Consultation Paper on Third Party Funding for Arbitration

BY DAMON SO AND JANICE CHENG

The Law Reform Commission of Hong Kong published a consultation paper on Third Party Funding for Arbitration in October 2015 (the “Consultation Paper“), proposing that the Arbitration Ordinance be amended to provide that Third Party Funding for arbitration taking place in Hong Kong is permitted under Hong Kong law, subject to compliance by third party funders with the appropriate ethical and financial standards to be developed.

The common law doctrines of maintenance and champerty have been held to continue to apply in Hong Kong and to prohibit third party funding of litigation both as a tort and as a criminal offence (save in three exceptional areas).  

Under the current law of Hong Kong, however, it is unclear whether the operation of the doctrines of maintenance and champerty also applies to third party funding for arbitration taking place in Hong Kong, a question also expressly left open by the Hong Kong Court of Final Appeal in Unruh v Seeberger [2007] 2 HKLRD 414.

As Hong Kong is one of the major international financial and arbitration centres, the uncertainty in the relevant law concerning third party funding for arbitration potentially makes Hong Kong a less attractive forum to conduct arbitrations.  The Consultation Paper therefore aims to identify and address the need for legislative changes to give certainty and clarity to this area of law in Hong Kong.

Having reviewed the current position relating to third party funding for arbitration in Hong Kong as suggested by the Chief Justice and Secretary for Justice, and having considered the current legal positions on third party funding for litigation and arbitration in other jurisdictions, the Third Party Funding for Arbitration Sub-Committee (the “Sub-Committee“) recommended that the Arbitration Ordinance be amended to provide that third party funding for arbitration taking place in Hong Kong is permitted under Hong Kong law.  The Sub-Committee also recommended the development of clear ethical and financial standards for third party funders.

The Sub-Committee has also invited submissions as to whether the development and supervision of the applicable ethical and financial standards should be conducted by a statutory body or a self-regulatory body and whether such standards should address matters such as capital adequacy of the third party funders, conflict of interest, confidentiality and privilege etc.  

Other important issues raised in the Consultation Paper include whether a third party funder should be directly liable for adverse costs orders in the funded arbitration and whether the Arbitration Ordinance should be amended to give the tribunal powers to order third party funder to provide security for costs.

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