On 12 October 2016, the Law Reform Commission (“LRC”) released its Final Report on Third Party Funding for Arbitration (the “Final Report”) recommending that the Hong Kong Arbitration Ordinance (Cap. 609) be amended to provide that the common law doctrines of maintenance and champerty do not apply to third party funding of arbitration and associated proceedings under the Arbitration Ordinance (emergency arbitrator proceedings, mediation and court proceedings under the Arbitration Ordinance). In 2007, the Court of Final Appeal had left open the question of their application to arbitration, notwithstanding their clear application to litigation save in three exceptional areas (see Unruh v Seeberger (2007) 10 HKCFAR 31).
Among other things, the LRC recommended that the proposed amendments of the law apply also to the funding of services provided in Hong Kong for arbitrations taking place outside Hong Kong. However, third party funding provided either directly or indirectly by a person practising law or providing legal services should not be permitted to avoid conflicts of interest by lawyers in serving their clients.
The LRC also recommended that appropriate standards apply to the provision of third party funding in Hong Kong, proposing the adoption of a "light touch" regulatory approach for an initial period of three years. Third party funders funding arbitration in Hong Kong should comply with a Code of Practice (the "Code") to be issued by a body authorised under the Arbitration Ordinance after public consultation setting out the standards (including ethical and financial) that they should comply with.
The LRC recommended that the Advisory Committee on the Promotion of Arbitration be nominated by the Secretary for Justice to be the Advisory Body under the Arbitration Ordinance to monitor the conduct of third party funding for arbitration and the implementation of the Code, and to liaise with stakeholders. The Advisory Body should issue a report reviewing the Code’s operation three years after it has come into effect, and make recommendations as to the updating of the ethical and financial standards contained in it.
The Final Report followed three years of work by the LRC’s Subcommittee on Third Party Funding for Arbitration, including its publication of a Consultation Paper in October 2015, and consideration of the public’s 73 submissions received in response to it. The public’s responses were taken into account in formulating the LRC’s recommendations in the Final Report.
The LRC concluded that the proposed reforms are necessary to maintain and enhance Hong Kong's competitive position as an international arbitration centre and to serve users of arbitration.
The Final Report includes in its Appendix 1 a set of draft proposed amendments to the Arbitration Ordinance to implement the LRC’s Recommendations in the Final Report.
The LRC also recommended that consideration be given as to whether the non-application of the common law principles of maintenance and champerty be extended to mediation within the scope of the Mediation Ordinance (Cap. 620).
If the law is revised as the LRC recommends, lawyers will likely need to advise their clients of the possible option of seeking third party funding for arbitration and related proceedings. Among the LRC’s recommendations is that the professional conduct rules applicable to barristers, solicitors, and foreign registered lawyers be amended to expressly state the terms and conditions upon which such lawyers may represent parties in Arbitrations and related court proceedings funded by Third Party Funders. It will be important for lawyers to review these and comply with them.