Introduction

On 17 December 2020, the Outcome Related Fee Structures for Arbitration Sub-committee of the Law Reform Commission (the “Sub-committee”) published a consultation paper on amending the law to allow lawyers to be paid according to the outcomes of arbitrations taking place in and outside Hong Kong.

Background

Under Hong Kong law, lawyers are currently prohibited from entering into outcome related fee structures (“ORFSs”) for legal work performed for contentious proceedings such as litigation and arbitration. However, except for Singapore, all of the other leading seats in the world permit lawyers to offer some or all forms of ORFSs to their clients for contentious proceedings, including arbitration. 

In view of the increasing and significant demand for ORFSs, the Sub-committee considers that reform in this regard is required. Since ORFSs are attractive to clients with respect to financial risk management, access to justice, and a general desire that their lawyers share the risks inherent in litigating or arbitrating a claim, the Sub-committee takes the view that ORFSs may enable Hong Kong to maintain its status as one of the world’s top arbitral seats. 

After studying the legal regimes and experiences of other major arbitral seats and previous studies of conditional fees for proceedings and third party funding for arbitration, the Sub-committee recommends that the prohibition on the use of ORFSs for arbitration for lawyers should be removed, and makes recommendations on the operation of different types of ORFSs regimes.

Types of ORFSs

An ORFS is an agreement between a lawyer and a client, whereby the lawyer advises on a contentious matter and the lawyer receives a financial benefit if those proceedings are successful within the meaning of that agreement. In the consultation paper, ORFSs include (1) conditional fee agreements (“CFAs”), (2) damages-based agreements (“DBAs”) and (3) hybrid damages-based agreements (“Hybrid DBAs”)

CFAs

CFA refers to an agreement pursuant to which a lawyer agrees with a client to be paid a success fee in the event of the client’s claim succeeds.  The success fee can be an agreed flat fee or calculated as a percentage on the fee charged during the course of the proceedings.  It is not calculated as a proportion of the amount awarded to or recovered by the client.

There are two forms of CFAs:

1.        “No win, no fee” arrangement: The lawyer charges no fee during the course of the proceedings and is paid his/her usual fee plus an uplift if the client’s case succeeds; and

2.        “No win, low fee” arrangement: The lawyer charges a fee during the course of the proceedings at the usual rate or discounted rate, and the success fee if the client’s case succeeds.

DBAs

DBA is a form of “no win, no fee” arrangement. If the client’s case fails, the lawyer receives no fee. Unlike CFAs, if the client’s case succeeds, fee payment under DBAs is calculated by reference to the outcome of the proceedings, such as a percentage of the sum awarded or recovered by the client.

Hybrid DBAs

A Hybrid DBA is a form of “no win, low fee” arrangement.  The lawyers receive fees for legal services rendered, which is typically charged at a discounted rate, with the success fee calculated by reference to the outcome of the proceedings (i.e. success fee under DBA) in the event that the client’s claim succeeds.

Arguments for introducing ORFSs

The consultation paper also details and discusses the pros and cons of the abovementioned ORFSs arrangements. 

One of the core reasons that many other jurisdictions allow the introduction of ORFSs is the access to justice consideration. Although third party funding is currently legal and available in Hong Kong, many clients are unable to attract third party funders and to secure such funding even if their claims are strong. Hence, allowing ORFSs may allow clients who do not have enough funds or those may be otherwise unable to obtain the necessary financial assistance from the third party funders to pursue claims which are potentially meritorious. This regime could help filling the gap given that a significant proportion of the general public are not eligible for applying for legal aid, but at the same time cannot afford the high costs of commencing arbitration proceedings. 

Further, the introduction of ORFSs could also cater to the increasing demands and requests of clients hoping to enter into arbitration proceedings with outcome-related fee regimes which can provide them with alternative pricing and funding options. This will give clients greater pricing flexibility for structuring their dispute portfolios in monetary terms. This is also in line with the higher degree of flexibility offered by arbitration when compared to other litigation proceedings.

With lawyers’ direct financial incentive also thrown into the picture, lawyers may be discouraged from acting for weak or frivolous claims as they are de facto “investing” in the clients’ cases, making them less likely to pursue claims unless they view that the chances of success are more than even. Such may also be beneficial to clients as lawyers will then be more mindful when providing legal advice given the alignment of lawyer and client interests.

Arguments against introducing ORFSs

On the flip side, as lawyers will have direct financial interests in the outcome of the arbitral proceedings, there are also voices raising the concerns regarding the risks of conflict of interest. Previously in 2006, the Hong Kong Bar Association put forward the argument that lawyers might be tempted to settle the case sooner than it reasonably should such that they could secure fees albeit the fact that the settlement offer is less favourable than the merits that the case suggests. Further, there are concerns that lawyers would charge excessive legal fees in particular if lawyers over-estimate the risks of the client’s cases to justify higher fees.

However, this argument is viewed as being outdated as other jurisdictions which have had ORFSs in place for a period of time have put forth the evidence derived through time that there is no suggestion of the integrity of lawyers being undermined following the introduction of this regime. Arguably, the risk of conflict of interest could be present in our current system where lawyers’ work is charged by the number of hours worked as lawyers may bill more hours to increase their income regardless of the outcome of cases. In contrast and discussed above, the proposed outcome-related fee regime may actually be lesser of a risk in view of lawyer’s more aligned interests in client’s matters in financial terms.

Possible / recommended safeguards

In view of the above concerns that lawyers acting against their clients’ interests for personal gain, the Sub-committee has recommended to put in place appropriate safeguards to address such worries.

The Sub-committee considers it necessary to cap the financial returns on the success fees recoverable by lawyers, in order to protect parties from unfair arrangements. In particular, regarding the DBA Payment, there should be a cap which is expressed as a percentage of the financial benefit received or the compensation recovered by the client.

The Sub-committee has also proposed a list of other possible safeguards which may be included in the professional codes of conduct of the two legal professional bodies and in subsidiary legislation, so as to better protect the position of the clients when involved in ORFSs with some of the examples listed as follows:-

1.        the elected outcome-related fee structures and regimes shall be made in writing and signed by the clients;

2.        the clients must be fully informed of the nature and operation of the elected ORFSs, and confirm that they have been told of the right to seek independent legal advice before entering into any agreements; and

3.        there should be an inclusion of a “cooling-off” period that enables the client to terminate the agreement by written notice.

Further recommendations are welcomed as the Sub-committee invites the submission of other appropriate safeguards which should be incorporated in order to facilitate the implementation of this fee regime.

Conclusion

By the proposed changes of lifting the ban on “success fees” for lawyers engaging in arbitration practices, the introduction of ORFSs does not only seek to align with the common practices of other jurisdictions, but also to align interests of lawyers’ with that of clients’. Such arrangements could allow clients greater freedom to share the risk and reward of arbitrations with their lawyers if they wish to do so, with an increased flexibility to manage their capital, and enhance access to justice. As safeguards, which are to be later finalized, will likely be put in place in the professional codes of conduct and in subsidiary legislation, the Sub-committee is of the view that this proposal could cater to the rising demands and calls for implementing ORFSs in Hong Kong without undermining the parties’ interests. The public consultation will end on 17 March 2020.