FAQs on Outcome Related Fee Arrangements in Hong Kong Litigation and Arbitration

What is an Outcome Related Fee Arrangement?

In the context of litigation or arbitration, an outcome related fee arrangement is an arrangement in which a lawyer and a client agree that the fees payable by the client in respect of the litigation or arbitration depend upon the success of the litigation or arbitration. Outcome related fee arrangements may include:

• Conditional fee agreements
• Damages based agreements
• Hybrid damages based agreements

As set out in more detail below, in Hong Kong, outcome related fee arrangements may generally be made only in the context of insolvency and arbitration proceedings. In other words, outcome fee related arrangements are prohibited in litigation (i.e. disputes resolved through the Hong Kong courts) outside the insolvency context.

Outcome related fee agreements are often referred to as "no-win, no fee" or a "no-win, low fee" structures.

What Types of Claims are Suitable for Outcome Related Fee Arrangements?

Outcome related fee arrangements are typically suitable for claimants in litigation or arbitration proceedings where the amount of money sought by the claimant in those proceedings exceeds a minimum threshold. There are 2 reasons for this. First, lawyers pursuing claims for clients in litigation or arbitration proceedings are in effect investing in the claim and if the claim is too small, they will be unable to achieve a commercially acceptable return for the time and monies invested in the claim. Secondly, claimants will typically wish as well to see a minimum return on their claim. If the claim is too small, once fees are deducted to pay the lawyers, the claimant may not receive enough monies to make the proceedings worthwhile.

What are the Benefits of Outcome Related Fee Arrangements?

Outcome related fee arrangements offer claimants the ability to share the financial risk of a claim. Claimants give up a share of the potential return to a lawyer in exchange for a lawyer taking on all or some of the cost of the claim.

Consistent with this risk sharing, outcome related fee arrangements enable claimants to manage cash flow more tightly. As the lawyers assume all or some of the cost of the claim, claimants do not need to front as much cash to pursue their claims.

Because of their ability to limit the amount of cash which meritorious claimants must front, outcome related fee arrangements enable claimants to access justice in circumstances where they might otherwise lack the cash resources to pursue the claims at all.

Are There Alternatives to Outcome Related Fee Agreements?

Yes. Claimants may consider third party funding, also known as litigation funding or arbitration funding, to finance their claims. Like outcome related fee agreements, third party funding is a risk sharing model in which claimants give up a share of any monetary damages award in exchange for which a third party funder pays for the legal costs of pursuing the claims.

What is a No-Win, No-Fee Arrangement?

In the context of litigation or arbitration, a "no-win, no-fee" arrangement is a type of outcome related fee agreement in which the lawyer receives no fees unless the client achieves a successful outcome (i.e. a win).

“No-win, no-fee” arrangements only speak to the fees which the lawyer receives and do not necessarily cover adverse cost orders or security for such orders. Like many other jurisdictions, in Hong Kong, a party who loses in court or arbitral proceedings may be ordered to pay some or all of the costs incurred by the winning party in those proceedings. “No-win, no-fee” arrangements do not free a client from these adverse cost orders, meaning that if the client loses, the client may still be liable for these adverse costs orders even though the client has no obligation to pay his lawyer’s fees. Consistent with this, “no-win, no-fee” arrangements do not typically free a client from any obligation to provide security upfront for any future adverse cost orders.

Equally, a “no-win, no-fee” arrangement does not necessarily speak to disbursements which may be incurred in the proceedings. These disbursements may include court or arbitral fees as well as fees for third party experts. Typically, these disbursements do not form a significant part of the financial calculation in assessing the viability of a “no-win, no fee” arrangements but where arbitral fees or third party expert fees are high, clients will need to consider how to fund these disbursements and may wish to consider third party funding arrangements.

What is a No-Win, Low Fee Arrangement?

In the context of litigation or arbitration a no-win, low-fee arrangement is a type of outcome related fee agrement in which the lawyer receives a fee at a rate lower than his usual rate if the client fails to achieve a successful outcome (i.e. a win) but receives a fee higher than his usual rate if the client in fact achieves a successful outcome.

Like a “no-win, no-fee” arrangement, a “no-win, low-fee” arrangement does not speak to adverse cost orders, which are typical in Hong Kong litigation and arbitration, security for costs or disbursements. In other words, if a client loses in court or in the arbitral proceedings, the client may still be responsible for these adverse costs orders on top of the reduced fees payable to his lawyer. Equally, whether a client wins or loses, the client may be responsible for disbursements incurred. Finally, the client may be responsible in any event for security for costs.

What is a Conditional Fee Agreement?

In the context of litigation or arbitration, a conditional fee agreement is an arrangement between a lawyer and a client in which the fees the client will pay the lawyer for representing him in the litigation or arbitration depend upon a successful outcome in the litigation or arbitration.

For this purpose, the lawyer and the client agree what constitutes a “successful outcome”. A successful outcome may, for example, be the client obtaining a judgment, award or order in his favour in proceedings or the client being entitled to receive a minimum amount of money in connection with the settlement of those proceedings.

In the context of Hong Kong arbitration, conditional agreements often refer to arrangements in which a client pays a base fee to a lawyer plus an uplift calculated as a percentage of the lawyer's normal fees (rather than a percentage of the monetary damages awarded to the client) in the event of a successful outcome.

What is a Damages Based Agreement?

A damages based agreement is an arrangement between a lawyer and a client in which the lawyer will only receive fees in the event the client receives a financial benefit in court or arbitral proceedings. The amount of these fees will be calculated by reference to the financial benefit (rather than the amount of the lawyer's normal fees). So, for example, the lawyer and the client may agree that the lawyer will receive, as his fees for his work on the proceedings, 30% of any monetary damages awarded to the client.

What is a Hybrid Damages Based Agreement?

A hybrid damages based agreement is an arrangement in which a lawyer and a client agree that the lawyer will receive a fee for legal services comprised of both (i) a base fee for work done in court or arbitral proceedings and (ii) a fee calculated by reference to the amount of the monetary damages award in the event the client receives a monetary damages award in those proceedings.

The base fee may or may not be based on a rate that is lower than the lawyer’s usual charge out rate. However, in a typical hybrid damages based agreement, the base fee is at a discount to the lawyer’s usual charge out rate. Such an agreement constitutes a “no-win, low fee” arrangements.

What is a Success Fee Arrangement?

A success fee arrangement is another name for an outcome related fee agreement, which may include a conditional fee agreement, a damages based fee agreement or a hybrid damages based fee agreement. In the context of litigation or arbitration, it can take the form of either a "no-win, no-fee arrangement" or a "no-win, low fee arrangement".

Are success fees allowed for Hong Kong litigation?

Success fees, meaning outcome related fee agreements, are generally permissible in proceedings before the Hong Kong courts only in the insolvency context. This means that a liquidator of a company in winding-up or a trustee in bankruptcy of a bankrupt may enter into success fee arrangements with a lawyer to pursue possible claims which the company or the bankrupt debtor may have.

In a typical scenario, where a company is being wound-up and the company may have claims against other persons, a liquidator will consider the possibility of a lawyer taking on those claims on a success fee basis or the possibility of obtaining third party funding to finance the pursuit of those claims.

Are success fees allowed for Hong Kong arbitration?

Yes, except in certain limited cases such as personal injury cases, Hong Kong allows success fees in arbitral proceedings. In other words, claimants may retain lawyers to pursue claims in arbitration on the basis that such lawyers will be remunerated by reference to the success of those claims.

The Arbitration Ordinance, the Legal Practitioners Ordinance and the Arbitration (Outcome Related Fee Structures for Arbitration) Rules (“Success Fee Rules for Arbitration”) govern success fees in Hong Kong arbitral proceedings.

Requirements for Success Fees in Arbitration

The Success Fee Rules for Arbitration require that conditional fee agreements, damages-based agreements and hybrid damages based agreements meet the following requirements:

• Formalities – They must be documented in writing and signed by both the lawyer and the client.

• Subject Matter – They must state the scope of matter to which the agreement relates, that is the arbitration or any part of it.

• Conditions for Payment – They must state in what circumstances the lawyer’s fees and expenses, or any part of them, are payable.

• Independent Legal Advice – They must state that the lawyer has informed the client of the right to seek independent legal advice before entering into the agreement.

• Cooling Off Period – They must state 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.

• Disbursements – They must state whether disbursements, including barristers’ fees, are to be paid by the client irrespective of the outcome of the matter.

• Termination – They must state the grounds on which the agreement may be terminated before the conclusion of the matter and 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.

Fee Caps for Conditional Fee Agreements in Arbitration

The Success Fee Rules for Arbitration caps the uplift fee in a conditional fee agreement to 100% of the benchmark fee. As the benchmark fee is the fee, which may or may not be calculated on the basis of hourly rates, that the lawyer would have charged the client for the matter if no conditional fee agreement had been made for the matter and the uplift is the portion of the total fee payable to the lawyer that exceeds the benchmark fee, the total amount payable under a conditional fee agreement cannot exceed twice the benchmark fee.

Fee Caps for Damages Based and Hybrid Damages Based Agreements in Arbitration

For damages based agreements and hybrid damages based agreements, the Success Fee Rules for Arbitration cap the upside for the law firm at 50% of the financial benefit obtained by the client (excluding any recoverable lawyer’s costs). Thus, for example, a lawyer can receive up to 50% of the monetary damages awarded to the client in addition to any costs awarded to the client.

The agreement must also set out:

• the specific financial benefit to which it pertains (e.g. the monetary damages awarded),

• the basis for calculating the upside (e.g. 30% of the monetary damages awarded),

• the timing of when this payment becomes due,

• whether the client is directly responsible for paying the lawyer the upside (or, for example, if the upside is to be deducted from the monetary damages collected), and

• whether barrister’s fees are included as part of the upside payment or if the client will be responsible for those fees in addition to the upside payment.

Hybrid damages based agreements must also be subject to caps depending on the outcome. If the client receives no financial benefit (i.e. the client is unsuccessful), the lawyer’s fees are capped at 50% of the benchmark fees net of any costs recoverable by the client (i.e. the irrecoverable costs). However, if the client receives a financial benefit and the upside payable to the lawyer is less than irrecoverable costs, then the lawyer may elect to retain the irrecoverable costs instead of the upside.

What are Disbursements?

Disbursements are out of pocket expenses incurred. In the context of litigation or arbitration, disbursements may include court fees or arbitral tribunal fees as well as costs of third party experts.

Claimants considering outcome related fee arrangements should understand that such arrangements often relate only to the fees of a claimant’s own lawyers. They do not relate to disbursements. In other words, a claimant must still shoulder the disbursement costs even though a lawyer has agreed to should some or all of the legal fees.

Claimants who wish to manage disbursement costs should consider third party funding arrangements. Such arrangements commonly provide for the payment of disbursement costs as and when these are incurred to pursue the claims. As a result, third party funding arrangements offer a more complete means of risk sharing than outcome related fee arrangements.

What is an Adverse Cost Order?

Both in the Hong Kong courts and in arbitral proceedings, it is common for the judge or the arbitral tribunal to award costs to the successful plaintiff or claimant. These costs are to be paid by the unsuccessful defendant or respondent and are known as “adverse cost orders”.

Clients should bear in mind that outcome related fee agreements generally do not cover adverse cost orders. In other words, although a lawyer may agree to shoulder a part of the risk of the failure of the claim by foregoing the fees which the lawyer would otherwise earn in pursuing the claim, the lawyer will not generally bear any adverse cost order made against the client.

Clients who wish to mitigate the risk of adverse cost orders may wish to consider third party funding arrangements as it is more common in such arrangements for a third party funder to agree to bear the risk of any adverse cost order.

What are Security for Costs?

Security for costs comprise a sum of money which is put into deposit to secure a potential adverse cost order. In the case of Hong Kong litigation, the deposit may be placed with the Hong Kong court and in the case of Hong Kong arbitration, the deposit may be placed with the arbitral institution administering the arbitration.

In both court cases and arbitral proceedings, the defendant or the respondent may request a security for costs order against the plaintiff or claimant on the basis that there is a risk that if the claim is ultimately unsuccessful, the plaintiff or the claimant lacks financial resources to meet any adverse cost order.

A Hong Kong court or arbitral tribunal may take a number of factors into account in determining whether to order security for costs, including the ordinary residence of the plaintiff or claimant, the presence or absence of assets of the plaintiff or claimant in Hong Kong, the financial position of the plaintiff or claimant, and the prospect of the success of the claim.

Importantly, lawyers typically do not assume responsibility to shoulder security for cost orders in outcome related fee arrangements. This means that even though a lawyer has agreed to shoulder the legal fees to pursue a claim, the claimant client may still be responsible to shoulder a security for costs order.

Claimants who wish to manage the risk of security for costs orders may consider third party funding agreements as it is more common in such arrangements for a third party funder to agree to bear the risk of any security for costs.