Third party funding - the answer to access to justice?
Reporter: Felicia Cheng (Squire Patton Boggs, Hong Kong)
Contingency and conditional fee arrangements remain prohibited in Hong Kong.
Since 1 February 2019, parties lacking financial resources can consider third party funding in arbitration, which is now permitted. Whilst access to justice might be improved to some extent, it must be remembered that third party funders decide to fund arbitration as an investment and therefore look at various factors to consider prospects of recovery to decide whether to fund. Of course, it is not only parties that lack financial resources that consider third party funding; parties may do so to hedge costs risks or reduce capital outlay.
In any event, the introduction of the third party funding scheme is a welcome step forward in bringing Hong Kong in line with England, Singapore and other jurisdictions.
On 1 February 2019, amendments to the Arbitration Ordinance (Cap 609) (AO) took effect such that the common law offence and tort of maintenance (including champerty) do not apply to arbitration. Thus, third party funding is now permitted where the place of arbitration is Hong Kong or, if outside Hong Kong, for funding of services provided in Hong Kong. However, funding may not be provided by a lawyer or legal practice acting for a party or likely or former party to arbitration. This reflects the fact that contingency and conditional fee arrangements remain prohibited in Hong Kong.
A Code of Practice was also issued earlier on 7 December 2018 to provide guidance.
A failure to comply with the Code of Practice does not, of itself, render any person liable to any judicial or other proceedings. However, such non-compliance may be taken into account, if relevant, to a question being decided by a court or arbitral tribunal.
Comparison with English Code
The Hong Kong Code of Practice (HK Code) is similar to an English Code of Conduct for Litigation Funders (English Code), introduced in November 2011, which covers funding in litigation and arbitration. The English Code provides for an industry self-regulation model and all members of the Association of Litigation Funders are bound by the English Code.
That said, there are some differences between the HK Code and English Code. In contrast to a self-regulation model, the HK Code (and the operation of the amended AO) is monitored and reviewed by an advisory body appointed by the Secretary for Justice (advisory body).
The HK Code also contains more detailed provisions in some respects including regarding conflicts of interest and addressing complaints from funded parties.
Of interest, under the English Code, the capital requirement is £5 million as compared to HK$20 million (about £2 million) under the HK Code (discussed below).
Key provisions of HK Code
The key provisions of HK Code are as follows:
- Application. The HK Code applies to third party funders, as defined in the AO, being a person who is a party to an arbitration funding agreement who does not have an interest in the arbitration other than under the funding agreement. Potential third party funders are also covered.
- Application Date. The HK Code applies to funding agreements commenced or entered into on or after 7 December 2018.
- Funding Agreement generally. Regarding the funding agreement, the funder must (i) make the funded party aware of his or her right to seek independent legal advice; (ii) provide a Hong Kong address for service subject to an otherwise agreed mode of service (iii) explain clearly all the key features and terms of funding (iv) set out the name and contact details of the advisory body.
- Capital Adequacy Requirements. The HK Code contains capital adequacy requirements including maintaining the capacity to cover all funding liabilities under all funding agreements for minimum period of 36 months and access to at least HK$20 million of capital. Such requirements also involve provision of qualified third party evidence including provision of annual audit opinions to the advisory body and obligations of continuous disclosure to the funded party.
- Conflicts of Interest. The funder must maintain effective procedures for managing any conflict of interest. This should be done by senior management or partners of the funder. Effective procedures should include written procedures for identifying and managing conflicts of interest and implementation of such procedures. Conflicts of interest may include a situation in which a lawyer acts for both the funder and a funded party or in which there is a pre-existing relationship between any such parties.
- Disclosure. The Code provides that the funder must remind the funded party of the obligation to disclose under the amended AO being disclosure of third party funding and the identity of the third party funder. Similarly, if a funding agreement ends, appropriate notice must be given. The existence of funding is relevant in the context of an arbitrator carrying out a conflict search and making appropriate disclosures, as well as perhaps more controversially, security for costs applications (discussed below). Disclosure of a funding arrangement may also indicate that an independent third party considers the substantive merits of the case to be strong and could encourage settlement.
- Confidentiality and privilege. The funder’s obligation to observe confidentiality and privilege is contained in the Code. This complements the amended AO, which provides for an exception to the parties' confidentiality obligations by permitting communication of information regarding the arbitration proceedings to a funder for the purpose of seeking or having third party funding of arbitration. With such communication to the funder, however, the risk that any privilege may be waived must be considered, albeit Hong Kong does recognise partial waiver of privilege and common interest privilege may apply.
- Costs. The Code deals with this issue by requiring the funding agreement to state whether (and if so, to what extent) the funder is liable to the funded party to meet any liability for adverse costs. This is an issue in arbitration because whilst the loser pays principle applies at least in Hong Kong arbitration, an arbitral tribunal lacks jurisdiction over third parties such as the funder and cannot order that it bear costs.
- Security for costs. Similarly, the Code deals with this issue by requiring the funding agreement to state whether (and if so, to what extent) the funder is liable to the funded party to provide security for costs. If security for costs is ordered by a tribunal, this might increase the cost of funding even if the funder is prepared to pay, and if not, the funded party might be forced to procure alternative funding. Ordering security for costs simply for a claimant’s use of third party funding is also controversial. A tribunal should take into account other factors such as the claimant’s conduct in the proceedings or any lack of financial resources (it should not be assumed that this is the reason for third party funding).
- Control. The funding agreement shall set out clearly that the funder will not seek to influence the funding party or his or her legal representative to give control or conduct of the arbitration to the funder except to the extent permitted by law, or seek to influence the arbitral tribunal or any arbitral institution involved.
- Grounds for Termination for Funder. The funding agreement must state whether (and if so, how) the funder may terminate the funding agreement in the event: (i) the funder reasonably ceases to be satisfied about the merits of the arbitration; (ii) the funder reasonably believes there has been a material adverse change of prospects to success in the arbitration or recovery; or (iii) of a material breach of the funding agreement. A discretionary right to terminate in the absence of such circumstances must not be established in the funding agreement. Further, the funding agreement must provide that the funder is to remain liable for all funding obligations accrued to termination unless the termination is due to material breach.
- Grounds for Termination for Funded Party. The funding agreement must provide that the funded party may terminate if he or she reasonably believes that the funder has committed a material breach of the Code or the funding agreement, which may lead to irreparable damage.
- Miscellaneous. The Code also contains other provisions, for example, regarding promotional materials (they must be clear and not misleading) and addressing complaints from funded parties.
The recent reforms have brought Hong Kong in line with England and other jurisdictions where third party funding is permitted. Whilst the reforms may not resolve access to justice issues, it at least gives parties another option in funding their arbitration. This is certainly welcome as a major concern of parties is costs.