Third party funding of arbitration in Hong Kong is given the green light

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

On 14 June 2017, the Legislative Council of Hong Kong passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016.

The Bill comes on the heels of the consultation paper issued in October 2015 by the Law Reform Commission’s Third Party Funding for Arbitration Sub-committee and closely follows the recommendations made by the Law Reform Commission in its Report dated 12 October 2016 to clarify the law concerning third party funding of arbitration and associated proceedings under the Arbitration Ordinance. (For more information about the report and the LRC’s recommendations, see our article in the May 2017 issue of Arbitration World.

The Bill clarifies that the law concerning maintenance and champerty, which prohibits third party funding of litigation and is still punishable as a criminal offence, does not apply to the funding of arbitration and mediation.

It is expected that the legislative amendments to the Arbitration Ordinance and Mediation Ordinance will come into effect later this year.

Key features of the Bill include:

• The definition of “arbitration” includes arbitration proceedings covered by the Arbitration Ordinance, as well as any related court proceedings, proceedings before an emergency arbitrator or mediator.
• It does not permit the funding of arbitration (whether directly or indirectly) by lawyers or providers of legal services in order to avoid any conflict of interest.
• It does not have retrospective effect, so funding agreements made before the commencement of the legislative amendments are not covered.
• It applies to non-Hong Kong arbitrations (i.e. where the place of arbitration is outside Hong Kong or there is no place of arbitration) to the extent that costs and expenses of services are provided in Hong Kong in relation to the arbitration.
• An advisory body and authorized body will be established to monitor and review the operation of the legislative amendments and issue a code of practice.
• The code of practice will set out the expected standards and practices of third party funders with regard to their funding agreements and minimum capital requirements, and ensure that there are proper internal procedures in place for addressing conflicts of interest and complaints. There will be a public consultation process before the code is issued. Failure to comply with the code will not create any judicial or other liability; however, the code is admissible in evidence and may be taken into account where there is an issue of non-compliance.
• The communication of confidential information to an existing or potential party funder and its professional adviser is permitted, but any recipient is subject to confidentiality requirements.
• There are similar amendments to the Mediation Ordinance.

While Hong Kong will soon join the (growing) list of jurisdictions that permit third party funding, there are many other jurisdictions around the world where such arrangements are not allowed.  One point of concern that has garnered discussion among arbitration practitioners is whether it would be possible for a party to challenge the recognition and enforcement of an arbitral award obtained through the involvement of a third party funder on the basis that the arrangement is unlawful and therefore contrary to public policy. The risk of this happening in Hong Kong is low, following the Court of Final Appeal decision in Unruh v Seeberger (FACV Nos. 9 &10 of 2006; 9 February 2007). The court held that even if an agreement might be regarded as champertous according to the laws of Hong Kong, it would not be contrary to public policy to enforce such an agreement where it involves an arbitration taking place in a jurisdiction (in this case, the Netherlands) where maintenance and champerty are not contrary to public policy. The authors consider that, by extension, the same outcome would likely be reached if it were in relation to an arbitral award obtained in a jurisdiction which permits third party funding for arbitration. That said, it is possible that the courts in other jurisdictions may take a different approach to the issue so it would be advisable to consult with legal counsel in the relevant jurisdiction if there is any doubt.

Third party funding of arbitration has become increasingly common over the last decade in numerous jurisdictions including England and Wales, Australia, the United States of America and Singapore. With the implementation of this Bill, Hong Kong will continue to be an important regional centre in Asia for legal services and dispute resolution, and the place of choice for business parties to conduct arbitration and mediation proceedings.