Third Party Funding in Hong Kong – An Introduction to Litigation Funding and Arbitration Funding

What is Third Party Funding?

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:

In a typical case, the third party funder pays for the client’s lawyers. If the case is unsuccessful, meaning the client receives nothing, the funder receives nothing as well. However, if the case is successful, the funder receives a share of the damages awarded to the client.

A variation of the third party funding model allow for a client to pay for some of the legal fees of his lawyer with the third party funder paying the balance of those legal fees. In this variation, the third party funder receives a smaller share of any monetary damages awarded as the funder bears a smaller share of the risk in that the funder’s total cash outlay is smaller if the claim fails.

What are the Benefits of Third Party Funding?

The third party funding model allows claimants to share the risk of their claims with a third party funder in exchange for sharing the return on these claims with the third party funder.

Because third party funding pays for the legal costs of a claim, it allows claimants to limit the amount of cash which they otherwise would need to front to pursue their claims. As a result, it allows claimants to pursue a claim which they might otherwise be unable to pursue because of lack of capital and to conserve cash resources whilst still pursuing their claims.

What Types of Claims are Suitable for Third Party Funding?

Generally, third party funding is suitable for larger claims in which the claimants are comfortable with sharing a significant portion of any monetary damages award with the third party funder. Typically, third party funders will finance claims which are sizeable enough to allow a recovery that will not only recoup the costs and expenses paid by them to pursue those claims but also to generate a significant return for the risk undertaken by them in covering these costs and expenses. Where the claims are too small to enable third party funders to achieve these objectives, a third party funder is unlikely to proceed.

Equally, a third party funder will typically only finance a claim where the confidence of success is high and where the defendant or respondent to the claim is sufficiently creditworthy to satisfy any monetary damages awarded.

The Legality of Third Party Funding in Hong Kong

In Hong Kong, the common law doctrines of maintenance and champerty limit the availability of third party funding arrangements to disputes in the insolvency context and in arbitral proceedings and disputes which trigger recognized categories of public policy (e.g. funding for litigation by an insurer pursuant to its rights of subrogation).

Maintenance occurs when a person maintains civil proceedings, which do not concern the person, by assisting a party to those proceedings by money or otherwise, such as by indemnifying the party against legal costs incurred in pursuing those proceedings.

Champerty is a particular form of maintenance in which a person provides assistance to a party to proceedings in return for a promise of part of the fruits of the proceedings.

Third Party Funding in Insolvency

The Hong Kong courts have recognized that maintenance and champerty do not apply in the insolvency context because a liquidator or a trustee in bankruptcy, as the case may be, has the power to sell the property of the company being wound up or the bankrupt, including choses in action. Thus, in Cyberworks Audio Video Technology Ltd, the Hong Kong court recognised that “there is no objection in principle to the court approving a funding agreement which includes an assignment of a cause of action”. The court went on to note that companies legislation in Hong Kong gives a liquidator the power to sell the “property” and “things in action” of the company being wound-up, that “property” includes “choses in action” and that a “cause of action is a chose of action”. The court went on to conclude that “the assignment of a cause of action by a liquidator or a trustee in bankruptcy as part of the type of funding agreement” in the present case “is an exception to the prohibition of maintenance and champerty and is lawful”.

No Court Approval Required for Third Party Funding in Insolvency

Hong Kong courts have held that the power of a liquidator of a Hong Kong company to enter into third party funding agreements may be exercised without the approval of a court. In Re Patrick Cowley and Lui Yee Man, Joint and Several Liquidators of the Company, the court confirmed that “it is not necessary for a liquidator in either a voluntary liquidation or a winding-up by the court to obtain the court’s santion of a funding agreement, which involves the sale of a chose in action in return for a right to participate in the proceeds of successful litigation to enforce the chose of action”.

Assignment of Chose of Action Not a Pre-Requisite

The same case went on to hold that a sale, assignment or transfer of a chose of action was not essential to the validity of a funding agreement entered into by a liquidator in a compulsory winding-up. This was because a liquidator in such a winding-up had authority under companies legislation “[d]o all things as may be necessary for winding-up the affairs of the company” and, so long as the requisite sanction of the court or a committee of inspection had been given for the exercise of such authority generally, not only would a liquidator be allowed to enter into a funding agreement but the liquidator would not need to seek the specific approval of the court for that funding agreement.

Third Party Funding in Arbitration

Amendments to the Arbitration Ordinance provided a statutory exception to maintenance and champerty, allowing for outcome related fee structures (ORFS) in 2022 and third party funding in 2019 in arbitration.

As amended, the Arbitration Ordinance defines “third party funding of arbitration” as the provision of money or other financial assistance (known as “arbitration funding”) for any costs of an arbitration under a written agreement (known as a “funding agreement”) to a person (known as a “funded party”) by another person (known as a “third party funder”) in return for the third party funder receiving a financial benefit only if the arbitration is successful within the meaning of the funding agreement. If the arbitration is unsuccessful, the funded party does not have to pay any amount to the third party funder.

When Can Arbitration Funding Be Put in Place in Hong Kong?

For the purposes of the Arbitration Ordinance, the funded party may be a person who is a party to arbitral proceedings that have commenced, are yet to commence or have ended. As a result, third party funding arrangements may, for example, be put in place ahead of the commencement of arbitral proceedings.

What Types of Proceedings Can be Funded by Third Parties in Hong Kong?

Under the Arbitration Ordinance framework for third party funding, an “arbitration” includes arbitration proceedings inside and outside Hong Kong as well as related court proceedings (e.g. for interim relief).

What Arbitral Costs Can Be Financed by Third Party Funding in Hong Kong?

The Arbitration Ordinance third party funding regime permits the funding of all the costs and expenses of an arbitration, including pre-arbitration costs and expenses as well as fees and expenses of the arbitration body. However, in the case of an arbitration outside Hong Kong, the Arbitration Ordinance has no extra-territorial effect, meaning that it only permits the funding of costs and expenses that relate to services provided in Hong Kong in relation to the arbitration.

What Rules Govern Third Party Funding in Hong Kong?

The Arbitration Ordinance and the Code of Practice for Third Party Funding (“Third Party Funding Code”) govern third party funding arrangements in Hong Kong. Though the Third Party Funding Code is non-binding, compliance or failure to comply with it may be taken into account by a court or arbitral tribunal if it is relevant to any question being decided by the court or arbitral tribunal.

Under the Arbitration Ordinance, a party to a third party funding agreement must give written notice to the arbitral tribunal and every party to the arbitration of the fact that the funding agreement has been made and the name of the third party funder. The notice must be given at the commencement of the arbitration or within 15 days after the funding agreement is made. Similarly, a party to a third party funding agreement must given written notice to the arbitral tribunal and every party to the arbitration of the end of any funding agreement.

The Third Party Funding Code establishes requirements for third party funders, including as to minimum financial resources, the management of conflicts of interest, confidentiality and legal professional privilege, minimum terms for funding agreements and the control of proceedings and an obligation to ensure that a funded party is aware of the right to seek independent legal advice on the funding agreement.