Third party funding has historically been prohibited in common law jurisdictions (including Hong Kong) by the doctrines of maintenance and champerty. The use of third party funding has, however, become increasingly prevalent in a number of jurisdictions over the past decade, including in Australia and England. On 12 October 2016, the Hong Kong Law Reform Commission recommended that the Arbitration Ordinance (Cap. 609) be amended to allow third party funding of arbitrations. Following the recommendations, on 11 January 2017 the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016 was introduced into the Legislative Council. If passed, the proposed legislation will amend the Arbitration Ordinance (Cap. 609) and the Mediation Ordinance (Cap. 620) to remove the prohibition of third party funding of arbitrations and to provide safeguards in relation to such third party funding.
The Status of Third Party Funding in Hong Kong
Third party funding of litigation is not currently permitted in Hong Kong, save in limited circumstances, primarily in relation to insolvency proceedings or proceedings in the interests of justice. Hong Kong has retained tortious and criminal liability for third party funding of litigation under the common law doctrines of maintenance (the intermeddling in litigation by a party whom has no interest) and champerty (a form of maintenance whereby the uninterested party agrees to fund the litigation in return for a share of the proceeds). These English doctrines were developed to ensure that the litigation process was not used for commercial purposes and, in particular, to avoid allowing disinterested third parties to profit from a cause of action.
In 2009, a personal injury solicitor became the first ever legal practitioner to be convicted in Hong Kong of conspiracy to commit maintenance. The Court of Appeal upheld the District Court’s conviction and the resultant 15-month sentence. However, the Court of Final Appeal overturned the conviction in 2012 finding that the conviction was unsafe and that to uphold it would be a substantial and grave injustice (Winnie Lo v HKSAR [2012] HKCFA 23). In his judgment, the Honourable Mr Justice Ribeiro also raised the question whether and to what extent criminal liability for maintenance ought to be retained in Hong Kong, noting the abolition of criminal and tortious liability in England, Wales and Australia.
It is unclear whether the same principles apply to third party funding for arbitrations in Hong Kong. In Cannonway Consultants Ltd v Kenworth Engineering Limited [1995] 1 HKC 179, Kaplan J held that the law of champerty did not extend to arbitration. However the subsequent decision of the Court of Final Appeal in Unruh v Seeberger [2007] 10 HKCFAR 31 expressly left open the question of whether arbitrations in Hong Kong remain within the scope of the residual operation of the doctrines of champerty and maintenance.
In light of this uncertainty, a sub-committee of the Law Reform Commission of Hong Kong (“HKLRC”) was established to review third party funding of arbitration in Hong Kong to consider whether reform was needed and to make recommendations for the same.
The Recommendations
Following a consultation period and the review of the approach taken to third party funding in other major jurisdictions, the HKLRC published a report on 12 October 2016 in which it recommended that the Arbitration Ordinance (Cap. 609) be amended to expressly permit third party funding in Hong Kong.
The recommendations of the HKLRC included, inter alia, that:
Adverse Costs and Security for Costs Against a Third Party Funder
The HKLRC also gave consideration to whether the Arbitration Ordinance should be amended to grant a Tribunal the power to order security for costs against a third party funder, or to make adverse costs orders against a funder, despite the funder not being a party to the underlying arbitration agreement.
The HKLRC considered that, in principle, the Arbitration Ordinance ought to grant a Tribunal the power to award costs against a third party funder in appropriate circumstances. Nevertheless, it concluded that it was premature to amend the Arbitration Ordinance at this stage. The HKLRC was of the view that further consideration was required in light of the need to preserve the integrity of Hong Kong’s arbitral regime and to provide due process to a third party. Further consideration is to be given to this issue during the initial three-year period following the implementation of any amendments to the Arbitration Ordinance.
In relation to the Tribunal’s power to order security for costs against third party funders, the HKLRC considered adequate protection is afforded by the Tribunal’s current powers under the Arbitration Ordinance to order a funded party to give security for costs.
The Arbitration and Mediation Legislation (Third Party Funding)(Amendment) Bill 2016
Following the release of the HKLRC’s report, the Department of Justice consulted the Administration of Justice and Legal Services (ALJS Panel), various key legal and arbitration professional bodies in Hong Kong and the Steering Committee on Mediation.
Having completed the consultation, on 30 December 2016, the Government gazetted the Arbitration and Mediation Legislation (Third Party Funding)(Amendment) Bill 2016, which seeks to amend the Arbitration Ordinance and the Mediation Ordinance to clarify that third party funding is not prohibited in Hong Kong by the doctrines of maintenance and champerty, and adopt the HKLRC’s recommendations. The Bill was introduced into the Legislative Council on 11 January 2017. A Bills Committee to consider the proposed legislation was formed on 13 January 2017 and its first meeting was held on 14 February 2017. At the time of writing, a date for the Second Reading of the bill is yet to be announced.
Third party funding plays a key role in assisting unfunded parties to pursue claims. Should the Arbitration and Mediation Legislation (Third Party Funding)(Amendment) Bill 2016 be passed, it will further strengthen Hong Kong’s role as an international dispute resolution centre.
