Third party funding of arbitration in Asia

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While third party funding has become a standard part of the litigation and arbitration landscape in many places, until this year it has had a very limited role in Hong Kong and Singapore, due to the prohibition on the funding of legal proceedings under the common law doctrines of maintenance and champerty.

The doctrine of maintenance forbids a third party from supporting a party in legal proceedings in which the third party has no interest, and the doctrine of champerty forbids that third party from taking a share of the damages in return for providing maintenance.

In many common law jurisdictions, such as England and Wales, Australia, New Zealand, Bermuda, some provinces of Canada and the majority of states in the US, commercial funding of litigation by third party litigation funders has been approved by the courts. The application of the doctrines of maintenance and champerty have been restricted, and in some jurisdictions, such as Australia, abolished.

Many third party funders are substantial businesses in their own right, with the first publicly listed third party funder IMF Bentham listing on the Australian Securities Exchange in 2001.

Legislation has now been passed in both Hong Kong and Singapore to allow third party funding for arbitration claims and abolish the doctrines of maintenance and champerty in relation to arbitration and related proceedings.

In the competition between cities and arbitration institutions for a share of the arbitration market, Hong Kong and Singapore were concerned that they would lose market share as arbitration seats if they did not allow third party funding, given the increasing number of funded arbitrations. The funding of litigation per se is still restricted.

Singapore won the race to legislate with its legislation to amend the Civil Law Act, introduced in January this year and in force as of 1 March 2017. The Hong Kong Legislative Council passed legislation in June 2017 to amend the Arbitration Ordinance and Mediation Ordinance. These amendments will not be in force until later this year.

Third party funding

Commercial third party funders provide funding to claimants that cover all or some of the legal costs in pursuing a claim including counsel’s fees, expert’s fees, court or arbitration costs and hearing costs, in return for a share in the proceeds, i.e., the amount of damages awarded or settlement agreed. The funding is provided on a non-recourse basis so that if the claimant is unsuccessful the claimant does not need to repay the third party funder.

Often the third party funder will also provide cover for adverse costs orders and security for costs. The amount of the share of the damages or settlement amount varies depending upon the degree of risk involved, the time at which the funding agreement was entered into, and at what stage any settlement is achieved. Most commercial funders only fund large commercial claims that have good prospects of success.

In Singapore, and soon in Hong Kong, a claimant can obtain funding for an international commercial arbitration proceeding and arbitration-related court proceedings (such as setting aside and enforcement applications). The funder can also fund the mediation of the claim.

Disclosure of funding arrangements

Both Singapore and Hong Kong require that the existence of the third party funding arrangement and name of the funder be disclosed. In Singapore it is the responsibility of the legal practitioner under the Professional Conduct Rules. In Hong Kong it is the responsibility of the funded party to make the disclosure.

In both jurisdictions, disclosure is required at the commencement of the arbitration if the funding agreement was entered into beforehand. If the funding agreement is entered into after the commencement of the arbitration, in Singapore disclosure is required as soon as practicable, and in Hong Kong within 15 days.

Disclosure must be made to the other party and the arbitration tribunal. This is to ensure that any actual or potential conflict of interest involving members of the arbitration tribunal is addressed, for example if a tribunal member is acting as counsel in another matter for a party that is funded by the same funder.

Regulation of the funders

In Singapore the funding needs to come from a “qualifying third party funder”. To qualify, the funder needs to carry on the principal business of funding the costs of third party dispute resolution proceedings, and has a paid up share capital of not less than S$5 million (US$3.6 million) or not less than S$5 million in managed assets.

Hong Kong has taken a different approach with the planned introduction of a code of practice setting out the practices and standards for third party funders to follow. Funding of claims in Hong Kong is not limited to professional funders, although the code of practice may discourage others from funding claims. The code of practice is likely to cover areas such as promotional material, the clarity and terms of funding agreements, capital requirements, monitoring and complaints procedures, and ensuring that funded parties obtain independent legal advice. The Secretary of Justice appoints the advisory body that will issue the code of practice.

In England and Wales, the Association of Litigation Funders administers a Code of Conduct for Litigation Funders. The code requires, among other things, that funders maintain adequate financial resources, behave reasonably, only withdraw funding in specific circumstances, and that funders do not take control of the litigation or settlement negotiations. The Association of Litigation Funders has a complaints procedure for any violation of the code.

Recoverability of costs

One controversial issue internationally is whether the costs of obtaining third party funding should be recoverable by the successful claimant from the losing respondent.

Arbitral tribunals typically have a wide discretion over the award of the costs of the arbitration. Many arbitration rules, including the International Chamber of Commerce (ICC) Rules, Singapore International Arbitration Centre (SIAC) Rules and London Court of International Arbitration (LCIA) Rules allow an arbitral tribunal to decide that all or part of the legal or “other” costs or expenses of a party be paid by another party.

In 2016, the English High Court upheld an ICC award in Essar Oilfields Services Limited v Norscot Rig Management, in which the arbitrator awarded the successful claimant the costs of obtaining litigation funding as part of the costs award. The arbitrator ordered the respondent to pay the claimant the amount that it had to pay the litigation funder under the funding agreement due to the arbitrator’s view that the respondent had set out to financially cripple the claimant. The court held that “other costs” could include the costs of obtaining litigation funding.

By contrast, the Hong Kong International Arbitration Centre (HKIAC) Rules are more proscriptive and only allow a party to claim “the reasonable costs for legal representation and assistance if such costs were claimed during the arbitration”. This is unlikely to cover the costs of obtaining funding.

Insolvency

The courts in Hong Kong and Singapore have recognized that a liquidator or trustee in bankruptcy has the power to enter into agreements to sell and assign a cause of action vested in the insolvent company or bankrupt, including where that sale and assignment is done as part of a funding agreement. This does not offend the doctrines of maintenance and champerty. With the presence of additional funders in Asia, there is likely to be greater use of funding by liquidators or bankruptcy trustees in the future.

Future developments

Some global funders have already opened in Asia and more are in the process of doing so. There is a lot of interest already in the provision of third party funding. Burford Capital announced at the end of June 2017 that it was funding an arbitration seated in Singapore. This is believed to be the first funding arrangement made since the legislation came into force.

Investor-state arbitrations, where a claimant pursues a claim against a state under a bilateral or multilateral investment treaty, are expected to increase in Asia. These claims often involve third party funding of the investor. In contrast to commercial arbitrations, the parties to the arbitration often choose the seat of the arbitration after the dispute arises. The lifting of the prohibition on third party funding of arbitration claims removes a potential barrier to those arbitrations being seated in Singapore or Hong Kong.

While, for now, third party funding in Singapore is limited to arbitration and related proceedings, the legislation in Singapore enables the government to make future regulations to allow third party funding of other types of proceedings, for example proceedings in the Singapore International Commercial Court.

Amanda Lees is an of counsel with Simmons & Simmons JWS in Singapore