Hong Kong’s lawmakers kicked off the process of permitting the third-party funding of arbitration as far back as 2013, even then recognising the anachronistic nature of the prohibition. It has taken nearly six years for us to reach this point, but from February 1st the funding of both domestic and international arbitration is legally permitted in Hong Kong.
Rather than focus on the pace of change though, today should be celebrated; claimants in the territory can now avail themselves of the many benefits of arbitration funding, switched-on law firms can use it in their business development efforts and to ensure regular payment of fees, and Hong Kong itself will no longer be at a competitive disadvantage to other major global arbitral venues, where funding has been permitted and utilised for some time.
Litigation and arbitration funding is now an established and unremarkable feature in many common law and civil law jurisdictions across the world. The ever-increasing utilisation and understanding of how funding works has led to a real appreciation of its benefits and a realisation that many of the fears around funding are unfounded.
The Benefits of Funding
Initially, third-party-funding was seen as a way of levelling the playing field in ‘David v Goliath’ scenarios where a relatively cash-constrained claimant with a strong claim was in dispute with a much better resourced defendant. While this provision of access to justice is still a key benefit of funding, well-resourced corporate claimants are increasingly seeing funding as a highly effective risk-management tool that can reduce the need to have working capital tied up for several years and has an immediately positive impact on the bottom line.
Under the new regime, disclosure of a third party’s involvement in financing an arbitration is mandatory. As a professional funder with significant resources, Woodsford is comfortable with the disclosure of its involvement. Indeed, we often find that once a defendant knows that we have backed a claim, serious settlement discussions ensue. The knowledge that the claimant is fully resourced and backed by a team of world-class lawyers who have taken an objective and dispassionate view of the case and decided to make a (potentially) multi-million dollar investment on a non-recourse basis, sends a very powerful message to the defendant.
From a cost-benefit analysis, it generally makes sense for a claimant to submit its case to a funder such as Woodsford for review. Funders do not charge an application fee to evaluate a funding opportunity so there is zero out-of-pocket cost and there can be many material benefits to both the claimant and its lawyers of having a matter independently reviewed.
Neither Hong Kong nor regional rival Singapore, where funding was permitted last year, has yet embarked upon a comprehensive liberalisation of their funding regimes. Their reforms, for the time being at least, only permit litigation funding for arbitration, and it remains prohibited in domestic litigation save in limited circumstances. However, assuming no major problems are encountered with the funding of international arbitration, it is likely that further liberalisation will occur, which will allow litigation funding to be used to support claims brought before the domestic Hong Kong and Singaporean courts. This gradual introduction of litigation funding is unlikely to hinder its success in Hong Kong and Singapore, as the higher value disputes in these jurisdictions, which are generally the more fundable propositions, tend to be subject to arbitration rather than domestic litigation.
Before the recent reforms, Hong Kong was in danger of being ‘left behind’ and seen as a less appealing venue for arbitration. However, with the barriers to funding in Hong Kong being dismantled, it is likely that it will become an increasingly popular venue for arbitration in the years to come.
Today’s change means that, an Asian-based corporate that may have opted to have its arbitration heard in a venue where funding has long been permitted, such as London Paris or more recently Singapore, now may prefer to select Hong Kong as its venue of choice. We do not anticipate an avalanche of funded cases, but rather a slow and steady take-up as we have seen in other jurisdictions which have liberalised their rules.