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Third Party Funding for Arbitration (and Mediation) in Hong Kong


2019年1月15日

Over a period of years, arbitration has emerged as a preferred method of dispute resolution because of its cost efficiency relative to lengthy court proceedings, confidentiality and procedural autonomy, so too in terms of the ‘portability’ and enforceability of its decisions and Awards, particularly in the context of complex cross-border commercial disputes.

Hong Kong is recognized as one of the leading seats of arbitration for its world-class arbitration law (in close alignment with the UNCITRAL Model Law) and for its membership of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Only very recently, however, has Hong Kong opened its doors to third party funding for arbitration, as an exception to its general prohibition of maintenance and champerty (which remains a tort and criminal offence despite its almost-complete abolition in other common law jurisdictions).

A change in the law was brought about by the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017, enacted in June 2017 to amend the Arbitration Ordinance (Cap. 609) (the “AO”). This change was proposed to be rolled out in two separate phases to allow time for the necessary regulatory framework to be prepared.                                              

The Code of Practice for Third Party Funding of Arbitration (the “Code”) was issued on 7 December 2018 (adopting a ‘self-regulating’ approach and setting down professional standards with which third party funders of arbitration are expected to comply­) to supplement the statutory changes.

The Secretary of Justice has now announced, on 3 December 2018, that the third party funding framework shall come into operation on 1 February 2019.

For the avoidance of doubt, amendments to the AO apply in relation to a mediation (a non-binding process of assisted negotiation) as if a reference to arbitration were a reference to mediation. The Code, however, does not apply to third party funders of mediation for the time being (i.e. they are subject only to provisions relating to confidentiality and disclosure (see below)). This Article therefore deals with changes in the law in relation to third party funders of arbitration only.

Key Aspects of the Third Party Funding Framework

Promotional Materials

Third party funders must ensure its promotional materials are clear and not misleading.

Funding Agreements

Funders must take reasonable steps to ensure the funded party is made aware of its right to seek independent legal advice on the funding agreement.

Funders must also clearly state the proposed terms of funding, including, without limitation:-

  • Set out clearly that the third party funder will not seek to influence / control the arbitration or the arbitration body / institution involved;
  • When and on what basis parties can terminate the funding agreement / third party funders may withhold funding (e.g. third party funder ceases to be satisfied about merits of arbitration / prospects of success / material breach of funding agreement); and
  • The financial liabilities of third party funders (if any) e.g. adverse costs orders, insurance premiums or security for costs.

The AO as currently enacted does not empower an arbitral tribunal to make adverse costs orders against a third party funder direct (c.f. the HK Courts have the power to make costs orders in favour of / against any third party). The Law Reform Commission however commented that it will revisit this matter after the first 3 years of implementation of the New Law.

Capital Adequacy Requirements

Third party funders must:-

  • Maintain access to a minimum HK$20 million of capital and provide the supervising Advisory Body  with confirmation from a qualified third party (preferably an auditor);
  • Maintain its capacity to pay all debts when they become due and payable;
  • Maintain its capacity to cover all its aggregate funding liabilities under all its funding agreements for a minimum of 36 months
  • Provide the Advisory Body with an audit opinion on its most recent financial statements; and
  • Accept a continuous disclosure obligation in respect of the capital adequacy requirement.

Conflict

Third party funders must maintain procedures for managing conflicts for the duration of the funding agreement.

Confidentiality & Privilege

§18 of the AO already prohibits all parties from disclosing information relating to the existence of any arbitration proceedings and any subsequent awards made.

The parties can however communicate such information to a third party funder insofar as it is for the purpose of having or seeking third party arbitration funding or for pursuing a legal right / enforcing or challenging an award made.

Third party funders must also observe the confidentiality and privilege of all information and documentation relating to the arbitration and the subject of the funding agreement.

Disclosure

A funded party is under an obligation to disclose information about the funding arrangement to its opponent (and the arbitration body) by giving written notice of (1) the fact that a funding agreement has been made and (2) the name of the third party funder.

This notice must be given either on the commencement of the arbitration, or if such an agreement is entered into after the commencement of arbitration, within 15 days after entering into such an agreement. Equally, the other party must also be notified of termination of funding agreements, within 15 days of such termination.

Consequences of Non-Compliance with the Code

While non-compliance with the Code does not of itself gives rise to any liability, the fact of non-compliance is admissible as evidence for any related Court / arbitral tribunal proceedings.

Conclusion and Outlook

By way of comparison with other popular seats of arbitration, Singapore’s Civil Law (Third Party Funding) Regulations 2017 applies only to professional funders and imposes a higher minimum capital requirement of SG$5m (roughly HK$28 million), while the English Association of Litigation Funders’ Code of Conduct does not establish any supervisory entity unlike the Advisory Body appointed under the Code.

The Law Reform Commission recommended adopting a ‘light touch’ approach to the new third party funding framework for the first 3 years, and room therefore still remains for further amendments to the law in this area in the coming years.

 

Author:  Barry Hoy
Research:  Minky Kim

 

 

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