I Market Overview
While other common law systems have for years abolished the common law doctrines of champerty and maintenance, Hong Kong has, to date, held on to these two doctrines, and as a result, has arguably lagged behind in its development of a third party funding regime. In 2017, Hong Kong opened up arbitrations and mediations to third party funding, legalising what were previously actions that would have attracted the tortious or criminal liability of champerty or maintenance. Save for some narrow exceptions, the rules for court litigation, which might be able to benefit from third party funding, have largely remained unchanged: any third party funding in court proceedings may still attract the potential tortious, or even criminal, liability of champerty or maintenance.
In 2013, the Law Reform Commission of Hong Kong (the Commission)2 commenced its consultation with the industry's professionals on third party funding for arbitrations and mediations. A report was released by the Commission in October 2016 recommending that maintenance and champerty should not apply to arbitration and mediation and that the Arbitration Ordinance (Cap. 609) and the Mediation Ordinance (Cap. 620) should be amended accordingly.3
The Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance Order No. 6 of 2017 (the Amendment Ordinance) was passed by the Legislative Council on 14 June 2017. The legislation came into force, save for some specific sections as discussed below, on 23 June 2017, legalising third party funding in arbitrations and mediations in Hong Kong.
II Legal and Regulatory Framework
Under Hong Kong's own mini constitution, the Basic Law, all the laws previously in force in Hong Kong before the handover would be maintained unless they contravene the Basic Law or have subsequently been amended by the legislature. Accordingly, Hong Kong inherited the common law principles that existed before the handover, including the maintenance and champerty doctrines.
Maintenance is 'directed against wanton and officious intermeddling with the disputes of others in which the defendant has no interest whatever, and where the assistance he renders to the one or the other party is without justification or excuse'.4 Champerty has been described as 'a form of maintenance, and occurs when the person maintaining another takes as his reward a portion of the property in dispute'.5
While the United Kingdom has abolished the torts and crimes of maintenance (unless unlawful) and champerty, Hong Kong has chosen to preserve these two doctrines. As a result of which, Hong Kong had a long-standing general ban (with limited exceptions) on third party funding in litigation, arbitration and mediation.
i Third party funding in court litigation
Third party funding in the court litigation context, save for the three express exceptions mentioned below, will still attract potential tortious or criminal liability. The Amendment Ordinance,6 discussed further below, only allows for third party funding in arbitrations and mediations to be exempted from criminal and tortious liability.
Courts are aware of the cost of litigation and the need for making court access available to all. Cases have developed exceptions to the doctrines of champerty and maintenance, allowing third party funding in litigation in three narrow areas: (1) where the third party has a legitimate common interest in the litigation, (2) where there is access to justice considerations and (3) in insolvency proceedings.7
In the first exception, certain relationships already pre-existing between the claimant and the would-be third party funder, where the funder has legitimate interest in the action such as groups or associations funding their members' actions, are open to third party funding. The second exception, access to justice, is one recognised judicially to help claimants who have meritorious claims but do not have the resources to fund litigation services. The Supplementary Legal Aid Scheme in Hong Kong is a major player in this area, helping potential claimants who lack funds to seek justice. Finally, in insolvency proceedings, there are a handful of cases pushing the boundaries on the ban against third party funding in the insolvency proceedings context. The case of Akai Holdings Ltd (in compulsory liquidation) & Ors v. Ho Wing On Christopher & Ors8 is one of the earlier cases where liquidators received court approval for third party funders to fund the insolvency proceedings. The court of first instance decision in Re Cyberworks Audio Video Technology Ltd 9 further confirmed that a party can seek third party funding to fund proceedings in insolvency cases. There is also case law suggesting that the Hong Kong courts will allow for litigation funding in the insolvency context where there is a 'legitimate commercial purpose' (Re Po Yuen (To's) Machine Factory Ltd).10
However, apart from the three categories discussed above, there has been no indication at all from the Hong Kong courts that third party funding can be allowed in other areas of court litigation. On the contrary, the court in Raafat Imam v. Life (China) Co Ltd11 has refused to expand the exceptions to other areas. The court stated that since the plaintiff was essentially seeking a declaration of non-criminality from a civil court and failed to show that his case fell into the category of exceptional cases, it would be inappropriate for the court to approve of the plaintiff's third party funding agreement.12
ii Third party funding in arbitration
Unlike in litigation, judicial attitudes towards third party funding in arbitration have been more open. Prior to the statutory amendment, the courts did not come to a definitive view on whether champerty and maintenance actually apply to arbitration: Kaplan J in Cannonway Consultants Limited v. Kenworth Engineering Limited13 has said that third party funding is allowed in arbitration. However, in Unruh v. Seeway, the Court of Final Appeal expressly left open the question on whether maintenance and champerty should be applied to arbitrations in Hong Kong,14 thereby casting doubt as to whether third party funding is appropriate in arbitrations. The Court of Final Appeal has stated expressly that this is an issue that requires 'serious legislative attention'.15
As stated above, legislative attention was given when the Commission began its consultation in 2013. Following the consultation, the Commission came up with a set of recommendations for the Legislative Council, and subsequently the Legislative Council passed the Amendment Ordinance to amend various provisions in the Arbitration Ordinance and the Mediation Ordinance on 14 June 2017. The amendments to the Arbitration Ordinance (and the Mediation Ordinance as discussed below) came into operation on 23 June 2017.
However, not all of the amendments contained in the Amendment Ordinance have been incorporated into the Arbitration Ordinance when the Amendment Ordinance came into effect in 2017. At the time of writing in September 2018, Division 3 and Division 5 have yet to come into force. Division 3 seeks to, among other matters, ensure that third party funding of arbitration is not prohibited by the civil and criminal common law doctrines of maintenance and champerty. Division 5 predominantly relates to disclosure in third party funding in arbitration. According to the Legislative Council Brief (Legco Brief)16 prepared by the Department of Justice for the first reading of the Amendment Ordinance in the Legislative Council, the Amendment Ordinance would be rolled out in two phases in order to 'facilitate the preparatory work for the relevant regulatory framework to be done before the provisions clarifying the legal position come into operation'.17
The main change ushered in by the Amendment Ordinance now is a declaration that third party funding is allowed in arbitration, including proceedings before emergency arbitrators and ancillary court proceedings.18 The Amendment Ordinance defines third party funding of arbitration to mean a 'provision of arbitration funding for an arbitration (1) under a funding agreement; (2) to a funded party; (3) by a third party funder; and (4) in return for the third party funder receiving a financial benefit only if the arbitration is successful within the meaning of the funding agreement'.19 A third party funder is someone '(a) who is a party to a funding agreement for the provision of arbitration funding for an arbitration to a funded party by the person; and (b) who does not have an interest recognized by law in the arbitration other than under the funding agreement'.20
In the meantime, the Hong Kong International Arbitration Centre has introduced changes to accommodate the legalisation of third party funding for arbitrations in its proposed amended Administered Arbitration Rules (the Proposed HKIAC Rules) published on 11 July 2018 for public consultation. The revised rules expressly recognise third party funders and funding agreement such funder may enter into with an arbitration party.21
iii Third party funding in mediation
The Commission also recommended that third party funding be allowed in mediation22 and the Amendment Ordinance amends the Mediation Ordinance to allow for third party funding in mediation.
Part 3 of the Amendment Ordinance provides that the provisions for third party funding in arbitration apply equally to mediation with some slight amendments, thereby expanding third party funding to both mediation and arbitration equally.
However, in the same way as certain provisions in the Amendment Ordinance are not yet in force, certain sections amending the Mediation Ordinance are also not yet in force at the time of writing. They have been postponed and will be brought into force on a date to be appointed by the Secretary of Justice.23
iv Self-regulation of third party funding
The Law Reform Commission envisioned that a Code of Practice (the Code) would be issued by a body under the Arbitration Ordinance to promote best practices in the initial three-year period.24 This is a common approach in Hong Kong to ensure accountability among the relevant industries. This also reflects the trend in other common law jurisdictions that a 'light touch'25 or self-regulating approach towards third party funding in arbitration is often preferred.
On 30 August 2018, the Department of Justice launched a two-month public consultation26 to seek views on a draft of the Code of Practice (the draft Code).27 The draft Code is said to apply to some pre-contractual negotiations and the making and performing of any funding agreement between a third party funder and a funded party. According to the draft Code, the third party is subject to duties to maintain capital adequacy requirements to (1) pay all debts when they become due and payable; and (2) cover aggregate funding liabilities under all of their funding agreements for a minimum period of 36 months.28 They also must maintain access to a minimum of HK$20 million of capital.29
The draft Code also states that the third party funder must undertake that '(1) the third party funder will not seek to influence the funded party or the funded party's legal representative to give control or conduct of the arbitration or mediation to the third party funder except to the extent permitted by law; and (2) the third party funder will not take any steps that cause or are likely to cause the funded party's legal representative to act in breach of professional duties',30 addressing the issue mentioned by Stone J in Akai Holdings Ltd v. Ho Wing On Christopher.31
The draft Code also includes provisions attributing to funders the responsibility for compliance by its subsidiary, associated entities and any investment advisors acting as its agent, 32 a dispute resolution mechanism for disputes on the funding agreement, a complaints procedure, and a requirement for an annual return.33
The draft Code, when implemented, will not be a part of the legislation, and so failure to comply with the Code will not attract any legal consequences.34 However, the Amendment Ordinance does give the Code some teeth: while failure to comply does not make a person liable to civil or criminal liabilities, it can be used as evidence in court and may be taken into account in court proceedings if it is relevant to the matter at hand.35
v Contingency fees rules
Unlike other jurisdictions, Hong Kong law does not permit Hong Kong solicitors or barristers to charge conditional or contingency fees.36 While the Commission conducted a consultation on conditional fees in 2005, it concluded that such reform was unnecessary, as the Commission was of the view that it would be against the public interest to allow Hong Kong lawyers to charge conditional fees and contingency fees.
A solicitor, barrister or registered foreign lawyer seeking to be a third party funder in an arbitration where he or she is serving, will serve or has previously served as counsel to a party, may be committing the crime and tort of champerty or maintenance. It leaves open the possibility of Hong Kong law firms that do not represent any party in an arbitration being third party funders.
The Amendment Ordinance does make clear that third party funding is not available to lawyers acting for parties in the arbitration but it does not prohibit providers of legal services or persons practising law from being third party funders.37 It is worth noting, however, that this section has not yet come into force, as it falls under Division 3 in the Amendment Ordinance.38
III Structuring the Agreement
The Amendment Ordinance does not specify any particular requirements as to the funding agreement, but defines a funding agreement to mean 'an agreement for third party funding of arbitration that is (a) in writing; (b) made between a funded party and a third party funder; and (c) made on or after the commencement date of Division 3'.39 The draft Code requires that a third party funder must set out and explain clearly in the funding agreement all the key features, risks and terms of the proposed funding, provide a Hong Kong address for service, and set out the name and contact details of the advisory body responsible for monitoring and reviewing the operation of third party funding.40 While the inclusion of such terms is not compulsory, it is seen as best practice to include those terms as they are incorporated in the draft Code.
The draft Code also requires the funding agreement to state whether a third party funder can terminate the funding agreement when it '(1) reasonably ceases to be satisfied about the merits of the arbitration; (2) reasonably believes that there has been a material adverse change of prospects to the funded party's success in the arbitration; (3) reasonably believes that there has been a material adverse change of prospects to the funded party's being able to reach any agreement with the other party(ies) to the mediation to resolve in whole or in part the dispute in question; or (4) reasonably believes that the funded party has committed a material breach of the funding agreement'.41 The funding agreement must provide that if the third party funder terminates the funding agreement, the third party funder is to remain liable for all funding obligations accrued to the date of termination, unless the termination is due to a material breach.42
i Disclosure to third party funders
Arbitrations in Hong Kong generally abide by strict confidentiality rules. Section 18 of the Arbitration Ordinance prohibits any disclosure of information relating to the existence of any arbitration proceedings and any subsequent awards made pursuant to the arbitration proceedings. However, with the development of a third party funding regime for arbitration, there is a need to balance the right to confidentiality of the party not seeking third party funding and the need of information for the third party funder. Section 98T of the Amendment Ordinance carves out an exception to the confidentiality obligation and allows disclosure by a party to another person for the purpose of having or seeking third party funding from the person.43
Section 98T provides that despite the restriction under Section 18, a funded party can communicate information relating to the arbitral proceedings to a third party funder and the subsequent awards made for the purpose of having or seeking funding. However, no information may be further communicated unless the information is made 'to protect a legal right or interest and enforce or challenge an arbitration award',44 'to any government body, regulatory body, court or tribunal and the person is obliged by law to make the communication'45 or 'to a professional adviser of the person for the purpose of obtaining advice in connection with the third party funding or arbitration'.46 However, it should be noted that these sections have not yet come into force as they are contained in Division 5 of the Amendment Ordinance.47 There is a section in the Draft Code on confidentiality and privilege that reaffirms the duty for the third party funders to observe confidentiality of the arbitration.48 Similarly, the Proposed HKIAC Rules also allow parties to make necessary publication and disclosure to a person for the purposes of having or seeking third party funding for arbitration.49
ii Disclosure to the other party
To protect the party not seeking funding, the funded party must give written notice of the fact that a funding agreement has been made and the identity of the third party funder.50 The notice must be given on or before the commencement of the arbitration, or, for a funding agreement made after the commencement of the arbitration, within 15 days after the funding agreement is made.51 Notice must be given to all parties to the arbitration and the arbitral tribunal (or an emergency arbitrator if there is one).52 Where there is no arbitral tribunal set up at the time the notice is served, the notice must instead be given to the arbitration tribunal immediately after one is set up for the arbitration.53 There should also be disclosure about the end of third party funding.54 The draft Code reaffirms the funded party's duty to disclose information about the third party funding arrangement.55
The Proposed HKIAC Rules also require parties to disclose the (1) existence of any funding agreement; and (2) identity of the third party, as soon as practicable after the funding agreement is made, or in the Notice of Arbitration or the Answer to the Notice of Arbitration, whichever event is earlier.56
i Adverse costs against third party funders
Adverse costs are generally 'an order of a Tribunal or of a Court requiring a party to an arbitration or court proceedings to pay all or some of the costs of the other party or parties involved'57 and the Commission has recommended that it was not necessary to put in a power to award adverse costs against third party funders in the draft of the Amendment Ordinance. By contrast, there are already such powers available in the litigation regime.58
The Commission has expressed that it thinks in principle an arbitral tribunal should be given power under the Arbitration Ordinance to award costs against a third party funder where the appropriate circumstances arise and after due process is given. However, there are technical issues that need to be overcome, such as how a third party funder can be ordered to pay adverse costs if it is not a party to the arbitration agreement between the parties. Since arbitration agreements operate on the basis of consent from all the relevant parties, it would be difficult to order a third party who is not a party to the arbitration agreement to pay costs. Because of this technical issue, as well as the prematurity of this development in arbitration, the Commission decided not to incorporate any such power in the Amendment Ordinance,59 but will review this matter after the initial three years of the Amendment Ordinance coming into effect. After the initial three-year period of implementation, the advisory body will consider whether it is appropriate to empower the arbitrator or tribunal to make such orders.60 It is worth noting that the government responded in agreement with the Commission's view and mentioned that it would look into the developments made by the international arbitration community such as the International Council for Commercial Arbitration-Queen Mary Task Force on Third-Party Funding in International Arbitration.61
Even though the Amendment Ordinance does not give arbitral tribunal powers to give adverse cost orders to third party funders, the draft Code envisages that a funding agreement should state whether (and if so, to what extent) a third party funder, a subsidiary or an associated entity should be liable to the funded party to: '(1) meet any liability for adverse costs; (2) pay any premium (including insurance premium tax) to obtain costs insurance; (3) provide security for costs; and (4) meet any other financial liability'.62
In contrast to the Amendment Ordinance, the Proposed HKIAC Rules move further and give the arbitral tribunal power to take into account any third party funding arrangement in apportioning all or part of the costs of the arbitration.63
ii Security for adverse costs against third party funders
The Commission's view is that a power to make an order awarding security for adverse costs is not necessary for arbitrators. The main reason is that the arbitrator or tribunal already has the power under the existing Arbitration Ordinance regime to make an order for security for costs against a party, thereby offering adequate protection to the respondent.64 Hong Kong's third party funding regime will therefore place a greater emphasis on the funding agreement, which, as detailed above, should cover the responsibility for adverse costs, as well as security for costs.
VI The Year in Review
There have been a number of new developments in third party funding in Hong Kong in 2017–2018. On one hand, the court has refused to expand the existing exceptions to allow third party funding in other areas of court litigation. On the other hand, the regulation regime on third party funding in arbitration and mediation is gradually developing. First, the publication of the draft Code is a further step in opening up the availability of third party funding in arbitrations and mediations. Secondly, Hong Kong International Arbitration Centre has proposed changes to its Administered Arbitration Rules to accommodate the legalisation of third party funding arrangements. The Proposed HKIAC Rules recognise third party funders and third party funding agreements. They set out disclosure standards for parties seeking third party funding and also give arbitral tribunals the power to order costs against third party funders.
The industry is expecting the draft Code to be finalised in the near future to provide a clearer set of standards and practices that third party funders are expected to comply with. The final rollout by the Secretary of Justice of Division 3 and Division 5 of the Amendment Ordinance will see all of the Commission's recommendations and Legislative Council's adoptions fully coming into force.
VII Conclusion and Outlook
Third party funding in Hong Kong has seen new developments this year. At present, there is limited guidance on how third party funding will affect arbitrations in Hong Kong. Guidance from the Commission, the Amendment Ordinance and the draft Code indicates that Hong Kong envisions its third party funding regime to be similar to that of other arbitration-friendly jurisdictions. Third party funding is self-regulated, with disclosure requirements imposed on the third party funder and the funded party. There are carve-outs made against normal confidentiality requirements in arbitration. Some things, however, will not change, such as the general ban on solicitors and barristers to charge contingency or conditional fees. The future of the powers to award adverse costs and security for adverse costs remains to be seen. At present, the Commission does not see the need to empower any arbitrator or tribunal to have the power to award security for adverse costs, but may, after the initial trial period, empower any arbitrator or tribunal to do so.
The future for arbitration practitioners is bright, and the future for third party funders, especially for third party funding law firms, is even brighter. While this area is very new, there will undoubtedly be a lot of further developments in Hong Kong, which will present many new opportunities to local and overseas arbitration professionals. It is hoped with the new developments materialising in the legalisation of third party litigation in arbitration and mediation, Hong Kong will be able to capture the increasing demand for arbitration services in Asia.
1 Melody Chan is a partner at White & Case. She was assisted in writing this chapter by Stephanie Ma and Aurora Leung, trainees at White & Case.
2 The Commission's role is to reform aspects of Hong Kong law through referral from the Secretary for Justice or the Chief Justice and normally will do this in consultation with members of the relevant industry groups.
4 Unruh v. Seeway  2 HKC 609.
5 Neville v. London 'Express' Newspaper Ltd  A C 368 at para. 382.
6 Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (Amendment Ordinance).
7 See Unruh (n.4); and Law Reform Commission Report para. 1.5.
8  HKCU 172.
9  2 HKLRD 1137.
10  2 HKLRD 752.
11  HKCFI 1852.
12 ibid .
13  2 HKLR 475.
14 Unruh (n.4) .
15 Unruh (n.4) .
16 Department of Justice, Legislative Council Brief: Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 (File Ref.: LP 19/00/16C) www.legco.gov.hk/yr16-17/english/bills/brief/b201612301_brf.pdf (Legco Brief).
17 Legco Brief at para. 23.
18 Amendment Ordinance, Sections 98K and 98 L.
19 Arbitration Ordinance Cap 609, Sections 98F and 98G (Arbitration Ordinance).
20 Arbitration Ordinance Sections 98F and 98J(1)(a) and (b).
21 Hong Kong International Arbitration Centre, Proposed Amended HKIAC Administered Arbitration Rules (12 July 2018) www.hkiac.org/sites/default/files/ck_filebrowser/PDF/arbitration/HKIAC%20AAR%20%28for%20public%20consultation%29%2012.7.2018.pdf (Proposed HKIAC Rules).
22 Law Reform Commission of Hong Kong Report, ibid. at para. 3.48.
23 Amendment Ordinance, Section 1(3)(a).
24 Arbitration Ordinance Section 98P.
25 Law Reform Commission of Hong Kong Report, ibid. at para. 4.14.
26 Department of Justice, Public consultation on proposed code of practice on third party funding of arbitration and mediation starts today (30 August 2018) www.info.gov.hk/gia/general/201808/30/P2018083000396p.htm.
27 Department of Justice, Draft Code of Practice for Third Party Funding of Arbitration and Mediation https://www.doj.gov.hk/eng/public/pdf/2018/tpfcode_e.pdf (Draft Code).
28 Draft Code, clause 2.5(1).
29 Draft Code, clause 2.5(2).
30 Draft Code, clause 2.9.
31  HKCU 172. Stone J criticised that funders often appear in practice to exercise more control over proceedings than proper.
32 Draft Code, clause 2.1.
33 Draft Code, clauses 2.17–2.19.
34 Amendment Ordinance, Section 98S(1).
35 Amendment Ordinance, Section 98S(2).
36 Law Reform Commission Report, para 3.36; Legal Practitioners Ordinance Cap 159 Section 64(1); Law Society of Hong Kong, Guide to Professional Conduct Vol. 1, Rule 4.17; Bar Association, Code of Conduct, para. 124.
37 Amendment Ordinance, Section 98F and Section 98O.
38 Amendment Ordinance, Section 1(3)(a).
39 Amendment Ordinance, Section 98H.
40 Draft Code, clause 2.3.
41 Draft Code, clause 2.13.
42 Draft Code, clause 2.15.
43 Amendment Ordinance, Section 98U.
44 Amendment Ordinance, Section 98T(2)(a).
45 Amendment Ordinance, Section 98T(2)(b).
46 Amendment Ordinance, Section 98T(2)(c).
47 Amendment Ordinance, Section 1(3)(a).
48 Draft Code, clause 2.8.
49 Proposed HKIAC Rules, Article 45.4(e).
50 Amendment Ordinance, Section 98U(1).
51 Amendment Ordinance, Section 98U(2).
52 Amendment Ordinance, Section 98U(3).
53 Amendment Ordinance, Section 98U(4).
54 Amendment Ordinance, Section 98V.
55 Draft Code, Clauses 2.10 – 2.11.
56 Proposed HKIAC Rules, Article 44.
57 Law Reform Commission Report 1.
58 Rules of the High Court Cap 4A, Ord 62, r 6A; High Court Ordinance Cap 4, Sections 52A and 52B.
59 Law Reform Commission Report, paras. 2.11(1) & 7.31(1).
60 Law Reform Commission Report, paras. 2.11(2) & 7.31(2).
61 Legco Brief, Annex B, Recommendation 4.
62 Draft Code, clause 2.12.
63 Proposed HKIAC Rules, Article 34.4.
64 Law Reform Commission Report, paras. 2.11(3) and 8.15.