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73COMPARATIVE ANALYSIS OF THIRD-PARTY FUNDING OF ARBITRATION IN SINGAPORE AND HONG KONG
Du Junpeng1
In recent years, relevant practice and theoretical discussions on third-party funding have gradually been carried out in various jurisdictions. This new type of dispute resolution financing tool has gained unprecedented attention in the Asia-Pacific region, especially with the legislative breakthroughs in the arbitration field in Singapore and Hong Kong, China - two international dispute resolution centers in Asia. Both arbitration practitioners and arbitration institutions themselves, while expecting more opportunities from third-party funding, are also working hard to explore the internal logic in order to meet the many challenges brought by the entry of capital into the legal field.
Starting from the overview of third-party funding, this article discusses the development and innovation of funding models, the advantages and disadvantages of third-party funding, compares and analyzes the third-party funding arbitration system in Singapore and Hong Kong, hoping that readers can have a comprehensive understanding of third-party funding.
Key words: Third-party funding, Non-recourse Investment, Disclosure; Conflict of Interest.
I. Overview of Third-Party Funding
(1) Definition
Third Party Funding, also known as Litigation Funding, Arbitration Finance, also known as Alternative Litigation Financing in the United States. For the definition of third-party funding, there has been a lot of controversy in the academic community,<Report Of The Icca-Queen Mary Task Force On Third-Party Funding In International Arbitration> 2devoted a dedicated chapter to this issue of definition. But in terms of its fundamentals, the definition of third-party funding is roughly divided into broad and narrow definition.
In practice, the broad definition is more adopted by national legislation and arbitration institution. For example, Section 98G of the <Cap. 609 Arbitration Ordinance of Hong Kong> 3 clearly stipulates that:Third-party funding of arbitration is the provision of arbitration funding for an arbitration—(a)under a funding agreement;(b)to a funded party;(c)by a third party funder; and (d)in return for the third party funder receiving a financial benefit only if the arbitration is successful within the meaning of the funding agreement.
Article 27 of the <CIETAC International Investment Arbitration Rules - China International Economic and Trade Arbitration Commission>4stipulates that: a"third-party funding"means the situation where a natural person or an entity, who is not a party to the dispute, provides funds to a party to the arbitration to cover all or part of that party's costs for the arbitral proceedings, through an agreement with the party accepting the funding.In addition, similar broad definitions are adopted in the <Siarb Guidelines For Third Party Funders> 5 issued by the Singapore Institute Of Arbitrators.The purpose of the broad definition adopted by the above institutions is mainly to prevent or reduce the circumstance that funders circumvent this definition
1Du Junpeng - master, Tashkent State University of Law.
2 https://cdn.arbitration-icca.org/s3fs-public/document/media_document/Third-Party-Funding-Report%20.pdf
3 https://www.elegislation.gov.hk/hk/cap609?xpid=ID_1498191924036_006
4 https://www.acerislaw.com/wp-content/uploads/2021/07/cietac.org-CIETAC-International-Investment-Arbitration-Rules-China-International-Economic-and-Trade-Arbitration.pdf
5 https://siarb.org.sg/images/SIArb-TPF-Guidelines-2017_final18-May-2017.pdf
through a certain special entity arrangement (Special Purpose Vehicle), thereby evading supervision.
The narrow definition is more adopted by third-party funders and some scholars, and more defined as "Non-recourse Investment".The Association of Litigation Funders of England and Wales defined the concept of "litigation financing" as follows in the <Code of Conduct for Litigation Funders> published in 2011:"A Funder has access to funds immediately within its control or acts as the exclusive investment advisor to an investment fund which has access to funds immediately within its control, such funds being invested pursuant to a Litigation Funding Agreement (LFA) to enable a Litigant to meet the costs of resolving disputes by litigation or arbitration (including pre-action costs) in return for the Funder: (a) receiving a share of the proceeds if the claim is successful (as defined in the LFA); and (b) not seeking any payment from the Litigant in excess of the amount of the proceeds of the dispute that is being funded, unless the Litigant is in material breach of the provisions of the LFA. " In his book, Yves Derains, a well-known scholar in the field, defines third-party funding as:"A person unrelated to the claim provides funding arrangements for the arbitration costs of one party to the claim (in most cases, the applicant), and the funder then receives remuneration as agreed, either in proportion to the benefits obtained from the award, or in multiples of the investment principal. Fees can also be combined according to the above two methods or set up other more complex charging methods. In the case of an unfavorable ruling, the investor will fail to invest." 2The narrow definition is more intended to exclude similar dispute resolution financing models such as pre-litigation insurance, post-litigation insurance, and assignment of claims.
(2) Development and innovation of funding models
In addition to the initial dispute settlement procedure initiated by the applicant due to insufficient funds, with the evolution and development of the model itself, the funded parties are not limited to commercial transaction entities with financial difficulties, and some multinational companies with strong funds will also as a mode of company financing and capital planning, third-party funding is included in the scope of its overall capital operation and investment planning.3Most third-party funders start their business with a case-by-case non-recourse investment.4Whether through the institution's own in-house legal team or external lawyers, funders need to evaluate and risk control to varying degrees on the cases to be invested, and potential targets are often presented through a single case. When deciding to start the investment after the evaluation, the funder will sign a funding agreement with the funded party on the investment matters, and stipulate the respective rights and obligations of both parties according to the characteristics of the case. However, such a model also has many problems such as cost control, conflict of interest, limitation of the right to appeal and so on in some specific jurisdictions. Based on the above considerations, more funders are constantly expanding new products and business models to better adapt to market development and customer needs.
1. Batch case investment
Batch case investment is currently the preferred method of funding for many funders, and it also accounts for the majority of their investment. According to the subdivision of the target object, it is generally divided into two types: Law Firm Finance and Corporate Finance.
(1) Law Firm Finance
1 https://www.judiciary.uk/wp-content/uploads/JCO/Documents/CJC/Publications/ CJC+papers/Code+of+Conduct+for+Litigation+Funders+(November+2011).pdf
2 William W. Park & Catherine A. Rogers, Third Party Funding in International Arbitration: The ICCA Queen-Mary Task Force, in Austrian Yearbook of International Arbitration 113, 118 (Gerold Zeiler et al. eds, 2015).
3 Norton Rose Fulbright, International arbitration report, Issue7--September 2016, at 3.
4 Annual Observation of Commercial Dispute Resolution in China (2018), China Legal Publishing Company, 2018 edition, p. 30
Dispute resolution financing arrangements centered on a particular law firm or team of lawyers. The funder conducts due diligence on the law firm or team of lawyers in the early stage to assess the ability and level of lawyers, and then determines a credit line based on the results of the investigation, and agrees a corresponding rate of return for this limit itself according to a specific period. Within this amount, the law firm can review the cases it represents with financing needs and submit investment applications, and the funder only makes a preliminary surface review before making loan investment. The final settlement is based on the agreed investment cycle and rate of return. If the agreed income is exceeded, the law firm and the funder shall distribute according to the previous agreement. If the agreed income is insufficient, the funder shall bear the corresponding losses and risks. Such an arrangement, on the one hand, enhances the efficiency of funders' use of funds, and on the other hand avoids ethical and professional conduct issues such as "should lawyers be responsible to clients or to funders". The Lawyers Ethics Committee of the American Bar Association once wrote a report proposing that "third parties should not be allowed to interfere with their independent exercise of professional judgment." Meanwhile, the funder's investment in the case is also more reflected in financial investment, and the conflict of interest that arbitration prctitioners are often worried about has also reduced the basis for existence.
(2) Corporate Finance
This model is essentially a further derivative of the law firm finance, but the investment object has become the legal department or intellectual property department responsible for dispute resolution in the enterprise. The funder uses the method of due diligence to the legal department of the enterprise in advance to determine a specific line of credit. Similarly, within this limit, the legal department can apply for investment in cases that need financial support in the company, and the legal department will find external lawyers to cooperate and formulate case strategies and control cases. The legal department only needs to pay the previously agreed amount of funds plus the agreed return multiple after a certain return period. As for when to reconcile, and whether the reconciliation conditions are acceptable or not, it is naturally up to the company and its legal department to decide on its own, which avoids potential third-party funders' restrictions on reconciliation and the adverse consequences of termination of the corresponding funding agreement.2 This, in a sense, satisfies the company's native needs, and at the same time reduces the concerns of many company customers about this model of third-party funding.
2. Case crowdfunding
To attract high-net-worth individuals and professionals to invest with a single case or batch case asset packages as investment targets. Among them, the platform plays a major role. On the one hand, the platform contacts the source of the case, publishes the relevant public information of the source of the case to the prospective investors on the platform, and decides the subscription amount after evaluation. If the subscription does not meet the actual expected capital needs of the case, the platform will also consider introducing professional institutional investors to make up the investment. This innovative model, on the premise of ensuring the total amount of funds, pays more attention to the diversification of fund sources to realize the resource mobilization of this model in the whole society.3
3. Analysis of the advantages and disadvantages of third-party funding
(1) Positive effects of third-party funding
American Bar Association, Commission on Ethics 20/20, International Report to the House of Delegates, at 4.
2Dr. Maxi Scherer and Aren Goldsmith, Third Party Funding in International Arbitration in Europe, Part 1: Funder's Perspectives, RDAI/IBLJ Round Table, 2012.
3 Hu Xian, Huang Yiwen,The Application of Third-Party Funding in the Combined Arbitration and Mediation System - A Customized Systematic Dispute Resolution Solution Author,China International Arbitration Review (Volume
III),http://www.hrbac.org.cn/newsshow.php?id=4455
For funded party, first of all, international arbitration is often time-consuming and costly. Third-party funding can avoid the dilemma of being unable to apply for international arbitration to protect their legitimate rights and interests due to economic problems. Second, third-party funding enables the funded party to transfer the risk of losing an arbitration case, because the arbitration fee that has been paid is borne by the funder and cannot be refunded because the funded party loses the case. In addition, because third-party funders aim at the benefits that can be obtained after winning the arbitration, they and the funded party are a community of interests, so they often provide or seek more professional legal services for the funded party to compensate the funded party deficiencies, increasing the odds of winning the case.
For funders, the third-party funding system is a new investment method that allows funders to share a certain percentage of the winning benefits in the event that the funded party wins the case, while the amount involved in international arbitration cases is often huge, although the funder will face a higher investment risk of losing the case, but at the same time its benefits are also considerable.
For arbitration institutions, recognizing the legitimacy of the third-party funding system and allowing its application will bring more arbitration cases, enhance its influence in the field of international arbitration, and improve its competitive advantage in international arbitration centers.
For the court, the most important positive effect on it is to promote the diversion of cases and ease the pressure of handling more cases with fewer people in the court.
(2) Negative effects of third-party funding
For the arbitration procedure itself, first of all, the existence of the third-party funding system may affect the neutrality and fairness of the arbitration procedure. When the third-party funder intervenes in the arbitration as an investor, an investment relationship arises in addition to the arbitration relationship, which makes the arbitration commercialized and complicated; at the same time, the third-party funding behavior is concealed. If it is not actively disclosed, the counterparty and the arbitrator often cannot know whether the funder has a strong relationship with the arbitrator. Once it exists, it will obviously affect the impartiality of the arbitrator, which in turn will affect the neutrality and impartiality of the arbitration procedure. Second, the third-party funding system may also affect the confidentiality of the arbitration system. Disputes involved in international commercial arbitration are often cross-border disputes and more often involve trade secrets. However, in order to reduce investment risks, funders will inevitably conduct due diligence, such as obtaining information about the counterparty of the arbitration from the funded party, or learning about the arbitration through other channels, which will obviously affect the confidentiality of the arbitration.
For arbitration institutions, the existence of the third-party funding system is prone to the problem of excessive litigation. The emergence of third-party funders relieves the economic pressure of arbitration parties, shares or transfers the risk of losing the case, stimulates the surge in the number of international arbitration cases, and easily leads to the phenomenon of excessive litigation.
For arbitration participants, the existence of third-party funding may give rise to multiple conflicts of interest. For example, there may be conflicts of interest between the funder and the counterparty to the arbitration, with the arbitrator, and even with the funded party. Taking the latter as an example, the interests of the funder and the funded party are generally the same, that is, to obtain the support of the arbitral tribunal and thus obtain income/compensation. However, this consistency may disappear in some cases. For example, when facing the settlement request of the counterparty, the settlement amount is often lower than the prevailing referee, so the funder intervenes in the settlement and prefers the arbitration referee in order to obtain more returns. Funded parties often consider settlement because of litigation, which creates a conflict of interest between the parties.
4. Comparative analysis of third-party funding arbitration system in Singapore and Hong Kong
The laws of both Singapore and Hong Kong draw on many of the more mature judicial and regulatory regimes in the UK at the time, including the prohibition of maintenance and champerty. But 2017 was an important turning point for the arbitration community in both Hong Kong and Singapore, as both jurisdictions have overcome various fears and challenges associated with third-party funding, passing legislation to allow third-party funding to be used in international arbitration. Third-party funding has gradually gained acceptance in other jurisdictions that set up international arbitration, and Hong Kong and Singapore have a tradition of competition, which has prompted both places to actively or passively defend against any clearly progressive or inclusive approach and reform introduced by the other. No doubt, once one of these jurisdictions takes steps to legalize third-party funding, the other will soon follow.
There are differences in the legalization mechanisms adopted by Hong Kong and Singapore for third-party funding. But no matter which jurisdiction it is, the core driving force or objective driving its change is to ensure that it is a competitive arbitration centre. The following article compares and analyzes the legal systems, pre-set regulatory frameworks, and substantive safeguards and restraints established by the two jurisdictions for third-party funding of arbitration.
(1) Legislative and regulatory attitudes
For the third-party funding regime, both Hong Kong and Singapore recognize its legality in arbitration proceedure. By contrast, Singapore has proactively abolished the prohibition of maintenance and champerty by amending its civil law, thereby creating a platform where third-party funding can easily be extended to other forms of dispute resolution, especially court proceedure.1 Hong Kong, on the other hand, has taken a more conservative approach: by amending its arbitration regulations, third-party funds can exist in the field of arbitration.2 In addition, both Hong Kong and Singapore have adopted the 'light touch approach' favoured by Australia, the UK and Wales. Singapore's Ministry of Justice has stated that its reforms "prioritize autonomy and flexibility, with disclosure at the center". However, if the funding arrangement constitutes an abuse of public policy, it may still render it unenforceable. This approach is relatively correct. It goes without saying that in order to be successful, regulation must be principled and commensurate with the actual risks involved. Insufficient regulation of high-risk industries can lead to market misbehavior, while over-regulation of low-risk industries can stifle growth. Since third parties have no recourse for arbitration-funded funds, this is inherently self-regulating: if funders fund unworthy claims, they will lose their investment, so the loose regulation model is adapted to that of.
(2) Scope of application
<Civil Law (Amendment) Act 2017>3 sets out the scope of permitted use of third-party Funding. These proceedure include international arbitration proceedure together with any ancillary litigation proceedings, mediation proceedings and any enforcement proceedings relating to international arbitral awards. According to Section 98G of the <Cap. 609 Arbitration Ordinance of Hong Kong> 4, third-party funding is mainly applicable to arbitration proceedings and related court proceedings, proceedings before emergency arbitrators and mediation proceedings.
(3) Basic requirements for third-party funders
Both Singapore and Hong Kong require third-party funders to meet certain minimum standards. Such as capital adequacy requirements, in order to ensure that the funded party is not left "isolated" by the funder's inability to meet its obligations during the arbitration process. Furthermore, in Singapore, third-party funding can only be
1 SG Regulations, S.3.
2 The Hong Kong Arbitration Ordinance
3 https://sso.agc.gov.sg/Acts-supp/2-2017/
4 https://www.elegislation.gov.hk/hk/cap609?xpid=ID_1498191924036_006
provided by organisations whose main business involves providing such funding, and in the event of non-compliance (e.g. not meeting capital adequacy requirements), the funder will no longer be eligible and its rights under or arising from the tripartite funding contract will not be enforceable, including those that are critical to the funder, such as the right to share the proceeds if the case is successful. The Ministry of Justice of Singapore has the authority to impose further regulatory standards on the definition of third-party funders, the nature of disputes in which funding is permitted, and the manner in which funding is provided. In Hong Kong, the Department of Justice of Hong Kong, as an institution under or authorized under <Cap. 609 Arbitration Ordinance of Hong Kong>1 has formulated a code of practice for third-party funding of arbitration in accordance with Section 98G of the <Cap. 609 Arbitration Ordinance of Hong Kong>, which clarifies that third-party funding of arbitration-related activities in Hong Kong is carried out by a third party routines and standards to be followed. In addition to meeting capital adequacy requirements and capital adequacy disclosure obligations, any promotional material published by third-party funders is required to be clear and accurate, and the funder must ensure that the funded party obtains independent legal advice on its terms before signing the funding agreement, etc.
(4) Disclosure and Conflict of Interest
Conflict of interest is another obvious factor to consider. As noted above, the participation of a third-party funder in arbitration may result in conflicts between the funder and the arbitrator, or between the funder and the non-funded party. To this end, both Hong Kong and Singapore have set disclosure obligations. In Hong Kong, the disclosure obligation rests with the funded party.2 If a Third-party Funding Agreement exists, the Funded Party must inform all parties involved in the arbitration and the arbitral tribunal (or relevant court, if any) with respect to the implementation and identity of the third-party funder at the commencement of the arbitration or within 15 days of the signing of the Autonomous Agreement ) by giving written notice. The third party that makes the fund must remind the funded party. In Singapore, however, the duty of disclosure rests with the legal practitioner, the funded party's lawyer. Relevant documents from the Ministry of Justice indicate that the <Legal Profession (Professional Conduct) Rules 2015>3 will be amended to stipulate that legal practitioners are obliged to report to courts, arbitral tribunals as soon as practicable and all other arbitration parties to disclose that their clients are third-party funded and to disclose the identity of the third-party funders. This is similar to the statutory requirement in Hong Kong, as it applies to all legal practitioners, including Singapore-registered lawyers as well as regulated foreign lawyers.
Due to the peculiarities of international arbitration proceedings, these disclosure requirements reflect a reasonable position. However, this is subject to an important qualification: Disclosure to the arbitral tribunal and the opposing party should include only two points: first, the existence of funds (including the name and address of the funder); and second, whether the funding agreement includes payment of any the content of unfavorable expenses (the issue of the burden of unfavorable expenses shall be determined by the parties to the agreement autonomously). Of course, opposing parties should not have access to the specific confidential funding arrangements of their opponents, as these arrangements are irrelevant to the substance of the dispute. All commercially and case-sensitive details (such as litigation budgets, funding terms, or funders' risk assessments) should be confidentially edited for disclosure, which may give opposing parties a tactical advantage.
(5) Control issues of third-party funders
The extent to which the third-party funder has control over the conduct of the arbitration (especially any compromise settlement of disputes) is another central issue. Generally speaking, the funder and the funded party have the right to negotiate and decide independently on the control scope of the funder. Singapore took a similar
1 https://www.elegislation.gov.hk/hk/cap609?xpid=ID_1498191924036_006
2 2018 HKIAC Administered Arbitration Rules
3 https://sso.agc.gov.sg/SL/LPA1966-S706-2015
approach to the UK, recognising that control over the process "should be dealt with in funding agreements". Hong Kong's position prohibits funders from "attempting to influence the legal representative of the funded party to cede control of the arbitration to a third-party funder" and "taking any measures that cause or may cause the legal representative of the funded party to breach their professional duties". In addition, it further prohibits funders from seeking to "control or direct funded parties in arbitration, including but not limited to negotiating and reaching any settlement". This stricter approach reflects Hong Kong's concerns and concerns that third-party investors could influence the judicial process.1
In this regard, it should be noted that the moral and fiduciary duty of the funded party's lawyers to their clients must not be limited or hindered by the funded party, and that in the event of a conflict between the funder and the funded party, the funded party attorneys must have the freedom to act in the best interests of the funded party, even if it is against the funder. These protective arrangements can be explicitly included in funding agreements.
(6) Confidentiality
Obviously, under the third-party funding system, it is unavoidable to disclose confidential information about the case to the funder. After all, funders must have sufficient information to assess case risk before they can sign a funding agreement. Once a funder joins, it will obviously want to monitor the progress and development of the process. <The Hong Kong Arbitration Ordinance> 2 has been amended to allow disclosure of protected information "in order to obtain or seek funding from third parties". However, correspondingly, the confidentiality obligations of funders will be further strengthened, requiring them to keep all information and documents related to the main content of arbitration and autonomous agreements confidential in accordance with Hong Kong laws and other applicable laws, and to comply with relevant legal professional confidentiality regulations. As under contract law, follow the terms of any non-disclosure agreement signed between the third-party funder and the funded party. Singapore will address confidentiality issues in industry guidance and best practices for third-party funders, lawyers and arbitrators.
5. Summary
Legislative changes in Singapore and Hong Kong represent a watershed in the development of the third-party funding regime in the field of international arbitration. With changing legislative attitudes in Singapore and Hong Kong, third- party funding could play a greater role in the Asian arbitration community. At present, third-party funding arbitration has been on the rise in many countries and regions, and it is playing an increasingly important role in international trade and international dispute resolution. We should face the booming third-party funding arbitration system with an open and inclusive mind.
References:
1. https://cdn.arbitration-icca.org/s3fs-public/document/media_document/Third-Party-Funding-Report%20.pdf
2. https://www.elegislation.gov.hk/hk/cap609?xpid=ID_1498191924036_006
3. https://www.acerislaw.com/wp-content/uploads/2021/07/cietac.org-CIETAC-International-Investment-Arbitration-Rules-China-International-Economic-and-Trade-Arbitration.pdf
4. https://siarb.org.sg/images/SIArb-TPF-Guidelines-2017_final18-May-2017.pdf
5. https://www.judiciary.uk/wp-content/uploads/JCO/Documents/CJC/Publications/CJC+papers/Code+of+Conduct+ for+Litigation+Funders+(November+2011).pdf
1 Liu huayan,On the Third Party Funding System in International Commercial Arbitration-From the perspective of comparative analysis of third-party funding arbitration systems in Singapore and Hong Kong,http://www.dhl.com.cn/CN/tansuocontent/0008/016908/7.aspx?MID=0902
2 https://www.elegislation.gov.hk/hk/cap609
6. William W. Park & Catherine A. Rogers, Third Party Funding in International Arbitration: The ICCA Queen-Mary Task Force, in Austrian Yearbook of International Arbitration 113, 118 (Gerold Zeiler et al. eds, 2015).
7. Norton Rose Fulbright, International arbitration report, Issue7--September 2016, at 3.
8. Annual Observation of Commercial Dispute Resolution in China (2018), China Legal Publishing Company, 2018 edition, p. 30
9. American Bar Association, Commission on Ethics 20/20, International Report to the House of Delegates, at 4.
10. Dr. Maxi Scherer and Aren Goldsmith, Third Party Funding in International Arbitration in Europe, Part 1: Funder's Perspectives, RDAI/IBLJ Round Table, 2012.
11. Hu Xian,Huang Yiwen,The Application of Third-Party Funding in the Combined Arbitration and Mediation System - A Customized Systematic Dispute Resolution Solution Author,China International Arbitration Review (Volume III),http://www.hrbac.org.cn/newsshow.php?id=4455
12. SG Regulations, S.3.
13. The Hong Kong Arbitration Ordinance
14. https://sso.agc.gov.sg/Acts-supp/2-2017/
15. https://www.elegislation.gov.hk/hk/cap609?xpid=ID_1498191924036_006
16. https://www.elegislation.gov.hk/hk/cap609?xpid=ID_1498191924036_006
17. 2018 HKIAC Administered Arbitration Rules
18. https://sso.agc.gov.sg/SL/LPA1966-S706-2015
19. Liu huayan,On the Third Party Funding System in International Commercial Arbitration-From the perspective of comparative analysis of third-party funding arbitration systems in Singapore and Hong Kong,http://www.dhl.com.cn/CN/tansuocontent/0008/016908/7.aspx?MID=0902
20. https://www.elegislation.gov.hk/hk/cap609
© Du Junpeng, 2022.
