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February 22, 2016

ILR Responds to Hong Kong Law Commission on Risks of Third Party Litigation Funding

Will Hong Kong go the way of the U.S. by allowing questionable third-party funding of lawsuits by outside investors?

That is the question at the heart of ILR’s recent public comments on a proposal by the Hong Kong Law Commission to authorize the use of what is commonly known as third-party litigation funding (TPLF) to finance the conduct of arbitration matters in this city that is one of the world’s most important business centers.

Third party funding involves an arrangement where a third party, typically a large hedge fund, provides financial support or assistance to a party during a legal proceeding in return for a share of the profits.

In 2015, the Hong Kong Law Commission published a Consultation Paper recommending that TPLF for arbitration taking place in Hong Kong should be permitted under Hong Kong Law. Ms. Kim Rooney, the Chairman of the Third Party Funding for Arbitration Sub-committee noted that:

“[Hong Kong] is a major international financial and arbitration centre and that parties considering whether to resolve their disputes in [Hong Kong] by international arbitration are starting to take into account, among others, the potential financial options available to them in conducting such arbitrations. Accordingly, clarity and certainty of the relevant law concerning third party funding for arbitration will be desirable.”

ILR’s comments, which can be found here, express a strong agreement with the long-standing view of the Hong Kong judiciary that TPLF is inappropriate in court litigation matters and should be similarly prohibited in arbitration matters. However, if TPLF is permitted in arbitration proceedings, as recommended by the Law Commission, such activity should be subject to common-sense regulations to prevent potential negative consequences.

In particular, ILR’s comments observe that the use of TPF in the arbitration context would likely diminish client control over arbitrated claims, threaten the independence of the legal profession and create conflicts of interest. The comments urge that any authorization of TPLF in the arbitration context should be accomplished by robust disclosure requirements, as well as provisions prohibiting the exercise of control over arbitration proceedings by third-party funders. Identifying persons and entities with a stake in the outcome of an arbitration proceeding would allow arbitrators and counsel to ensure compliance with ethical obligations. Similarly a provisions expressly barring funders’ control over the strategic decisions made by a party to an arbitration proceeding would ensure that the interests of the claimant are not subordinated to those of the funder.

The consultation period for public submissions concluded in January. While Hong Kong desires to become the preeminent international arbitration seat in the region, TPLF is not the route to take to achieve that goal and fuels a system that is ripe for abuse, particularly without safeguards and ethical standards. The Law Commission is set to review its position and will release a second consultation later in 2016.

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