Third Party Funding for Arbitration in Hong Kong

By: Sacha Cheong and Dominic Lau, K&L Gates, Hong Kong

Given the highly technical and complex nature of the activities in the construction industry, to provide familiarity and certainty, and to save time and (legal and administrative) costs, standard form contracts are widely in use. Arbitration agreements are contained in most standard form contracts for similar reasons.

Traditionally, parties to construction disputes rely on their own financial resources to pay for legal representation in arbitration. This may soon undergo substantial changes as third party funders become much more active in this area.

Many jurisdictions such as the United Kingdom, and more recently Singapore, already permit third party funding for arbitration.

The Hong Kong Government is in the process of introducing similar legislation in Hong Kong, along with various safeguards to ensure ethical standards are maintained and to prevent abuse. The law relating to maintenance and champerty, which is still punishable as a criminal offence, will no longer be applicable to Hong Kong arbitration.

In October 2015, the Law Reform Commission of Hong Kong (LRC) issued a consultation paper on the subject. The responses showed that there was overwhelmingly support for the proposal.

On 12 October 2016, the LRC released its final report, setting out its recommendations with respect to the implementation of the legislation and its regulation. The recommendations include:

• Statutory law and professional conducts rules be amended to permit third party funding for arbitration. The proposed amendment to the Arbitration Ordinance (Cap. 609) be applicable to any arbitration conducted in or outside Hong Kong so long as the third party-funded legal services are provided in Hong Kong. The professional code of conduct for legal practitioners be amended to specify the terms and conditions under which they may represent parties being funded.
• A body be set up under the Arbitration Ordinance with authority to issue a code of practice laying down clear ethical and financial standards for third party funders.
• A “light touch” approach be adopted for the first three years of its implementation, during which failure to strictly comply with the new law/regulations would not, of itself, lead to criminal or civil liability. An advisory body nominated under the Arbitration Ordinance will monitor the conduct of third party funding for arbitration and implementation of the code of practice, liaise with stakeholders, and suggest revisions to the code of practice at the end of the period.
• Arbitral tribunals be given the power to award costs against third party funders (subject to further consultation), who may have corresponding rights to be heard by the tribunal.

It is anticipated that the Hong Kong Government will put the amendment bill before the Legislative Council in early 2017.

With the implementation of the third party funding legislation, Hong Kong will continue to be an important regional centre in Asia for legal services and dispute resolution.