Hong Kong – Third Party Funding.

16 November, 2015

 

 

Third party funding has become increasingly common in numerous common law jurisdictions over the last decade. Hong Kong is at a relatively early stage of development in this regard, likely due to the fact that third party funding of litigation with a view to profit may potentially constitute both tort and the criminal offences of champerty and maintenance in Hong Kong. As regards third party funding of arbitrations in Hong Kong, the position is not clear although that may be about to change.

 

This Article considers the restrictions on third party funding in Hong Kong, the current position in relation to third party funding of litigation in Hong Kong, as well as the much anticipated Consultation Paper recently released by the Law Reform Commission of Hong Kong recommending that third party funding for arbitrations should be permitted in Hong Kong.

 

The restrictions on third party funding in Hong Kong

 

Third party funding is historically prohibited under the traditional common law doctrines of maintenance and champerty, which were developed in mediaeval England to prevent “oppression of poor men by rich men, through the means of legal proceedings”1. “Maintenance” is defined as “an officious intermeddling in a suit which in no way belongs to one by maintaining or assisting either party with money or otherwise to prosecute or defend it.”2 “Champerty” is defined as a form of maintenance, and occurs when the person receives consideration for the maintenance out of the proceeds of successful litigation; in other words, taking a share of any damages award.

 

Traditionally the doctrine involves value judgements as to whether: (i) third party funding “may encourage the perversion of justice and endanger the integrity of judicial processes”3 where a “champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses”4, and (ii) third party funding may involve “a stranger to the litigation in “trafficking” or “gambling” in the outcome of the litigation”5, which should be made unlawful. As a result, exceptions exist including an exception for those who have a legitimate common interest in the outcome of the litigation.

 

In March 2014, the Hong Kong Government considered the issue of whether to abolish the offences of maintenance and champerty. It was decided that the offences should be preserved for the time being, as the abolition would raise legal and public concerns including those of recovery agents and litigation funding companies.6

 

Despite the abolition of prohibition of maintenance and champerty in some other common law jurisdictions7, the crimes and torts of maintenance and champerty, and the common law rules which make them a basis for rendering contracts unenforceable as against public policy, are still part of Hong Kong law today.

 

Current position as to third party funding of litigation in Hong Kong

 

Third party funding arrangements that have been considered acceptable by the Hong Kong courts generally have involved the funder providing funds at arm’s length to the funded party in the event that the plaintiff is successful in its pursuit of the litigation and in obtaining financial recovery. The funded party retains control of the proceedings and the third party funder assumes liability for the costs and disbursements of the plaintiff, Adverse Costs Orders and Security for Costs Orders, if so ordered by the Court.

 

In Siegfried Adalbert Unruh v Hans- Joerg Seeberger8, the Court of Final Appeal in 2007 held that the doctrines of maintenance and champerty continue to have effect in Hong Kong but recognise several exceptions to the common law rules. These are:

 

(a) the “common interest” category, whereby persons with a legitimate interest in the outcome of the litigation are justified in supporting the litigation;

(b) cases involving “access to justice” considerations9; and

(c) a miscellaneous category of practices accepted as lawful, such as the sale and assignment by a trustee in bankruptcy of an action commenced in the bankruptcy to a purchaser for value10; and certain insolvency proceedings11

 

Do the same principles apply to arbitration?

 

In Hong Kong, the answer may be “no”; but clarity is needed.

 

A High Court decision by Mr Justice Kaplan in the 2005 decision of Cannoway Consultants Limited v Kenworth Engineering Limited12 concluded that “….the law of champerty does not apply to arbitration proceedings”.

 

However, in 2007 in Unruh v Seeberger, Mr Justice Ribeiro of the Court of Final Appeal left open the question as to whether maintenance and champerty apply to arbitrations in Hong Kong, given it did not need to be decided.

 

The position in Singapore, by contrast, is clear. The Court of Appeal in 2007 (Otech Pakistan v Clough Engineering) found that “it would be artificial to differentiate between litigation and arbitration proceedings and say that champerty applies to one because it is conducted in a public forum and not to the other because it is conducted in private”. In Singapore, champerty applies to both.

 

Hong Kong publishes consultation paper on third party funding in arbitration

 

For arbitration in Hong Kong, it is uncertain whether the operation of the doctrines of maintenance and champerty also apply12.

On 19 October 2015, a Law Reform Commission Sub-committee published its Consultation Paper on “Third Party Funding for Arbitration” in Hong Kong. It was unanimously agreed by the sub-committee that “reform of Hong Kong law is needed to make it clear that third party funding for arbitrations taking place in Hong Kong is permitted under Hong Kong law provided that appropriate financial and ethical safeguards are complied with”13.

 

It is recommended that the Arbitration Ordinance (Cap. 609) be amended to provide that third party funding for arbitration taking place in Hong Kong is permitted under Hong Kong law. This would provide a firmer and statutory footing. It also recommends that clear ethical and financial standards for third party funders providing third party funding to parties to arbitration taking place in Hong Kong should be developed.

 

To that end, the Law Reform Commission has invited submissions on a number of issues, as follows: .

 

• Whether the development and supervision of applicable ethical and financial standards for third party funding of arbitration taking place in Hong Kong should be conducted by a statutory or governmental body, or a self-regulated body;
• How the applicable ethical and financial standards should address other matters such as (a) conflicts of interest; (b) confidentiality and privilege; (c) control of the arbitration by the third party funder; (d) disclosure of third party funding to the tribunal and other party/parties to the arbitration and (e) grounds for termination of third party funding;
• Whether a third party funder should be liable for adverse costs orders in a matter it has funded and whether the Arbitration Ordinance should be amended to provide an arbitral tribunal with power to order security for costs against a third party.

 

Responses to the above recommendations are invited by 18 January 2016.

 

The way forward regarding third party funding of arbitration in Hong Kong

 

It appears from the research by the Law Reform Sub-committee that nearly all major international arbitration centres now allow third party funding in arbitration.

 

Specific concerns have been raised in the context of international arbitration, where the presence of such funding is likely to be far less transparent in the arbitration process and also less likely to be the subject of public scrutiny. A few specific concerns are as follows14:

 

• Confidentiality and privilege issues. The lawyer’s duty of confidentiality to the client seeking funding could be compromised by providing information about the claim to the funder in the standard due diligence process.
• Disclosure of funding and costs. A question arises as to whether a claimant is obliged to disclose the participation of a funder to a respondent or an arbitral tribunal. The Respondent may well want to use that knowledge to take steps to seek security for its arbitration costs.
• Conflict of interest. This issue can emerge sharply in the context of settlement negotiations, particularly in circumstances where the funder and client may be in disagreement over whether or not to settle a claim. Another potential conflict of interest, or perceived conflict of interest, could arise between a funder and one of the arbitrators appointed to arbitrate a dispute, for example, where the arbitrator is a partner of a law firm with which the funder has a relationship. Disclosure of such a connection could cause particular difficulties where the funding has been kept confidential until the arbitration process is well under way.

 

Introducing third party funding in arbitration to take place in Hong Kong with appropriate financial and ethical safeguards, would not only resolve the present uncertainty over whether the doctrines of maintenance and champerty in Hong Kong apply, but also enhance Hong Kong’s competitive position as an international arbitration centre.

 

The current uncertainty regarding whether the archaic doctrines of maintenance and champerty applies to Hong Kong arbitration does need to be removed. The Law Reform Sub-committee currently recommends that third party funding should be permitted in arbitration taking place in Hong Kong. Hong Kong law could therefore soon be reframed to expressly permit third party funding in the context of arbitration, with appropriate safe guards to mitigate perceived negative implications.

 

1 Bradlaugh v Newdegate (1883) LR 11 QBD 1 at p.7
2 Unruh v Seeberger (2007) 10 HKCFAR 31, para 82
3 Unruh v Seeberger (2007) 10 HKCFAR 31, para 82
4 Re Trepca Mines Ltd (No 2) [1963] Ch 199 at p.219
5 Unruh v Seeberger (2007) 10 HKCFAR 31, para 101
6 See the report of the Legislative Counsel Panel on Administration of Justice and Legal Services, Abolition of the common law office of champerty, LC Paper No. CB(4)486/13-14(04), paras 11-12
7 For example, in the United Kingdom, the Criminal Law Act 1967 has abolished the offences and torts of maintenance and champerty, though the principles remain potentially relevant to tainted agreements as unenforceable for being contrary to public policy or otherwise illegal. Similarly several Australian states have also abolished maintenance and champerty as both a tort and a crime, but champerty remains relevant when considering the illegality and enforceability of tainted agreements
8 [2007] HKCU 246
9 See Ram Coomar Coondoo v Chunder Canto Mookerjee (1876) LR 2 App Cas 186; see also Beijing Tong Gang Da Sheng Trade Co. Ltd v Allen & Overy [2015] HKCA 232 in which the Court of Appeal upheld the first instance decision that a litigation funding agreement and assignment of a cause of action were champertous as there were vastly disproportionate potential returns for the outlay in the funding agreement and the assignment, which were significant to the genuineness of the impugned transaction. The “access to justice” ground relied upon by the Plaintiff failed
10 See Berman v SPF CDO I Ltd [2011] HKCU 522
11 One clear exception has been that relating to claims by insolvent companies. In the case of Re Cyberworks Audio Video Technology Limited[2010] HKCU 974, the assignment of a cause of action to a litigation funding company by liquidators under s.199(2)(a) of the old Companies Ordinance (Chapter 32 of the Laws of Hong Kong), was held to be a lawful exception to the prohibition on maintenance and champerty
12 [1995] 1 HKC 179
13 See Unruh v Seeberger (2007) 10 HKCFAR 31, para 123, where Mr Justice Ribeiro PJ leaves open the question whether maintenance and champerty apply to agreements concerning arbitrations taking place in Hong KongConsultation Paper on “Third Party Funding for Arbitration” by the Law Reform Commission of Hong Kong – Third Party Funding for Arbitration Sub-committee, October 2015, para 1.31
14 C Bowman: K. Hurford; S. Khouri, “Third party funding in international commercial and treaty arbitration – a panacea or a plague? A discussion of the risks and benefits of third party funding”