Third-party funding in the Asia-Pacific region

In summary

This chapter provides an overview of the third-party funding regime in key arbitration hubs within the Asia-Pacific region.

Discussion points

• Recent trends and developments of the third-party funding regime in the region.
• Comparing key regulations on third-party funding arrangements in major arbitration hubs in the Asia-Pacific region, including Australia, Hong Kong and Singapore.

Referenced in this article

• The Corporation Amendment Regulation (No 6) 2012.
• The Australian Securities and Investments Commission Regulatory Guide 248.
• The Arbitration and Mediation Legislation (Third-Party Funding) (Amendment) Ordinance 2017.
• The Code of Practice for Third-Party Funding of Arbitration issued by the Hong Kong Department of Justice.
• The Civil Law Act (Chapter 43).
• The Civil Law (Third-Party Funding) Regulations 2017.
• The Legal Profession Act (Chapter 161).
• The Legal Profession (Professional Conduct) Rules 2015.
• Guidance Note 10.1.1 on Third-Party Funding issued by the Law Society of Singapore.
• Practice Note on Arbitrator Conduct in Cases Involving External Funding issued by the SIAC.

Third-party funding broadly refers to a financing arrangement whereby the legal costs and expenses of a party (and in some arrangements, the opposite party’s costs if the funded party is so ordered) are funded by a third party that is not party to the dispute. This is normally done in exchange for a financial reward of an agreed share of any favourable award or settlement. The funded cases are usually those being adjudicated at a well-established and reliable forum with a realistic claim value and good prospects of success. Further, the opposing party should be both solvent and have assets sufficient to meet any damages award in jurisdictions where enforcement will not be problematic.

Within the Asia-Pacific region, Australia has a mature third-party funding market, while for the rest of the region the market is still relatively new and growing. Nevertheless, the past few years have seen significant developments and the landscape is changing.

In this chapter, we discuss and compare the recent trends in and development of the third-party funding regime in major dispute forums within the region. In general, the trend shows that third-party funding regimes in the region usually take a light touch and a self-regulating approach, focusing on regulating third-party funders, managing conflict of interests, governing the disclosure of the third-party funding arrangement and preventing undue control or influence by the third-party funder in the arbitration.

Australia

Australia has a home-grown, sophisticated third-party funding market, with relatively more liberal regulations towards third-party funding in both litigation and arbitration proceedings.^[1] The benefits of external funding to dispute resolutions have been recognised by the Australian courts in the context of cost and efficiency, even in a scenario where the claimant is not in a disadvantaged position to invoke policy considerations of access to justice.^[2]

According to recent statistics, there are about 25 active litigation funders in the Australian market,^[3] with IMF Bentham being the world’s first publicly listed company on the Australian Securities Exchange in 2001. The range of third-party funding products is also increasingly varied, offering diverse forms of funding methods (eg, portfolio funding and syndication). There has also been a recent trend for major law firms to partner with third-party funders to offer funding arrangements to clients.

There is no formal regulation of third-party funding in Australia and the regulatory regime has evolved incrementally through legislation and court decisions from as early as the mid-1990s, subsequent to the permission of insolvency practitioners to enter into contracts to finance litigation,^[4] which later expanded into class actions.

Maintenance and champerty were abolished as a crime and as a tort by legislation in Victoria, New South Wales, South Australia and the Australian Capital Territory.^[5] However, the underlying policy was retained and a contract could still be treated as contrary to public policy if it was found to be in aid of maintenance or champerty. Queensland, Western Australia, Tasmania^[6] and the Northern Territory have yet to abolish the criminal and civil liability of maintenance and champerty by legislation.

In 2006, the landmark case of Campbells Cash and Carry Pty Limited v Fostif Pty Limited^[7] granted judicial legitimacy to a third-party funding arrangement, clearly stating that there was no broad public policy against litigation funding agreements and the only reason to prohibit it was to prevent corruption of court process. Since Fostif, the third-party funding market in Australia has grown steadily.

The key regulations on third-party funding in Australia can be summarised as follows:

• Licensing – Third-party funders in Australia are free from mandatory licensing, financial disclosure requirements, reporting obligations and prudential supervision unless they are listed on the Australian Securities Exchange. There is no regulation for capital adequacy for third-party funders in Australia. Third-party funders are nonetheless subject to consumer protection under the Australian Securities and Investments Commission Act 2001 against unconscionable, misleading or deceptive conduct and false or misleading representations.
• Conflict of interest – The Corporations Regulation 2001, as amended by the Corporations Amendment Regulation (No 6) 2012, requires that a third-party funder demonstrate through documentation of written procedures that it has adequate practices for managing a conflict of interest that may arise. Third-party funders are also subject to the Australian Securities and Investments Commission Regulatory Guide 248, which sets out the requirements for funders to have in place and follow continuous robust arrangements for addressing potential, actual or perceived conflicts of interest including the disclosure of conflicts of interest to funded parties, oversight by senior management and requirements for any settlement before a proceeding is issued to be approved by counsel (or senior counsel).
• Control by third-party funders – The influence and control that the third-party funder may have on the conduct of the proceedings is identified as a clear potential conflict of interest under the Australian Securities and Investments Commission Regulatory Guide 248, which must be properly disclosed and managed.
• Disclosure – In general, a funding agreement for arbitration does not need to be disclosed to the opposing party or tribunal.
• Legal fees arrangements – Australian law firms are not permitted to enter into contingency fee arrangements for all types of legal service and legal action^[8] (ie, agreement for legal fees to be calculated by reference of any award or settlement or the value of any property that may be recovered is prohibited). However, conditional cost agreements are permitted where the payment of some or all legal costs is conditional on the successful outcome of the matter to which those cost relate.

On 24 January 2019, the Australian Law Reform Commission’s report ‘Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders’^[9] was put forward in the Australian Parliament. Even though the report focuses primarily on third-party litigation funding for class actions, it also contains recommendations on regulations for third-party funders and the management of conflict of interest, which could affect third-party funding for arbitrations in Australia.

Hong Kong

In Hong Kong, the government passed comprehensive legislations on third-party funding for arbitration in 2017 to bolster and uphold its status as a dispute resolution centre for international arbitration after the public expressed overwhelming support for the legislation.^[10]

On 1 February 2019, the key provisions (except for those related to third-party funding of mediation) of the Arbitration and Mediation Legislation (Third-Party Funding) (Amendment) Ordinance 2017 entered full operation. The amendments to the Arbitration Ordinance (Cap 609) unequivocally allow third-party funding for arbitrations in Hong Kong, which go unprohibited by common law doctrines such as maintenance and champerty.^[11] The amendments apply to Hong Kong arbitrations that are conducted within or outside Hong Kong.^[12]

The third-party funding regime for arbitration in Hong Kong is mainly governed by:

• the Arbitration Ordinance (as amended); and
• the Code of Practice for Third-Party Funding of Arbitration.^[13]

Compliance with the Code is overseen by an advisory body consisting of three senior Hong Kong lawyers. Even though it is not part of the legislation, failure to comply with the Code can be used as evidence in relevant court proceedings (eg, disputes arising from the funding agreements).

The key regulations for third-party funding can be summarised as follows:

• Capital requirement – No licensing is required, but a third-party funder must:
  • maintain capacity to pay all its debts and aggregate funding liabilities for a minimum of 36 months; and
  • maintain access to a minimum of HK$20 million of capital^[14] and furnish its audited financial statements or provide reasonable evidence that it can satisfy the requirement on capital adequacy to the advisory board.
• Conflict of interest – A third-party funder must maintain effective procedures to identify and manage conflicts of interest.^[15] A lawyer who, in the course of the legal practice, acts for any party in relation to the arbitration, cannot be a funder of such arbitration.^[16]
• Control by third-party funders – The third-party funding agreement should stipulate that the third-party funder will not seek to influence the funded party or the funded party’s legal representative to give control or conduct of the arbitration to the third-party funder except to the extent permitted by law.^[17]
• Mandatory complaints procedure – The third-party funder must maintain an effective procedure for addressing complaints against it and submit annual returns to the advisory body reporting any complaints.^[18]
• Disclosure – In contrast with the requirements in Singapore, the disclosure obligation is placed on the funded party rather than the lawyer. The funded party must give written notice of:
  • the existence of the third-party funding agreement; and
  • the name of the third-party funder.
• Such disclosure must be made on the commencement of the arbitration if the third-party funding agreement is made on or before the commencement of arbitration and within 15 days after the third-party funding agreement is made if arbitration is commenced.^[19] The funded party must also give written notice if the third-party funding agreement ends.^[20] Article 44 of the HKIAC Administered Arbitration Rules 2018 contains detailed requirements for disclosure of third-party funding arrangements.
• Legal fees arrangement – Law firms in Hong Kong cannot enter into a conditional or contingency fee arrangement in contentious matters.^[21]

The self-regulating approach adopted by the Hong Kong government was intended to allow the third-party funding market to develop and is no doubt drawing from the experience of Australia. In contrast to the Australian approach, however, emphasis is placed on the disclosure requirement and transparency is seen to mitigate any risks for conflict of interest.

The regime will be reviewed by the advisory body after three years to see whether there is a need to further relax or tighten the code of practice and consider whether it is appropriate to give power to arbitral tribunals to award costs against third-party funders.^[22]

Singapore

On 10 January 2017, the Civil Law (Amendment) Bill (38/2016) was passed by the Singaporean Parliament, which abolishes the torts of maintenance and champerty and expressly allows third-party funding for arbitration in Singapore. The new regime applies to international arbitration, court proceedings and mediation proceedings arising out of or in any way connected to international arbitration, applications for stay of proceedings in favour of arbitration, applications to enforce an arbitration agreement and arbitral awards. The Bill was published and entered full effect on 1 March 2017.

The legislations and regulations forming Singapore’s third-party funding regime include:

• the Civil Law Act (Chapter 43);
• the Civil Law (Third-Party Funding) Regulations 2017;
• the Legal Profession Act (Chapter 161); and
• the Legal Profession (Professional Conduct) Rules 2015.

These legal provisions are supplemented by the following practice notes and guidelines – although not mandatory, they are the result of significant input from the arbitration community and carry significant weight:

• Guidance Note 10.1.1 on Third-Party Funding issued by the Law Society of Singapore, which sets out best practices for lawyers advising on third-party funding;^[23]
• Guidelines for Third-Party Funders issued by the Singapore Institute of Arbitrators, which deal with issues such as pre-funding considerations, preparation of funding contracts, financial obligations, confidentiality and privilege, conflicts of interest and control of proceedings, withdrawal of funding and disclosure of funding;^[24] and
• Practice Note on Arbitrator Conduct in Cases Involving External Funding issued by the SIAC, which contains standards of practice and conduct in areas such as disclosure and costs.^[25]

The key regulations for third-party funding are summarised as follows:

• Capital requirement – A third-party funder must have a paid-up share capital or managed assets of not less than S$5 million and must be “a person who carries on the business of funding all or part of the costs of dispute resolution proceedings to which the person is not a party”.^[26]
• Conflict of interest – The funding agreement is required to recognise that lawyers owe duties to the client and not the funder, and should allow the lawyer to continue to act solely for the client (not the funder) should any conflict of interest arise.^[27] The Guidelines for Third-Party Funders issued by the Singapore Institute of Arbitrators require third-party funders to be satisfied that the funding will not give rise to conflict of interest. Legal practitioners and law practices are prohibited from holding any share or ownership interest in a third-party funder that they have referred to clients and must not receive any commission, fee or share or proceeds from a funder.^[28] However, lawyers may introduce or refer a third-party funder to their clients, as long as they do not receive any direct financial benefit from the introduction or referral.
• Control by third-party funders – The funding agreement is required to set out the third-party funder’s level of involvement in decision making and the dispute resolution procedures should the funder and claimant disagree.^[29]
• Disclosure – Legal practitioners (including Singapore solicitors and registered foreign lawyers) bound by the Legal Profession (Professional Conduct) Rules 2015, when conducting any dispute resolution proceedings before a court or tribunal, must disclose the existence of any third-party funding contract and the identity of any third-party funder to the court or tribunal and every party to the proceedings.^[30] The disclosure must be made at the commencement of the proceeding if the third-party funding contract was made before the date of commencement, or as soon as practicable thereafter if the third-party funding contract is entered on or after the commencement of the proceedings.^[31] According to the Practice Note on Arbitrator Conduct in Cases Involving External Funding issued by the SIAC, arbitrators have the power to order the disclosure of the existence of third-party funding, including details of the funder’s interest in the outcome of the proceedings. As the disclosure obligation is placed on counsel bound by the Legal Profession (Professional Conduct) Rules 2015, unregistered foreign counsel not bound by the rules may escape disclosure requirements despite acting for parties in Singapore-seated arbitrations.
• Legal fees arrangement – All lawyers registered under the Legal Profession Act are prohibited from entering into any conditional or contingency fee arrangement under the Legal Profession (Professional Conduct) Rules 2015.^[32]

Since Singapore has opened its doors to third-party funding in 2017, such funding has become increasingly common for international arbitrations in Singapore and many international third-party funders have set up a presence there.

In October 2019, the Singapore Ministry of Law announced that it has decided to extend third-party funding to domestic arbitration and are seriously considering the introduction of conditional fee arrangements for domestic and international arbitrations.^[33]

A snapshot of other key jurisdictions in the region

For the rest of the region, the market for third-party funding is nascent and arrangements are uncommon. Without comprehensive legislation and case law, whether third-party funding is permitted for arbitration is sometimes unclear.

The third-party funding market in the Asia-Pacific region is still yet to fully develop. However, given the large and growing number of arbitration cases in the region, the escalating costs of the arbitral process and competition for a bigger market share of international arbitration, it is expected that the funding market and regulatory regime will continue to evolve to provide the necessary support.

Notes

^[1] Minister for Transport for Western Australia v Civcon Pty Ltd (in Liq) ([2003] WASC 99), which dealt with the Western Australian Commercial Arbitration Act. Master Sanderson made no distinction between the principles governing third-party funding of arbitration and the principles that would apply to such funding of litigation.

^[2] QPSX Ltd v Ericsson Australia Pty Ltd (No 3) ([2005] FCA 933).

^[3] Victorian Law Reform Commission, Access to Justice – Litigation Funding and Group Proceedings, Consultation Paper, July 2017, para. 2.71–2.72, available at: http://lawreform.vic.gov.au/sites/default/files/VLRC_Litigation_Funding_and_Group_Proceedings_Consultation_Paper_for_web.pdf.

^[4] See, for example, Jones v Great Southern Ltd (in liq) ([2012] FCA 807).

^[5] The Abolition of Obsolete Offences Act 1969 (Vic), the Crimes Act 1900 (NSW), sch 3; the Civil Liability Act 2002 (NSW), sch 2; the Criminal Law Consolidation Act 1935 (SA), sch 11; and the Civil Law (Wrongs) Act 2002 (ACT), s 221.

^[6] Tasmania has abolished champerty and maintenance as torts but not as crime. The Civil Liability Act 2002 (Tas).

^[7] [2006] HCA 41.

^[8] The Legal Profession Act 2006 (ACT), s 285; the Legal Profession Uniform Law (NSW), s 183; the Legal Profession Act (NT), s 320; the Legal Profession Act 2007 (Qld), s 325; the Legal Practitioners Act 1981 (SA), sch 3, cl 27(1); the Legal Profession Act 2007 (Tas), s 309; the Legal Profession Uniform Law Application Act 2014 (Vic) sch 1, cl 183; and the Legal Profession Act 2008 (WA), s 285.

^[9] Australian Law Reform Commission, ‘Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders’, December 2018. Available at www.alrc.gov.au/publication/integrity-fairness-and-efficiency-an-inquiry-into-class-action-proceedings-and-third-party-litigation-funders-alrc-report-134/.

^[10] Final Report on Third-Party Funding for Arbitration, October 2016, issued by the Law Reform Commission. Available at https://www.hkreform.gov.hk/en/docs/rtpf_e.pdf.

^[11] The Arbitration Ordinance, s 98E.

^[12] The Arbitration Ordinance, s 98N.

^[13] The Hong Kong Department of Justice, the Code of Practice for Third-Party Funding of Arbitration, 7 December 2019. Available at www.info.gov.hk/gia/general/201812/07/P2018120700601.htm.

^[14] The Code of Practice for Third-Party Funding of Arbitration, para. 2.5.

^[15] The Code of Practice for Third-Party Funding of Arbitration, paras. 2.5–2.7.

^[16] The Arbitration Ordinance, s 98O.

^[17] The Code of Practice for Third-Party Funding of Arbitration, para. 2.9.

^[18] The Code of Practice for Third-Party Funding of Arbitration, paras. 2.18 and 2.19.

^[19] The Arbitration Ordinance, s 98U.

^[20] The Arbitration Ordinance, s 98V.

^[21] The Legal Practitioners Ordinance (Cap. 159), s 64(1)(b); and the Solicitors Guide to Professional Conduct.

^[22] ‘Face to face with Teresa Cheng Yeuk-wah GBS SC JP Secretary for Justice for Hong Kong’, Hong Kong Lawyer [2019] HKL 266.

^[23] The Law Society of Singapore, Guidance Note 10.1.1 on Third-Party Funding, 25 April 2017. Available at https://app.mlaw.gov.sg/files/Council_GN_Third_Party_Funding.pdf/.

^[24] SIArb Guidelines for Third-Party Funders, 18 May 2017. Available at www.siarb.org.sg/images/SIArb-TPF-Guidelines-2017_final18-May-2017.pdf.

^[25] SIAC Practice Note PN-01/17 on Arbitration Conduct in Cases Involving External Funding, 31 March 2017. Available at http://www.siac.org.sg/images/stories/articles/rules/Third%20Party%20Funding%20Practice%20Note%2031%20March%202017.pdf.

^[26] The Civil Law (Third-Party Funding) Regulations 2017, Regulation 4(1).

^[27] The Law Society of Singapore, Guidance Note 10.1.1, Section C-3.

^[28] The Legal Profession (Professional Conduct) Rules 2015, Rule 49B.

^[29] The Law Society of Singapore, Guidance Note 10.1.1, Section C-4; Guidelines for Third-Party Funders issued by the Singapore Institute of Arbitrators, paras 3.1.7 and 6.2.3.

^[30] The Legal Profession (Professional Conduct) Rules 2015, Rule 49A(1).

^[31] Rule 49A of the Legal Profession (Professional Conduct) Rules 2015.

^[32] The Legal Profession (Professional Conduct) Rules s 18.

^[33] Speech by Minister (Law and Home Affairs) K Shanmugam at the Opening Ceremony of Law Society at Maxwell Chamber Suites on 10 October 2019. Transcript available at www.mlaw.gov.sg/news/speeches/speech-by-minister-k-shanmugam-at-opening-ceremony-of-lawsoc-at-maxwell-chambers-suites.

^[34] The Measures for the Administration on Lawyers’ Fees issued by the National Development and Reform Commission and the Ministry of Justice on 13 April 2006.

^[35] Passarilal Mannolal v Mst Chuttanbai (AIR 1958 MP 417).

^[36] Bar Council of India Rules, Rule 20.

^[37] Law 18, 2003.

^[38] James Greenland ‘Seven litigation funding services in NZ’, 5 May 2016, New Zealand Law Society. Available at http://www.lawsociety.org.nz/news-and-communications/latest-news/news/seven-litigation-funding-services-in-nz.

^[39] Article 72 and Article 73 of Attorneys Act.

^[40] Basic Rules on the Duties of Practicing Attorneys.

^[41] Article 6 of the Trust Act.

^[42] Article 2 of the Attorney-at-Law Act.