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Third Party Funding in Dispute Resolution


Jun 23, 2017

In Hong Kong, the doctrines of maintenance and champerty (“Doctrines”) generally apply to prohibit the funding of claims by commercial bodies in return for a share of the proceeds recovered (“Third Party Funding”). However, Hong Kong is currently undergoing a reform which, if passed by the legislature, will render the Doctrines inapplicable to Third Party Funding in arbitrations and mediations in Hong Kong.


The road to reform

Back in 1994, the High Court of Hong Kong held in Cannonway Consultants Ltd v Kenworth Engineering Ltd1 that whilst the Doctrines were contrary to public policy, it is inappropriate to extend the Doctrines from the public justice system to the private consensual system (i.e. arbitrations) where parties chose to keep out of the public justice system. It was also considered that subjecting international parties of arbitrations taking place in Hong Kong to a rule of law that is not applicable in many other jurisdictions would render Hong Kong a less desirable venue for international arbitration.

Despite the Cannonway judgment, in 2007, the final appellate court of Hong Kong in Unruh v Seeberger2 left open the question of whether the Doctrines also apply to Third Party Funding for arbitrations taking place in Hong Kong.

In June 2013, the Chief Justice and the Secretary for Justice proposed to review the issue of Third Party Funding in arbitrations. Public consultation has since taken place and a bill was introduced into the legislature in January 2017.

 

Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016

The Bill aims to amend the law to ensure that third party funding of arbitration and mediation are not prohibited by the Doctrines, and provide for related measures and ethical and financial safeguards.

In order to fulfil the aims, the Bill proposes to add a Part 10A to the current Arbitration Ordinance and a section 7A to the current Mediation Ordinance.

The modification will provide for the meaning of Third Party Funding of arbitration and mediation and specifically provide that the common law offences and the tort of maintenance and champerty do not apply to Third Party Funding in arbitration and mediation.

A statutory body will be appointed pursuant to the modification. The statutory body will be given the power to issue a code of practice, which should regulate Third Party Funders in Hong Kong and provide for ethical and financial safeguards. What should be included in the code of practice is set out in the Bill – for instance, Third Party Funders will be required to have a sufficient minimum amount of capital and procedures for addressing potential conflicts of interest. 

 

Conclusion

We welcome this reform as it enhances Hong Kong’s competitive position as international arbitration centre whilst keeping Third Party Funders regulated. No information is available as to the implementation timeline of the Bill, but we shall keep clients posted in this space.

 

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1 [1995] 1 HKC 179

2 (2007) 10 HKCFAR 31

 

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