On 16 December 2022, the Outcome Related Fee Structures for Arbitration (“ORFSA”) regime was fully implemented in Hong Kong through the amended Arbitration Ordinance (Cap. 609) and the new Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap. 609D).
Previously, under Section 64 of the Legal Practitioners Ordinance and Principle 4.17 of the Hong Kong Solicitors’ Guide to Professional Conduct, amongst other rules, solicitors are prohibited from receiving conditional/contingency fees in contentious matters from their clients. The ORFSA regime relaxes this restriction in respect of arbitration proceedings as it gives lawyers and their clients the flexibility to agree on fees conditional upon the outcome of a contentious matter under specific circumstances.
Under the ORFSA, an outcome related fee structure (“ORFS”) agreement is any of the following agreements made between a client and a lawyer of the client in respect of arbitration proceedings: (a) a conditional fee agreement; (b) a damages-based agreement; and (c) a hybrid damages-based agreement. The meanings of each type of agreement are as follows:-
|Type of Agreement
|Conditional fee agreement
|This is an agreement, made for a matter between a client and a lawyer of the client, 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 in the matter. * success fee means a payment calculated by reference to the fee that a lawyer of a client would have charged the client for the matter if no ORFS agreement had been made for the matter; *successful outcome: (a) means any outcome of the matter falling within the description of being successful as agreed to between the client and a lawyer of the client; and (b) includes any financial benefit that is obtained by the client in the matter.
|The success fee must be expressed as a percentage of the benchmark fee.
The agreement must provide that the uplift element must not exceed 100% of the benchmark fee.The agreement must state what constitutes a “successful outcome”.* The benchmark fee refers to the fee, which may or may not be expressed as an hourly rate, that the lawyer would have charged the client for the matter if no ORFS agreement had been made for the matter. * The uplift element refers to 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.
|An agreement, made between a client and a lawyer of the client for a matter, under which—(a) 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(b) the DBA payment is calculated by reference to the financial benefit that is obtained by the client in the matter.
|The payment must be calculated by reference to the financial benefit obtained by the client, cannot exceed 50% of the financial benefit obtained by the client, and must be payable in addition to any recoverable lawyer’s costs.The agreement must state the “financial benefit” to which the agreement relates, the basis for calculating the payment, when the payment becomes payable by the client, and whether barristers’ fees are included in the payment.
|Hybrid damages-based agreement
|A hybrid damages-based agreement is an agreement, made between a client and a lawyer of the client for a matter, under which the lawyer agrees with the client to be paid for the matter—(a) in the event the client obtains a financial benefit in the matter—a payment calculated by reference to the financial benefit; and(b) 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.
|Must satisfy the specific conditions for damages-based agreements as stated above.State the fees applicable during the course of the matter.State the benchmark fee.Provide the cap the client is to pay in the event of no financial benefit, being not more than 50% of the irrevocable costs.Provide that where the payment in the event of obtaining a financial benefit is less than the capped amount, the lawyer may elect to retain the capped amount instead.
Furthermore, in order for an ORFS agreement to be valid and enforceable, the following general conditions must be met:-
- The agreement is in writing;
- The agreement is signed by the lawyer and the client;
- The agreement states:-
- the matter to which the agreement relates
- in what circumstances the lawyer’s fees and expenses, or any part of them, are payable;
- that the lawyer has informed the client of the right to seek independent legal advice before entering into the agreement;
- that during a period of not less than 7 days after the date of the making of the agreement, the client may terminate the agreement by written notice without incurring liability;
- whether disbursements, including barristers’ fees, are to be paid by the client irrespective of the outcome of the matter;
- the grounds on which the agreement may be terminated before the conclusion of the matter; and
- states the alternative basis, which may or may not be expressed as an hourly rate, on which the lawyer is to be paid by the client in the event of a termination under subparagraph (vi).
The introduction of the ORFSA regime will enable Hong Kong to keep up with international practices and to maintain its competitiveness as one of the world’s leading arbitral seats against other jurisdictions, such as Singapore, which has recently amended its Legal Profession Act to allow for conditional fee agreements in specified situations, including arbitration proceedings. The ORFSA regime will also promote access to justice and support freedom of contract, which are factors that the Law Reform Commission of Hong Kong also took into account in their Consultation Paper in December 2020.