arbitration" should have the meaning given to it in s.98F of the Arbitration Ordinance, and include the following proceedings under that Ordinance: (i) court proceedings; (ii) emergency arbitrator proceedings; and (iii) mediation proceedings.
- Where a CFA is in place, any Success Fee and After the Event (ATE) Insurance premium agreed by the claimant with its lawyers and insurers respectively should not be recoverable from the respondent.
- Where a CFA is in place, there should be a cap on the Success Fee which is expressed as a percentage of normal or "benchmark" costs. The Sub-committee has invited proposals on what an appropriate cap should be, up to a maximum of 100% and also on whether barristers should be subject to the same or a different cap and, if different, what the cap should be, up to a maximum of 100%
- Where a DBA is in place any ATE Insurance premium agreed by the claimant with its insurers should not be recoverable from the respondent.
- There should be a cap on the DBA Payment, which should be expressed as a percentage of the "financial benefit" or "compensation" received by the client. The cap should be fixed after consultation.
- Clients should be able to agree, on a case by case basis, whether:
(a) the DBA Payment (and thus the DBA Payment cap) includes barristers' fees; or
(b) barristers' fees would be charged as a separate disbursement outside the DBA Payment.
- To the extent that barristers can be, and are, engaged directly, this could also be arranged via a separate DBA between client and barrister. In such circumstances, a solicitor's DBA Payment plus a barrister's DBA Payment in relation to the same claim or Proceedings should not exceed the prescribed DBA Payment cap.
- In the event that the claim is unsuccessful (such that no financial benefit is obtained), the Sub-committee invites submissions as to:
whether the lawyer should be permitted to retain only a proportion of the costs incurred in pursuing the unsuccessful claim;
if the answer to (a) is "yes", what an appropriate cap should be in these circumstances; and
if the answer to (a) is "no", whether the relevant regulations should provide that, if the DBA Payment is less than the capped amount of irrecoverable costs, the lawyer is entitled to retain the capped amount of irrecoverable costs instead of the DBA Payment.
- A CFA, DBA, or Hybrid DBA should specify whether, and if so in what circumstances,
a lawyer or client is entitled to terminate the fee agreement prior to the conclusion of arbitration; and if so
any alternative basis (for example, hourly rates) on which the client shall pay the lawyer in the event of such termination.
The Sub-committee has also invited submissions on a number of matters, including the safeguards to be put in place in the professional codes of conduct and regulations, whether personal injury claims should be treated differently from other claims in arbitration and whether any additional category/ies of claim should be treated differently from other claims that are submitted to arbitration, and what should be the relevant method and criteria for fixing "Success Fees" in CFA.
The consultation period ends on 16 March 2021 and we shall provide further updates once the Sub-committee has issued its further recommendations.