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Norton Rose Fulbright LLP

12/01/2021 | News release | Distributed by Public on 11/30/2021 04:27

Third Party Funding in the Asia-Pacific

Content

Introduction

Third party funding (TPF) continues to gain momentum in Asia-Pacific. Australia, Singapore and Hong Kong have established TPF regimes, supported by arbitral rules promulgated by leading arbitral institutions, and which continue to develop to be more permissive and TPF friendly. India has a nascent but growing TPF market which draws its inspiration from the others. Recent developments in TPF and other types of fee arrangements in these jurisdictions help strengthen Asia-Pacific as a pro-arbitration region.

Australia

Australia was one of the first jurisdictions to permit TPF in both arbitration and litigation. Funding is an active and growing market, particularly in domestic class action litigation.

Despite this, Australia does not have any centralised rules governing the provision of TPF. In part, this is a reflection of how TPF has developed in the states and courts.

Historically, TPF was prohibited by the doctrines of maintenance and champerty. Although all states have abolished these as crimes, they remain a tort in several states. Although the courts have upheld TPF agreements, they retain the discretion to set aside any agreement which is contrary to public policy. As a result, parties and funders need to be conscious of any divergence in the relevant states.

Australia does not have any centralised rules governing the provision of TPF. In part, this is a reflection of how TPF has developed

However, Australia is gradually moving towards a more consistent and regulated regime:

Corporations Amendment (Litigation Funding) Regulations 2020 (Cth): Overall, funders enjoy considerable freedom in Australia. That remains the case, but funders are now subject to financial services regulations. In July 2020, the Federal government enacted regulations designed to make funders more transparent and subject to greater regulatory oversight and accountability. As a result, funders are now required to hold an Australian Financial Services Licence and comply with the managed investment scheme regime as a provider of financial services.

Maintenance and champerty: The tort of maintenance and champerty arguably still exists in Queensland, Western Australia, Tasmania and the Northern Territory. In 2020, WA recommended that the tort be abolished entirely, in a positive step towards consistency across Australia.

Fee arrangements: Generally, practitioners are permitted to charge conditional fees (e.g. accept a reduced fee upfront with an uplift if successful). In 2020, Victoria became the first state to permit contingency fees in limited circumstances, permitting representative plaintiffs in class actions to apply to the Victorian Supreme Court for an order that their lawyers be paid a specified percentage of the sum recovered.

ACICA Rules: The Australian Centre for International Commercial Arbitration's 2021 rules (ACICA Rules) introduce new provisions dealing with the disclosure of TPF. Under those rules, parties are required to disclose the existence of TPF and the identity of the funder at the time of filing their Notice of Arbitration or Answer, or as soon as practicable after funding is agreed. Parties have a continuing obligation to disclose any changes to the funding and the tribunal is empowered to order a party to make a disclosure at any time.

Singapore

Singapore was one of the first jurisdictions in Asia to permit TPF in international arbitration and related court proceedings. Unlike Australia, Singapore still prohibits TPF in domestic litigation and is actively looking into permitting conditional fees for arbitration and Singapore International Commercial Court (SICC) proceedings.

There have been three noteworthy recent developments:

  • Insolvency, Resolution and Dissolution Act (IRDA): The new omnibus insolvency regime came into force on 30 July 2020. This permits liquidators to enter into TPF agreements with court approval or the authorisation of the committee of inspection in respect of claims relating to transactions at an undervalue, unfair preferences, extortionate credit, fraudulent trading, wrongful trading and the assessment of damages against delinquent company officers. Recently, the Singapore High Court issued an order to the effect that a third party funder's investment in a successful international arbitration would be accorded super priority status (i.e. be paid in priority to all preferential debts and unsecured debts) in the insolvency process under the IRDA.
  • SICC and domestic arbitration: On 28 July 2021, the Ministry of Law extended the TPF regime to include: (i) domestic arbitration and associated court proceedings; (ii) proceedings in the SICC and related appeals; and (iii) mediations relating to domestic arbitrations and SICC proceedings.
  • Fee arrangements: Both conditional and contingency fee arrangements are unlawful. In August 2019, the Ministry of Law initiated public consultation about the possibility of allowing conditional fees in international and domestic arbitrations and certain SICC proceedings. Although the Ministry of Law has yet to announce the findings from this consultation, this remains a space to watch.

These developments reflect a gradual liberalisation of TPF in Singapore. Nevertheless, important distinctions remain. First, as noted above, TPF is still prohibited in domestic litigation. There is no sign that this will change in the near future. Secondly, lawyers registered to practise in Singapore are subject to more stringent disclosure requirements than "fly in, fly out" lawyers. Professional conduct rules require them to disclose the existence of any TPF their client is receiving in an arbitration or SICC proceeding, whilst lawyers practising outside Singapore who act for clients in Singapore seated arbitrations or SICC matters are not subject to the same disclosure obligations. This loophole creates a competitive disadvantage for lawyers practising in Singapore.

Hong Kong

Hong Kong also recently opened up to TPF. Historically, TPF was prohibited in both litigation and arbitration by the doctrines of maintenance and champerty. Common law developed three recognised exceptions, being: (i) where the third party has a legitimate common interest in the litigation; (ii) where there are access to justice concerns; and (iii) in insolvency proceedings.

This changed on 1 February 2019, when the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 came into force, permitting TPF in arbitration and ancillary court proceedings.

TPF remains prohibited in domestic litigation in Hong Kong.

The Ordinance was accompanied by a detailed Code of Practice for Third Party Funding of Arbitrations, which funders must comply with, including:

  • Ensuring access to adequate capital in order to satisfy all debts for a minimum of 36 months;
  • Maintaining effective processes and procedures for identifying and disclosing conflicts of interest;
  • Setting out and explaining the key terms in the funding agreement regarding termination, control and liability for costs;
  • Ensuring the funded party is aware of its entitlement to seek independent legal advice; and
  • Providing suitable dispute resolution processes.

With the introduction of this legislation, the Hong Kong International Arbitration Centre (HKIAC) amended its rules to expressly recognise third party funders and require a funded party to promptly disclose the existence of a funding agreement, the identity of the funder and any subsequent amendments. Tribunals are also empowered to take account of TPF arrangements in determining the costs of the arbitration.

In December 2020, the Law Reform Commission published a consultation paper proposing to permit the use of outcome related fee structures. These proposals are designed to preserve and promote Hong Kong's competitiveness as a leading arbitration centre, whilst increasing access to justice.

India

India has a nascent TPF regime, which has the most potential for growth. There is no statute relating to TPF in India. Historically TPF was considered illegal in India by the application of the English law doctrines of maintenance and champerty. However, over the past decades, courts have held that those doctrines do not apply in Indian law, thereby removing the primary legal hurdles to TPF in India. There is a growing consensus that TPF is key to making India an arbitration hub in South East Asia. This gradual progress culminated in the Supreme Court's decision in 2018 in Bar Council of India v. AK Balaji, which reaffirmed the legality of a non-lawyer funding litigation and recovering sums after the outcome of the dispute. The Court also reaffirmed that lawyers are barred from funding legal proceedings in which they act.

Although this decision relates to domestic litigation, it indicates a growing trend towards the acceptance of TPF in India.

A number of Indian states have independently recognised TPF by amending the Code of Civil Procedure, 1908 (as applicable within their territories), in the absence of any clear central legislation on the issue.

There has already been a marked increase in funding activity since the Court's decision in AK Balaji, particularly in investor-State arbitration and we expect this to continue in Indian-seated commercial arbitrations.

However, the position remains uncertain in the absence of clear statutory guidance and there are various complexities (for instance, in relation to foreign exchange management) that can only be resolved through central legislation.

There is a growing consensus that TPF is key to making India an arbitration hub in South East Asia.

India can, and is, looking towards the TPF regimes in Singapore and Hong Kong for guidance to develop centralised rules to support TPF in arbitration.

The way forward

Australia, Singapore, Hong Kong and India are each developing and strengthening TPF regimes and, in some jurisdictions, looking to conditional fees to support the growth of dispute resolution. Each face separate challenges and policy considerations, but can draw upon the lessons learnt by others to create opportunities. A clear, cohesive TPF regime addressing the disclosure of TPF, conflicts and recoverability of costs can help strengthen each of these jurisdictions' pursuit to be regional and global arbitration hubs.

The authors would like to thank Nathan Giacci, Graduate Student, Perth, Australia, for his assistance with this article.