When can a dispute in Hong Kong be funded by a third party?

February 2024 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

February 2024 Issue

Litigation and arbitration can often be expensive endeavours, and parties that lack the means to fund their case increasingly look to third-party funders to provide financing, usually in return for a share of the proceeds that will be recovered if the case succeeds.

Unlike many of its fellow common law jurisdictions, Hong Kong continues to generally prohibit third parties from funding litigation under the rules against maintenance and champerty. Put simply, the rule against maintenance forbids any third party from interfering with litigation which is no concern of his (by, for example, financing the case), whereas the rule against champerty bars a third party from doing so in return for a share of the fruit coming out of the litigation.

Naturally, contingency fee structures – where clients pay their lawyers depending on the success of the litigation – are also prohibited. A violation of the principles against maintenance and champerty is both a civil and criminal wrong, and prosecutions have been brought for violations of these rules in the past.

There are three limited categories of litigation that are excluded from the scope of the rules against maintenance and champerty.

The first is the ‘common interest’ category, which involves cases where a third party has a legitimate interest in the outcome of someone else’s lawsuit, and is therefore justified in supporting it. This usually covers cases where a third party has a genuine commercial interest in the result of the litigation: a well-known example involved a car-rental company that funded damages claims brought by motorists who had rented its cars and subsequently suffered traffic accidents at the hand of others.

The second category comprises cases where access to justice will be obstructed if a claimant is prevented from obtaining third-party funding. A classic example is the case where a claimant has rightful title to property, but has no means (other than the property itself) to claim it. The claimant is required to make an application to the court to seek its approval.

The third category covers a miscellaneous range of cases where third-party funding arrangements have been recognised as legally permissible. Insolvency litigation is the most common type of case that falls within this category, and liquidators often seek third-party funding to commence litigation in order to make claims and recover assets that belong to the company in liquidation.

The position is markedly different for arbitration. Given Hong Kong’s position as a leading arbitration centre, and the consensus that parties with a good case should not be deprived of the support they need to pursue arbitration, third-party funding of arbitration was officially legalised in 2019. Then, in 2022, a range of funding options was further expanded with the introduction of outcome-related fee structures arrangements (ORFSA) for arbitration.

In this context, ‘third-party funding of arbitration’ specifically refers to funding that is provided under a written funding agreement between a party to an arbitration and a third-party funder with no interest in the arbitration.

A party to an arbitration includes not only those currently engaged in an arbitration, but also any potential or former party to an arbitration. Parties that enter into a funding agreement must give written notice of the agreement’s existence and the third-party funder’s name to the other parties and the arbitration body. They must also make disclosure when the agreement has come to an end.

Practically speaking, the fact that a party receives (or no longer receives) funding is sometimes taken as a sign of that party’s impecuniosity, which, once disclosed, may cause the other parties to seek security for the costs of the arbitration from the funded party.

Third-party funders are subject to a more stringent set of rules and guidelines. For example, third-party funders are under explicit confidentiality obligations in respect of any information obtained by them in relation to an arbitration, and must maintain effective written procedures for managing any complaints or conflicts of interest that might arise out of a funding agreement. They are also subject to capital and solvency requirements, which, among other things, require them to maintain access to at least HK$20m in capital, as well as the capacity to cover all funding obligations for at least 36 months and pay any debts as they become due and payable. Third-party funders must further maintain proper processes for addressing complaints against them by funded parties, and ensure that funded parties know of their right to seek independent legal advice on the funding agreement before they sign it.

There are also stipulations as to the content of a funding agreement. An agreement should, for instance, clearly explain the key terms of the proposed funding, and provide that the third-party funder will neither seek to exert control over the arbitration, nor take any steps that are likely to cause the funded party’s lawyers to act against their professional duties. An agreement must also describe the extent of the funder’s obligations to the funded party for any liabilities that may arise out of the arbitration, such as adverse costs (i.e., costs that the funded party may be ordered to pay to the other parties). Furthermore, the agreement must provide for an independent dispute resolution mechanism for settling disputes relating to the funding arrangement, and it must also set out the grounds of termination.

As for ‘ORFSA’, this covers three broad categories of agreements. The first category covers conditional fee agreements, which involve lawyers and their clients agreeing for the lawyers to be paid a success fee only if the case results in a favourable outcome. The second category includes damages-based agreements, where lawyers and clients agree for the lawyers to be paid only if the client obtains a financial benefit in the case, and for the payment to be calculated based on the financial benefit obtained (i.e., a damages-based payment). The third category comprises hybrid damages-based agreements, which involve lawyers and clients agreeing for the lawyers to receive a damages-based payment on top of their regular fees for services performed during the case. Notably, this is a more expansive scheme than Singapore’s regime, which generally does not permit any form of damages-based agreement.

ORFSA agreements can be used for any type of arbitration proceedings in Hong Kong, except those related to personal injury claims. All ORFSA agreements must be in writing and signed by the lawyer and client, and must clarify a series of matters including (among other things) the circumstances in which the lawyer’s fees and expenses are payable, the client’s right to cancel the agreement within seven days of making it, the grounds for early termination of the agreement and the alternative way that the lawyer will be paid if the agreement is terminated early (e.g., by hourly rate).

There are also specific conditions that pertain to each type of ORFSA. For instance, the success fee under a conditional fee agreement cannot exceed 100 percent of the ‘benchmark’ fee (i.e., the fee that the lawyer would have charged the client had there been no ORFSA), and the agreement itself must also clearly define the circumstances that constitute a ‘successful outcome’ and justify payment of the success fee.

Similarly, a damages-based agreement or a hybrid damages-based agreement must clearly define the ‘financial benefit’ that the client needs to obtain before the lawyer is entitled to the damages-based payment, which cannot exceed 50 percent of the relevant financial benefit. Hybrid damages-based agreements must further describe the lawyer’s regular fee for services performed during the case, as well as detailed matters regarding the limits on how much the client needs to pay the lawyer if the client obtains (or does not obtain) a financial benefit out of the case.

Lastly, both the lawyer and the client owe certain duties in respect of an ORFSA agreement. For instance, prior to entering into an ORFSA agreement, a lawyer has to clearly explain certain matters to the client, such as the general and specific conditions that apply to the type of ORFSA agreement being signed, and the client’s right to seek independent legal advice on the agreement. If an ORFSA agreement is indeed made, the lawyer must give written notice of its existence and the client’s name to the arbitration body and the other parties. Conversely, if the agreement comes to an end, it is the client who must make the necessary disclosures.

In short, there is a stark distinction between the availability of third-party funding for litigation and arbitration in Hong Kong. On the one hand, the old restrictions of maintenance and champerty continue to hold strong for court litigation, such that third-party funding is generally unavailable, save in exceptional circumstances.

On the other hand, various funding solutions are available for arbitration proceedings in Hong Kong, and these are generally regulated by straightforward rules that are geared toward ensuring certainty, financial stability and the integrity of the arbitration process. The availability of these solutions can greatly benefit parties that seek to arbitrate in Hong Kong, and only adds to the city’s appeal as a pre-eminent centre for arbitration.

Brian Gilchrist and Elaine Chen are partners and Alex Wong is of counsel at Gibson, Dunn & Crutcher. Mr Gilchrist can be contacted on +852 2214 3820 or by email: bgilchrist@gibsondunn.com. Ms Chen can be contacted on +852 2214 3821 or by email: echen@gibsondunn.com. Mr Wong can be contacted on +852 2214 3822 or by email: awong@gibsondunn.com.

Brian Gilchrist, Elaine Chen and Alex Wong

Gibson, Dunn & Crutcher