The Landscape of Litigation Funding in Hong Kong

This is the fourth article in our latest international arbitration series covering the topic of litigation funding across various international jurisdictions. In this piece, Pryderi Diebschlag (Counsel) from our Hong Kong office provides the legal perspective from Hong Kong.

The old common law rules against maintenance and champerty remain in force in Hong Kong, with the result that third-party funding for litigation is not permitted save for certain limited exceptions. However, there have been major developments in the field of arbitration in recent years, with third-party funding and outcome related fee structures (“ORFS”) now permitted.

We mention ORFS in the same breath as third-party funding as they can be seen by clients as different sides of the same coin – they are both methods of hedging the risks of disputes by moving the financing burden off the client’s book and onto either a funder or a lawyer. 

As regards ORFS, Hong Kong continues to demonstrate its pro-arbitration stance and has gone further than many other jurisdictions with respect to the range and flexibility of funding structures which may be utilised.

(1)  Is litigation funding permitted in your jurisdiction?

Save for limited exceptions, litigation funding is contrary to the doctrines of maintenance (which prohibits a third-party from officious intermeddling in litigation in which it has no legitimate interest) and champerty (which prohibits a third party from taking a share of the proceeds of the litigation it has maintained), and are both torts and indictable offences in Hong Kong.¹ Criminal prosecutions are pursued and have resulted in fines and imprisonment.² Further, contracts for such funding are liable to be found unenforceable as against public policy.

However, it is to be emphasised that broad definitions of maintenance and champerty are not enough to find liability. The totality of the facts must be examined to see whether there is an actual risk to the integrity of the court’s processes.³ The exceptions fall into three categories:

• (a) a legitimate “common interest” in the outcome of litigation, including a genuine commercial interest;
• (b) cases involving considerations of access to justice/impecuniosity; and
• (c) miscellaneous exceptions, including insolvency.

Liquidators commonly rely upon the insolvency exception to utilise litigation funding in conjunction with an assignment of a cause of action to the funder.⁴  

(2)  Does this position on litigation funding apply in the same way to arbitration?

Third-party funding for arbitration and related court proceedings has been permitted since 1 February 2019 and ORFS have been permitted in arbitration since 16 December 2022.

Third-party funding for arbitration is regulated by Part 10A of the Arbitration Ordinance (Cap. 609 of the laws of Hong Kong). It sets out a mandatory requirement to notify each party and the tribunal about the commencement and termination of the funding agreement, and expressly prohibits solicitors, barristers and their firms/chambers from acting as funders in cases where they are also representing one of the parties to the arbitration.

As much of the detail of how funders interact with their clients is regulated by the funding agreement itself, the Secretary for Justice published a Code of Practice for Third-Party Funding of Arbitration (the “Code”) on 7 December 2018. The Code endeavours to establish practices and standards as to what should be expected from funders operating in this jurisdiction. It provides, for example, detailed provisions on capital adequacy, conflicts, confidentiality, costs, control, complaints, and grounds for termination of the agreement. One key difference from several other jurisdictions, is that Hong Kong has established an “advisory body” charged with overseeing compliance with the Code, acting under the authority of the Secretary for Justice.⁵  

ORFS are regulated by Part 10B of the Arbitration Ordinance (Cap. 609 of the laws of Hong Kong) and the Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap. 609D of the laws of Hong Kong) which allow lawyers to enter into:

• conditional fee agreements (“CFAs”), i.e. a success fee;
• damages-based agreements (“DBAs”), i.e. a percentage of the outcome; and
• hybrid damages-based agreements (“Hybrid DBAs”), i.e. a mixture of each of the above.

Further, ORFS can be entered into for arbitrations seated in Hong Kong regardless of where the work is done, or for arbitrations seated elsewhere if the work is done in Hong Kong.

While several requirements are imposed by the legislation, of key importance is that under a CFA the level of the success fee (also known as “uplift”) must not exceed 100% of the base or “benchmark” fee that the lawyer would have charged in the absence of a CFA. Similarly, under a DBA, the success fee cannot exceed 50% of the damages/benefit in the event of a successful outcome in the arbitration. 

(3)  Are there any upcoming or proposed rules or regulations in respect of litigation funding that may alter how your jurisdiction approaches litigation funding?

In 2020, third-party funding was described by the courts as “nascent and uncertain” and “a novel area of law” in Hong Kong.⁶ This is largely the result of the courts showing increasing recognition that the prohibition on third-party funding is antiquated and that more needs to be done to alleviate the strains of an often expensive civil justice system, while ensuring that the integrity of the justice system is maintained. However, the courts remain reluctant to relax their approach to maintenance and champerty in the absence of legislative reform. While this has been forthcoming for arbitration, it appears we will need to wait a little longer for litigation funding.

Of more imminent arrival is a Code of Practice for third-party funders of mediation. Such funding is now permitted following the introduction of section 7A of the Mediation Ordinance (Cap. 620 of the laws of Hong Kong), but additional clarity as to what is expected of such funders is awaited by the market.

(4)  Have there been any key decisions or awards?

The landmark decisions in respect of maintenance and champerty are the Court of Final Appeal decisions of Unruh and Winnie Lo mentioned above. However, with regard to the exceptions which permit litigation funding, there have been three cases over recent years which stand out:

• (a) In Raafat Imam,⁷ the plaintiff was suing for breach of a consultancy agreement, so sought a declaration from the court that he be permitted to enter into a third-party funding agreement. It was seen as a test case for the courts’ approach to funding in the modern day. The court reiterated that the access to justice exception is intended to avoid good cases being stifled by a lack of funding. The exception is not intended to be used, as in this case, to assist a litigant to access their choice of solicitor/barrister or to otherwise improve the strength of a legal team that could be deployed. 
• (b) In Re A,⁸ the court was similarly asked for a declaration of non-criminality, albeit in the context of a matrimonial dispute. The Hon. Marlene Ng J embarked upon an in-depth analysis of the current position in Hong Kong, ultimately concluding that impecuniosity must be shown in order to avail oneself of the “access to justice” exception.
• (c) In Re Patrick Cowley,⁹ it was confirmed that a liquidator’s statutory authority to “do all things as may be necessary for winding-up the affairs of the company and distributing its assets” extends to entering into funding agreements, with or without an assignment of the chose in action to the funder. Further, a liquidator of a company in liquidation does not require the court’s sanction in order to do so.

(5)  What is the current landscape of litigation funding in your jurisdiction – is there a notable market and are there any litigation funders well established in your jurisdiction?

Third-party funding is still in its infancy in Hong Kong, although it is undoubtedly on the rise. The growth can be seen clearly from the statistics published by the Hong Kong International Arbitration Centre (the “HKIAC”). In 2021, the HKIAC received disclosures of third-party funding in 6 cases, whereas by 2022, that figure had risen to 74 cases (around 29% of the total case load).

Many funders are active in the jurisdiction, including Burford Capital and Deminor, amongst others. If you require advice in this area, please do not hesitate to reach out to the author or your usual Clyde & Co contact.

This series will continue next week with the perspective from Germany.

^{1 Unruh v Seeberger [2007] HKCFA 9, Winnie Lo v HKSAR [2012] HKCFA 23}

^{2 See for example HKSAR v Mui Kwok Keung [2013] HKCA 599}

^{3 Unruh v Seeberger [2007] HKCFA 9, 99-104}

^{4 See for example Re Cyberworks Audio Video Technology Ltd [2010] HKCFI 404}

^{5 However, despite the establishment of the advisory body, non-compliance with the Code does not carry direct liability.}

^{6 Re A [2020] HKCFI 493}

^{7 Raafat Imam v Life (China) Co Ltd and Others [2018] HKCFI 1852}

^{8 Re A [2020] HKCFI 493}

^{9 Re Patrick Cowley and Lui Yee Man, Joint and Several Liquidators of the Company [2020] HKCFI 922}