Hong Kong has introduced a legal framework for third-party funding in arbitration, marking a significant development in commercial dispute resolution in the region. This article outlines the regime governing TPF in Hong Kong, its historical background and how it compares to other leading arbitral jurisdictions in Asia.
Historically, the doctrines of maintenance and champerty in common law prohibited third-party funding in both litigation and arbitration. Maintenance referred to the act of a third party intermeddling in a lawsuit in which they had no interest. At the same time, champerty involved agreements where a third party financed litigation in exchange for a share of the proceeds. These doctrines were initially intended to prevent the commercialisation of legal actions and to curb meddling in court matters for personal gain. While many jurisdictions have abolished these doctrines, they continued to pose challenges in Hong Kong until recent reforms.
Hong Kong faced uncertainty regarding the application of these doctrines to arbitration until the law was reformed in 2018. Prior to that, court decisions created confusion. The case <span class="news-text_italic-underline">Cannoway Consultants Ltd v Kenworth Engineering Ltd (1994)</span> suggested that champerty did not apply to arbitration, while <span class="news-text_italic-underline">Unruh v Seeberger (2007)</span> left the issue unresolved. In response to this uncertainty, the Hong Kong Law Reform Commission (“<span class="news-text_medium">LRC</span>”) conducted a review of TPF in arbitration. Following public consultation, the LRC recommended that TPF should be expressly permitted in arbitration, subject to certain safeguards.
The LRC’s recommendations were incorporated into the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016, which passed into law on 23 June 2017. The amendments to the Arbitration Ordinance (AO) provided a clear legal basis for TPF in Hong Kong, with the relevant provisions coming into effect on 1 February 2019.
Under the current legal framework, third-party funding is permitted for arbitration proceedings seated in Hong Kong. However, the system incorporates several safeguards to ensure ethical and financial responsibility among funders. These safeguards are outlined in the Code of Practice for Third-Party Funding of Arbitration, which funders must adhere to.
One key requirement is the obligation to disclose the funding arrangement to the other party and the tribunal at the outset of the arbitration. Funders are also required to maintain adequate capital and financial resources and they must establish procedures to manage potential conflicts of interest. Furthermore, funders cannot control the arbitration or interfere with the funded party’s legal strategy.
The law also includes provisions on confidentiality, ensuring that the strict confidentiality obligations governing arbitration proceedings do not extend to TPF disclosures. Importantly, while the tribunal has no power to make an adverse costs order against a third-party funder, the court retains the ability to do so.
Hong Kong's TPF regime stands out in Asia as one of the more developed systems for funding arbitration. While some other jurisdictions, like Singapore, have also established frameworks for TPF, Hong Kong’s comprehensive regulations, which include a detailed Code of Practice, provide clear guidelines for the conduct of third-party funders. These measures have positioned Hong Kong as a leading arbitration and dispute resolution jurisdiction in Asia.
In addition to TPF, Hong Kong has also introduced the concept of outcome-related fee structures (“ORFSA”) for arbitration, effective from 16 December 2022. This allows lawyers to offer conditional fee agreements, damages-based agreements and hybrid agreements in arbitration, providing another option for managing arbitration costs. Unlike TPF, ORFSA agreements do not involve third-party funders, but they offer clients flexibility in how they manage the costs of their arbitration.
The TPF regime in Hong Kong has evolved significantly, making it a more attractive jurisdiction for arbitration funding. With clear regulations, ethical standards and financial safeguards, Hong Kong offers a robust framework for third-party funding in arbitration. This development strengthens Hong Kong’s position as a global arbitration hub, encouraging both local and international parties to use arbitration as an effective means of resolving commercial disputes.
