Reed Smith In-depth

The Hong Kong government has formally published the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Bill (the Bill), which was introduced into the Legislative Council on 30 March 2022 and is expected to pass into law this year. When enacted, the Bill will provide for the validity and enforceability of outcome related fee structures (ORFS) and remove the existing prohibitions on the use of ORFS by Hong Kong lawyers acting for their clients in arbitration seated in and outside Hong Kong.

Current legal position

Following legislative amendments to the Arbitration Ordinance (Cap. 609) (the AO) that came into effect in 2019, third parties are permitted to fund arbitration proceedings seated in Hong Kong and work done by lawyers in Hong Kong on arbitrations seated outside Hong Kong. However, section 98O of the AO expressly provides that the third-party funding regime in Hong Kong does not apply to funding to a party by a lawyer who acts for any party to the arbitration.

The Bill

Types of ORFS agreements

The Bill, which is based on the recommendations set out in a report by the Law Reform Commission of Hong Kong published in December 2021, will add a new Part 10B into the AO to provide for the validity and enforceability of three types of ORFS agreements made between a client and its lawyer, namely (i) conditional fee agreements; (ii) damages-based agreements; and (iii) hybrid damages-based agreements. Under the Bill, such agreements are not prohibited by the common law doctrines of maintenance, champerty and barratry.

A conditional fee agreement is an agreement whereby the client agrees to pay the lawyer a success fee in the event of a successful outcome for the client in the matter.

A damages-based agreement is an agreement under which the lawyer only receives payment if the client obtains a financial benefit in the matter, and such payment is calculated by reference to the financial benefit, such as a percentage of a monetary sum awarded to the client.

A hybrid damages-based agreement is an agreement whereby the client agrees to pay to the lawyer not only a fee (which is usually discounted) for the legal services rendered by the lawyer during the course of the matter but also an additional fee in the event that the client obtains a financial benefit.