Singapore introduced TPF earlier this year. Now it is time for Hong Kong. Hong Kong is in the process of changing its law to allow TPF in the context of arbitration and mediation.

Setting the scene for TPF

In Hong Kong, the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance (“the new law”) was enacted on 23 June 2017. The new law has laid out the foundation for TPF of arbitration and mediation in Hong Kong. The new law will come into full force in the near future, once the regulatory framework is in place. In respect of arbitration, the new law is designed to add Part 10A to the Arbitration Ordinance. Part 10A consists of the following six divisions:

• Division 1 – Purposes

• Division 2 – Interpretation

• Division 3 – Third party funding of arbitration not prohibited by common law offences or torts

• Division 4 – Code of practice

• Division 5 – Other measures/safeguards

• Division 6 – Miscellaneous

Transitional arrangements

Some of the above divisions have been added to the Arbitration Ordinance, but divisions 3 and 5 are yet to be included and therefore will not be effective until further notice is published in the Gazette. Division 3, once implemented, will operate to permit TPF in Hong Kong by dis-applying the common law offences of maintenance and champerty in the context of third party funded arbitration. In other words, without division 3 in effect, third party funded arbitration is still illegal in Hong Kong. Similarly, division 5 will waive confidentiality restrictions and allow parties to communicate certain confidential information to third party funders in order to obtain funding. Without division 5 in operation, parties cannot disclose information about their cases to funders, making it practically impossible for TPF arrangement to take place.

Upcoming regulatory framework - Code of Conduct

The expectation is that divisions 3 and 5 will be brought into effect, after finalisation of the code of practice, which will set out the expected standards and practices of third party funders. The Department of Justice has prepared and issued a preliminary draft code of practice in the Legislative Council Brief in 2016. Areas covered in the draft are: promotional materials, funders’ minimum capital requirements, annual return requirements, procedure for conflicts of interest and protection of funded parties. No concrete timeline has been set for finalisation of a code of practice, but an authorised body will be appointed and finalise the code of practice, subject to a public consultation process.

Commercial point of view

From the commercial perspective, agreements between parties and funders will likely follow a format similar to those seen in other jurisdictions where TPF is available. In the U.K., for example, it is common for funders to take between 20% and 35% of proceeds recovered or three times the funder’s investment, whichever is greater. In addition, for those who are considering obtaining TPF, it is worth noting that funders commonly aim to invest up to one-tenth of the claim value.

The exact mechanism of TPF in Hong Kong and its impact on the volume of the arbitral proceedings remain to be seen. Nonetheless, the development should be worthy of note to all legal practitioners in the city, including those not directly considering TPF of their proceedings. This is particularly so because they may be facing a third party funded opponent in arbitration.

In a recent High Court decision in the U.K. (Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd [2016] EWHC 2361), HHJ Waksman QC upheld the arbitrator’s award that the losing party shall pay the costs of the winning party (which was funded by TPF) including the costs of obtaining the TPF. Although costs are normally at the discretion of the tribunal and the court, parties should be aware of the possible cost consequences as we proceed to the era of TPF.