Background

ORFS for arbitration and litigation are currently prohibited in Hong Kong, other than under third party funding arrangements. With a view to maintaining Hong Kong’s leading status as an international arbitration hub, a LRC Sub-Committee published a Consultation Paper in December 2020, which received overwhelming support for the law to be amended to introduce an OFRS regime for arbitration proceedings.

The LRC Report builds on the 2020 Consultation Paper. In making the recommendations, the LRC has taken into account the significant demand for OFRS, as parties (ranging from impecunious ones, to sophisticated commercial entities) increasingly look for alternative fee-structures.

The recommendations

The LRC Report recommends permitting three forms of ORFSs, namely, conditional fee agreements (“CFAs”), damages-based agreements (“DBAs”), and “Hybrid DBAs”. Their key features being, in summary:

  • Under a CFA a lawyer could agree with the client to be paid a success fee in the event of a win for the client. This would be an additional fee; either at a flat fee or pegged to the “benchmark” rates that the lawyer would have charged if there were no ORFS in place. The success fee is capped at 100% of benchmark costs, with barristers subject to the same cap.
  • A DBA would be a “no win, no fee” arrangement, whereby the lawyer charges no fee if the client does not obtain a financial benefit in the matter. The lawyer’s fee is calculated by reference to the financial benefit (such as a percentage of the amount that is obtained), or a respondent’s success in dismissing or reducing a claim for damages. Barristers’ fees may be included in the DBA payment or charged as a separate disbursement. DBA payments  are capped at 50% of the financial benefit.
  • A Hybrid DBA would be a “no win, low fee” arrangement, whereby the lawyer charges a fee (typically at a discounted rate); and in the event the client obtains a financial benefit in the matter, an additional success fee (such as a DBA payment). Conversely, if the case is unsuccessful (such that the client obtains no financial benefit), the lawyer would retain only a portion of the “benchmark” costs.

Following the position in English litigation, the LRC Report proposes prohibiting a winning party from recovering from the losing opponent the success fee and/or legal expense insurance premium (save in exceptional circumstances as determined by the arbitral tribunal). This is to avoid a rise in satellite litigation, where a losing party seeks to challenge the validity of the winning party’s OFRS arrangement with its lawyers.

Proposed safeguards

The LRC Report also makes recommendations for appropriate regulations and safeguards concerning the use of ORFS. These include (among others):

  • A requirement for the ORFS to be in writing and signed by the client, with stipulations on whether, and in what circumstances, an ORFS can be terminated prior to the conclusion of the arbitration. The ORFS agreement should also specify an alternative basis on which the client should pay the lawyer in the event of such termination.
  • A requirement for OFRS to be subject to a minimum cooling off period of 7 days during which the client, by written notice, may terminate the ORFS.
  • Subsidiary legislations which provide, on a non-exhaustive basis, that lawyers may terminate a CFA, DBA or Hybrid DBA where they believe that the client (i) has committed a material breach of the ORFS; or (ii) has behaved or is behaving unreasonably.
  • A detailed regulatory framework including client-care provisions to be set out in professional codes of conduct.
  • A requirement that the lawyer should inform clients of their right to take independent legal advice on the funding arrangement.
  • Not permitting OFRS for personal injury claims.

Comment

The LRC Report and its recommendations reflect Hong Kong’s ongoing commitment to maintaining its position as a leading arbitration regime; with some other major arbitral seats accommodating ORFS in one form or another. Furthermore, if properly implemented, the availability of ORFS stands, generally speaking, to have beneficial effects in improving access to justice and in giving parties more freedom to shape their commercial arrangements to meet their circumstances. Therefore, irrespective of whether, in future, ORFS might be appropriate for, or used in, any particular case, the progress of these reforms will, from the perspective of immediate developments in Hong Kong’s civil justice system, be closely watched.

For further information, please contact:

Shirley Au Yeung​, Linklaters

shirley.au_yeung@linklaters.com