24 Dec 2018

Issuance of the Code of Practice for Third Party Funding of Arbitration

As the most recognized international arbitration center in the Asia Pacific region, Hong Kong has long maintained a positive and open attitude towards its development of the arbitration system and the recognition and enforcement of arbitral awards.

With the amendment of the Arbitration Ordinance (Cap. 609) (hereinafter referred to as the “Ordinance”) in Hong Kong in 2017, the Code of Practice for Third Party Funding of Arbitration (hereinafter referred to as the “Code of Practice”) pursuant to Division 4 of Part 10A of the Ordinance has been issued in December 2018. The law that allows third party funding of arbitrations will come into effect on 1 February 2019.

Important amendments brought by the newly amended Ordinance

Previously, with respect to third party funding of litigation or arbitration, the common law principles of maintenance and champerty apply. A party with no legitimate interest in the proceedings may not engage in funding the parties to the proceedings in return for a share in any award or settlement (e.g. no-win-no-fee arrangement). Such third party may be criminally liable.

The newly revised Arbitration Ordinance has lifted restrictions on third party funding of arbitration. Not only may a third party funder provide financial assistance in relation to the cost of the arbitration, claimants and respondents in arbitration may also enter into more flexible agreements with their solicitors. Although the funder bears the risk of receiving a financial benefit only if the arbitration is successful, it is a reduced financial risk to the funded party when pursuing a claim.

The conditions to third party funding of arbitration under the Ordinance are briefly summarized as follows:

(1) funding by a body without an interest recognized by law in the arbitration (other than under the funding agreement);

(2) of a party (or prospective party’s) costs and expenses of an arbitration;

(3) in return for a share of the proceeds from the arbitration if it is successful (as defined in the funding agreement).

Code of Practice

The Code of Practice was issued pursuant to Division 4 of Part 10A of the Ordinance. The Code of Practice sets out a clear and complete set of practices and standards for third party funding of arbitration, governing the funding agreement and the responsibilities of the contracting parties, for example:-

(1) the funding agreement: to be confirmed by the funded party in writing to the third party funder, that the funded party has taken independent legal advice provided by the third party funder;

(2) capital adequacy requirements of third party funders: the third party funder must ensure that it maintains the capacity to cover its funding liabilities for a minimum of 36 months and maintain a minimum of HK$20 million of capital;

(3) conflicts of interest: the third party funder must carefully manage their conflicts of interest under the funding agreement;

(4) control of arbitration: the arbitration shall be controlled by the funded party or the funded party’s legal representative, and the third party funder shall not influence or cause the funded party’s legal representative to act in breach of professional duties;

(5) liability of adverse costs: the funding agreement must clearly state whether the third party funder is liable to the funded party to meet any liability for adverse costs;

(6) termination of the funding agreement: the funding agreement must clearly state the grounds for termination.

The Code of Practice serves as a guide and standard when entering into a funding agreement. Failure to comply with the Code of Practice does not of itself render any person liable to judicial proceedings, but may be taken into account as admissible evidence in future legal proceedings.

Please contact our Head of Litigation and Disputes Resolution Ms. Heidi Chui heidichui.office@sw-hk.com for any enquiries or further information about this update.