The Race in the East and its Challenges: Third Party Arbitration Funding in Singapore & Hong Kong

Singapore and Hong Kong have long been leading seats for international arbitration in Asia. Both seats were ranked in the 2015 Queen Mary International Arbitration Survey as being among the five most preferred and widely used.[1]

It is unsurprising then that the Hong Kong International Arbitration Centre (HKIAC) and the Singapore International Arbitration Centre (SIAC) were also ranked among the five most preferred arbitral institutions.[2]

Most recently, the attention of the international arbitration community has been on these seats following developments to third party funding regimes. Third party funding contracts in Singapore no longer offend the age-old doctrines of maintenance and champerty which previously meant these agreements were contrary to public policy or illegal. The passage of third party funding legislation in Hong Kong on 14 June 2017 has re-levelled the playing field.[3]

Singapore

1 March 2017 will now be recognised as a significant moment in the history of international arbitration in Singapore, as the Civil Law (Amendment) Act 2017 entered into force along with the Civil Law (Third Party-Funding) Regulations 2017. The Professional Conduct Rules in Singapore have also been amended, most notably the insertion of Part 5A – ‘Rules Applicable to Third-Party Funding’.

This follows earlier developments where the Civil Law (Amendment) Bill was passed on 10th January 2017. This bill amended the Civil Law Act (Cap. 43), allowing for third party funding for international arbitration and related proceedings before Singapore courts.

Such arrangements were previously prohibited in Singapore, and attracted civil liability under the common law tort of maintenance and champerty (now abolished in Singapore as part of this amendment).

This development comes shortly after SIAC released the first edition of its official Investment Arbitration Rules (IA Rules), effective from 1 January 2017. These Rules expressly address third party funding in several aspects:

• Rule 24(l): the tribunal may order parties to disclose third party funding arrangements which may include the identity of the funder and any other pertinent details which the tribunal requires disclosure of; and

• Rule 33.1: the tribunal may take into account any third party funding arrangements when apportioning the cost.

• Rule 35: the tribunal may take into account any third party funding arrangements in its Award.

Hong Kong

Hong Kong is not far behind the developments in Singapore. On 14 June 2017, the Hong Kong Legislative Council passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016. This amends the Arbitration and Mediation Ordinances (Cap 609 and Cap 620 respectively) to ensure that there are no common law barriers (namely maintenance and champerty) to third party funding being utilised. Prior to this development, third party funding was unlawful with respect to litigation (with limited exception), but there was no express prohibition with respect to arbitration.

The Bill amends the Arbitration Ordinance and the Mediation Ordinance as per the report’s recommendations.[4] Though this does not include abolishing the tort of maintenance and champerty as the Singapore reforms did, this will allow for third party funding of arbitrations. Pursuant to clause 98F of the bill, this definition of arbitration covers proceedings made under the two Ordinances including court proceedings, proceedings before an emergency arbitrator, and mediation proceedings.

The developments in this area, in this jurisdiction, are largely sourced from the common law, as opposed to dedicated legislation.

A landmark case which considered third party funding in the context of arbitration was Cannonway Consultants Ltd v Kenworth Engineering Ltd [1995] 1 HKC 179.[5] Kaplan J held that this prohibition did not apply to arbitration in Hong Kong. His Honour did not see it appropriate to extend the doctrine of champerty to arbitrations as ‘it would be extending champerty from the public justice system to the private consensual system which is arbitration.’[6] In a more recent decision, Unruh v Seeberger (2007) 10 HKCFAR 31, Mr Justice Ribeiro left open the question as whether maintenance and champerty applied to agreements regarding arbitrations taking place in Hong Kong as it did not arise in that case.[7]

The Law Reform Commission of Hong Kong (the Law Reform Commission) commenced a review of the position relating to third party funding for arbitration in June 2013, considering the need for reform and the scope of such if appropriate.[8] In October 2015, the Law Reform Commission released a consultation paper which was in favour of permitting third party funding for arbitrations in Hong Kong.[9]

On 12 October 2016, the Law Reform Commission released a report recommending a ‘light touch approach’ to the regulation of third party funding of arbitration and associated proceedings for an initial period of three years.[10] This included a recommendation to amend the Arbitration Ordinance (Cap. 609) to clarify that third party funding is acceptable and would not attract civil or criminal liability under the principles of maintenance and champerty. The report also recommended that consideration be given to amending the Mediation Ordinance (Cap. 620) to extend third party funding to mediation.

It is encouraging to see that Hong Kong’s regulatory framework governing international arbitration is set to become even more attractive to parties, thanks to its flexible approach.

Why are these developments important for International Arbitration?

Third party funding has historically been recognised as a tool that assisted parties who were otherwise unable to pursue their rights due to financial constraints. In contrast, modern third party funding agreements are used as a financing and risk management tool. Third party funders provide risk management with respect to ensuring the predictability of costs in the event of adverse outcomes, providing protection from opponent costs awards in adverse outcomes, and other skills which parties may capitalise on.

It would be naïve to conclude that these recent legislative developments alone will significantly promote the use of arbitration in Singapore and Hong Kong. Both jurisdictions have an already strong arbitration framework, underpinned by a supportive legislature and judiciary. These reforms remove the competitive edge that certain jurisdictions (those which allowed for third party funding) formerly enjoyed. Neither of the jurisdictions would have progressed as quickly as they have if only one were pursuing reform. The competitive nature of reform in this area has enabled both jurisdictions to bring about change at a commendable rate.

Allowing third party funding in arbitration proceedings is a positive step forward as Singapore and Hong Kong will both undoubtedly benefit from an increase in arbitral agreements listing their jurisdictions as the seat of the arbitration.