In our previous articles dated 8 February 2021 and 7 February 2022, we reported on outcome related fee structures for arbitration. On 16 December 2022, the Arbitration (Outcome Related Fee Structures for Arbitration) Rules will come into operation, permitting the use of certain outcome-related fee structures in arbitration proceedings (ORFSA) and setting out the regulatory framework on ORFSA.
ORFSA under the new Rules
The Rules allow 3 types of ORFSA, namely conditional fee arrangements (CFAs), damages-based agreements (DBAs) and hybrid damages-based agreements (Hybrid DBAs):
- CFA: An agreement under which the lawyer agrees with the client to be paid a success fee for the matter, only in the event of a successful outcome for the client i.e. a no win no fee arrangement.
- DBA: An agreement under which the lawyer agrees with the client to be paid for the matter only in the event the client obtains a financial benefit in the matter (DBA payment) and the DBA payment is calculated by reference to the financial benefit that is obtained by the client in the matter e.g. a percentage of the sum awarded or recovered.
- Hybrid DBA: An agreement under which the lawyer agrees with the client to be paid for the matter in the event that the client obtains a financial benefit in the matter – a payment calculated by reference to the financial benefit and, in any event, a fee which may or may not be calculated at a discount, for the legal services rendered by the lawyer for the client during the course of the matter.
All types of ORFSA must be in writing, signed by the lawyer and the client and state:
(i) the matter to which the agreement relates (that is the arbitration or any part of it);
(ii) in what circumstances the lawyer’s fees and expenses, or any part of them, are payable;
(iii) that the lawyer has informed the client of the right to seek independent legal advice before entering into the agreement;
(iv) a cooling off period of at least 7 days, during which the client can terminate the agreement without incurring liability;
(v) whether disbursements, including barristers’ fees are to be paid by the client irrespective of the outcome of the matter;
(vi) the grounds on which the agreement may be terminated before the conclusion of the matter; and
(vii) the alternative basis, on which the lawyer is to be paid by the client in the event of termination of the agreement under (vi) above.
There are specific conditions for each type of ORFSA, as follows:
- The success fee payable by the client to the lawyer must be expressed as a percentage of the benchmark fee.
- The uplift element must not exceed 100% of the benchmark fee. The uplift element means the portion of the total fee payable by the client to the lawyer in the event of a successful outcome that exceeds the benchmark fee for the matter to which the agreement relates.
- The agreement must state the circumstances that constitute a successful outcome of the matter, the basis for calculating the success fee and when the success fee becomes payable.
- The DBA payment must be calculated by reference to the financial benefit obtained by the client, must not exceed 50% of the financial benefit obtained by the client and must be payable in addition to any recoverable lawyer’s costs.
- The DBA must state the “financial benefit” to which the agreement relates, basis for calculating the DBA payment, when the DBA payment becomes payable by the client, and whether barrister’s fees are to be regarded as part of the DBA payment or the client is liable to pay the barrister’s fees in addition to the DBA payment.
In addition to the conditions for a DBA agreement above, a hybrid DBA agreement must also:
- State the fees applicable during the course of the matter and the benchmark fee.
- Provide that in the event that no financial benefit is obtained by the client, the client is not required to pay the lawyer more than 50% of the irrecoverable costs.
- Provide that in the event that the client obtains a financial benefit, but the DBA payment is less than the capped amount, the lawyer may elect to retain the capped amount instead of the DBA payment; and if the lawyer so elects, the capped amount instead of the DBA payment is to be payable by the client to the lawyer. The capped amount means the amount of the irrecoverable costs that would have been payable to the lawyer by the client under the agreement in the event that no financial benefit is obtained by the client in the matter.
Singapore has permitted conditional fee agreements between lawyers and their clients for arbitration cases since May 2022. The ORSFA brings Hong Kong in line with Singapore and other top global dispute resolution centres. ORSFA, together with the third party funding law in Hong Kong, provides more funding options for clients. How it will change the way lawyers charge their clients is yet to be seen.
It should also be noted that the ORSFA is only applicable to lawyers. Some arbitrations, in particular construction arbitrations, may be conducted by claims consultants. Whether if they charge fees on a contingency basis will infringe the law against champerty and maintenance (which is a criminal offence) is unclear after Unruh v Seeberger (2007) 10 HKCFAR 31 (please see our previous article on this judgment),where the Hong Kong Court of Final Appeal expressly left open this question.
For further information, please contact:
Stanley Lo, Partner, Deacons