Legal update: third party funding of arbitration

Background

Traditionally litigation funding has been illegal in common law jurisdictions. There were concerns that such funding could result in subornation, threaten the impartiality and integrity of judicial procedure and lead to a culture of excessive litigation. However restrictions on maintenance and champerty prevent legitimate claimants without sufficient financial means to take legal action.

Over the past few decades, litigation funding has become more prevalent in many jurisdictions, namely in Europe, the United States and Australia. Hong Kong is following the trend and recently legalised third party funding for arbitration.

What is Litigation Funding?

In litigation funding the litigant obtains funding from an independent third party to cover their legal costs. The funder can agree to pay some or all of the expenses associated with the dispute. In return, if the case is successful, the funder shares an agreed amount of proceeds of the claim. If the litigation is not successful, the funder bears the costs and nothing will be owed by the litigant.

New Arrangements to Hong Kong’s Arbitration Law

Amendments to Hong Kong’s arbitration law were passed on 14 June 2017. The Arbitration and Mediation Legislation (Third Party Funding Amendment) Bill 2016 (“The Bill”) ensures that “third party funding of arbitration is not prohibited by particular common law doctrines’’ (Clause 3 Part 10A 98E(a)). In other words, funding by a third party of arbitration, mediation and related proceedings is no longer a crime under the laws of Hong Kong.

Meanwhile there are developments to the Arbitration Code of Practice (“The Code”) which aim to safeguard the integrity of justice, as stated in The Bill which will “provide for measures and safeguards in relation to third party funding of arbitration” (Clause 3 Part 10A 98E(b)). Introducing precise ethical standards and guidelines for funders will help to prevent potential abuse of this finance tool. The Code will need to be finalised at the end of the consultation process. Therefore amendments relating to arbitration will most likely come into effect sometime later.

The Future

After Singapore began to understand the benefits of third party funding, there promptly came into effect a reform to abolish restrictions on such funding. Singapore appeared to be one step ahead of Hong Kong.

With modern legislation on third party funding in arbitration in Hong Kong, it has undoubtedly furthered the popularity and incidence of arbitration and promoted Hong Kong’s competitiveness as an international arbitration hub in Asia, bringing it in line with international developments.

The legalisation of third party funding for arbitration also provides another option for law firms to manage litigation-related risks and an alternative for less privileged claimants to gain access to justice. However as the litigation funder’s return is based on the success of the case, funders tend to pick cases with higher probability of success or value, for instance commercial cases. Consumer cases or claims that do not carry high expected levels of returns are usually refused.

The legalisation of third party funding for arbitration is a welcome decision in Hong Kong and we shall continue to witness the changes brought by the amendment.

For further information, please contact:

Pamela Mak
Partner | Email

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.