Litigation Funding Comparative Guide

• Law Firm: Allen & Overy Hong Kong
• Subject Matter: Finance and Banking, Consumer Protection, Financial Services, Consumer Law, Consumer Credit
• Author: Ms Elizabeth Chan and Ruth Stackpool-Moore
• Published date: 22 February 2023

1 Commercial legal finance basics

1.1 How is commercial legal finance defined in your jurisdiction?

There is no single definition of 'commercial legal finance' in Hong Kong.

Legal finance is often referred to as 'third-party funding' (TPF). This is where a third-party funder funds litigation or arbitration in return for a share in the proceeds recovered (or some other financial benefit) if the proceedings are successful.

This funding is on a non-recourse basis - that is, a funded party does not have to pay the funder if the proceedings are unsuccessful.

Some parties use TPF to access financial resources to pursue claims, while others use it to manage the risks of proceedings by sharing the risk of non-recovery and preserve cash for core business activities.

Arbitration: In the arbitration context, 'third party funding of arbitration' is defined under Section 98G of the Arbitration Ordinance (Cap 609) (AO) as:

the provision of arbitration funding for an arbitration'

1. under a funding agreement;
2. to a funded party;
3. by a third party funder; and
4. in return for the third party funder receiving a financial benefit only if the arbitration is successful within the meaning of the funding agreement.

Litigation: In the litigation context, given that Hong Kong is a common law jurisdiction, there is no definition of TPF per se. However, the Hong Kong Court of First Instance in Re A [2020] HKCFI 493 described TPF as the "provision of capital by an unrelated funder, usually on a non-recourse basis, to finance all or part of the fundee's litigation costs in return for a portion of any financial recovery".

In the litigation context, TPF is generally not permitted, except in three areas as set out by the Court of Final Appeal in Unruh v Seeberger (2007) 10 HKCFAR 31:

• where the third party has a legitimate common interest in the outcome of the litigation;
• where there are legitimate "access to justice" considerations; and
• in certain miscellaneous categories, including insolvency proceedings.

With respect to insolvency proceedings, Hong Kong case law confirms that it is within a liquidator's statutory powers under Section 199(2)(a) and Schedule 25 to the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO) to negotiate the terms of, and enter into, a funding agreement.

1.2 How does commercial legal finance differ from consumer litigation finance and contingency agreements?

The key differences between the three lie in who and what is being funded, and/or who is doing the funding.

Commercial legal finance: Commercial legal finance is the provision of TPF by funders for large commercial disputes being brought by companies or individuals:

• that have experience in contentious proceedings;
• that are legally represented; and
• whose disputes typically involve significant amounts at stake (eg, sums in the multimillion-dollar range).

Consumer litigation finance: Consumer litigation finance primarily covers individual claimants with limited exposure to the legal system, such as personal injury plaintiffs and other individual consumers. Such claimants are rarely represented by counsel in the funding transaction.

Contingency agreements: Under a contingency fee arrangement, the legal practitioner is rewarded (either in full or in part) by the payment of a sum if the proceedings in question are successful.

Historically, these arrangements were generally prohibited in Hong Kong under the common law doctrines of maintenance and champerty. Additionally, legal practitioners were prohibited from entering into contingency fee arrangements in contentious proceedings under:

• Section 64 of the Legal Practitioners Ordinance (Cap 159) (LPO);
• Principle 4.17 of the Hong Kong Solicitors' Guide to Professional Conduct; and
• Paragraph 9.9 of the Hong Kong Bar Association Code of Conduct.

However, on 30 June 2022, Hong Kong gazetted the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Ordinance ('Amendment Ordinance'). Significantly:

• the Amendment Ordinance introduced legislative amendments to the AO and the LPO to allow certain types of outcome-related fee structures (ORFS) in arbitration. 'Arbitration' is defined in the AO to include court proceedings, proceedings before an emergency arbitrator and mediation proceedings under the AO and
• the new Section 98OA of the AO states that the provisions in the AO which prevent law firms from acting as funders unless they are providing TPF at arm's length for proceedings in which they do not act for any party (ie, Section 98O of the AO) does not apply to ORFS agreements for arbitration within the meaning of the AO.

The Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap 609D) (ORFS Rules), which enacted the ORFS regime, came into effect on 16 December 2022.

1.3 What are the major legal finance products/solutions in your jurisdiction? (a) Single case fees and expenses; (b) Portfolio fees and expenses; (c) Monetisation of claims; (d) Monetisation of judgments and awards and (e) Other

(a) Single case fees and expenses

Historically, single case funding has been the most common form of TPF in Hong Kong and remains widely used.

Such funding involves a party using funding to cover all or part of the legal fees and expenses in a single litigation (insolvency), arbitration or enforcement case.

The covered legal fees and expenses include, among other things, lawyer, expert, arbitrator, institution and other hearing-related fees, as applicable.

(b) Portfolio fees and expenses

Portfolio funding for corporate clients involves bundling multiple cases together, including actions to enforce or monetise awards or judgments, all of which are supported by the funder.

The funder's return is linked to the overall net financial performance of the portfolio of cases instead of the outcome of each individual claim.

Given that the funder's risk is diversified, seeking funding for a portfolio of cases can improve the funding terms. This form of funding allows clients to fund a broader range of disputes, including smaller claims, non-monetary claims and even defences.

Portfolio funding for law firms allows firms to take on cases under contingency or conditional fee arrangements and treat those cases as revenue-generating assets against which they can secure funding to smooth liquidity, mitigate risk and extend alternative fee arrangements to additional clients and generate new business.

The introduction of the ORFS in arbitration and arbitration-related court, emergency arbitrator and mediation proceedings is expected to increase the prevalence of this latter form of portfolio funding in Hong Kong.

(c) Monetisation of claims

Monetisation of claims involves converting all or a portion of a pending claim into cash.

This is particularly common in the insolvency space. Section 199(2)(a) of the CWUMPO provides a liquidator with rights to assign causes of action, which allows them to sell their claims to a funder. The rationale is to help creditors recoup their money more quickly.

(d) Monetisation of judgments and awards

The monetisation of judgments and awards is a common legal finance product in Hong Kong. This involves funders purchasing a judgment or award held in a party's favour for a discount off its face value or providing an upfront cash advance for part of its value.

(e) Insurance

There are different types of insurance products available. Please see questions 10.6 to 10.8 below.

1.4 In what areas of law is litigation finance most prevalent in your jurisdiction (eg, competition, insolvency, patents, contracts)?

Insolvency: As discussed in question 1.1, there are three categories of cases where TPF is permitted for litigation in Hong Kong. TPF for insolvency proceedings (ie, one of the established exceptions under Unruh (see question 1.1)) is the area in which the use of TPF for litigation has been and is most readily permissible, and therefore is the most widely used.

Global instability caused by the COVID-19 pandemic to businesses and corporations has set the scene for increased numbers of corporate insolvencies. According to data published by the Hong Kong Government's Official Receiver's Office, filings for compulsory winding-up petitions reached 493 at the end of 2021, as compared to 449 in 2020, representing a 9.8% increase.

The development of creditor-friendly regulations, such as the Mutual Enforcement of Arbitration Awards between the Mainland and Hong Kong, is also likely to contribute to greater numbers of insolvency proceedings.

Both developments are anticipated to feed into increased use of TPF in this context in Hong Kong.

Arbitration: In the arbitration context, commercial cases remain a popular target of TPF. Examples include:

• disputes in relation to breaches of contract and contractual interpretation;
• shareholder disputes;
• joint venture disputes; and
• other general commercial disputes.

TPF is also used in investor-state arbitration. As this form of arbitration is less prevalent in Hong Kong than commercial arbitration, the use of TPF for such cases is less common.

1.5 Who are the major players in the industry (eg, pure players, multi-strategy firms, start-ups)?

Under the AO, there are certain limitations regarding who can act as a funder. For example, the following cannot act as funders:

• legal representatives of a party to the arbitration; or
• persons with an interest recognised by law in the arbitration (other than under the funding agreement).

Beyond these restrictions, there is broad scope for different types of entities to act as funders in Hong Kong, some examples of which are given below.

Pure players: Pure players are the major providers of TPF in Hong Kong. Key participants in Hong Kong market include Omni Bridgeway, Burford Capital and Deminor.

The corporate organisational structures of funders can vary significantly, with some being publicly listed and others being privately held companies.

The way in which...