INTERNATIONAL ARBITRATION 1/3LY
THIRD - PART Y FUNDING OF DI SPUT ES IN HONG KONG
Third-party funding of arbitration has been in existence for some time in many Western jurisdictions. Up until now, however, it has not been widely used in Asia. Given the popularity of arbitration in Hong Kong and its increasing popularity in the Peoples Republic of China (“PRC”), it may not be long before third-party funders start to look East for claims to fund. In this article, we explore the legality of third-party funding arrangements in Hong Kong and the PRC, and assess the prospects for third-party funding in those two jurisdictions. OVERVIEW OF THIRD-PART Y FUNDING Third-party funding has been described as the “funding of claims by commercial bodies in return for a share of the proceeds”. A third-party funding arrangement usually provides that a third-party funder, who does not otherwise have an interest in the proceedings, pays a party’s legal and other costs of arbitration, in return for a percentage or part of the financial recoveries in arbitration. Normally, the third-party funder will be compensated from the funded party’s net recoveries from the proceedings after deducting agreed costs and expenses. However, if proceedings are unsuccessful, the funded partywill not have to pay any amount to the funder. Third-party fundingmay be provided by a funder who routinely engages in such third-party funding activity, by banks or financial institutions, by individuals or corporations whose primary business is not third-party funding, by a party’s lawyer, or in the formof after the event (ATE) insurance taken by the party. THIRD-PART Y FUNDING IN HONG KONG Under Hong Kong law, the general rule in relation to third-party funding of disputes is that it is not permitted if it amounts to “maintenance and champerty”. Maintenance is the intermeddling of a disinterested party to encourage a lawsuit. Champerty is the “maintenance” of a person (by the third-party funder) in a lawsuit on condition that the subject matter of the action is shared with that person. Traditionally, maintenance and champerty have been prohibited in common law jurisdictions because they are seen as gambling on the outcome of a lawsuit, encouraging frivolous lawsuits and the perversion of justice. With regard to legal practitioners, Hong Kong lawprohibits lawyers fromentering into conditional or contingency fee arrangements. While Hong Kong lawprohibitsmaintenance and champerty, the Hong Kong Courts have, in several cases, upheld third-party funding arrangements provided that there is a proper commercial purpose to the transaction and it does not give rise to a risk of the corruption of the judicial process. The cases where third-party funding arrangements have been considered in Hong Kong appear mostly to have concerned transactions where an insolvent company’s debts have been assigned to a third-partywho has funded the litigation against the company’s debtors. In those cases, the Courts have allowed third-party funding arrangements on the basis that there is a legitimate commercial interest in recovering the company’s debts.
AND THE PEOPLES REPUBL I C OF CHINA
BY RICHARD BELL, PARTNER AND YONG TONG ANG, LEGAL DIRECTOR AT CLYDE & CO LLP
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