In 2020, the elective course titled “International Arbitration Practice” was re-introduced into the PCLL program by popular demand. The content of the course was up-dated to include latest development in arbitration practices in the world. In particular, the topic of “third party funding” was introduced towards the end of the course to teach our practitioners-to-be this new legal development in arbitration in Hong Kong. Third party funding is a relatively new concept in Hong Kong and even practitioners may not be familiar with the concept, let alone its operation in practice. Our PCLL program seeks to bring our students up to speed with the most recent legal development in the region to equip them to best serve their clients in the future.

Third party funding is a means to transfer the financial risks of a legal proceeding from the party to a third party funder. The funder pays the expenses related to a proceeding and in return, obtains part of the damages recovered by the party as its investment return if the party wins. If the party loses, the funder does not have the right to recover any of the money it paid. Depending on the financial terms agreed upon by the party, this usually means the funder will be responsible for the legal fees, expert fees, arbitral tribunal’s fees, other expenses related to the arbitration and even the adverse party costs of the other party should the client lose at the end.

Third party funding was historically prohibited in Hong Kong in arbitration as a result of the common law doctrine of maintenance and champerty. Maintenance occurs when one ‘officiously intermeddles’ in a legal action by maintaining or assisting a party with money (or otherwise) to prosecute or defend the action, when one has neither an interest in the action nor any other motive recognized by the laws justifying such interference. Champerty is a type of maintenance, and occurs when ‘the person maintaining another takes as his reward a portion of the property in dispute’.

While champerty and maintenance continues to be actionable both as crimes and torts in Hong Kong to date in most court proceedings. The exceptions to third party funding in court proceedings in Hong Kong include insolvency cases, which was well established by case law. The Hong Kong courts have confirmed again in Re Patrick Cowley and Lui Yee Man, Joint and Several Liquidators of the Company that a liquidator has the power to negotiate the terms of a funding agreement and court sanction is not required for a liquidator to enter into a third party funding agreement.

As for third party funding in arbitration, it was not until 2017 that the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance Order No. 6 of 2017 (the Amendment Ordinance) was passed, legalising third-party funding of arbitration, mediation and related proceedings in Hong Kong. The Arbitration Ordinance (Cap. 609) has since been amended to expressly provide that the two doctrines no longer apply to arbitration and related court proceedings in Hong Kong.

Similar to other common law jurisdictions, Hong Kong has adopted a light-touch or self-regulating approach towards third-party funding in arbitration. The Code of Practice for Third Party Funding of Arbitration (the “Code”) was issued on 7 December 2018 pursuant to Part 10A of the Arbitration Ordinance to assist with the implementation of the new amendments. It is observed that the Code is similar to the English Code of Conduct for Litigation Funders issued in 2011, which covers funding in both litigation and arbitration. The Code applies to all third-party funders within the definition set out in s. 98J of the Arbitration Ordinance. Section 98S of the Arbitration Ordinance provides that non-compliance with the Code does not, of itself, render any person liable to any judicial or other proceedings. However, the Code is admissible as evidence and any compliance or non-compliance may be taken into account in the relevant decision-making process of the court or tribunal.

Amendment to the HKIAC Rules
Following amendments to the Arbitration Ordinance, the Hong Kong International Arbitration Centre (the “HKIAC”) amended its rules to provide for third party funding in proceedings that it administered. Under the HKIAC 2018 Rules, a funded party must disclose the existence of a funding agreement and the funder’s identity to all parties, the tribunal and HKIAC. The funded party may also disclose arbitration-related information to existing or potential funders. The arbitral tribunal may take the funding arrangement into account when determining the arbitration costs.

Obtaining Funding
Given that third party funding is still relatively new in this area of the world, a lot of practitioners are still unfamiliar with how it works. It is thus important for students to learn about it so that they can advise their clients accordingly when they practise. In reality, third party funders conduct careful due diligence before deciding whether to invest in a dispute. Funders typically focus their due diligence on merits of the case, enforcement strategy, target amount of damages and legal budget required for the case. It is only when the case has strong merits, clear enforcement strategy and a healthy proportion between target amount of damages and legal budget that a funder would consider investing in the case. Due diligence is important because the funder will only recover the amount it invested with investment return if the client is able to recover compensation from the case. Funders often work with legal practitioners to assess the case.

Third party funding is widely used all around the world. It is likely that practitioners working on cross-boarder disputes will have to work with funders at some point. Same as Hong Kong, Singapore also changed its law in 2017 to allow third party funding in arbitration. Singapore subsequently extended the use of third party funding to cases before the Singapore International Commercial Court in 2021. Practitioners and funders alike are optimistic that it is only a matter of time before Hong Kong will also allow third party funding in other types of proceedings.

Ms Irene LEE

Part-time lecturer, School of Law, City University of Hong Kong

General Counsel, Greater China and Southeast Asia, Deminor Recovery Services

Article by Dr. Lauren Yu-Hsin LIN Featured on SCCEI (Stanford Centre on China’s Economy and Institutions) China Briefs

Prof. Virginia HARPER HO’s research cited in the US Securities and Exchange Commission’s Proposal for Corporate Climate Disclosure

CityU Information Day 2022

New Student Orientation 2022

Seminars for Research Assessment Exercise 2026

Jack BURKE and Shaun McCarthy, ‘Should Remote Hearings be Extended Post the Covid-19 Pandemic in Hong Kong and What Could be the Ramifications for Practical Legal Training?’, (2022) 9:1 Journal of International and Comparative Law 155-178.

Julien CHAISSE ‘Toward a Big Bang for the Taxation of the Digitalized Economy: a Business Retrospective, Perspective, and Prospective’, (2022) 41(3) Virginia Tax Review 345-389.

FANG Meng ‘Low-Hanging Fruit’? Direct Supply in China’s Natural Gas Market Reform’, (2022) 15(5) Journal of World Energy Law & Business 1-15. 

HE Tianxiang ‘On the Intellectual Property Cooperation Framework of the Guangdong-Hong Kong-Macau Bay Area’, in Guobin Zhu and Kai Deng (eds.), Legal Development of the Guangdong-Hong Kong-Macau Bay Area – Cooperation and Innovation (pp. 181-191). Joint Publishing, 2022 (何天翔，《粵港澳大灣區知識產權合作框架芻議》，載《粵港澳大灣區法制建設-合作與創新》，朱国斌、鄧凱主編，三聯書店（香港）有限公司，2022 年，第181-191 頁).

Congratulations to Ms LIU Blanche Bo Kay Eufrosina, Year 2 LLB Student

Congratulations to Ms TSOI Cheuk Ling, Year 2 LLB Student