The Price is Right?

Third party funding in Hong Kong and its

potential impact on the construction industry
Hong Kong November 3 2016

In the recently released Report on Third Party Funding for Arbitration (Report) the Law

Reform Commission (LRC) has recommended that the Arbitration Ordinance (Cap. 609)

be amended to permit third party funding in arbitration, mediation and litigation

proceedings under the Arbitration Ordinance.

Though the reform still awaits passage through Hong Kongs Legislative Council, should it

go ahead it is likely to herald a flurry of activity in the funding space, with several funders

having already set up shop in Hong Kong over the past 18 months in anticipation of the

reform.

The reform is also likely to have a significant impact on the construction industry which

continues to rely on arbitration, mediation and litigation proceedings under the Arbitration

Ordinance as its primary means of dispute resolution. We discuss below the background to

and results of the Report and our reading of the tea leaves on some of the key takeaways

for the construction industry in Hong Kong.

Background to the Report

As a common law jurisdiction, Hong Kong has inherited the now somewhat archaic English

legal doctrines of maintenance and champerty which prohibit funding of legal proceedings

by third parties. Whilst there has been a loosening of the scope of these doctrines, the

Hong Kong courts have continued to resist their outright abrogation.

As a result, and subject to limited exceptions, third party funding of litigation remains

impermissible in Hong Kong. With regard to third party funding of arbitrations taking place

in Hong Kong, however, the position has been less clear. In Cannonway Consultants Ltd v

Kenworth Engineering Limited [1995] 1 HKC 179, Kaplan J held that in light of the history of

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champerty, it was not appropriate to extend the doctrine from public justice to the private

consensual system of arbitration. The Court of Final Appeal, however, muddied the waters

in the case of Unruh v Seeberger (2007) 10 HKCFAR 31. In that case, Ribeiro PJ expressly

left open the question of whether maintenance and champerty applied to arbitrations taking

place in Hong Kong. It has remained an open question since whether the doctrines of

maintenance and champerty apply to arbitrations in Hong Kong.

In an attempt to clarify the position, the Law Reform Commissions Third Party Funding for

Arbitration Sub-committee was formed in June 2013 with the task of reviewing the current

position relating to third party funding for arbitration and considering whether reform was

necessary. On 19 October 2015, the Sub-committee released a Consultation Paper which,

amongst others things, proposed that third party funding for arbitration be allowed.

On 1 February 2016 the public consultation period ended and on 12 October 2016 the LRC

released the Report.

Results of the Report

Apart from the Reports key recommendation that third party funding of proceedings under

the Arbitration Ordinance be allowed, some of the other LRCs recommendations included:

1. Regulation

Following the trend towards light touch regulation in common law jurisdictions, the LRC

has proposed an initial three year period in which a code containing clear standards

(including ethical and financial standards) for third party funders providing funding to

parties should be developed (Code). The LRC recommended that the Hong Kong

Advisory Committee on the Promotion of Arbitration should oversee the adoption of the

Code and assess its effectiveness after this initial three year period.

2. Disclosure of Funding

The LRC has recommended that if a funding agreement is entered into, the funded party

must give written notice to the other party to an arbitration and any administering arbitral

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institution of the fact that a funding arrangement has been entered into and the identity of

the third party funder. Disclosure of funding agreements will assist in minimising conflicts of

interest and fostering a more open and transparent system of funding.

3. Adverse Costs Orders

Interestingly, the LRC did not recommend that any changes be made to the power of the

arbitral tribunal to make an adverse costs award against third party funders. The Report

found that the current powers of a tribunal under the Arbitration Ordinance to order a party

to give security for costs was adequate protection. The LRC also recommended that the

Hong Kong Advisory Committee should consider the adequacy of this arrangement further

during the initial three year period of the Code's operation.

4. Mediation and Court Proceedings

The LRC has also recommended that consideration be given to whether to make

consequential amendments at the same time to the Mediation Ordinance (Cap 620) to

extend such non-application of the common law doctrines.

The Report considered the effect of changing the law with respect to the Arbitration

Ordinance and not making consequential changes to the Mediation Ordinance and court

proceedings. It considered that given the interaction between the Arbitration Ordinance

and court proceedings, such as enforcement and supervision, that the changes to allow

third party funding should equally apply to court proceedings.

Key takeaways for the Construction Industry

With most construction contracts in Hong Kong containing arbitration or mediation clauses,

the Report and recommendations are likely to significantly affect the construction industry

and disputes concerning it. We think some the key takeaways from the reform are:

1. Access to arbitration and mediation;

2. Claim risk and administration;

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 3. Funding arrangements; and

4. Conflicts.

1. Access to arbitration and mediation

Hong Kong construction contracts typically contain multi-tiered dispute resolution clauses.

This usually leads to the dispute being finally resolved by mediation or arbitration.

Frequently, funding such disputes lies with claimant sub-contractors who do not have the

financial means or flexibility of resources to pursue potential claims against their larger and

more resourceful contractor employers.

Accessibility to third party funding is likely to free up otherwise encumbered cash flow for

these industry participants and has the potential to increase the number of claims brought

in arbitration allowing meritorious claims to be brought that might not have been able to

without the support of such funding.

Third party funders can also assist impecunious contractors or sub-contractors in

managing resources during a project. Bringing or defending a claim has the potential to

severely strain already tight budgets and tie up cash flow. With the assistance of a third

party funder, the contractor or sub-contractor can avoid having to allocate or find funds to

deal with the claim.

Should they go ahead, consequential amendments to the Mediation Ordinance will also

likely affect the construction industry. Given that many standard form government

construction contracts include dispute resolution clauses which mandate that the parties

go to mediation this will equally open the door to many more mediation claims being

brought.

2. Claim risk and administration

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Third party funding will also allow construction industry claimants to spread their risk by not

bearing the whole cost of bringing or defending a claim. Third party funders can assist in

mitigating the financial exposure in exchange for a percentage of the successful award.

Another advantage of third party funding to the construction industry will be in the presence

that the funder has on the administration of the claim. The presence of a funder may assist

in discouraging vexatious or oppressive interlocutory applications or discovery processes

which are often used by defendants to stifle a claimants claim in arbitration. Where a

claimant is funded, its deeper pockets can allow it to expend the necessary legal costs to

deal with these applications and may therefore discourage such applications being taken

out in the first place.

A further corollary benefit is in the settlement of claims: knowledge of a funding

arrangement (if disclosed) may promote settlement by increasing the defendants

perception of the claims strength.

3. Funding Arrangements

Although there are now established players in the Hong Kong funding market, the reform,

should it pass, is likely to encourage other funders to enter the market.

Construction claimants should therefore take care in choosing any funder and should

ensure that they are financially able to see a claim through. A funders internal financing

can vary significantly: some are publicly listed, some are backed by high net worth

individuals whilst others have lines of credit available to them. The nature of a funders

financing structure can affect not only its ability to maintain necessary funds but may

influence its approach to management of claims. Different funders will focus on cases of

different claim sizes, types and in differing jurisdictions.

Parties to a funding agreement should also be aware of potential risks that may arise from

the agreement. Key amongst these, the effect on legal professional privilege of the funding

agreement and documents provided to the funder in order to assess the claim should be

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considered. Construction industry claimants should do their due diligence on any funder

and independent legal advice should be sought on the funder and the terms of the funding

arrangement.

4. Conflicts

Potential conflicts of interest should be a key area of concern to construction parties

seeking to use a third party to fund an arbitration. Although the LRC has recommended the

adoption of the Code and the disclosure of funding agreements, funded parties should

ensure that conflicts arising from the funding agreement are carefully managed.

One area of concern arises where a funder pays the legal costs of proceedings directly.

This arrangement may result in a claimants lawyer being unduly influenced by the funder

and therefore favour the funder's interests and views over those of the claimant beyond the

terms set out in the agreement.

This should militate that those construction industry claimants accepting funding carefully

consider the nature and extent of a funders control over proceedings. Any funding

arrangement should clearly set out the relationships between the parties and necessary

disclosures.

Conclusion

With the recent release of the Law Reform Commissions Report and recommendations, it

is now for the Legislative Council to decide on the proposed law amendments. In the

meantime and in anticipation of likely reform, the construction industry should familiarize

itself with the benefits of funding arrangements. In doing so, particular care should be

taken to examine both the structure of third party funders and the details of any funding

arrangement which will ultimately prove the most determinative elements in the success of

any such arrangement.

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Hong Kong January 10 2017

609

18

Cannonway Consultants Ltd Kenworth Engineering Limited [1995] 1 HKC 179

Kaplan

Unruh Seeberger (2007) 10 HKCFAR 31

Ribeiro

2016 6

2015 10 19

2016 2 1 2016 10 12

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1.

2.

3.

4.
620

1.

8 of 10


2.

3.

9 of 10


4.

Sources
Law Reform Commission of Hong Kong. The Law Reform Commission of Hong Kong
Report on Third Party Funding for Arbitration (October 2016).

The Law Reform Commission of Hong Kong Consultation Paper on Third Party
Funding for Arbitration.

Cannonway Consultants Limited v Kenworth Engineering Limited [1995] 2 HKLR 475.

Unruh v Seeberger (2007) 10 HKCFAR 31.

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