On 19 October 2015, the Hong Kong Law Reform Commission (“LRC”) issues Consultation Paper recommending that under Hong Kong law, Third Party Funding (“TPF”) should be permitted for arbitrations taking place in Hong Kong.

What is TPF?
TPF arrangements commonly provides that the Third Party Funder(s) (“Funder(s)”) will pay the funded party’s legal costs in litigation or arbitration proceedings, in return for a percentage of the judgment or arbitration award or some other financial benefit from any financial recoveries in the proceedings. If the funded proceeding is unsuccessful, the Funder will not receive any (i) repayment, or (ii) return on the funds that have advanced to the funded party. 

Hong Kong and TPF
Despite the doctrine of maintenance and champerty prohibits TPF of litigation in Hong Kong, the Court of Final Appeal created three significant exceptions to the doctrine in Unruh v Seeberger (2007)10HKCFAR 31, namely:-

1.         where a third party can prove that there is a legitimate interest in the outcome of the litigation;

2.         where the party (who seeks for TPF) can persuade the court it will have access to justice by obtaining TPF; and

3.         where the proceedings are in relation to a miscellaneous category including bankruptcy and insolvency proceedings. 

Such development demonstrates that the Hong Kong courts have been prepared to evolve the law in order to cope with modern requirements and conditions. To date, TPF arrangements that have been considered acceptable by Hong Kong courts have generally involved the Funders providing funds at arm’s length to the funded party. The funded party retains control of the Proceedings.

Why use TPF for arbitration?
Parties who conduct arbitration must pay upfront the costs and expenses associated with it, which includes the costs of the arbitrators, lawyers, expert witness, hearing venue etc. The accrued costs can be relatively high. Therefore, without TPF, claimant who has limited financial resources but is bound to use arbitration as the dispute resolution might find it difficult to pursue its legitimate claims.

Concerns with TPF of arbitrations in HK
Hong Kong is one of the major international arbitration centres. However, the position on TPF for arbitration in Hong Kong remains uncertain and reservations have been raised, such as:-

1.         there is no binding law deciding whether a TPF agreement is valid in respect of an arbitration taking place in Hong Kong;

2.         would the Funders exercise an excessive level of control over the arbitration proceedings;

3.         would TPF promote unnecessary arbitration proceedings;

4.         would the Funders abuse the usage of TPF for the sake of its share of the proceeds;

As such, the current consultation paper plays an important role to clarify the position. 

Recommendations by the LRC consultation paper
The LRC consultation paper recommends that:-

1.         the Arbitration Ordinance be amended to provide that TPF for arbitration be permitted;

2.         HK should develop clear ethical and financial standards for Funders providing TPF to parties to arbitrations taking place in HK;

During the consultation period (which ends on 18 January 2016), the LRC invites submissions on issues, such as:-

1.         whether an applicable ethical and financial standards should be developed to regulate the Funders and, if so, whether a statutory or governmental body, or a self-regulatory body should be the supervisory body;

2.         whether other matters should also be included in the standards, such as conflicts of interest; confidentiality and privilege; control of the arbitration by the Funder; disclosure of TPF to the Tribunal and to the other party/parties to the arbitration;

3.         whether the Funder should be directly liable for adverse costs orders in a matter it has funded.

How does TPF in arbitration impact the shipping industry?
Shipping related disputes usually involve parties from different jurisdictions, and it is a common practice in the shipping industry to use arbitration to resolve disputes due to its advantages in the enforcement of awards under the New York Convention. Given the costs of arbitration can be relatively high, many shipping companies may not be willing to proceed with the claim (even if it has a good case) if the amount in dispute is not substantial or the chance of recovery is not high.     

With the introduction of TPF, it is expected that there will be more arbitration cases to be conducted in Hong Kong as the shipping companies will be able to shift part of their litigation risk to the Funders. It is anticipated that the TPF will receive great reception and support by the shipping industry, although it remains to be seen how the uncertainties and reservations on TPF can be resolved in satisfaction of all the stakeholders.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: shipping@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.