Arbitration funding in Hong Kong: the winds of change
This is an article recently published in the journal of the Chartered Institute of Arbitrators in Australia, which I co-authored with a colleague, Susanna Khouri. The subject matter may be of interest to disputes lawyers in Asia in particular.
Arbitration funding in Hong Kong: the winds of change
In October 2015, the Law Reform Commission of Hong Kong published its consultation paper on third party funding for arbitration.[1] The Committee comprised Kim Rooney (chair), Teresa Cheng SC, Justin D’Agostino, Victor Dawes SC, Jason Karas and Robert Pang SC. After consulting with the arbitration community, funders and other interested parties over a two year period, the Committee concluded:
“We recommend that the Arbitration Ordinance should be amended to provide that Third Party Funding for arbitration taking place in Hong Kong is permitted under Hong Kong law [...] clear ethical and financial standards for Third Party Funders providing Third Party Funding to parties to arbitrations taking place in Hong Kong should be developed”.
The Committee’s conclusion was based upon a detailed analysis of litigation funding in various jurisdictions (including Australia), arbitration funding in other jurisdictions and upon an analysis of the benefits and risks of third party funding for arbitration. The Committee expressed the view that the benefits of third party funding for arbitration clearly outweighed the risks.
The Committee’s recommendation will be welcomed by commercial parties who are concerned by the cost of participating in the arbitral process, and, if implemented, will undoubtedly help to increase the attractiveness of Hong Kong as an arbitral seat. These issues were clearly front of mind for the Committee, who considered equivalent regulatory regimes around the world and concluded that since all but one (Singapore) permitted arbitration funding, reform was necessary “to avoid Hong Kong being overtaken by its competitors”.
There will now be a further consultation period regarding the form which “ethical and financial standards” should take. In so doing, Hong Kong has an opportunity to break new ground and become the first jurisdiction to introduce a code specifically to regulate the practice of arbitration funding. There is likely to be extensive and vigorous debate regarding the form which such regulation should take: in this article we take a look at some of the key issues which will likely frame that debate, and offer some pragmatic solutions.
Statutory or voluntary regulation?
At the heart of the question is whether to give powers to a statutory regulator, or allow the industry to self-regulate using a voluntary code of conduct (a model adopted in the United Kingdom to regulate litigation funders). There are pros and cons to each approach, but a good starting point is to identify whether regulation is required to address concerns that have been expressed by some commentators that third party funding may cause prejudice to the integrity of the judicial or arbitral process.
In regard to funded litigation, Courts in Australia and England have expressed the view that the modern civil justice system is robust enough to guard against the risks to the integrity of the litigation process which funding arrangements might pose. Instances of abuse are rare. Arbitral tribunals may similarly use their powers over the parties and the arbitral process to guard against any risks which third party funding may pose.
The ability of an arbitral tribunal to protect the integrity of its own process points in favour of a light touch regulatory regime, such as a voluntary code (the “Code”) and which can be enforced by the tribunal (or court) hearing the matter for example through costs awards, as considered further below. Certainly this approach would sit more easily with the consensual and flexible nature of arbitration, though some mechanism (such as the proposal for a deed, discussed further below) will need to be found to allow the funder to submit to the tribunal’s jurisdiction and be bound by orders which the tribunal may make.
Disclosure of funding arrangements?
One important issue for the Code to address is the question many tribunals are faced with at an interlocutory stage: should respondents be entitled to disclosure of the claimant’s funding arrangements? Generally such applications for disclosure fail, as they do in national court litigation, on the grounds that the claimant’s funding arrangements are:
- a satellite issue which bear no relevance to the substantive issues in dispute; and/or
- private and confidential: it is the claimant’s right to decide how to finance its operations, provided there is no prejudice to the integrity of the dispute resolution process.
However, two points arise.
First, disclosure to the arbitrators may be necessary in order to determine whether a potential conflict of interest arises. This issue can be dealt with by a provision equivalent to article 7(a) of the IBA Guidelines on Conflicts of Interest in International Arbitration, which requires disclosure to the tribunal, the other parties to the arbitration and the arbitral institution of any relationship between the arbitrator and a party or persons or entities with a “direct economic interest” in the outcome of the proceedings.[2]
Second, respondents may be entitled to know who is funding the claim against them in order to determine whether they are adequately protected for costs should the claim fail. It would save time and unnecessary satellite disputes if funders provided certain basic information to the respondent at an early stage of the arbitral process, such as the funder’s identity and place of incorporation. Respondents can then assess the joint financial strength of the plaintiff and funder before deciding whether it is appropriate to apply for security. This approach was recently endorsed by the authors of the 2015 ICC Commission Report on decisions on costs in international arbitration.[3]
Liability for adverse costs?
When asked to determine the issue of whether a third party funder should be liable to pay adverse costs to a successful defendant, the High Courts of Australia and England & Wales have reached different conclusions. In Jeffrey and Katauskas (2009) 239 CLR 75, the Australian justices held that there is no general principle to this effect; conversely in Excalibur v Texas Keystone [2013] EWHC 2767, Lord Justice Christopher Clarke found the third party funders of “speculative, opportunistic and catastrophic litigation” liable to pay the defence costs on an indemnity basis according to the amount of funding provided and the period of time within which funding was made available. Again, there is a simple and pragmatic solution which the Code can encourage parties to follow. At the outset of a funded arbitration, the plaintiff and funder can execute a deed, countersigned by the respondent, pursuant to which the funder agrees to submit to the tribunal’s jurisdiction in relation to any award of costs (in respect of costs incurred during the term of the funding agreement ). The respondent will then have locus to enforce any costs award directly against the funder.[4]
Since funders will generally agree to provide adverse costs indemnities for disputes they are funding (or pay for adverse costs insurance), in practical terms this proposal would not increase a funder’s risk exposure. Nor is it likely that funders would routinely refuse to sign up to such deeds: if they do not underwrite the adverse costs risk, they are likely to have to put up security for costs, and if they do not put up security, the proceedings will be stayed and their investment may be lost.
There are numerous other points which could be incorporated into the Code, which are beyond the scope of this article. In our view, the above proposals are a good starting point and would help to support the integrity of the arbitral process – in particular by allowing the parties to avoid satellite disputes and focus on resolving the substantive issues in dispute. If that helps to mitigate delay and reduce costs of the arbitral process, then the Hong Kong Code will indeed be groundbreaking.
Authors: Oliver Gayner, Investment Manager and Susanna Khouri, Investment Manager, IMF Bentham Limited
15 December 2015
[1] The Law Reform Commission of Hong Kong, Consultation Paper on Third Party Funding for Arbitration, October 2015 <https://www.hkreform.gov.hk>
[2] IBA Guidelines on Conflicts of Interest in International Arbitration, Adopted by resolution of the IBA Council on Thursday 23 October 2014, <https://www.ibanet.org/Document/Default.aspx?DocumentUid=e2fe5e72-eb14-4bba-b10d-d33dafee8918>
[3]See ICC Commission Report Decisions on Costs in International Arbitration, ICC Dispute Resolution Bulletin 2015 – Issue 2, page 17.
[4] Funding arrangements may not always address the claimant’s adverse costs exposure. If the funding provided by the funder is more limited (for example, limited to the payment of the claimant’s disbursements), different consideration may arise.