Racing to The Start Line: Singapore & Hong Kong Take Steps To Permit Third Party Funding
We, at Lake Whillans, recently wrote on the evolution of litigation finance around the globe. Parties to arbitrations have played a significant role in that evolution, being some of the earliest adopters of litigation finance (more often called third-party funding in that context) and triggering global competition among centers of international arbitration to embrace third party funding. Recently, the race in Asia has led Hong Kong and Singapore to introduce legislation that would enable the use of third-party funding in arbitrations seated there. Lake Whillans funds litigation and arbitration globally, and we asked Nicholas Lingard, Robert Kirkness and Emily Stennett of Freshfields Bruckhaus Deringer’s international arbitration practice in Asia to detail the recent developments in Hong Kong and Singapore.
Third-party funding is an established feature of international arbitrations seated in many of the world’s leading arbitration centers, including New York, London, Paris and Geneva. Asia is an exception.
While Singapore and Hong Kong rank among the leading five seats for international arbitration globally, and compete for the mantle of Asia’s leading international dispute resolution center, in both jurisdictions third-party funding arrangements are prohibited by the common law torts of “maintenance” (ie, where a non‑interested party provides assistance to a party to proceedings) and “champerty” (ie, the maintenance of an action in return for a share in its proceeds). (There is some uncertainty whether third‑party funding agreements relating to arbitrations taking place in Hong Kong are exempted from the prohibition — but the majority view seems to be that they are not exempt.) As a result, parties arbitrating Singapore and Hong Kong-seated disputes do not have the same financing and risk-allocation options available to them as parties arbitrating disputes in other leading centers. Recent developments in both jurisdictions indicate that is about to change.
Hong Kong — the early frontrunner
In October 2015, Hong Kong’s Law Reform Commission released a public consultation paper proposing amendments to the law to permit third-party funding for arbitration in Hong Kong. One year later, the Commission recommended the introduction of legislation to this effect and, on December 30, 2016, the Arbitration and Mediation Legislation (Third Party Funding) Amendment Bill 2016 (the Hong Kong Bill) was published in the Government Gazette. The Hong Kong Bill had its first reading, ie, its formal introduction to Hong Kong’s Legislative Council, on January 11, 2017. A date for the next step — the so-called second reading, and a vote — has not yet been published.
The Hong Kong Bill (as currently drafted) amends Hong Kong’s Arbitration Ordinance, which sets out the legislative framework for domestic and international arbitrations in Hong Kong, to provide that neither criminal nor civil liability under the doctrines of maintenance, champerty and barratry (the tort of inciting vexatious litigation) attaches to third-party funding of arbitration proceedings. The definition of “arbitration” for the purposes of the third-party funding provisions includes not only arbitrations, but also court, emergency arbitrator or mediation proceedings covered by the Arbitration Ordinance. The new provisions also will apply to the funding of costs and expenses of services in relation to foreign-seated arbitrations that are provided by persons in Hong Kong.
The Hong Kong Bill additionally provides for a code of practice to be introduced (following a further public consultation) setting out certain standards relating to, among other things, the terms of funding agreements (including the degree of control over the proceedings handed to the third-party funder and the third-party funder’s liability for costs), minimum capital requirements for third-party funders and procedures for addressing conflicts of interest. Under the terms of the Hong Kong Bill, parties will also be required to disclose the fact that a funding agreement has been made and the name of the third‑party funder to each party to the arbitration and the arbitral body.
The Hong Kong Bill is expected to complete the remaining stages of the legislative process and enter into force in 2017.
Singapore — catching up for lost time
Singapore — whose Ministry of Law conducted a public consultation on third-party funding in June 2016 — responded swiftly. Following approval by the Singapore Parliament on January 10, 2017, the Civil Law (Amendment) Act 2017 (the Singapore Act), which amends Singapore law to permit third-party funding for certain categories of dispute resolution proceedings, was published in the Government Gazette on February 24, 2017. The Singapore Act will enter into force on March 1, 2017, along with associated regulations (the Civil Law (Third‑Party Funding) Regulations 2017 (the Regulations)) and an amendment to the professional conduct rules for lawyers in Singapore.
The Singapore Act: (a) abolishes the common law torts of maintenance and champerty in Singapore; (b) provides that third-party funding contracts are not contrary to public policy or illegal for certain categories of dispute resolution proceedings; and © amends the Legal Profession Act so that lawyers can assist their clients with third-party funding arrangements as long as the lawyer does not receive a direct financial benefit from the introduction or referral.
The Singapore Act establishes the framework for third-party funding in Singapore. Further detail is contained in the Regulations, including: (a) the full list of criteria that a third-party funder must meet to fund a claim in Singapore; and (b) the categories of dispute resolution proceedings for which third-party funding will be permitted.
The Regulations make clear that only professional funders will be permitted to enter into third‑party funding arrangements in Singapore. They provide that a qualifying third‑party funder must: (a) carry on the “principal business” of funding dispute resolution proceedings (in Singapore or elsewhere); and (b) have a paid‑up share capital or managed assets (as defined in the Regulations) of not less than S$5 million (approximately US$3.6 million at current exchange rates).
As to the permitted categories of dispute resolution proceedings, under the Regulations, third-party funding initially will be limited to international arbitration and related court or mediation proceedings — so, no funding for local litigation for now. However, Indranee Rajah, SC, Singapore’s Senior Minister of State for Law, has indicated that this may be revisited after a period of monitoring the operation of the new legal framework.
New rules applicable to third‑party funding will also be inserted into the existing professional conduct rules for lawyers in Singapore (pursuant to the Legal Profession (Professional Conduct) (Amendment) Rules 2017) as of March 1, 2017. Under the new rules, a legal practitioner conducting dispute resolution proceedings before a court or tribunal must disclose to that court or tribunal, and to every other party to the proceedings: (a) the existence of any third‑party funding contract “related to the costs of those proceedings”; and (b) the identity and address of the relevant third‑party funder. The new provisions also prohibit legal practitioners or law practices from holding financial or other interests in, or receiving commissions, fees or shares of proceeds from, third‑party funders that they have introduced or referred to their clients or that have third‑party funding contracts with any of their clients.
Disclosure of third‑party funding contracts has also been addressed in the Singapore International Arbitration Centre’s new Investment Arbitration Rules, which came into force on January 1, 2017. Under the new rules, an arbitral tribunal expressly is empowered, unless the parties agree otherwise, to order disclosure of the existence of third-party funding arrangements, the identity of the funder and/or, where appropriate, details of the third-party funder’s interest in the outcome of the proceedings. The new Investment Arbitration Rules also permit arbitral tribunals to take into account any third‐party funding arrangements in apportioning the costs of the arbitration and making orders for payment of legal costs. It remains to be seen how these powers will be used in practice.
The steps outlined above are a positive development for international dispute resolution in Asia. Singapore appears likely to be first across the start line, but Hong Kong is expected to follow suit this year. The important point to note is that parties arbitrating Singapore or Hong Kong-seated disputes soon will have the same financing and risk management tools available to them as parties arbitrating in other major international arbitration centers.
Originally published at lakewhillans.com on February 21, 2017.