Third Party Funding Of Arbitration In Singapore And Hong Kong: A Comparison.

 

17 February, 2017

 

In January 2017, Singapore and Hong Kong introduced legislation to pave the way for third party funding of international arbitration, overturning long-held prohibitions on the practice. Here we consider and compare the new legislation and the implications for each jurisdiction's future as a hub for dispute resolution. 

 

What is third party funding?

 

"Third party funding" refers to the financing of a claim by a party unconnected to the dispute in return for financial gain – typically, a share of the damages if the claim succeeds. Its use is well established in many jurisdictions including Australia, England & Wales and the United States.

 

Traditionally, commercial parties sought such funding where they lacked the financial resources to pursue claims on their own. Increasingly, however, third party funding is being used as a financing or risk management tool. The non-recourse nature of third party funding (where the funder will only receive a return for its funding if the claim is successful) is particularly attractive to businesses, allowing them to apply their own funds towards their core business while shifting the risk and cost of their claims to the funder. 

 

Numerous jurisdictions, however, prohibit third party funding on public policy grounds to protect vulnerable litigants and guard against abuse of process. The common law torts of champerty and maintenance historically have provided this protection in common law systems, including in Singapore and Hong Kong. In those jurisdictions, an agreement by a third party to fund litigation or arbitration would infringe these doctrines and be held void as contrary to public policy.

 

Winds of change in Asia

 

In a significant shift in position, both Singapore and Hong Kong introduced legislation in January 2017 to permit third party funding in arbitration, bringing them in line with other leading arbitral centres such as London, Paris and Geneva.1

 

Scope and effect of the new legislation 

 

The Hong Kong legislation provides that the doctrines of maintenance and champerty no longer apply to the third party funding of "arbitration".2 This includes arbitrations under the Arbitration Ordinance, whether international or domestic,3 and any proceedings before the court, an emergency arbitrator or mediator that are covered by the Arbitration Ordinance.4 

 

The law also permits funding of the costs and expenses of services that are provided in Hong Kong in respect of arbitrations which are seated outside Hong Kong, thereby permitting the funding of the fees of Hong Kong based lawyers regardless of the seat of the arbitration.5

 

Singapore has abolished the torts of maintenance and champerty altogether,6 legislating that third party funding agreements for "prescribed dispute resolution proceedings" are no longer contrary to public policy or otherwise illegal.7 Prescribed dispute resolution proceedings include international arbitrations and related court and mediation proceedings.8 Domestic arbitrations are not included, although the Government has indicated that the third party funding framework may be extended to other categories of dispute resolution proceedings after a period of assessment.9 Unlike in Hong Kong, the legislation does not include express provisions dealing with foreign-seated arbitrations.

 

Regulation of funders

 

Both jurisdictions have been careful to ensure that the third party funding industry will be closely regulated.

 

In order to benefit from the legislation in Singapore, a funder must be a "qualifying third party funder".10This means that the funder must:

 

• carry on the principal business, in Singapore or elsewhere, of the funding of the costs of dispute resolution proceedings to which it is not a party (that is, the funder must be a professional funder);
• have access to funds immediately within its control, including within a parent corporation or the third party funder’s subsidiary, sufficient to fund the dispute resolution proceedings in Singapore; and
• invest those funds, pursuant to a third party funding contract, to enable a funded party to meet the costs (including pre-action costs) of prescribed dispute resolution proceedings.11

 

Crucially, a third party funder that fails to comply with these requirements will not be able to enforce its rights under a third party funding agreement,12 although a third party funder can apply for relief where it can show its non-compliance was accidental or inadvertent, or because it would otherwise be just and equitable to grant relief.13

 

In Hong Kong, the manner in which funders will be regulated remains somewhat uncertain:

 

• an advisory body will be appointed to monitor and review the new legislation;14
• an authorised body will be established to issue (and amend or revoke if appropriate) a code of practice setting out the practices and standards with which third party funders will be expected to comply;15
• the code of practice will not be issued prior to public consultation on the issue,16 but "may" contain provisions dealing with, among other things, the content of third party funding promotional material, the content of funding agreements, minimum capital requirements for funders, complaint procedures, and procedures for addressing conflicts of interest;17 and
• a failure to comply with the code of practice does not, of itself, render any person liable to judicial or other proceedings but may be taken into account if relevant to a question being decided by a court or arbitral tribunal.18 

 

Disclosure of third party funding arrangements

 

Both jurisdictions have also provided for the disclosure of third party funding arrangements.

In Hong Kong, a funded party must notify the tribunal and every party of the existence of a funding agreement and the identity of the funder either upon commencement of an arbitration, or if the agreement is made after commencement, within 15 days of it being made.19

 

In Singapore, there are proposals to amend the Professional Conduct Rules to require lawyers to disclose the existence of a third party funding agreement and the identity of the third party funder to the court or tribunal and to every other party to proceedings "as soon as is practicable."20  

 

Liability for adverse costs and security for costs 

 

Hong Kong has not given tribunals the express power to award costs against third party funders. However, the Government has accepted the Hong Kong Law Reform Commission's recommendation that this issue be further considered in the initial three-year period following implementation of the legislation.21 On the question of whether the tribunal should be empowered to order security for costs against a third party funder, the Government again accepted the Law Reform Commission's recommendation that this was not necessary given that the powers of a tribunal to order a funded party to give security for costs (which will likely be paid by the funder anyway) afforded adequate protection.22

In Singapore, these questions do not appear to have been specifically addressed.23

 

Another string to their bow?

 

Given the increased use of third party funding in international arbitration over recent years, the move to legalise the practice in Singapore and Hong Kong can be seen as reflecting the desire of each jurisdiction to retain their positions as leading centres for dispute resolution. As recognised by the Senior Minister of State for Law in Singapore, Indranee Rajah SC, Singapore needs to "stay responsive to business and constantly adapt what we do to better serve their needs" if it is to stay competitive as a leading arbitral centre.

 

Offering third party funding, she said, "will strengthen Singapore's position as a premier international commercial dispute resolution hub and a key arbitration seat in the world."24

The Hong Kong Secretary for Justice, Hon Rimsky Yuen SC, similarly spoke of the need to "keep up with the latest international development" to "enhance [Hong Kong's] competitive position" and made clear that, if action was not taken on this issue, "the attractiveness of Hong Kong as a venue of arbitration may be affected".25

 

However, while keen to open their doors to third party funders, it is notable that both jurisdictions have sought to impose regulatory requirements on funders in a way that has not occurred in some other jurisdictions (the industry in the UK, for example, is self-regulated).  

 

Disclosure requirements of the kind introduced in Hong Kong and Singapore, for example, have proved a controversial topic. Disclosure of funding can be beneficial where it demonstrates to a respondent that an independent third party has faith in the merits of the claim, which may encourage early settlement. Disclosure at an early stage may also prevent the opposing party from raising conflicts arguments at the enforcement stage should the funded party prove successful. However, some funders take the view that mandatory disclosure allows the opposing party to obstruct and delay the proceedings (for example, by making security for costs applications). Others consider it unfair that such requirements are imposed on specialist third party funders and not on other organisations who provide similar services, such as insurers and lawyers working on a contingency fee basis.  

 

Interestingly, the new SIAC Investment Arbitration Rules, introduced at the start of this year, expressly empower the tribunal to order disclosure of the existence of a party's third-party funding arrangement, the identity of the third party funder and, where appropriate, details of the third party funder's interest in the outcome of the proceedings and/or whether or not the third party funder has committed to undertake adverse costs liability.26 

While the proposed regulations in Singapore and Hong Kong are intended to be 'light touch', it remains to be seen whether such regulation will inhibit or strengthen the growth of the funding industry in these jurisdictions, and whether it will deter or attract businesses to arbitrate there. In  many respects, Singapore and Hong Kong are leading the way and it will be interesting to see whether other jurisdictions and arbitral institutions follow suit. 

 

For more information on the use of third party funding in international arbitration see our Quickguide.

 

Notes

 

1. In Singapore, the amendments have been introduced under the Civil Law (Amendment) Bill 2016 and the Civil Law (Third-Party Funding) Regulations 2016, and in Hong Kong, by way of the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016.
2. New sections 98K and 98L of the Arbitration Ordinance.
3. Although the Arbitration Ordinance provides for a unitary arbitration regime with no distinction between international and domestic arbitration, parties can opt in to certain provisions which were applicable to domestic arbitration under the previous arbitration law.
4. New section 98F of the Arbitration Ordinance.
5. New section 98N of the Arbitration Ordinance.
6. New section 5A of the Civil Law Act.
7. New section 5B of the Civil Law Act.
8. Section 3 of the Civil Law (Third-Party Funding) Regulations 2016.
9. Second Reading Speech by Senior Minister of State for Law, Indranee Rajah SC, on the Civil Amendment Bill 2016.
10. New section 5B(2) of the Civil Law Act.
11. New section 5B(10) of the Civil Law Act and section 4 of the Civil Law (Third-Party Funding) Regulations 2016.
12. New section 5B(3)-(4) of the Civil Law Act.
13. New section 5B(5)-(6) of the Civil Law Act.
14. New section 98W(1) of the Arbitration Ordinance.
15. New sections 98W(2) and 98O of the Arbitration Ordinance.
16. New section 98Q of the Arbitration Ordinance.
17. New section 98P of the Arbitration Ordinance.
18. New section 98R of the Arbitration Ordinance.
19. New section 98T of the Arbitration Ordinance.
20. Public Consultation on the Draft Civil Law (Amendment) Bill 2016 and Civil Law (Third Party Funding) Regulations 2016. In her second reading speech, Senior Minister of State for Law, Indranee Rajah SC, referred only to a duty to disclose the "existence" of third party funding, and did not mention a duty to disclose the identity of the funder. The precise form of the amendment has not yet been released.
21. The Law Reform Commission of Hong Kong Report on Third Party Funding for Arbitration, paragraph 7.31. 
22. Ibid, paragraph 8.15.
23. Interestingly, however, the SIAC appears to be leading the charge in this area with its recent Investment Arbitration Rules. Rule 33.1 empowers the tribunal to take into account any third-party funding arrangements in apportioning the costs of the arbitration. 
24. Second Reading Speech by Senior Minister of State for Law, Indranee Rajah SC, on the Civil Amendment Bill 2016. 
25. Speech of the Secretary for Justice, Hon Rimsky Yuen, SC, JP, at the Legislative Council on 11 January 2017 to move the Second Reading of the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016. 
26. Rule 24(l) of the SIAC Investment Arbitration Rules (1st Edition, 1 January 2017).
     

For further information, please contact:

 

Ronnie King , Partner, Ashurst
ronnie.king@ashurst.com