On 19 October 2015, the Third Party Funding for Arbitration Sub-committee of the Law Reform Commission (LRC), released a consultation paper recommending that third-party funding should be permitted under the law of Hong Kong for arbitrations taking place in Hong Kong. The deadline for feedback on the issues addressed in the consultation paper was 1 February 2016.
The LRC subsequently released its report last month recommending that third party funding should be allowed for Hong Kong-seated arbitrations, as well as for services provided locally for arbitrations seated outside Hong Kong (Recommendation 1). The recommendations also target arbitration-related court proceedings conducted in the Hong Kong courts. The LRC’s consultation paper aims to support parties with a strong case, on the basis that they should not be deprived of the chance to resort to arbitration under the Arbitration Ordinance due to lack of finances.
To achieve this goal, the LRC further recommends that clear standards for third-party funders operating in Hong Kong ought to be implemented (Recommendation 2). In this regard, the sub-committee has suggested that a Code of Practice should be assembled to set standards and practices to be followed by third party funders. The Code should cover issues such as adequacy requirements, privilege, confidentiality, disclosure, control of the arbitration and grounds for termination.
The consultation paper also highlights that these requirements should also be addressed in the funding agreements. Furthermore, the funded party will have the obligation to send written notifications to both the opposing party and the arbitral institution, informing them either about the conclusion or termination of a funding agreement.
What is Third-Party Funding?
The consultation paper makes reference to the case of Unruh v Seeberger, defining third party funding as "the funding of claims by commercial bodies in return for a share of the proceeds”. Essentially, a third party to the arbitral proceedings will provide financial “assistance or support” to a party to the proceedings. The third party funder would usually pay the funded party’s legal costs, as well as other costs associated with the arbitration, in return for a percentage of the final award or other financial benefit. The prima facie advantage of such an agreement is that if the funded party is unsuccessful they do not have to pay the funder, as the latter is only compensated from the recoveries obtained by the funded party.
Third party funding is, arguably, taking the financial pressure off a party who has strong grounds to pursue their case. But for the funding agreement, parties must usually pay upfront costs, which can be high. Costs associated with the arbitrators, the arbitral institution, translators (if necessary), expert witnesses, venue facilities as well as legal costs can become unbearable to the parties.
Third-Party Funding in Hong Kong
Hong Kong is becoming an increasingly popular seat of arbitration and has experienced a rapid case-load over the years. Parties resorting to arbitration in Hong Kong should be able to have access to third party funding irrespective of whether they have no funds at all or simply wish to efficiently allocate what they do have.
With respect to the choice of the seat of arbitration, the consultation paper highlights that “the users of arbitrations taking place in Hong Kong are overwhelmingly corporations, partnerships, government departments and similar entities. Sovereign countries may also participate in international arbitration, generally either as a party to an arbitration brought under an investment treaty by an investor in that country, or in an arbitration brought by another sovereign country under a treaty or trade agreement between those two countries. Hearings for such arbitrations may take place in Hong Kong”.
It is important to note that, with very few exceptions, Hong Kong does not allow for third-party funding in litigation. It continues to rely on the common law principles of maintenance and champerty. This was one of the issues addressed by the sub-committee, who raised the question of whether these principles would apply to arbitral proceedings as well. In the same case of Unruh v Seenberger, the court upheld the validity of a third-party funding agreement for an arbitration taking place in a different country. Ribeiro PJ stated in relation to the case:
"The Hong Kong court should not strike down an agreement on the grounds of maintenance or champerty where it is to be performed in relation to judicial or arbitral proceedings in a jurisdiction where no such public policy objections exist … I leave open the question whether maintenance and champerty apply to agreements concerning arbitrations taking place in Hong Kong since it does not arise in the present case”.
Hong Kong’s competitiveness as a seat of arbitration will grow with the new third party funding recommendations, placing it on an equal level with other leading arbitration centres. The sub-committee believes that there will be considerable benefits for stakeholders and the potential risks arising will be manageable once clear financial standards are in place.
Sabina Adascalitei LLB, LLM, MCIArb
Research and Academic Affairs Coordinator
 Unruh v Seeberger (2007) 10 HKCFAR 31.