16 June 2017 | Robert Rhoda, James Wong

Hong Kong passed a much anticipated law on 14 June 2017 to allow third party funding of arbitration and mediation. This marks the dawn of a new era for the Hong Kong arbitration landscape, and brings it in line with the laws of other major arbitration seats. This article outlines the legislative changes in relation to arbitration funding, the new regulatory regime and the implications of the legislative changes for businesses.

The new law

On 14 June 2017, the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 was passed in the Legislative Council of Hong Kong. This followed a public consultation in 2013 by the Hong Kong Law Reform Commission, which received overwhelming response in support of third party funding of arbitration, as summarised in a Consultation Report released in October 2016 (see our previous Client Briefing here).

A new Part 10A (sections 98E to 98W) will be added to the Arbitration Ordinance (Cap.609), which is expected to take effect in around late 2017.

The new law abolishes the ancient common law offences of maintenance and champerty and of being a common barrator (a person who incites litigation to cause annoyance), as well as the torts of maintenance and champerty, in relation to third party funding of arbitration. Third party funders will be allowed to provide arbitration funding to a funded party under a written funding agreement, in return for the third party funder receiving a financial benefit if the arbitration is successful.

Notably, the amendments will not apply to funding provided by lawyers acting for any of the parties to the arbitration, which is in line with professional conduct rules in Hong Kong which prohibit lawyers from acting on a conditional or contingency fee basis. There is now, as a matter of Hong Kong law, no reason in theory however why law firms cannot provide third party funding of arbitration in which they are not involved.

Regulatory regime

Hong Kong is to adopt a "light touch" approach to the regulation of third party funding of arbitration. The new law does not set out regulations for funders, but states that the authorised body (to be appointed by the Secretary for Justice) may issue a code of practice for funders. The code may cover funders' promotional materials, terms of the funding agreement, capital adequacy requirements for funders, the degree of the funders' control of the arbitration, etc.

The new law requires a funded party to disclose to the arbitral tribunal and other parties to the arbitration the existence of a funding agreement, the name of the funder and if/when the funding agreement comes to an end (other than because of the end of the arbitration).

Failure to comply with the code of practice or the above disclosure requirements will not, of itself, render any person liable to any judicial or other proceedings. Failure will, however, be admissible in evidence and may be taken into account by any court or arbitral tribunal in deciding any relevant question.

Implications for businesses

The legislative changes have been keenly anticipated in and widely welcomed by the arbitration community.

Businesses of all sizes are now able to seek third party funding in relation to arbitration in Hong Kong. This allows businesses to leverage their financial resources and share the risks of exploring and pursuing a claim through arbitration with third party funders. In our experience, businesses, no matter big or small, welcome the opportunity to keep legal costs off the balance sheet while retaining the ability to pursue a claim. The availability of third party financing options for arbitration will also be good news for investors in businesses.

This development enhances Hong Kong's status as a leading arbitration hub, as it brings Hong Kong in line with the laws of other major jurisdictions. We expect institutional funders, many of whom are already active in Hong Kong, to position themselves to begin funding arbitration as soon as the new law takes effect.

Given the variety of third party funding products in the market, businesses are encouraged to consider carefully the terms on which funding is offered. These terms will address issues including confidentiality and conflicts of interest, the extent of the funder's control over the arbitration and the level of recovery by the funder in the event of success. Parties to an arbitration should consider the terms of potential funding arrangements carefully, or seek professional guidance, before entering into them.