Proposed Legislative Amendments Pave the Way for Third Party Funding of International Arbitration in Singapore

Singapore continues to cement its place as a preferred seat of international arbitration globally, but it has remained in the minority within the group of leading venues in terms of its approach to third party funding. Third party funding is currently prohibited in Singapore, but this is about to change.

On 30 June 2016 the Singapore Ministry of Law announced proposed legislative amendments to expressly allow third party funding in international arbitration and related court proceedings in Singapore. These proposed amendments follow similar legislative reforms proposed by the Hong Kong Law Reform Commission in the Consultation Paper released by its Third Party Funding for Arbitration Sub-committee in October 2015, thereby enhancing the attraction of resolving disputes in the region generally.

The public consultation closed on 29 July 2016, and it is anticipated that Singapore will act quickly to implement the proposed amendments, potentially before the end of this year. This is a significant development for Singapore’s dispute resolution regime, and global dispute resolution generally.

Summary of the Changes Proposed

The current prohibition against third party funding in Singapore operates in two ways:

• A party who is affected by a third party funding arrangement (e.g. a counterparty in the funded proceedings) may be entitled to sue the third party funder and the funded party for the tort of champerty and maintenance.
• A third party funding contract would be unenforceable on the grounds of illegality or public policy.

The prohibition applies to both litigation and arbitration proceedings in Singapore, although there is an important exception in the insolvency context which permits a liquidator to use the statutory power of sale to sell a cause of action or its proceeds to a third party (see Re Vanguard Energy Pte Ltd [2015] SGHC 156).

The Ministry has released drafts of the Civil Law (Amendment) Bill (“Bill”) and Civil Law (Third-Party Funding) Regulations 2016 (“Regulations”), which contain the proposed legislative amendments.

If passed they will bring about the following changes:

• Abolish the common law torts of champerty and maintenance in Singapore (new section 5A, Civil Law Act).
• Provide that third party funding contracts are not contrary to public policy or illegal in the following categories of dispute resolution proceedings (new section 5B, Civil Law Act; Rule 3, Regulations):
  • international arbitration proceedings;
  • court proceedings arising from or out of international arbitration proceedings;
  • mediation proceedings arising out of or in connection with international arbitration proceedings;
  • applications for a stay of proceedings in favour of international arbitration; and
  • proceedings for or in connection with the enforcement of an international arbitration award.
• Prescribe the following conditions to be imposed on funders, non-compliance with which would render the third party funding contract unenforceable (new section 5B, Civil Law Act; Rule 4, Regulations):
  • the funder must carry on the principal business of the funding of the costs of dispute resolution proceedings to which the funder itself is not a party;
  • the funder must have access to funds immediately within its control, including within a parent corporation or subsidiary, sufficient to fund the dispute resolution proceedings in Singapore; and
  • the funds must be invested, 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.
• Provide that lawyers may recommend third party funders to their clients or advise their clients on third party funding contracts so long as they do not receive any direct financial benefit from the recommendation or facilitation (new section 107(3A), Legal Profession Act (Cap. 161)).

The Ministry has also indicated that related amendments would be made to the Legal Profession (Professional Conduct) Rules 2015 to supplement the Bill and new Regulations. While these related amendments have not been made available for review as part of the public consultation, the amendments are expected to draw reference from the revised International Bar Association Guidelines on Conflict of Interest in International Arbitration (October 2014) and the Ministry foreshadowed may include:

• A duty on legal practitioners to disclose the existence of a third party funding contract and the identity of the third party funder to the Court or tribunal and to every other party to the proceedings, as soon as is practicable; and
• A prohibition against legal practitioners and law practices having interests in relevant third party funders and receiving referral fees and commissions.

“Light-touch” Approach

The Ministry has emphasised that the proposed legislative amendments are part of a broader regulatory framework which includes best practices and guidelines for lawyers and third party funders, giving precedence to party autonomy and flexibility, with disclosure as the central tenet. The Ministry of Law has adopted a “light touch” approach to regulation in the proposed amendments, drawing from the approach of other jurisdictions which permit third party funding.

Consistent with this approach, there are no minimum paid-up capital requirements, nor any restrictions on the subject matter or quantum of the disputes for which third party funding is allowed.  This is a significant relaxation from the narrower legislative amendments proposed by the Ministry the last time it held a public consultation on the possibility of allowing third party funding for international arbitration in 2011.

Room for Further Liberalisation

Notwithstanding the unrestricted subject matter and quantum of the disputes for which third party funding will be permitted under the proposed amendments, one significant restriction still remains. As things stand, the amendments will permit third party funding only for international arbitration and court proceedings which are related to international arbitration. Contracts providing for third party funding of domestic arbitration or litigation remain unenforceable under the new legislation, although parties to such contracts can no longer be sued under the tort of champerty and maintenance.

The proposed legislative amendments, however, expressly allow the Minister of Law to prescribe further categories of dispute resolution proceedings for which third party funding is permitted. This paves the way for third party funding to be further extended to domestic arbitration and commercial litigation more generally.