REUTERS | Jason Lee

And then there were three… Third party funding in Hong Kong

On 1 February 2019, just before the start of the Chinese New Year Celebrations to welcome the Year of the Pig, the final pieces in the third party funding (TPF) puzzle slot into place for Hong Kong leaving parties free to obtain funding for arbitration.

On 7 December 2018, a Code of Practice for TPF was issued by the Secretary for Justice. Compliance with the code will be overseen by an “advisory body”, consisting of three senior Hong Kong lawyers, whose powers derive from section 98X of the Arbitration Ordinance. On 1 February 2019, the key sections of the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (the Third Party Funding Ordinance) come into effect. The Third Party Funding Ordinance abolishes the common law offence and tort of maintenance (including champerty) and amends the Arbitration Ordinance (Cap. 609) to allow third party funding for arbitration.

So, what is TPF anyway?

In essence, TPF allows you (as a party to a dispute or a legal representative to that party) to go to a third party to obtain funding for an arbitration. If you lose, the funder does not have any recourse against you. If you win, the funder is repaid from the claim proceeds that are recovered.

TPF has become an increasingly popular way to finance claims. It allows companies to reduce their legal budgets and remove the cost of arbitration from its balance sheet, instead channeling those costs into other parts of the business. In fact, TPF is seen by many as one of the work-arounds to the problem of the rising cost of arbitration.

Importantly, TPF is big business; the global market for dispute funding is currently estimated as exceeding US $10 billion. With the introduction of TPF in Hong Kong and Singapore, that figure is only set to rise.

The amendments to the Arbitration Ordinance

The amendments go much further than legalising TFP in Hong Kong. They also deal with two issues that have been the subject of significant debate: disclosure and conditional fee arrangements.


In spite of the popularity of TPF, very few jurisdictions have chosen to regulate the disclosure of TPF in arbitration. Hong Kong (and Singapore) is one of the exceptions.

Section 98U of the Arbitration Ordinance provides that the funded party must give notice to each party to the arbitration and the arbitration body of: (a) the fact that a funding agreement has been made; and (b) the name of third party funder.

Section 98V provides that notice must also be given of: (a) the fact that a funding agreement has been terminated; and (b) the date of such termination within 15 days of the date of termination.

This “systematic disclosure” is relatively unusual, with most jurisdictions merely affirming the tribunal’s power to order disclosure. Despite being unusual, this step has been welcomed by the Hong Kong arbitration community as it tackles head on the issue of conflicts of interest involving funders. Disclosing the existence of a funding agreement and the identity of the funder enables all parties to the arbitration to asses potential conflicts, which, in turn, will reduce the delay associated with applications for disclosure of funding agreements; reinforce the legitimacy and integrity of arbitration; and ensure the enforceability of arbitral awards.

Section 98W confirms that non-compliance with this part of the Arbitration Ordinance does not render a person liable to judicial or other proceedings. However, failure to comply can be taken into account by a court or arbitral tribunal if it is relevant to a question being decided by the court of tribunal.

Conditional fee arrangements

Section 98O of the Arbitration Ordinance confirms that the reforms do not apply to lawyers acting for parties in arbitration. This means that lawyers that are acting for a party in an arbitration cannot act as funders to that party by acting on a conditional or contingency fee basis. This exclusion is not surprising, given the ongoing restrictions on conditional fee arrangements in Hong Kong.

The Code of Practice

The Code of Practice sets out specific requirements for funding agreements including provisions to address: the capital adequacy of the funder; effective procedures for managing conflicts of interest; and effective procedures for complaints against the funder. It also mirrors some of the provisions in the Arbitration Ordinance, including those relating to disclosure.

A key section is that dealing with the content of the funding agreement. The Code of Practice provides that the agreement must set out whether the funder will be liable for adverse costs orders, the premium for costs insurance, security for costs, as well as any other liabilities. Further, when it comes to termination, the Code of Practice provides that the agreement:

  • Must not provide a discretionary right for the funder to terminate.
  • Must provide that, upon termination, the funder remains liable for all liabilities up the date of termination unless termination is caused by a material breach by the funded party.
  • Must provide whether (and if so, how) the funder is entitled to terminate if the funder:
    • reasonably ceases to be satisfied about the merits of the arbitration;
    • reasonably believes that there has been a material adverse change of prospects to the funded party’s success in the arbitration or recovery of success; or
    • reasonably believes that the funded party has committed a material breach of the agreement.

As with the obligations in the Arbitration Ordinance, section 98S of the Arbitration Ordinance confirms that a failure to comply with a provision of the Code of Practice does not, of itself, render any person liable to any judicial or other proceedings.

The HKIAC Rules

Whilst most institutional rules do not include any specific provisions in relation to TPF, Hong Kong is again setting a new trend. At the end of last year, the HKIAC released its revised arbitration rules which came into force on 1 November 2018. The new rules contain provisions which reinforce the disclosure obligations in the Arbitration Ordinance and the Code of Practice. Article 44 provides that a party must disclose to all other parties, the tribunal, any emergency arbitrator and the HKIAC the fact that a funding agreement has been made and the identity of the funder. The rules also provide that a funded party must disclose any changes to this information that occurs after the initial disclosure, which would include the termination of the agreement.

The future for TPF in Hong Kong

The availability of TPF in Hong Kong is seen as a positive development that will further enhance Hong Kong’s position as a leading arbitration centre.

In the right cases, TPF can facilitate access to justice by giving parties a choice as to how they fund the cost of an arbitration. However, the devil is often in the detail, and a comprehensive and well-drafted funding agreement is key as this will determine:

  • The extent and duration of the funding.
  • The returns payable to funder and how the proceeds of an award should be distributed amongst the parties.
  • Who should be responsible for ancillary claims, including appeals or challenges.
  • Who will be responsible for adverse awards of costs.
  • What happens at termination.

And the list goes on. These points go well beyond what is contained in the Arbitration Ordinance and the Code of Practice but are key to ensuring that a successful party retains a large portion of the proceeds. You don’t want to be in a position of winning an arbitration but having to hand over all of the proceeds to your funder…

It would be far preferable to enjoy the Year of the Pig with plenty of wealth and fortune (in line with what it symbolises). Gung Hay Fat Choy!

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