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Third Party Funding in Arbitration in Hong Kong

27 Jun 2017

Jose-Antonio Maurellet SC examines the latest development in Third Party funding in Arbitration in Hong Kong.

On 14 June 2017, Hong Kong passed a landmark legislation allowing third party funding relating to arbitration and mediation, thereby bringing Hong Kong in line with the law in some of the other major jurisdictions. The new legislation, in the form of adding a new Part 10A (ss.98E – 98W) to the Arbitration Ordinance (Cap. 609) and a new s.7A to the Mediation Ordinance (Cap. 620), is expected to take effect shortly this year.

The new legislation permits a funding agreement whereby a third party funder provides arbitration funding to a funded party in return for a financial return in the event that the arbitration is successful. However, the existing common law prohibition of maintenance and champerty in litigation and the prohibition of contingency or conditional fees under current professional conduct rules remain.

Importantly, the new legislation also provides for a code of practice to be enacted by an authorized body to regulate third party funding, including capital adequacy requirements, terms of funding agreements and the degree of the funder’s control of the arbitration. While violation of the code of practice itself does not render any person liable to judicial or other proceedings, such failure would be admissible in evidence if relevant to a question being decided by the court or arbitral tribunal.

The new legislation also requires a funded party to disclose any funding agreement, the name of the funder and the end of such funding agreement (other than because the arbitration has ended).

These much-awaited changes are welcome and important as they strengthen Hong Kong’s position as a leading arbitration seat. Funder activities are expected to significantly increase after the law takes effect, given that many funders are already active in Hong Kong. Businesses can also better leverage and use their capital with flexibility as well as share the risks of pursuing a claim.