The Hong Kong Government has published a new bill, which when enacted, will allow a flexible regime for outcome-related fees in arbitration. This legislation, compliments the existing regime for third party funding, providing parties with improved access to justice.
When in force, the new legislation, will permit solicitors, barristers, and foreign lawyers to use a variety of success-related fee agreements to fund arbitrations and court proceedings related to these arbitrations – even where the place of arbitration is outside Hong Kong. The Government has said it expects the new model to be implemented later this year.
Hong Kong has in recent years been arbitration friendly in abolishing the torts of champerty and maintenance, which prevent third parties from providing financial support to litigation. For example, following the amendment in 2017, the Arbitration Ordinance now permits third party funding of arbitration and related proceedings where the place of arbitration is Hong Kong. However, funding may not be provided by a lawyer or legal practice acting for a party to the arbitration. It must be provided by a third party funder.
There has been a trend for arbitral seats around the world to allow some form of success-related funding by lawyers. The new Hong Kong legislation is based on a report by the Law Reform Commission (LRC) which itself was drawn up after an extensive consultation with arbitral institutions, lawyers, professional bodies, the finance sector and members of the public. In its report, the LRC recommended that outcome related fee structures be introduced for arbitration and related court proceedings such as applications for interim relief or for set aside or enforcement before the Hong Kong courts.
Types of agreements
The Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Bill had its first reading in the Legislative Council on 30 March 2022. The legislation – based on Law Reform Commission Report – will permit three types of agreements – (i) conditional fee agreements; (ii) damages-based agreements; and (iii) hybrid damages-based agreements.
A conditional fee agreement (CFA) is an agreement where the client agrees to pay the lawyer an additional fee by reference to the success achieved in the proceedings. This may be in the form of a percentage uplift on the fee that the lawyer would otherwise have charged (“benchmark” fees) or a flat fee.
A damages-based agreement (DBA) means an agreement whereby the lawyer is only remunerated where the client obtains a financial benefit in the matter. The DBA payment is calculated by reference to the financial benefit, such as a percentage of a monetary award in damages.
A hybrid DBA is an agreement under which the lawyer agrees to be paid in the event the client obtains a financial benefit and a fee in any event in respect of the legal services provided by the lawyer during the course of the matter.
The legislation in detail
The legislation introduces a new Part 10B into the Arbitration Ordinance (Cap. 609). Division 1 of the Part 10B sets out the purposes and application of the new arrangements and provides that an outcome related fee structure (ORFS) agreement for arbitration is not prohibited by the common law doctrines of champerty and maintenance and provide for the validity and enforceability.
Division 2 sets out definitions and confirms that “arbitration body” refers to proceedings before an arbitral tribunal or court as the case may be and includes proceedings before an emergency arbitrator or a mediator. “ORFS agreement” is defined to mean a CFA, DBA or a Hybrid DBA. The definition of lawyer is given a broad meaning to include barristers, solicitors and persons qualified to practise the law of a jurisdiction other than Hong Kong, including foreign lawyers.
Division 3 provides that ORFS agreements for arbitration are not prohibited by the common law doctrines of maintenance, champerty and barratry as to both civil and criminal liability.
Division 4 provides for the validity and enforceability of ORFS agreements for arbitration but states that an ORFS agreement for arbitration in relation to a personal injuries claim is void and unenforceable.
Division 5 empowers the advisory body (to be appointed) to make rules to specify the general and specific conditions and to provide for the effective implementation of the purposes and provisions of the section.
Division 6 empowers the authorized body (to be appointed) to issue a code of practice setting out the practices and standards with which lawyers who enter into ORFS agreements for arbitration are ordinarily expected to comply with in connection with the agreements.
Division 7 addresses the issue of confidentiality. It allows for the communication of confidential information relating to arbitral proceedings to a person for the purpose of entering into, or seeking to enter into, an ORFS agreement for arbitration with the person. The recipient of the information is subject to confidentiality obligations. These are similar to the safeguards where a third party funder is involved in arbitrations.
Division 7 also deals with disclosure of information regarding the ORFS agreement. If an ORFS agreement is made between an client and a lawyer of the client, the lawyer must inform each other party and the arbitration body by written notice of the fact that an agreement has been made and the name of the client within a specified time frame. Similarly, disclosure about the end of an ORFS agreement is also required. The explanatory memorandum says ”this is to minimise the possibility of conflicts of interest being the subject of a challenge to the arbitration process.”
Division 8 empowers the Secretary of Justice to appoint an advisory body and authorised body for the purposes of the new provisions.
Section 64 of the Legal Practitioners Ordinance is also amended to enable the validity of ORFS agreements for arbitration.
It is intended that the new provisions will come into operation in two stages. Divisions 1, 2, 5, 6 and 8 will commence on the gazettal of the Ordinance, while Divisions 3, 4 and 7 will commence on a day to be appointed. The Government says this is “to facilitate the preparatory work for the relevant regulatory framework to be done before the provisions clarifying the legal position come into operation”.
According to the Queen Mary University of London 2021 survey report, international arbitration is the respondents’ preferred method of resolving cross-border disputes for 90% of respondents, either on a stand-alone basis (31%) or in conjunction with ADR (59%). Hong Kong is the third most preferred seat of arbitration according to the survey. Outcome related fees in arbitration will continue enhance Hong Kong’s competitiveness as one of the world’s main arbitration centres.
Outcome related fee arrangements in commercial and investment arbitration is a welcome development, subject to an appropriately regulated regime containing ethical and financial safeguards.
Outcome related fee arrangements are already a part of business practices in other jurisdictions, and used in leading seats such as London, Paris, and New York. It should be allowed in jurisdictions which currently prohibit it, such as Hong Kong and Singapore. International arbitration can be an expensive process.
Outcome related fees in arbitration provide an additional means of funding arbitrations, and for some parties, the only means of funding arbitration for meritorious claims. Although a successful claimant foregoes a percentage of its damages, it is better for it to recover a substantial part of its damages than to recover nothing at all.
Watch out for a future Talking Point Asia where we will report on developments and comment more widely on the provisions as enacted.
Authored by Tim Hill, James Kwan, Nigel Sharman.