International Arbitration and Third Party Funding in Hong Kong: Q&A with the Secretary-General of the Hong Kong International Arbitration Centre

Marla Decker

As jurisdictions compete for status as premier international arbitration hubs, a differentiating factor (or, increasingly, a must-have factor) is whether the jurisdiction’s legal framework allows for third party funding in arbitrations seated there.  We have followed the development towards a more permissive environment for third party funding in Asia closely, recently asking members of Freshfields’ international arbitration group to provide an update on developments in Asia with Singapore and Hong Kong leading the charge.  Today, we focus in on Hong Kong, which on February 1, 2019, put into effect previously enacted legislative changes to permit third party funding in international arbitration.  In connection with this development, the Ministry of Justice has released the Code of Practice for Third Party Funding of Arbitration, which sets out practices and standards with which third party funders are expected to comply in connection with funding of arbitrations in Hong Kong, and the Hong Kong International Arbitration Centre (“HKIAC”) amended its rules to harmonize with the legislative changes and to address disclosure requirements, confidentiality, and costs in third party funded matters.  We asked Sarah Grimmer, Secretary-General of HKIAC to discuss the changing landscape.

  1. What do you think motivated Hong Kong to legalize the use of third-party funding in the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance?

Third Party Funding (“TPFing”) for arbitration and mediation has become increasingly common over the last decade in various jurisdictions, including Australia, England and Wales and the United States.  In light of this growing demand for TPFing in international arbitration, Hong Kong decided to amend the Arbitration Ordinance to ensure that third party funding for arbitration, mediation and associated proceedings in Hong Kong is not prohibited by the common law doctrines of maintenance and champerty.  Prior to the TPFing amendment, it was unclear under Hong Kong law whether the doctrines of maintenance and champerty also applied to TPFing for arbitration taking place in Hong Kong, as the Court of Final Appeal in Unruh v. Seeberger (2007) 10 HKCFAR 31 left open this question (at para. 123).

The legislative amendment aims to achieve the following:

–              preserve and promote Hong Kong’s competitiveness as a leading centre for international legal and dispute resolution services;

–              promote access to arbitration and mediation; the introduction of the TPFing amendment will enable parties who may not have sufficient financial means to pursue their legal rights through arbitration and mediation;

–              reduce the burden on the Hong Kong courts by increasing the availability and use of arbitration and mediation services.

  1. Are there certain areas where you expect third party funding will be most useful?  

TPFing for arbitration will be most useful when a party lacks financial resources to pursue its claims and access to funding makes bringing the claim possible.  Further, where a party does have the financial resources necessary to bring an arbitration, TPFing can provide an effective financial or risk management tool. A funded party can divert financial resources that would otherwise be spent on pursuing its claim to its business strategies.  Also, the due diligence conducted by the third-party funder (“TPFer”) may help to give the parties a more objective view on the merits of their cases.

It is unclear in which kinds of disputes or industry sectors TPFing will be most useful. That will only become clearer with time as funded parties disclose the fact of funding.  According to the report issued by the ICCA Queen Mary Task Force on The Impact of Third Party Funding on Allocation for Costs and Security for Costs Applications, some evidence suggests that in 2016 at least 40% of investment arbitration claims were either secured or explored funding from TPFers.

  1. What objectives were you trying to achieve in drafting the new rules as they relate to third party funding?

The 2018 HKIAC Administered Arbitration Rules (“2018 HKIAC Rules”) have been amended to respond to some of the key issues that TPFing raises and to be in harmony with the TPFing amendments to the Arbitration Ordinance.

Under the 2018 HKIAC Rules:

–              Article 44: A funded party is required to disclose promptly the existence of a funding agreement, the identity of the funder and any subsequent changes to such information. This allows arbitrators and emergency arbitrators to conduct comprehensive conflicts checks;

–              Article 45: The confidentiality restrictions under the rules are amended to provide an exception to parties in respect of disclosure of confidential information to its existing or potential funder. This allows parties to provide potential or existing TPFers with otherwise confidential information without breaching their confidentiality obligations;

–              Article 34.4: A tribunal may take into consideration any third-party funding arrangement in fixing and apportioning the costs of arbitration.

  1. The new HKIAC rules allow an arbitral tribunal to take into account any third party funding arrangement in fixing and apportioning the costs of an arbitration.   As those rules are applied in practice, how do you expect tribunals might take these arrangements into account?

HKIAC takes no position as to whether and how the arbitral tribunal should take into account third-party funding arrangements in fixing and apportioning the costs of an arbitration.  It is within the arbitral tribunal’s power to determine the costs of an arbitration based on the specific circumstances of the case. The addition of this provision in the rules simply makes express that third-party funding may be one of the factors relevant to the tribunal’s decision.

One well-known example of how a tribunal took a third-party funding arrangement into account in the context of the allocation of costs is in the arbitration brought before the English courts in Essar Oilfield Services Ltd v. Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm). The arbitral tribunal had ordered the unsuccessful party to pay a substantial amount which the claimant had paid to a third-party funder.  The arbitral tribunal held that the respondent in the arbitration had exhibited egregious conduct in deliberately putting the claimant in a position where it could not fund the arbitration out of its own resources and it was therefore reasonable for the claimant to obtain funding from a third party on usual market terms for funding costs, namely 300 percent of the amount advanced or 35 percent of the amount recovered. This decision was subsequently upheld by the English High Court.

  1. There have been arguments advanced on both sides in terms of whether or not to require disclosure of third party funding arrangements.   What considerations were important to HKIAC in determining what its disclosure rule should be (which requires parties to disclose the existence and identity of a funder, but not more)?

Disclosure of TPFing allows arbitral tribunals to conduct comprehensive checks for potential conflicts of interest. While there is ongoing debate about what entities or arrangements should properly be considered as TPers or TPFing, requiring the disclosure goes some way to ensuring that conflicts are detected. This adds a safeguard to the process and helps to ensure that the enforceability or validity of an award is not jeopardised.  In addition, given that many arbitrations conducted by HKIAC are seated in Hong Kong, it is important to align the 2018 HKIAC Rules with the legislation (see in particular sections 98U and 98 V of the Arbitration and Mediation Legislation (Third Party Funding) (Amendment)).

  1. What input was important to HKIAC in the development of the rules as they relate to third party funding? To what extent did HKIAC take account of the provisions of the then-draft Code of Practice for Third Party Funding of Arbitration and Mediation in developing the rules as they relate to third party funding?

When drafting the provisions relating to TPFing in the 2018 HKIAC Rules, HKIAC took into account various resources, including but not limited to the following:

(i)            The Amendment Ordinance as well as the publications issued by the Law Reform Commission of Hong Kong with respect to TPFing for arbitration (including the 2015 Consultation paper and the 2016 Final Report);

(ii)           International practice including the Draft ICSID Rules (2018) with respect to TPFing as well as the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration;

(iii)          The feedback received from the extensive public consultation with relevant stakeholders and interest groups in TPFing (such as arbitration users and third-party funders).

The Amendment Ordinance is considered to have adopted a “light touch” approach in regulating third party funding of arbitration in Hong Kong, meaning that third party funders are required to comply with the applicable financial and ethical standards in the Code of Practice for Third Party Funding of Arbitration and Mediation (“Code of Practice”). The Code of Practice in itself is not subsidiary legislation.

In line with this approach, when developing the rules relating to TPFing in the 2018 HKIAC Rules, HKIAC did not intend to rely on the then-draft Code of Practice; rather, we introduced provisions for the reasons given above.

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