Caroline Kenny QC FCIArb covers the topic of third party funding in international arbitration for the 2017 Hong Kong Summit on Commercial Dispute Resolution in China as part of Hong Kong Arbitration week on 14 October 2017.
I would like to thank the Beijing International Arbitration Commission for inviting me to participate in this summit. In this session, where we are talking about the future of international arbitration, I want to take the opportunity to discuss the new legislation introduced by Singapore and Hong Kong to allow third party funding of arbitrations. The legislation is an important step in bringing these popular arbitral jurisdictions in line with other jurisdictions including Australia, England and the USA. I know that much will be said about third party funding in the course of Hong Kong Arbitration Week, but I chose this subject because being at the start of the week, I am able to get in first so to speak, and I find the topic immensely interesting.
By way of background, it is relevant to consider the reasons for the prohibition on third party funding. In common law jurisdictions third party funding was prohibited because it was said to offend the medieval torts and crimes of maintenance and champerty. Maintenance refers to an unconnected third party assisting to maintain litigation by providing financial assistance. Champerty is where a third party pays some or all of the costs associated with litigation in return for a share of the proceeds. The prohibition against funding arrangements was historically intended to prevent the abuse of judicial process by wealthy English noblemen who would associate themselves with fraudulent or vexatious claims, thereby strengthening the credibility of the claims, and, in return, receiving a share of the profits. Rules against third party funding were more recently justified on the public policy basis of protecting the processes of justice from manipulation by a third party who in Lord Denning’s words in ReTrepca Mines (No 2)  Ch 199 might “…be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses.”
But attitudes changed early this century to reflect concerns about the cost of access to justice and the recognition that courts are more than capable of controlling their own processes. The jurisdictions which permit third party funding arrangements initially justified them on an access to justice basis. But it is also now recognised that third party funding is a financing and risk-management tool. Third party funders provide risk management with respect to ensuring the predictability of the payment of costs and providing protection from opponent costs awards in adverse outcomes. This allows businesses to apply their own funds towards their core business while shifting the risk and cost of their litigation and arbitration claims to the funder, in exchange for a relatively small share of the damages if the claim succeeds. It is also argued that third party funding enhances the efficiency of litigation through the introduction of commercial considerations that reduce costs.
With today’s emphasis on providing access to justice, courts in common law countries generally consider the concerns of the funding of potentially fraudulent or vexatious cases or the manipulation of the justice system to be outdated. In England the turning point came with the Court of Appeal’s decision in Arkin v Borchard Lines Ltd  EWCA Civ 665 where it described commercial funders as groups who ‘…provide help to those seeking access to justice which they could not otherwise afford”. The next year the Australian High Court recognised the legitimacy of funding arrangements in the Campbell’s Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 ALR 58.
A decade later, so have Singapore and Hong Kong.
The legislation introduced in both jurisdictions is different. While Hong Kong carves out an exception to the torts of maintenance and champerty for what is defined as “third party funding of arbitration” the Singapore legislation has been more strident and has abolished those torts with certain exceptions.
The Hong Kong Approach
The HK Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (Amendment Ordinance) introduced a new Part 10 A into the Arbitration Ordinance (CAP 609) and also amended s 7 of the Mediation Ordinance (CAP 620). It is interesting to note that not all of the Amendment Ordinance is reproduced in the new Part 10A of the Arbitration Ordinance. Section 98E of the Arbitration Ordinance provides that the purposes of the new Part are to (a) ensure that third party funding of arbitration is not prohibited by particular common law doctrines and (b) provide for measures and safeguards in relation to third party funding of arbitration. However, sections 98K and 98L of the Amendment Ordinance which expressly abrogate the crimes and torts of maintenance and champerty are not reproduced in Part 10A. Similarly, section 98T of the Amendment Ordinance which provides that a funded party must notify the tribunal and every other party of the existence of a funding agreement and the identity of the funder have not been reproduced in the new Part 10A.
Notwithstanding these omissions in the new Part 10A, it is clear that the common law torts of champerty and maintenance will not apply to “third party funding of arbitration.” Section 98G defines “Third Party Funding of arbitration” as:
“… the provision of arbitration funding for an arbitration–
(a) under a funding agreement;
(b) to a funded party;
(c) by a third party funder; and
(d) in return for the third party funder receiving a financial benefit only if the arbitration is successful within the meaning of the funding agreement.”
Each of the relevant terms in section 98G is then defined.
The new Part 10A also make provision for regulating the third party funding industry. It provides that an advisory body (to be appointed by the Secretary of Justice) may issue a code of practice setting out the practices and standards with which third party funders will ordinarily be expected to comply. Section 98Q provides that the code of practice “may” contain provisions concerning, inter alia, the content of third party funding promotional material, the content of funding agreements including their key features, risks and terms, minimum capital requirements for funders, complaint procedures, and how to address conflicts of interest. Finally, the new section 98S provides that a failure to comply with any code of practice does not of itself render a person liable to any judicial or other proceedings, although the Code of Practice is admissible and non compliance with it may be taken into account if it is relevant to a question before a court or arbitral tribunal. Therefore although compliance is not mandatory the failure to comply with the Code of Practice may be relevant in certain circumstances. This lukewarm approach to compliance is regrettable; if there is a Code of Practice compliance should be mandatory.
The Singapore Approach
Section 5A of the Singapore Civil Law Act (Chapter 43) abolishes the tort of maintenance and champerty but provides this “does not affect any rule of that law as to the cases in which a contract is to be treated as contrary to public policy or otherwise illegal.” Section 5B(2) then provides that contracts for third-party funding of “dispute resolution proceedings” is “not contrary to public policy or otherwise illegal by reason that it is a contract for maintenance or champerty.” “Dispute resolution proceedings” is defined in Section 5B(10) as “the entire process of resolving or attempting to resolve a dispute between 2 or more parties and includes any civil, mediation, conciliation, arbitration or insolvency proceedings.” Arguably, this definition is sufficient to include litigation in civil courts which would be a major change for Singapore. In Re Vanguard Energy Pty Ltd  SGHC 156 the High Court confirmed that while funding could be available for certain insolvency cases under appropriate circumstances, funding was still prohibited and there was a strict rules against legal advisers having an economic interest in a third party funding arrangement.
Like the Hong Kong Ordinance the Civil Law Act provides for the eventual regulation of third party funding. Section 5B(8) provides that the Minister may make regulations necessary or convenient including
(a) prescribing the qualifications and other requirements that a third party funder must satisfy or comply with;
(b) prescribing the class or classes or description of dispute resolution proceedings to which this section applies; and
(c) governing the provision and manner of third party funding including the requirements that the third party funder and funded party must comply with.
The Law provides that when enancted these regulations must be complied with by a third party funder and the funded party.
The Singapore act does not require mandatory disclosure of funding arrangements. There is a proposal to amend the Professional Conduct Rules to require lawyers to disclose a funding arrangement as soon as practicable but this has yet to occur.
Neither the Hong Kong or Singapore legislation aaddress the issue of costs. How does a tribunal have power to make orders against funders who are not parties to the proceedings? No doubt it is envisaged there will be some amendment to the arbitration legislation or rules to allow tribunals to take into account funding arrangements when making awards of costs. I note in this regard that rule 31.33 of the new 2017 SIAC Investment Arbitration Rules provides that the tribunal may take into account third party funding arrangements when considering apportioning costs of the arbitration. In England it has been held that an unsuccessful party may be liable to pay a third party funders costs: Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd  EWHC 2361.
The proposal to regulate the funding industry in Hong Kong and Singapore is a welcome development in the area and one which I think is needed. In England and Australia there is a “hands off” approach to regulation which has been surprisingly successful to date.
England has adopted a model of self-regulation through the Association of Litigation Funders. This group adopted a Code of Conduct for Litigation Funders that covers arbitration. Created in 2011, the Code provides rules for third party that must be complied with if a funder is to remain a member of the Association. The Code requires that funders must have sufficient resources to fund all the disputes they have agreed to fund, and to cover aggregate liabilities under all of their funding agreements for a minimum period of 36 months. The rules also stipulate that a funder cannot withdraw from a funding agreement except under very limited circumstances, that funders cannot take control of litigation or settlement negotiations, and are prohibited from causing the litigant’s lawyers to act in breach of their professional duties. This Code has been effective to date because the prestige of membership appears to be a sufficient incentive to ensure compliance.
In Australia the third party funding industry is unregulated. The only requirement is that funders have mechanisms to avoid conflicts of interest. Lawyers in our jurisdiction often complain that they are subject to a cap on the amount they can recover for contingency fees if the claim succeeds but funders are not. In the State of Victoria, for example, lawyers cannot recover more than an uplift of 25% of their fees on a contingency basis if the case succeeds and cannot share in the damages whereas there is no cap for third party funders. This is somewhat anomalous as lawyers have strict professional conduct duties whereas funders do not.
In conclusion, the legislation in Hong Kong and Singapore is likely to herald in a new era for international arbitration and will ensure these jurisdictions remain competitive with other jurisdictions that allow funding. The arbitration community will watch with interest how the proposed regulation of the industry develops when the regulations come into force.
Caroline Kenny QC
Hong Kong, 14 October 2017