Hong Kong arbitration success fee regime fully in force

Lawyers can now offer success-based fee arrangements for work in Hong Kong on arbitrations and related proceedings. On 16 December 2022, Hong Kong enacted the outstanding sections of Part 10B Arbitration Ordinance, together with sub-legislation to regulate the new agreements. As a result, Hong Kong now boasts one of the world’s broadest legal success fee regimes for arbitration, giving parties the flexibility to cover legal costs while mitigating risk, aiding cash flow, and enhancing budget control.

What has changed?

From today, Hong Kong-based lawyers can charge success fees for arbitrations seated in or outside the territory, as well as related court and mediation proceedings. Lawyers and clients based outside Hong Kong can also take advantage of the new rules when working on a Hong Kong-seated case. Before now, such agreements were prohibited by Hong Kong law and professional conduct regulations.

Hong Kong’s new regime permits a broad range of fee options, including:

·       Conditional fee agreements (CFAs)

·       Damages-based agreements (DBAs)

·       Hybrid DBAs

Click here to learn how these agreements- known collectively as “Outcome related fee structures for arbitration” (ORFSA) – work.

What does this mean for you?

The ORFSA regime offers alternatives to the basic hourly rate, giving you greater flexibility to find a fee agreement that suits the needs of your dispute, your business and your budget. It also allows your lawyers to share the risk inherent in running an arbitration. While not every arbitration is suitable for a success-based engagement, it is always worth discussing with your lawyers what options they can offer under the new fee regime.

Success fees remain prohibited for Hong Kong court proceedings (civil and criminal), and for personal injuries arbitrations.

How is the ORFSA regime regulated?

Part 10B of Hong Kong’s Arbitration Ordinance (Cap. 609) removes the prohibition on success fees for arbitration and related court or mediation proceedings, and expressly permits CFAs, DBAs and Hybrid DBAs, so long as they meet certain conditions. Those conditions are set out in the Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Rules). Among other things, they include requirements that an ORFSA agreement:

·       be in writing and signed;

·       set out the arbitration to which it relates;

·       state when the success fee and expenses will be payable, including a clear explanation of how the success fee is calculated;

·       stipulate grounds for termination before the end of the arbitration, and the alternative basis for paying the lawyer in the event of such termination; and

·       include a brief “cooling off” period in which the client can cancel the agreement after signing.

Lawyers must also inform clients that they can seek independent advice before entering an ORFSA agreement, and check that clients have understood how the success fee agreement will work.

Finally, the Rules impose caps on the level of success fee that can be agreed. For a CFA, the success fee “uplift” cannot exceed 100% of the “benchmark” fee the lawyer would have charged were there no CFA in place.  Under a DBA, the lawyer cannot take more than 50% of the financial benefit (e.g. damages) that the client obtains if it wins the arbitration. Within those caps, clients are free to negotiate the uplift or DBA payment with their lawyers.  The specific fee arrangements on offer will depend on the lawyers’ assessment of the dispute and both client’s and lawyers’ attitude to risk and reward.

There is generally no downside for parties whose opponents have instructed their lawyers on an ORFSA basis. Barring exceptional circumstances, the arbitrator cannot order a losing party to pay any costs of its successful opponent that exceed the costs it would have paid if the successful party had no ORFSA agreement.

The ORFSA regime is overseen by an advisory body appointed by Hong Kong’s Secretary for Justice. Herbert Smith Freehills partner Kathryn Sanger is a member of the Advisory Body, alongside Briana Young and barrister Benny Lo. Kathryn is also a member of Hong Kong’s Advisory Body on Third Party Funding of Arbitration and Mediation, and is one of the territory’s leading experts on alternative fee arrangements.

How can we help your business?

Herbert Smith Freehills is a market leader in disputes pricing. Our Pricing and Analytics Team works with our lawyers and clients to achieve optimal pricing and commercial arrangements that work for everyone. We offer a variety of innovative and bespoke solutions, including CFAs, DBAs, Hybrid DBAs and other alternative fee arrangements.

Our Litigation Funding and Risk Transfer Insurance practice for dispute resolution is a unique offering in the global market. We are well versed in the opportunities and risks of funding disputes. Our clients benefit from our knowledge and experience in managing third-party funded disputes and our deep and long-running relationships with all the major funders.

To learn more about the alternative fee arrangements we can offer or the different funding regimes, including in Hong Kong, email Kathryn Sanger, John O’Donoghue or your usual Herbert Smith Freehills contact.

For more information, please contact Kathryn Sanger, Partner, John O’Donoghue, Head of Legal Operations – UK, US & EMEA, or your usual Herbert Smith Freehills contact.

Kathryn Sanger
Kathryn Sanger
Partner
+852 2101 4029
John O'Donoghue
John O'Donoghue
Head of Legal Operations – UK, US & EMEA
+44 20 7466 2201

 

 

 

Hong Kong gazettes success fee Bill

Hong Kong has officially published a Bill that would allow lawyers to agree outcome-based fees for arbitration work in the territory.

If, as expected, the Bill passes into law later this year, it will allow lawyers in and outside Hong Kong to agree fees based on their clients’ success in the arbitration. This is a sea-change for a jurisdiction that, until now, has prohibited such fees.

The Bill is the next stage in a process of reforming Hong Kong’s laws and professional conduct rules that began with a public consultation chaired by Herbert Smith Freehills’ Kathryn Sanger and Briana Young.

Under the proposed reforms, which enjoy widespread public backing, parties would benefit from a broad range of fee options, including:

  • Conditional fee agreements (CFAs)
  • Damages-based agreements (DBAs)
  • Hybrid DBAs

The Bill would add a new Part 10B to Hong Kong’s Arbitration Ordinance (Cap. 609), removing the prohibition on success fees for arbitration and related court or mediation proceedings. It would also amend the Legal Practitioners Ordinance (Cap. 159), as well as professional conduct rules, to allow Hong Kong barristers, solicitors, and registered foreign lawyers to accept such fees without breaching ethical obligations.

The new law would allow Hong Kong based lawyers to charge success fees for arbitrations seated in or outside the territory. Lawyers and clients based outside Hong Kong can take advantage of the new rules when working on a Hong Kong-seated case.

The proposed changes would not apply to Hong Kong civil or criminal proceedings, or to an arbitration involving a personal injury claim.

What are outcome related fees?

CFA

Under a CFA, the client agrees to pay the lawyer an additional fee, known as a success fee, only in the event of a successful outcome for the client. The success fee can be an agreed flat fee, or calculated as a percentage uplift on the lawyer’s usual (“benchmark” or “standard”) fee; i.e. the fee that the lawyer would have charged if there were no CFA in place. The client may also pay fees during the life of the matter, typically at a discounted rate. Alternatively, lawyers and clients may agree a “no win, no fee” CFA.

DBA

Under a damages based agreement, the lawyer charges no fees during the life of the arbitration, but receives payment only if the client obtains a “financial benefit” in the matter. The payment, known as the “DBA payment”, is calculated by reference to the financial benefit. Typically, it will be a percentage of money awarded to the client or paid to settle the claim. It can include any other form of financial benefit, such as a physical asset, debt or reduction in a sum claimed against the client.

Hybrid DBA

In a Hybrid DBA, the lawyer charges some (typically discounted) fees during the life of the matter, plus a DBA payment if the client obtains a financial benefit in the arbitration.

Regulation

The Bill paves the way for more detailed regulation of the outcome related fee regime, in the form of subsidiary legislation. It also empowers the Secretary for Justice to appoint an advisory body and an authorised body to oversee the regime, and allows the advisory body to issue a code of practice. This structure reflects the regime that regulates third party funding of arbitrations in Hong Kong (Part 10A Arbitration Ordinance). As with third party funding, a client will have to disclose in the arbitration that it has entered an outcome related fee agreement with its lawyers. The new provisions also contain exceptions to the general confidentiality regime under the Arbitration Ordinance, permitting such disclosure.

Finally – barring exceptional circumstances – an arbitrator cannot order a losing party to pay the costs of its successful opponent that exceed the amount it would have incurred had the successful party not entered an outcome related fee agreement with its lawyers. This adheres to the “indemnity principle” that applies in many common law jurisdictions, under which a court cannot order a losing party to pay more costs than the successful party actually paid to its lawyers. Respondents to the consultation also felt, overwhelmingly, that it was unfair to penalise an unsuccessful party for a fee arrangement over which it has no control at the outset.

Conclusion

The Bill proposes significant, welcome, changes to Hong Kong’s legal fee regime for arbitration. The recommended measures allow Hong Kong to maintain its competitive position as one of the world’s top seats, by responding to clients’ desire for alternatives to the traditional hourly fee, and allowing lawyers to share litigation risk with the parties who instruct them.

To learn more about the alternative fee arrangements we can offer, email Kathryn Sanger, Briana Young, John O’Donoghue or your usual Herbert Smith Freehills contact.

Kathryn Sanger
Kathryn Sanger
Partner
+852 21014029
Briana Young
Briana Young
Professional Support Consultant
+852 21014214

HERBERT SMITH FREEHILLS PROMOTES ARBITRATION SPECIALIST TO COUNSEL IN OUR GROWING GERMAN PRACTICE

Herbert Smith Freehills has promoted Catrice Gayer from our Düsseldorf office to Counsel with effect from 1st May. Catrice specialises in international arbitration and has broad experience as counsel and also as an arbitrator. Catrice focuses on technically complex large-scale projects and manufacturing/engineering products in the infrastructure/transport, TMT and energy sectors. Catrice has been ranked in Who’s Who Legal’s Future Leaders in Arbitration (2018, 2019 and 2020). She plays a significant role in the international arbitration and wider legal communities, sitting as co-chair of ASA below 40 and Young CEAC, while also being a member of the ICC Commission on Commercial Law and Practice.

Paula Hodges QC notes, “I am delighted to see Catrice’s promotion to Counsel. Catrice is a rising star and it is wonderful to see her success and that of our German offices recognised. This news-  together with our recent Partner promotions –  really does demonstrate the outstanding lawyers we have across our international arbitration practice.”

For more information, please contact Catrice Gayer, Counsel, or your usual Herbert Smith Freehills contact.

Catrice Gayer
Catrice Gayer
Counsel (From 1 May 2021)
+49 211 975 59135

Herbert Smith Freehills to participate in London International Disputes Week

London International Disputes Week 2021 (LIDW21) comes at a significant period for the UK legal sector, in the wake of the Covid-19 pandemic, post-Brexit and amid an uncertain global political environment.

With its theme: “Looking forward: change, challenge and opportunity”, LIDW21 will provide crucial insights on the business and law of international dispute resolution. The programme draws on contemporary global issues facing the sector, including the rise of group actions, the role of technology, the rule of law, climate change, social responsibility, and ethics.

To read more about LIDW21 click here and register at LIDW21.

Continue reading

LATEST EDITION OF ASIA PACIFIC DISPUTE RESOLUTION GUIDE NOW AVAILABLE

Disruption, downturn and recovery tend to generate more disputes – and in Asia Pacific cross-jurisdiction operations and investments increase that risk.

Our 2021 Guide to Dispute Resolution in Asia Pacific is your roadmap to potential problems in these fast-changing times, especially for those new to the region’s complex legal landscape.

From the basics of each legal system, including litigation and arbitration procedures, to class actions, fee arrangements, third party funding and electronic/digitisation reforms to court proceedings, the new edition summarises the key dispute resolution procedures and trends in 19 of Asia Pacific’s diverse jurisdictions.

The guide has been compiled by our network of Herbert Smith Freehills disputes specialists, with the assistance of local counsel in certain jurisdictions, led by Gareth Thomas and Priya Aswani.

Click here to request a copy of the guide or contact Priya Aswani.

Gareth Thomas
Gareth Thomas
Partner, Hong Kong
+852 2101 4025
May Tai
May Tai
Managing Partner - Asia
+852 2101 4031
Priya Aswani
Priya Aswani
Professional Support Lawyer, Singapore
+65 6868 8077

HERBERT SMITH FREEHILLS – SMU ASIAN ARBITRATION LECTURE

This year marks the tenth edition of the Herbert Smith Freehills – SMU Asian Arbitration Lecture Series.

We are delighted that Ms Loretta Malintoppi from 39 Essex Chambers will deliver the lecture on Thursday 22 October, on the topic “Don’t Shoot the Sheriff: The Threat of Legal Claims Against Arbitrators and Arbitral Institutions”.

The Herbert Smith Freehills-SMU Asian Arbitration Lecture Series was established in 2010 through funding from Herbert Smith Freehills, and promotes collaborative forms of dispute resolution and access to justice. It also aims to promote Singapore as a leading centre for dispute resolution in Asia, particularly in arbitration and mediation. Each year, a distinguished jurist delivers the lecture, which is also published in a leading global arbitration journal.

Continue reading

PRC court clarifies enforcement of Mainland award made by foreign institution

On 6 August 2020, Guangzhou Intermediate People’s Court made a civil ruling that an arbitral award made in Guangzhou by the ICC should be regarded as a Chinese arbitral award with a foreign element. It follows that the award should be enforced under Article 273 of the PRC Civil Procedure Law, rather than under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

(2015) Sui Zhong Min Chu Si Zi No. 62 or (2015)穗中法民四初字第62号

Background

This case concerned a supply contract between Brentwood Industries (US) as the seller, Guangzhou Faanlong Machinery Engineering Co Ltd (PRC) as the buyer, and Guangzhou Zhengqi Trading Co Ltd (PRC) as the agent of the buyer. Article 16 of the contract provided that “any dispute arising from or in connection with this contract shall be settled through friendly negotiation. If no settlement can be reached through negotiation, it shall be submitted to ICC for arbitration in the place where the project is located in accordance with international convention and practice” (emphasis added). Article 17 provided that “the applicable law of this contract is PRC law”. In this case, the project was located in Guangzhou, Mainland China.

On 16 December 2010, Brentwood brought a claim against Faanlong and others (Respondents) in the Court. The Court declined to hear the case, as there was an arbitration agreement between the parties. On 9 May 2011, Brentwood applied to the Court to invalidate the arbitration clause. Brentwood was not successful. Subsequent to the Court’s ruling confirming the validity of the arbitration clause, on 31 August 2012, Brentwood commenced ICC arbitration against the Respondents. The arbitration was administered by the ICC through its Secretariat Asia Office based in Hong Kong. On 17 March 2014, the sole arbitrator made a final award in favour of Brentwood. On 13 April 2015, Brentwood applied to the Court for recognition and enforcement of the award.

The Court’s ruling on enforcement

Brentwood argued that judicial practice in Mainland China is that the nationality of the arbitral award is determined by the place where the arbitration institution is located. Accordingly, as the award was made by the ICC, which is headquartered in Paris, it should be recognised and enforced in Mainland China in accordance with the New York Convention. Alternatively, if the Court considered that the award was made by the ICC Secretariat Asia Office based in Hong Kong, the award is a Hong Kong arbitral award and should be recognised and enforced in accordance with the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong Special Administrative Region (Mainland and Hong Kong Mutual Arrangement).

The Respondents argued that (1) the award was not “made in the territory of a State other than the State where the recognition and enforcement of such awards are sought “ (Article 1 of the New York Convention), and thus should not be recognised and enforced under the New York Convention; (2) ICC was not an arbitration institution stipulated in the PRC Arbitration Law and it was not legal for it to administer arbitration in Mainland China; and (3) the validity of the arbitration clause and the enforceability of the arbitral award were two separate legal issues under different rules. The fact that the arbitration clause was held valid did not necessarily suggest that the award made pursuant to it was enforceable.

The Court ruled that the award, made in Guangzhou by the ICC, should be regarded as a foreign-related arbitral award made in Mainland China. Enforcement of the award should be brought under Article 273 of the PRC Civil Procedure Law. It rejected Brentwood’s arguments for recognition and enforcement under the New York Convention or the Mainland and Hong Kong Mutual Arrangement and directed Brentwood to re-apply for enforcement under the PRC Civil Procedure Law.

Comment

It is a long-standing question whether foreign arbitration institutions can administer arbitration seated in Mainland China under the current PRC Arbitration Law regime. The traditional view was no, because “arbitration commission” in the PRC Arbitration Law meant Chinese arbitration institutions only. However, with the increase in commercial dealings between Chinese and foreign parties, the strict interpretation of the law no longer sits well with the demands of commercial parties. China’s Supreme People’s Court has recently, in several cases and judicial interpretations, confirmed the validity of clauses providing for arbitrations administered by foreign institutions seated in Mainland China. This latest decision made by the Guangzhou Court took a further step, supporting that the arbitral award made in arbitration seated in Mainland China and administered by a foreign arbitration institution can be enforced under PRC Civil Procedure Law. However, as Mainland China is not a case law jurisdiction, this latest decision by Guangzhou Court, even though it should have been vetted by the Supreme People’s Court via the internal reporting system, is not a binding authority in Mainland China.

Viewed in light of the fact that foreign arbitral institutions are now permitted to operate in Beijing and extended free trade zones in Shanghai (see here), we are hopeful that there will be a final clarification in the near future on the question of whether foreign arbitral institutions can administer arbitration seated in Mainland China. Legal practitioners in Mainland China have been calling for an amendment to the existing PRC Arbitration Law to address this issue. If that happens, it would be a significant step towards China further opening up its legal services market to foreign players. Having said that, before that final missing piece of the puzzle is complete, we would recommend that parties avoid agreeing to an arbitration clause that provides for arbitration seated in Mainland China to be administered by a foreign arbitral institution.

If you have questions or would like discuss any aspect of this post, please contact Helen Tang, Stella Hu or Briana Young of Herbert Smith Freehills, Weina Ye of Kewei Law Firm, or your usual Herbert Smith Freehills contact.

Helen Tang
Helen Tang
Partner, Shanghai
+86 21 2322 2160
Weina Ye
Weina Ye
International Partner, Kewei
+86 21 2322 2132
Stella Hu
Stella Hu
Of Counsel, Beijing
+86 10 65355017
Briana Young
Briana Young
Professional Support Consultant, Hong Kong
+852 2101 4214

 

 

Hong Kong arbitration internship 2021 – applications now open

 

HERBERT SMITH FREEHILLS PARTNER SIMON CHAPMAN TO BE APPOINTED QUEEN’S COUNSEL

We are very proud to announce that Simon Chapman, Head of Greater China Disputes, is to be appointed Queen’s Counsel.

The award of Queen’s Counsel is for excellence in both written and oral advocacy before the higher courts and arbitration tribunals. Simon is to be one of only 4 solicitor-advocates amongst the 114 QCs appointed this year. Simon will be one of a handful of Solicitor QCs in Asia, and the fourth QC currently practising at Herbert Smith Freehills. The prestigious appointment of QC is made by Her Majesty The Queen on the advice of the UK Lord Chancellor, following consideration by an independent Queen’s Counsel Selection Panel. The appointment is given to distinguished practitioners based on merit, and in recognition of their professional ability, reputation and integrity.

Simon is an international arbitration specialist focusing on cross-border disputes in Asia. He leads the Herbert Smith Freehills Practice in Greater China and appears regularly as lead counsel before arbitral tribunals all over the world. His practice covers both investment treaty and commercial arbitration and he has particular expertise in claims in fraud and breach of warranty, as well as post-M&A, joint venture, and shareholder disputes. Simon’s clients have included governments, state-owned entities, sovereign wealth funds and corporations across a range of industries, including the energy, private equity, finance, hospitality, and TMT sectors.

“With Simon’s appointment, Herbert Smith Freehills joins a very small group of firms that can offer its clients in-house access to senior advocacy through a practising QC based in Asia” said Executive Partner and CEO Elect Justin D’Agostino. “The appointment highlights the high calibre of talent and the bench strength of the firm’s market-leading disputes practice in the region and across our global disputes practice.”

“Simon is an extremely talented advocate, and we are very proud of this richly deserved appointment”, said Paula Hodges QC, Global Head of the International Arbitration practice at Herbert Smith Freehills. “It reflects Simon’s legal excellence and demonstrates the high esteem in which he is held by his peers, colleagues and clients.”

Simon will officially take silk at a ceremony on 16 April 2020.

Simon Chapman KC
Simon Chapman KC
Regional Head of Practice - Dispute Resolution, Asia
+852 21014217

Hong Kong–Mainland interim relief arrangement to take effect 1 October

The Supreme People’s Court of China and the Department of Justice of Hong Kong SAR announced today that the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region will come into effect on 1 October 2019 in both Mainland China and Hong Kong.  The SPC also released an explanatory memo setting out its understanding of key aspects of the Arrangement and its implementation.

The SPC and the DOJ signed the Arrangement on 2 April 2019.  As  reported in our posts of 2 April and 4 April, the Arrangement empowers Mainland Chinese courts  to order interim measures in support of Hong Kong-seated arbitrations, making Hong Kong the only seat outside Mainland China to benefit from such support.

The SPC and DOJ also released a list of “qualified arbitral institutions” in Hong Kong. These are the only institutions whose arbitrations  enjoy the benefit ofthe Arrangement.  They include:

  • Hong Kong International Arbitration Centre
  • China International Economic and Trade Arbitration Commission Hong Kong Arbitration Center
  • International Court of Arbitration of the International Chamber of Commerce – Asia Office
  • Hong Kong Maritime Arbitration Group
  • South China International Arbitration Center (HK)
  • eBRAM International Online Dispute Resolution Centre

Among other things, the SPC memo confirms that the Arrangement will apply to arbitral proceedings commenced prior to, but not yet completed as of, 1 October 2019.  As such, we anticipate that interim relief applications under the Arrangement are likely to emerge soon.

Helen Tang
Helen Tang
Partner, Shanghai
+86 21 2322 2160
Weina Ye
Weina Ye
Senior Associate, Shanghai
+86 21 2322 2132
Stella Hu
Stella Hu
Of Counsel, Hong Kong
+852 2101 4248