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December 19, 2022

Hong Kong and Singapore Expand Arbitration Funding Options

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HONG KONG AND SINGAPORE EXPAND ARBITRATION FUNDING OPTIONS

Hong Kong and Singapore, the Asia Pacific’s leading seats of international arbitration, have both implemented reforms enabling parties to enter into outcome related fee structures (ORFSs) with their lawyers for arbitrations and certain court proceedings. Hong Kong’s reforms entered into force on 16 December 2022 while Singapore’s did so on 4 May 2022.

ORFSs provides parties with welcome alternatives to traditional fee arrangements and third-party funding (TPF) for funding their disputes.

This note provides an overview of what parties can expect from these much-anticipated reforms, which are in line with best practice in other major dispute resolution hubs.

What Are ORFSs?

  • ORFSs, also known as “No-Win, No-Fee” and “No-Win, Low-Fee” arrangements, refer to an agreement between a lawyer and their client that conditions all or part of the amount payable from the client to the lawyer for their work on the outcome of the client’s dispute (e.g., if their claim or defence succeeds).
  • While ORFSs have traditionally been prohibited in many jurisdictions, this is no longer the case. Major arbitral seats, including London, Paris, Geneva and New York, all now allow ORFSs to varying degrees. For example, London permitted conditional fee agreements (CFAs) in the 1990s and damages-based agreements (DBAs) in 2013. The international trend towards permitting parties to enter into ORFSs recognizes:
    • the growing demand from sophisticated dispute resolution users for flexibility in how they fund their disputes and manage risk;
    • the potential for ORFSs to enhance access to justice for impecunious parties who would otherwise be unable to fund their disputes; and
    • the potential for ORFSs to enhance efficiency in dispute resolution.
  • ORFSs fall into three main categories, which can be distinguished by how the payment from the client to their lawyer is calculated if a successful outcome is achieved (e.g., a claim or defence succeeds):
  • First, CFAs generally provide for a ‘success fee’ payment, which can be calculated as a percentage ‘uplift’ on the lawyer’s standard fees. CFAs can be structured either as “No-Win, No-Fee” or “No-Win, Low-Fee” arrangements with no legal fees or reduced legal fees, respectively, being due to the lawyer if the successful outcome is not achieved.
  • Second, DBAs (also known as contingency fee arrangements) provide for the payment to be calculated by reference to the financial benefit achieved by the client, for example as a percentage of the sum of damages awarded to or recovered by the client. No payment is due if the proceedings are unsuccessful (i.e., “No-Win, No-Fee”).
  • Third, Hybrid DBAs provide for the payment to be calculated in the same manner as a DBA, except that the lawyer is entitled to be paid certain legal fees (typically at a discounted hourly rate) irrespective of the outcome of the proceedings (i.e., “No-Win, Low-Fee”). For example, a Hybrid DBA could provide for the client to pay: (i) their lawyer’s fees at discounted hourly rates; and (ii) an amount comprising 30% of the damages, if any, awarded to the client.

Singapore’s CFA Regime

  • On 4 May 2022, Singapore’s new CFA regime went live following Singapore’s enactment of the Legal Profession (Amendment) Act 2022 and the coming into force of the Legal Profession (Conditional Fee Agreement) Regulations 2022. Key features of the reform are set out below.
  • Overview: both Singapore qualified lawyers and registered foreign lawyers are permitted to enter into CFAs with clients regarding the same categories of disputes that already allow TPF in Singapore, namely:
    • domestic and international arbitrations (whether seated inside or outside of Singapore);
    • Singapore International Commercial Court proceedings; and
    • any related court and mediation proceedings.
  • CFAs can condition the whole or part of the lawyer’s remuneration (such as the lawyer’s normal hourly fees) and costs (such as the lawyers’ disbursements) on the occurrence of specified circumstances. Accordingly, both “No-Win, No-Fee” and “No-Win, Low-Fee” CFAs are permitted. CFAs can also include an uplift fee. At present, Singapore does not impose a cap or limit on uplift fees.
  • Uplift fees are not recoverable in costs: parties are not entitled to claim as a cost from the other side any ‘uplift’ that exceeds the amount the client would have paid to their lawyer if there had been no CFA.
  • CFA requirements: CFAs must comply with various requirements identified in the Act and Regulations, including that CFAs be in writing and clients have a five day ‘cooling-off’ period following signature of the CFA.
  • DBAs remain prohibited: CFA payments cannot be calculated as a percentage or proportion of the monetary damages awarded to the client in the dispute. Accordingly, unlike Hong Kong’s reforms, DBAs and Hybrid DBAs will remain prohibited in Singapore.
  • Compatibility of CFAs and TPF: while CFAs and TPF will generally be used separately, there may be situations where a client wishes to combine them. For example, in the context of a ‘No-Win, Low-Fee’ CFA, a TPF provider might be prepared to fund the discounted legal fees that are payable to the lawyer during the proceedings. The Act does not prohibit such arrangements.

Hong Kong’s CFA, DBA and Hybrid DBA Regime

  • On 16 December 2022, Hong Kong’s new regime permitting CFAs, DBAs and Hybrid DBAs for arbitrations and related proceedings came into force pursuant to the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Ordinance 2022 and the Arbitration (Outcome Related Fee Structures for Arbitration) Rules 2022. The new regime adopts in large part recommendations issued in December 2021 by the Hong Kong Law Reform Commission Sub-committee on Outcome Related Fee Structures for Arbitration following an extensive consultation process (to which Shearman & Sterling were proud to contribute).
  • Overview: Hong Kong’s reforms are similar to those in Singapore except that DBAs and Hybrid DBAs are also permitted. Hong Kong’s expansive approach should have the practical advantage of providing parties with more flexibility in selecting a fee agreement most suitable for their dispute.
  • Lawyers in Hong Kong including solicitors, barristers and registered foreign lawyers, are now permitted to enter into CFAs, DBAs and Hybrid DBAs for arbitration proceedings seated in or outside of Hong Kong, emergency arbitrator proceedings as well as related court and mediation proceedings. The reforms therefore allow parties to use ORFSs throughout the entire lifecycle of an arbitration, including for arbitration-related court proceedings such as setting-aside or enforcing awards.
  • Caps on uplift fees and DBA payments: unlike the uncapped CFA regime in Singapore, Hong Kong has imposed a cap of 100% of the normal legal fees on the maximum amount of uplift fees that parties and their lawyer can agree to in a CFA, and a cap of 50% of the damages awarded to the client on DBA payments.
  • ORFS payments are recoverable in exceptional cases: Hong Kong adopts a similar default rule to Singapore that any uplift fees (or DBA payments) in excess of the normal legal fees should not be recoverable from the losing party. However, unlike Singapore, arbitral tribunals will have a discretionary power to award uplift fees or DBA payments in “exceptional circumstances” (such as when the losing party’s conduct contributed to the impecuniosity of the successful party).

Authors and Contributors

Emmanuel Jacomy

Partner

International Arbitration

+86 159 2076 5289

+86 159 2076 5289

+65 6230 8957

+65 6230 8957

Beijing

Edward Taylor

Counsel

International Arbitration

+852 2978 8043

+852 2978 8043

Hong Kong

Kitty Zheng

Associate

International Arbitration

+852 2978 8061

+852 2978 8061

Hong Kong