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.
Scope of the Bill
In addition to usual arbitration proceedings, “arbitration” is defined to include certain proceedings under the AO, namely court proceedings, proceedings before an emergency arbitrator and mediation proceedings. It is worth noting that the Bill applies to arbitration seated in and outside Hong Kong, does not apply to civil or criminal proceedings in Hong Kong. In other words, lawyers in Hong Kong will still be prohibited from adopting ORFS arrangements in litigation.
“Lawyer” is broadly defined as barristers, solicitors and persons who are qualified to practise the law of a jurisdiction other than Hong Kong, including foreign lawyers.
The Bill also expressly provides that ORFS agreements in relation to personal injuries claims are void and unenforceable, although such claims are rarely seen in arbitration.
Other safeguards
Apart from setting out certain exceptions to the general confidentiality obligations under the AO, the Bill requires disclosure regarding the existence of an ORFS agreement as well as the end of such agreement in order to minimise the possibility that conflicts of interest will be the subject of a challenge to arbitration proceedings. In particular, where an ORFS agreement has been entered into between a client and its lawyer, the lawyer must give written notice to each other party and the arbitration body of (i) the fact that such agreement has been made and (ii) the name of the client.
Significantly, save for exceptional circumstances, an arbitral tribunal may not order a losing party to pay the costs of the winning party that are in excess of the amount of fees the winning party would have incurred if it had not entered into an ORFS agreement with its lawyer. This reflects the costs indemnity rule, which in general requires costs incurred by a party to be reasonable, as well as the fact that it would be unfair to require a losing party to bear the additional costs consequences arising from an ORFS agreement over which it has no control.
Comments
Most of the major arbitral seats have already embraced the concept of ORFS arrangements. The Bill has been much anticipated by Hong Kong’s arbitration community and is essential to Hong Kong preserving its competitiveness as one of the most popular arbitral seats in the world. In light of the fact that Hong Kong enjoys a robust legal system and has entered into certain mutual arrangements with Mainland China (including an interim measures arrangement signed in 2019 which allows parties to certain institutional arbitrations seated in Hong Kong to apply to PRC courts for interim relief), the Bill will further increase the attractiveness of Hong Kong as a seat of arbitration.
In addition, there is growing demand from clients for alternative fee arrangements and pricing flexibility. The Bill is a timely response to the expectations of arbitration parties, enabling Hong Kong’s arbitration services to thrive and compete with other leading arbitral seats.
In-depth 2022-121
