With a more flexible fee structure introduced in Hong Kong, Teresa Cheng, arbitrator, mediator and co-chairman at the Asian Academy of International Law, and Edward Liu, Hong Kong-based partner at Haiwen & Partners, expect bountiful benefits for arbitration parties, legal representatives and third-party funders
Arbitration has long been the most preferred form of dispute resolution for commercial and investment disputes, but the complexity of arbitration has increased with the diverse and comprehensive transactions that take place across many jurisdictions and often involve multinational corporations.
Length and cost of arbitration have therefore become a concern for many parties. Clients have to be proactive in managing their arbitrations, like a project in its own right. One crucial aspect is the overall cost of the arbitration, but the cash flow needed to fund it during the proceedings cannot be ignored either.
The Hong Kong Arbitration Ordinance has had provisions in place for years for the arbitrator to cap the recoverable costs so that both parties and their lawyers can be vigilant in conducting the case expeditiously and efficiently, with the interest of reducing costs in mind. Yet experience has shown that few, if any, are prepared to invoke this power, as it is a double-edged sword.
THIRD-PARTY FUNDING
Third-party funding (TPF) in the meantime has become a phenomenon that is much used in investment arbitration by reason of the need when, for instance, the investor’s assets are locked in with the host state for a variety of reasons yet to be adjudicated. The benefits of TPF in facilitating access to justice and in managing an arbitration has become more apparent, prompting its wider use in commercial arbitration.
In common law jurisdictions like Hong Kong, legislation had to be introduced permitting TPF in arbitration. This was done and the regime was in place by 2019. Its scope covers arbitration in Hong Kong and, for arbitration not seated in Hong Kong, costs incurred in Hong Kong in relation to the arbitration.
Notwithstanding the “self-regulatory” nature of the TPF mechanism, safeguards are embedded in the system to ensure sufficient protection for both the funded party and stakeholders in the arbitration. For instance, if a funding agreement is made, the funded party must give written notice of the fact that a funding agreement has been made, and the name of the third-party funder. Equally, notice has to be given upon the termination of the funding agreement and the date when the funding agreement ends.
The Code of Practice for TPF of Arbitration also formalises the guidelines and standards for TPF of arbitration. By way of an example, third-party funders are required to ensure that key features, risks and terms are set out in funding agreements, and that funded parties have obtained independent legal advice on funding agreements before entering into them.
Furthermore, an Advisory Body on Third Party Funding of Arbitration and Mediation was established by the Department of Justice on a three-year term from 24 August 2021. This advisory body is responsible for monitoring and reviewing the operation of the provisions on TPF of arbitration and mediation, including the implementation of the above-mentioned code for arbitration. This is of paramount importance in ensuring that the third-party regime is in line with international standards and remains up to date.
According to statistics released by the Hong Kong International Arbitration Centre (HKIAC), parties in six of the 277 arbitrations submitted to the centre in 2021 made disclosure of TPF. In 2020, parties in three of the 318 arbitrations submitted to HKIAC made disclosures of TPF. With an increasing demand for TPF, the authors are optimistic that the current third-party regime will serve as an important access to justice in light of the market development for legal fees.
With the TPF regime there is still room for improvement to address the needs of users of arbitration. The market is such that parties to arbitration are looking for arrangements for arbitration fees that have an element of risk sharing, and can address questions regarding its cash flow. For these reasons, other jurisdictions have amended their legislations to allow for contingency fees or conditional fees.
Hong Kong must provide the same option for users of Hong Kong arbitration should it wish to retain its position as a preferred seat of arbitration, and for parties to continue to adopt Hong Kong arbitration clauses. This is an objective reality as all major arbitration jurisdictions such as mainland China, Singapore and London have allowed clients to agree to pay some form of conditional fees with their lawyers.
As a result, Hong Kong, continuing to address the needs of parties to arbitration, introduced what is called the outcome-related fee structure for arbitration (ORFSA).
THE ORFSA
To start with, the ORFSA legislative framework is committed to working towards removing common law prohibitions in respect of champerty and maintenance in the arbitration space while providing for validity, enforceability and safeguards in relation to ORFSA agreements. The ORFSA is applicable to arbitration within or outside Hong Kong and to arbitration-related court proceedings, emergency arbitrators’ proceedings and mediation under the Arbitration Ordinance, that is, mediation where there is an arbitration agreement.
The Arbitration (Outcome-Related Fee Structures for Arbitration) Rules are flexible, providing for three types of outcome related fee structures, namely:
Conditional fee agreements (CFAs). The lawyer: (1) charges no fee during the course of the proceedings and is only paid a success fee if the client’s case succeeds; or (2) charges a fee during the course of the proceedings, either at his/her usual rate or at a discounted rate, plus a success fee if the client’s case succeeds (called a “no win, low fee” agreement).
Damages based agreements (DBAs). The lawyer only receives payment if the client is successful, with payment calculated with reference to the outcome of the proceedings, for example, as a percentage of the sum awarded or recovered.
Hybrid damages based agreements (hybrid DBAs). The lawyer receives both fees for legal services rendered (typically at a discounted hourly rate) and an additional fee that is calculated by reference to the outcome of the proceedings, for example, as a percentage of the sum awarded or recovered.
These multi-faceted arrangements foster flexibility and creativity in formulating fee arrangements and set Hong Kong apart from other jurisdictions. The reason why the word “structure” is devised for the ORFSA is that there is an infinite number of permutations by which the parties can use their creativity, addressing the particular needs of the case, the claiming parties and the lawyers representing them, to decide how they would like to formulate the fee arrangements, which will not only ultimately create a win-win for the client and the lawyers, but also for third-party funders when they are involved.
Putting the ORFSA agreements as well as the TPF agreements together, a litigant can probably cover as many situations as a party would need to address in terms of lawyers’ fees, as well as the costs of arbitration.
In addition, sufficient safeguards are in place to ensure the validity and enforceability of the ORFSA agreements. These include, for example, that ORFSA agreements must be in writing and signed by the lawyer and the client. The agreement must state the arbitration or any part to which the agreement relates, circumstances where lawyers’ fees and expenses are payable, and whether disbursements are payable.
Last but not the least, the agreement must state a cooling-off period of not less than seven days, the grounds for early termination and, if so, the alternative basis for paying the lawyer in such an event (the “general conditions”). An advisory body was likewise established under section 98ZM of part 10B of the Arbitration Ordinance to ensure smooth implementation of the ORFSA regime.
TPF AND ORFSA RULES
With the implementation of ORFSA regime in 2022, it is expected that the third-party regime will run in tandem with the ORFSA in enhancing the flexibility of fee options for Hong Kong arbitration.
It is anticipated that the flexibility and creativity enshrined under the ORFSA regime will attract third-party funders to fund arbitration in Hong Kong and work with Hong Kong lawyers in arbitration overseas. Specifically, third-party funders can now devise a comprehensive structure covering TPF support and payment of legal fees, which covers settlement situations in mediation under the Arbitration Ordinance.
The validity and enforceability as provided for under general conditions of the ORFSA rules allow better protection for third-party funders, lawyers and clients. The interests of clients are also safeguarded with the ORFSA rules and the Code for Arbitration, striking a balance between access to justice and financial interests of third-party funders and lawyers.
The ORFSA rules facilitate autonomy as between legal advisers and their clients and/or their respective third-party funders to devise a scheme adapted to their own circumstances within the parameters of the regime. The wide application of the ORFSA rules to both Hong Kong lawyers (for arbitration in Hong Kong or overseas) and to foreign lawyers (for arbitration in Hong Kong) signifies the Hong Kong arbitration regime’s appeal to its overseas audience.
It now only awaits the Hong Kong Law Society and the Bar Association to amend their rules to enable their members to adopt such a fee mechanism, should they so wish. Major international law firms have been and will continue to address the needs of clients on costs through arranging fee earners from other jurisdictions that permit conditional fees to conduct arbitration in Hong Kong. If this is fully implemented, Hong Kong lawyers, especially those from small and medium-sized firms, will be able to join the market and benefit from this ORFSA and TPF regime.
CONCLUSION
The ORFSA and TPF regime will create a “win-win-win” situation for parties to Hong Kong arbitration, their respective legal representatives and third-party funders. Having more legal fee structure options available is demonstrably beneficial for both law firms and their clients.
The availability of ORFSA agreements would go some way to enabling law firms to provide clients with greater access to counsel and tribunals, while removing any economic impediments that may otherwise prevent meritorious claims from being brought. There will be immense opportunities for law firms and legal finance providers in Hong Kong to partner and share risks, and manage related costs.
