Following consultation in October 2015 (discussed in our earlier blog here), the Hong Kong Law Reform Commission (LRC) released a report last week in which it recommended that third party funding of arbitration should be allowed for arbitrations seated in Hong Kong, and also for services provided in Hong Kong for arbitrations taking place outside Hong Kong.

Third party funding of litigation is not permitted in Hong Kong as, save in limited circumstances, the common law principles of maintenance and champerty continue to apply in the jurisdiction. It has remained an open question whether these same principles apply to arbitrations in Hong Kong.

In its report, the LRC has recommended that the Hong Kong Arbitration Ordinance be amended to permit third party funding of arbitrations seated in Hong Kong, and also for services provided in Hong Kong for arbitrations which are taking place outside Hong Kong. The recommendation also encompasses arbitration-related court litigation in the Hong Kong courts. The LRC's recommendations are founded on the position that a party with a good case in law should not be deprived of the financial support it needs to pursue that case by arbitration and associated proceedings under the Arbitration Ordinance, and that these reforms are necessary to enhance Hong Kong's competitive position as an international arbitration centre. It is worth noting that, for the purposes of the report, "Third party funding" does not extend to funding provided either directly or indirectly by a person practising law or providing legal services.

The report also recommends that consideration should be given as to whether such non-application of the common law principles of maintenance and champerty should be extended to mediation within the scope of the Mediation Ordinance.

As part of its recommendation to permit third party funding, the LRC has suggested that clear standards for third party funders operating in Hong Kong be developed. The LRC has suggested that this be achieved by the adoption of a "light touch" approach to the regulation of third party funding of arbitration in Hong Kong for an initial three year period. It is proposed that a Code of Practice be drawn up which sets out standards and practices that a third party funder will be expected to comply with. The Hong Kong Advisory Committee on the Promotion of Arbitration should oversee the adoption of that code and, following this initial three year period, assess the operation of the Code. If required, it should then recommend changes to the standards set out in it and/or consider whether the introduction of a statutory or other regulatory body is necessary.

The report suggests that the Code should cover a number of specific issues including capital adequacy requirements, confidentiality, disclosure, privilege, conflicts of interest, control of the arbitration by the funder and grounds for termination. The report also suggests that these issues should be addressed in any funding agreement. Interestingly, it has also recommended that a funded party be required to give written notice to the other party to an arbitration and any arbitral institution involved that they have entered into a funding agreement (either at the start of proceedings or within 15 days of the agreement being made) and provide the name of the funder. If the funding agreement is terminated, notice should also be given.

One area that has been of considerable interest to arbitration practitioners is the question of whether an arbitral tribunal has, or should be given, the power to make an adverse cost award or order security for costs against a third party funder. The LRC did not make any recommendations on the question of adverse costs awards, considering it was premature to amend the Arbitration Ordinance at this stage. However, it did recommend that the Hong Kong Advisory Committee should consider the question further during the initial three year period of the Code's operation. On this issue of security for costs. the LRC considered that the existing powers available under the Arbitration Ordinance to order security for costs against a party were sufficient.

Herbert Smith Freehills' Global Head of Disputes and Managing Partner for Asia & Australia, Justin D'Agostino, was a member of the subcommittee of the LRC which reviewed the law in this area and made recommendations for reform. Justin comments, "The proposed reforms are essential to solidifying Hong Kong's position as an established, forward-thinking international arbitration centre. I am honoured to have been a part of the subcommittee of the LRC which recommended reform; and I am looking forward to seeing Hong Kong continue to thrive as renowned global centre for arbitration."

For more information please contact Justin D'Agostino, Partner, Briana Young, Professional Support Consultant, or your usual Herbert Smith Freehills contact.