Third parties should be able to fund arbitrations in Hong Kong, Law Reform Commission says

Advisers push for liberalising rules despite fears about money laundering and ambulance-chasing

PUBLISHED : Tuesday, 20 October, 2015, 3:25am
UPDATED : Tuesday, 20 October, 2015, 3:25am

Third parties should be allowed to put up funding for arbitration cases in Hong Kong even though such arrangements remain illegal in court cases, government advisers have recommended.

The Law Reform Commission's proposal makes it the first official body to break the taboo on allowing third parties to take an interest in legal proceedings, amid fears of ambulance-chasing, which refers to lawyers soliciting for clients at a disaster site, and vexatious litigation.

The suggestion is seen as a way of promoting arbitration which, together with mediation, has been pushed by the Department of Justice as a way to resolve disputes outside court.

"The reform can bring clear benefits … and enhance Hong Kong's competitive position as an international arbitration centre," the commission's subcommittee on third-party funding for arbitration said as it launched a public consultation on its proposal yesterday.

Australia, England and the United States already permit parties to arbitration to seek financial support from third parties.

"Parties considering whether to resolve their disputes in [Hong Kong] by international arbitration are starting to take into account, among others, the potential financing options available," the subcommittee said. "Clarity and certainty of the relevant law concerning third party funding for arbitration will be desirable."

At present, it remains unclear whether the law of champerty and maintenance, which bans third parties from funding a court case in return for an interest in any subsequent payout, applies to arbitration. No court has yet ruled on whether the 700-year-old legal doctrine - long since abolished in many jurisdictions - applies in such cases.

Gary Meggitt, director of the Asian Institute of International Financial Law, welcomed the consultation paper and said it would resolve legal uncertainties.

Explaining the difference between arbitration and litigation, University of Hong Kong legal scholar Eric Cheung Tat-ming said the former could only be initiated by the agreement of all parties, while litigation "can be forced upon by a party".

The subcommittee admitted the move could spark unnecessary arbitration proceedings or give rise to money laundering, while third-party funders could exercise "too great a level of control". But it said it was unlikely to give rise to the kind of "no win, no fee" services seen elsewhere.

It said the benefits would outweigh the risks, which could be managed with proper "ethical and financial standards". Whether those standards should be set out in law or in a code of conduct remained open for discussion.

Justin D'Agostino, a member of the subcommittee and head of global dispute resolution practice at Herbert Smith Freehills, said Hong Kong was the third most popular place worldwide to settle commercial arbitrations. "Liberalising the funding rules will ensure Hong Kong maintains this leading position," he said.