18 July, 2017
On 14 June 2017, the much anticipated Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 (the “Bill”) was passed by the Hong Kong Legislative Council. This marks important progress for Hong Kong as a leading centre for international arbitration.
Genesis of the Bill
The Bill is the result of a long consultation process in Hong Kong, begun in 2013.
This recommended changes to the law surrounding the doctrines of maintenance and champerty. Developed at common law some 700 years ago in order to prevent abuse of the litigation system, maintenance and champerty operate to prohibit third party funding of court litigation, with limited exceptions, both as a tort and a criminal offence.
The dispute resolution landscape has, obviously, significantly altered since that time. It has been recognised that legal costs present a barrier to justice in both litigation and arbitration – hence the pressing need for reform of the system. Third party funding has been widely accepted in a number of foreign jurisdictions for some time. In Hong Kong, the issue had been considered by case law, and the case of Unruh v Seeberger (2007) 10 HKCFAR 31 left the question open as to whether maintenance and champerty apply to third party funding for arbitrations in Hong Kong.
The Bill serves to brings clarity to the legality of such funding.
The gist
In permitting third party funding for arbitration, the Bill defines ‘arbitration’ in a broad sense, to include court proceedings, proceedings before an emergency arbitrator and mediation proceedings. This will no doubt be welcome news for those seeking to profit from emergency arbitrator provisions under major institutional rules, as well as award creditors seeking enforcement against the assets of award debtors in Hong Kong by way of a court application.
Under the Bill the funded party must give written notice of (i) the fact that a funding agreement has been made; (ii) the name of the third party funder; and (iii) the termination of a funding agreement (other than because of the end of the arbitration). This is intended to alleviate concerns over conflicts of interest between a funder and the Tribunal (or even the opposing party or counsel), although difficulties may arise if the funding agreement is concluded during proceedings and therefore cannot be disclosed at the commencement of arbitration. This also differs from the corresponding disclosure obligations in Singapore, where
(i) the scope of disclosure does not include the termination of a funding agreement; and (ii) the burden lies with the legal practitioner rather than the funded party.
One of the key features of the Bill is the future issue a Code of Practice to regulate the practice of third party funding of arbitration in Hong Kong. This is not something that was included in the similar reforms that took place in Singapore earlier this year which abolished the doctrines of maintenance and champerty altogether in that jurisdiction.
With respect to any future Code of Practice, the Bill addresses similar issues as covered in the Code of Conduct of the Association of Litigation Funders (“ALF”), which regulates major litigation and arbitration funders operating in England. These include matters such as capital adequacy requirements, termination of agreements, and control of the dispute resolution process. However, there are also differences. For instance, the ALF’s Code of Conduct is applicable to the funder as well as any subsidiary providing the funds and associated entities to which the funder acts as the exclusive investment advisor. By contrast, the definition of a third party funder in the Bill would not extend to such entities.
Glimpse of the future
The Bill leaves open a number of matters which will need to be resolved in time – for instance its effect (if any) on applications for security for costs. Further, any future Code of Practice will shape the impact and effectiveness of the new law. However, overall the Bill is expected to well received by the Hong Kong arbitration community as a welcome step in the right direction toward the mainstream and accepted use of third party funding as a tool to assist litigants effectively to resolve their disputes.
For further information, please contact:
Malcolm Kemp, Partner, Stephenson Harwood
malcolm.kemp@shlegal.com
