Hong Kong to Give Green Light to Third Party Funding of Arbitration

The proposed amendments follow the publication of the Law Reform Commission’s report in October 2016. The report recommends amending the law to expressly permit third party funding of arbitration and associated proceedings under the Arbitration Ordinance (Cap.622) with appropriate safeguards and regulation.

Under the English common law principles of maintenance and champerty, funding another party's claim is both a tort and a crime. Although England abolished the crime in 1967, third party funding of litigation remains unlawful in Hong Kong, except (1) where it protects the party’s right of access to justice; (2) where the third party has a legitimate interest in the matter; or (3) under certain recognised exceptions including insolvency proceedings. Kaplan J held in Cannonway Consultants Ltd v Kenworth Engineering Ltd [1995] 1 HKC 179 that arbitration taking place in Hong Kong is excluded from the operation of maintenance and champerty under Hong Kong law. More recently, however, the Court of Final Appeal expressly left open the question of whether third party funding for arbitration is lawful in the case of Unruh v Seeberger (2007) 10 HKCFAR 31.

Third party funding provides flexibility to parties in allocating risks and managing their capital profitability, and is becoming increasingly prevalent in major jurisdictions in Europe and the United States. The uncertainty of the law places Hong Kong in a competitive disadvantage to other jurisdictions which permit third party funding.

The anticipated legislative reforms, which will clarify the law and put in place appropriate regulations, will strengthen Hong Kong’s position as a leading international arbitration centre.

The Law Reform Commission’s report made the following final recommendations, surrounding the authorisation of third party funding of arbitration:

• A “light touch” approach to the regulation of third party funding should be adopted for an initial period of 3 years. Clear standards for third party funders, including ethical and financial standards, should be developed.
• In the funding agreement, the third party funder must take reasonable steps to ensure that the funded party has received independent legal advice, and must explain the key features, risks and terms of the funding agreement, including capital adequacy requirements, conflicts of interest, confidentiality and privilege, control, disclosure, liability for adverse costs, grounds for termination and the complaints procedure.
• Legislative change should not be made at this stage to enable an arbitral tribunal to order costs against third party funders. The existing powers of the tribunal to order costs against a party and to order it to give security for costs afford adequate protection.
• During the initial 3-year period, the Advisory Committee on the Promotion of Arbitration should be nominated to monitor the conduct of third party funding of arbitration. After the expiry of the period, it should issue a report reviewing its operation and making recommendations.

The recommendations of the Law Reform Commission are widely welcomed in the arbitration community. The proposed initial “light touch” approach will provide a flexible regulatory framework for third party funding, which will bring Hong Kong in line with other major arbitration centres.

The amendment bill to the Arbitration Ordinance and the Mediation Ordinancewill be put forward to the Legislative Council for review on 11 January 2017.