Hong Kong: Litigation Funding Comparative Guide

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:

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 privately held funders obtain capital differs – for example:

• some are backed by high-net-worth individuals or are vehicles for investment for family offices;
• some will hold funds under management in private funds; and
• others may have lines of credit available to them.

Multi-strategy firms and start-ups: It is less common for multi-strategy firms, such as hedge funds and start-ups, to act as funders.

However, there is no prohibition on them doing so, provided that they meet the requirements in:

• the AO; and
• the Code of Practice for the Third Party Funding of Arbitration.

For example, a funder must maintain access to a minimum of HK$20 million of capital.

2 Legal framework

2.1 How mature is the market for legal finance in your jurisdiction? What types of commercial litigations and/or arbitrations may be funded by a third party?

Maturity of the Hong Kong market: The legal finance market in Hong Kong is developing in maturity.

Outside the insolvency context, where the market for third-party funding (TPF) is robust, the recognised exceptions to maintenance and champerty in which TPF of litigation is permitted remain limited. TPF for arbitration has been permissible from 2019 – a development which is expanding the breadth and depth of the Hong Kong TPF market.

While there is less awareness of TPF's availability in Hong Kong compared to more mature jurisdictions such as the United Kingdom and Australia, the trajectory of acceptance and use of TPF in Hong Kong, when compared in the same timeframe against other jurisdictions, suggests quicker acceptance. Funders in Hong Kong have seen exponential growth in the use of TPF generally in the last five to 10 years, and particularly an increase in the use of TPF for arbitrations.

Types of funded arbitrations: A wide range of commercial arbitrations can be funded, with no particular restriction on the types of cases in which funding is allowed.

In general, the Law Reform Commission of Hong Kong has observed that arbitration disputes typically include, among others, commercial, construction, corporate and shareholders, maritime, finance, joint venture, partnership, trade and commodities, and restraint of trade and restrictive covenant disputes.

Ultimately, funders look for high-value cases with a high chance of success.

Types of funded litigations: According to the definition of 'arbitration' in Part 10A of the Arbitration Ordinance (AO), TPF of arbitration-related court proceedings is permissible in Hong Kong. Beyond this, as mentioned in question 1.1, TPF of litigation is permissible in only three limited circumstances:

• 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.

The use of TPF in insolvency proceedings is the most common. TPF in the first two circumstances is rare.

There are only limited examples – for instance, in respect of groups and associations that pursue legitimate objectives – where a third party will be regarded as possessing a qualifying common interest in related litigation to authorise its provision of TPF.

The access to justice exception has also been interpreted narrowly by the Hong Kong courts. The exception involves a balancing exercise between competing public policies of fostering the right of access to justice and preventing the abuses that may result from maintenance and champerty, with the purpose of avoiding a situation where the litigant would be unable to pursue a claim which is perfectly good in law without TPF. However, the exception is not intended to facilitate access to the litigant's ideal or preferred legal representation.

2.2 Is there a dedicated legal finance regime in your jurisdiction? What other laws and regulations have relevance to legal finance in your jurisdiction?

There is no dedicated regime to govern the provision of TPF in Hong Kong. The market is regulated under a number of different statutory regimes and the common law.

AO: The AO governs the TPF of arbitration and arbitration-related court, emergency arbitrator and mediation proceedings, as well as outcome-related fee structures (ORFS) arrangements.

Code of Practice for the Third Party Funding of Arbitration ('Arbitration Code'): The Arbitration Code, issued pursuant to Section 98P of the AO, sets out the practices and standards that funders are expected to comply with when carrying on activities in connection with TPF under the AO.

Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap 609D) ('ORFS Rules'): Issued under the framework legislation of the AO, the ORFS Rules allow for ORFS and contingency fee arrangements in arbitration and arbitration-related court, emergency arbitrator and mediation proceedings.

Mediation Ordinance (Cap 620) (MO): TPF of mediations that are not related to an arbitration is permitted under Part 7A of the MO. At the time of writing, this section has yet to come into operation.

Common law: Unless an exception applies, TPF of litigation is generally considered an infringement of the doctrines of maintenance and champerty, which are both torts and indictable offences at common law.

Those in breach are liable under Section 101I of the Criminal Procedure Ordinance (Cap 221) to imprisonment and a fine.

2.3 Which public sector bodies and authorities are responsible for enforcing the applicable laws and regulations? What powers do they have?

Hong Kong courts and tribunals are responsible for enforcing applicable laws and regulations.

Arbitration: Consistent with other common law jurisdictions, Hong Kong has adopted a light-touch or self-regulating approach towards TPF in arbitration.

For example, Section 98S of the AO provides that a failure to comply with a provision of the Arbitration Code does not, of itself, render any person liable in any judicial or other proceedings. Nonetheless, the Arbitration Code is admissible in evidence in proceedings before any court or arbitral tribunal. A court or tribunal may take into consideration compliance, or failure to comply, with a provision of the Arbitration Code if it is relevant to a question to be decided.

Pursuant to Section 98X(1) of the AO, an advisory body appointed by the Secretary for Justice is responsible for monitoring and reviewing the operation of the provisions on the TPF of arbitration and mediation, including the implementation of a code of practice.

The current advisory body, comprising three senior legal professionals, was appointed on 24 August 2021 for a period of three years.

2.4 Do the rules and codes of any self-regulatory organisations or professional associations have relevance to legal finance in your jurisdiction? What powers do such organisations and associations have?

There are no self-regulatory organisations or professional associations relevant to non-lawyer funders in Hong Kong.

Generally, lawyers are prohibited from entering into contingency fee arrangements in contentious proceedings. This prohibition is pursuant to:

• for solicitors, paragraph 4.17 of the Hong Kong Solicitors' Guide to Professional Conduct ('Solicitors' Guide'); and
• for barristers, paragraph 6.3(a) and 9.9 of the Hong Kong Bar Association Code of Conduct ('Bar Code').

However, following the enactment of the ORFS regime, the Solicitors' Guide and the Bar Code were amended on 16 December 2022 to allow solicitors and barristers to enter into ORFS arrangements in arbitration.

The Solicitors' Guide and the Bar Code both contain principles that solicitors and barristers (as appropriate) are expected to comply with in relation to the ORFS regime.

In respect of solicitors:

• the Solicitors' Guide provides that a solicitor may enter into contingency fee arrangements for acting in contentious proceedings that are permitted under the law – for example, under the AO (paragraph 4.17 of the Solicitors' Guide); and
• the Solicitors' Guide also makes clear that the prohibition against a solicitor's sharing of profits costs with a person other than a practising solicitor is subject to the AO.

In respect of barristers, the new Chapter 13A of the Bar Code (added to provide that the ORFS regime in Hong Kong is permissible) provides that a barrister may negotiate, enter into and accept a brief or instructions to provide legal services under an ORFS agreement for arbitration with client(s). However, this is provided that such practising barrister shall act in full compliance with the applicable requirements in the AO.

Violations of the applicable rules and codes have disciplinary consequences. In respect of solicitors, the Law Society of Hong Kong may:

• investigate any charge of misconduct against any solicitor or employee of a solicitor; and
• institute and prosecute any disciplinary proceeding if it thinks fit.

In respect of barristers, a barrister in breach of the Bar Code may be referred to the Barristers Disciplinary Tribunal. If the Barristers Disciplinary Tribunal finds that a barrister is guilty of a disciplinary offence, it has power to impose a punishment, including:

• a fine;
• a suspension; or
• a strike-off from the Roll of Barristers.

2.5 What is the general attitude towards legal finance in your jurisdiction among the courts and other relevant bodies?

Arbitration: There is overwhelming public support for allowing TPF in arbitration, including from:

• government bureaux and departments;
• accounting firms;
• arbitral institutions;
• arbitrators;
• barristers;
• chambers of commerce;
• consumer and public interest groups;
• the financial sector;
• funders, insurers and insurers' associations;
• law firms;
• insolvency practitioners;
• professional bodies; and
• academics.

Key considerations include that:

• "a party with a good case in law should not be deprived of the financial support it needs to pursue that case by Arbitration and associated proceedings under the Arbitration Ordinance"; and
• TPF is necessary to enhance Hong Kong's competitive position as an international arbitration centre.

Importantly, while reform to allow TPF in arbitration was implemented by the Hong Kong government and lawmakers, this was in part motivated by the dictum of the Court of Final Appeal in Unruh, where the court had left open the question of whether the doctrines of maintenance and champerty applied to arbitrations taking place in Hong Kong.

The Court of First Instance discussed the dictum in Unruh more recently in Re A [2020] HKCU 705. There, Justice Marlene Ng noted that:

• "the origin of the laws of maintenance and champerty, which goes back to medieval times, is ancient and obscure"; and
• "notions of public policy necessarily evolve to meet the changing legal, moral, social and economic environment, which requires the court to unshackle itself from the formerly strict constraints against maintenance and champerty."

Litigation: There is also strong support from the courts and Hong Kong government for the use of funding in insolvency proceedings. It is well established by case law that a party can seek TPF in insolvency proceedings, and that liquidators do not require the sanction of the court to enter into a TPF agreement. However, similar support has yet to develop in respect of funding in litigation more generally.

2.6 Is legal finance considered consumer credit and is it captured by the relevant protective regulations in your jurisdiction?

TPF should not be considered consumer credit in Hong Kong.

Adopting the definition of 'consumer credit' used in the Code of Practice on Consumer Credit Data, issued by the Privacy Commissioner for Personal Data pursuant to the Personal Data (Privacy) Ordinance (Cap 486), 'consumer credit' is: "any loan, overdraft facility or other kind of credit provided by a credit provider to and for the use of an individual, or to and for the use of another person for whom an individual acts as mortgagor or guarantor."

While the Hong Kong courts have not addressed this specific question, TPF is unlikely to be considered consumer credit given that TPF is a form of non-recourse funding and is not a loan. In particular:

• there is no absolute obligation to repay the principal;
• there is no guaranteed return on investment; and
• the only collateral 'securing' the cash advance is the recovery from the proceedings, if any.

3 Other risk-sharing models available to litigants and law firms

3.1 Are conditional (contingent or success) fee agreements permitted in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?

Permissibility of conditional fee arrangements: Conditional fee agreements (CFAs) are permitted in certain circumstances in Hong Kong.

As discussed in question 1.2, this follows the enactment on 16 December 2022 of the Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap 609D) ('ORFS Rules'), which permit certain types of success-based fee arrangements in arbitration and arbitration-related court, emergency arbitrator and mediation proceedings.

One of the permitted ORFS arrangements is the CFA. This is an arrangement where the legal representative is paid a success fee for a favourable outcome on either a 'no win, no fee' or 'no win, low fee' basis.

The success fee element of the arrangement is calculated as a percentage uplift on the fees charged or, for a 'no win, no fee' case, with reference to the normal fees that the lawyer would otherwise have charged.

To be permissible under the ORFS Rules, the ORFS arrangement must:

• be in writing and signed by the lawyer and the client;
• state the matter to which the agreement relates;
• state that the lawyer has informed the client of the right to seek independent legal advice; and
• provide for a cooling-off period of not less than seven days.

Circumstances of use: Given that the ORFS regime applies only to arbitration and arbitration-related court, emergency arbitrator and mediation proceedings, CFAs may only be used by solicitors and barristers in these circumstances.

Advantages: The availability of CFAs is generally beneficial for both clients and law firms. The availability of CFAs generally facilitates the pursuit of meritorious claims given that lawyers are unlikely to 'invest' in cases they consider unlikely to succeed.

For clients in particular, CFAs generally:

• promote access to justice;
• provide clients with flexibility in selecting their commercial arrangements; and
• may facilitate clients being able to select law firms in Hong Kong as their legal representatives.

For law firms, they allow legal practitioners in Hong Kong to compete on a level playing field with their international counterparts.

Disadvantages: The majority of law firms do not have access to outside equity or long-term debt for use in the event of unsuccessful proceedings. This may be a significant hurdle to taking on such client risk via CFAs – particularly in relation to 'no win, no fee' cases. That said, this hurdle may be overcome by their use of third-party funding (TPF).

3.2 What is the maximum contingency that is permitted (ie, up to 100% of hourly fees or something less)? Is there a cap on the amount of success fees lawyers can receive under such arrangements?

The ORFS Rules provide for caps on 'uplift fees', which are the fees payable to legal representatives in excess of the benchmark fee in the event of success. The 'benchmark fee' is what the legal representative would have charged the client if there were no ORFS arrangement.

For CFAs, the success fee payable cannot exceed 100% of the benchmark fee.

3.3 Are damages-based agreements permitted in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?

Damages-based agreements (DBAs) are permissible under the new ORFS regime. Under these arrangements, the legal representative receives payment only if the client recovers a financial benefit in the matter.

Under the ORFS Rules, the agreement for DBAs must state, among other things:

• the financial benefit to which the agreement relates; and
• when the DBA payment becomes payable by the client to the lawyer.

In relation to the first point above, under the Arbitration Ordinance (AO), 'financial benefit' means any money or money's worth, but does not include any sum awarded in respect of a lawyer's costs and any sum awarded in respect of expenses.

Under the ORFS Rules, the DBA payment cannot exceed 50% of the financial benefit obtained by the client.

Circumstances of use: DBAs may be used only in arbitration and arbitration-related court, emergency arbitrator and mediation proceedings.

Advantages: For litigants, DBAs can be very attractive. A key advantage is that participation in a dispute run under a DBA will cause no drag on a litigant's cash flow or profit and loss statements, as no moneys need to be provisioned or paid for as legal fees during the lifetime of the case. Any payment that is required will come only from the proceeds of the dispute in the amount which corresponds to the agreed percentage in the DBA.

Further, the fact that no legal fees will be payable if the case is lost places litigants using a DBA in a much more favourable position than those that have paid monthly fees to their lawyers for the duration of proceedings if the case is ultimately unsuccessful.

From a law firm's perspective, DBAs (as with other ORFS arrangements) allow clients to retain them to act on their behalf in bringing meritorious claims when they may not otherwise be inclined (or able) to pay the firm's usual benchmark fees, thereby increasing business for the firm.

The availability of DBAs generally facilitates the pursuit of meritorious claims given lawyers are unlikely to 'invest' in cases they consider unlikely to succeed.

Disadvantages: DBAs place significant additional risk on the law firm in respect of its cash flow and profitability, even if the claims are meritorious. As such, the use of DBAs requires careful planning and management and, again, involves risk that the firm's use of TPF may help to mitigate.

3.4 What other funding and/or risk-sharing options are available to litigants in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?

Hybrid DBAs – another ORFS arrangement – are permissible in Hong Kong. Under the hybrid DBA arrangement, the legal representative receives:

• a payment pursuant to a DBA (ie, calculated by reference to the financial benefit recovered by the client at the outcome of the proceedings); and
• fees (which may or may not be discounted) for legal services rendered during the course of the matter.

In terms of caps on the amount of success fees, two scenarios should be considered:

• Where the proceedings are unsuccessful, the legal representative can only retain up to 50% of the irrecoverable costs incurred in pursuing the unsuccessful claim. 'Irrecoverable costs' refer to any portion of the benchmark fee that is not recoverable from another party to the arbitration.
• Where the proceedings are successful, if the DBA payment and recoverable costs are less than 50% of the irrecoverable costs incurred, the legal practitioner is entitled to retain:
• • the irrecoverable costs incurred; and
  • the recoverable costs (instead of the DBA payment).

Circumstances of use: As with the other ORFS arrangements, hybrid DBAs may only be used in arbitration and arbitration-related court, emergency arbitrator and mediation proceedings.

Advantages: The availability of hybrid DBAs as an additional funding option enhances access to justice by affording clients with greater flexibility of legal financing options. The use of hybrid DBAs will also facilitate the pursuit of meritorious claims, given that lawyers are unlikely to 'invest' in cases they consider unlikely to succeed.

Disadvantages: Hybrid DBAs may offer lucrative opportunities for lawyers to increase their earnings greatly, without a commensurate increase in risk. However, this is addressed by the cap imposed on the success fees.

3.5 Are law firms in your jurisdiction allowed to have non-lawyer owners or non-lawyer shareholders?

No. The management and control of a Hong Kong law firm are restricted to those who are legally qualified. Section 2 of the Legal Practitioners Ordinance (LPO) defines a 'Hong Kong firm' as a "law firm in which (a) all the partners are solicitors; or (b) the sole practitioner of which is a solicitor", and a solicitor as "a person who is enrolled on the roll of solicitors and who, at the material time, is not suspended from practice". Only persons who meet the qualification for admission under Section 4 of the LPO can be admitted on the roll of solicitors.

Further, solicitors are prohibited from sharing profits/fees with those who are not practising solicitors in Hong Kong under Rule 4 of the Solicitors Practice Rules (Cap 159H) (SPR) and Principle 4.16 of the Hong Kong Solicitors' Guide to Professional Conduct, subject to the exceptions set out in Rule 4 of the SPR and Parts 10A and 10B of the AO. Parts 10A and 10B of the AO govern TPF and ORFS in arbitration.

3.6 How do the available funding and risk-sharing options impact on the attitudes of corporate litigants about affirmative recovery programmes or the pursuit of high-value commercial claims more generally?

Legal finance and/or the possibility of sharing risk with law firms can be an important tool for companies with an affirmative recovery programme.

'Affirmative recovery programmes' are policies by a company's legal department to actively pursue claims with a high chance of recovery, for the purpose of:

• reducing costs; and
• enhancing liquidity through meritorious plaintiff-side litigation.

Both purposes can also be important factors in determining whether a corporate litigant decides to go ahead with a high-value claim.

Corporate litigants are far more likely to take the business decision to finance the pursuit of disputes if they can do so on a no or low-risk basis with no or reduced negative impact on their profit and loss statements. This is the case whether financing is on an individual basis or through the implementation of an affirmative recovery programme.

Financing is attractive to corporate litigants in this context because the funds that would otherwise be invested in the dispute can now be invested either in its core business activities or more generally.

3.7 How do the range of funding and risk-sharing options available impact on the attitudes of law firms about their own business?

Generally, the availability of TPF and other risk-sharing options has, or should have, a positive impact on law firms. It may encourage some firms to be more innovative and attract clients through offering alternative fee arrangements. It may also help some firms to diversify their client base, as it enables clients to retain law firms that they might otherwise have been unable to retain.

The availability of ORFS arrangements may also provide significant commercial advantages for the law firm's own bottom line, as if a case is successful, the law firm may make more profit than it otherwise would have without an ORFS arrangement. It may also encourage greater entrepreneurial thinking from firm management. By leveraging the capital available from a funder, a law firm can significantly increase the profit it may generate from a case (whether on the basis of a conditional or contingency fee arrangement) without taking the attendant financial risk, which is passed onto the funder through the TPF arrangement.

4 Collective actions

4.1 Is it possible to bring collective actions in your jurisdiction? If so, can they be funded by third parties? In those circumstances, how is the amount of the funder's return determined? Are there caps or other restrictions? Do such agreements require court approval?

Litigation: There is currently no specific procedure for class actions in Hong Kong. Although steps have been taken towards introducing a multi-party litigation regime, the only type of collective action currently permitted in Hong Kong is representative proceedings.

These proceedings arise when numerous people have the same interest in a grievance and seek the same relief. The person(s) who begin or continue such action are taken as representing all, or all except one or more of such persons with the same interest.

Such actions are effectively 'opt in'. This means that a judgment or order made in representative proceedings is binding on all the persons so represented. However, it shall not be enforced against any person not a party to the proceedings, except with the leave of the court.

While unlikely to occur in practice, in principle, third-party funding (TPF) should be permissible if the representative proceedings fall under one of the three recognised exceptions to champerty and maintenance as discussed in question 1.1.

Arbitration: While not a formal 'class action' procedure per se, the Hong Kong International Arbitration Centre (HKIAC) Rules do include provisions for the consolidation of multiple arbitrations involving multiple parties. It is also reported that several hundred claimants have brought a funded 'class action' style in a HKIAC arbitration against a cryptocurrency exchange.

4.2 How significant is the funding of collective actions in your jurisdiction relative to the use of legal finance by individual commercial litigants?

Please see question 4.1.

Representative proceedings are not common in Hong Kong. We are not aware of any representative proceedings which have been funded. The use of TPF is far more significant for individual commercial litigants.

5 Securing financing

5.1 What factors will a funder generally consider when evaluating whether to fund a case?

Ultimately, each funder's decision on whether to fund a case will depend on its own risk appetite and assessment. What factors a particular funder considers in making the decision to invest will depend on the funder involved and whether it is bound by any specific considerations required by its investors. For example, some funders may be limited to certain types of cases or investment amounts, which will guide investment decisions.

However, generally speaking, a funder will typically have three general considerations in mind when evaluating whether to fund a case:

• Legal merits: funders seek to invest in claims that they think will win, or, in other words, those that appear to have reasonable prospects of success. The assessment will involve a balancing exercise, considering the bases of the claim and the likely defences that may be raised.
• Economic viability: This involves an assessment of the claim value and its comparison to the amount of funding being sought. Funders look for a measurable commercial benefit and cases that they fund must have the required claim value to support that. Many funders will require at least a 1:10 ratio between the amount of funding sought and the realistic claim value.
• Recoverability: funders provide finance on a no-recourse basis. If no money is recovered, the funder receives no proceeds. A key criterion for a funder's decision to invest will therefore be the chance of financial recovery. Funders will invest in cases against opponents even if they are anticipated to be unwilling debtors, but not those which are unable to pay. The opposing party must be capable of paying the expected judgment or settlement.

5.2 What should a litigant or litigant's counsel look for in a legal finance partner?

Capital adequacy: Litigants should ensure that a potential funder has sufficient capital not only to meet the capital adequacy requirements in the Code of Practice for the Third Party Funding of Arbitration ('Arbitration Code'), but also to provide the finance required to see their claim through to completion.

Practically speaking, this may involve looking at the financial statements to ensure that it is well resourced.

The transparency of a funder's financial position is important in determining whether the funder has significant funds, and how it obtains and uses such capital. Generally, financial statements of a listed funder can be accessed online while privately held funds will have to be approached to provide this information directly.

Track record: Litigants should consider:

• the funder's track record, including:
• • its success rate (and how many cases it relates to); and
  • the record of returns generated for clients; and
• the funder's experience and reputation.

Personnel: A litigant should consider:

• the background, composition and availability of the funder's team;
• their familiarity with the relevant local jurisdiction(s);
• whether the funder has personnel located in the jurisdiction(s) of relevance; and
• its ability to assess and approach the investment promptly and commercially.

Funder involvement: Litigants should consider their preferred level of funder involvement and understand what the funding process (due diligence, funding approval and ongoing monitoring) will entail. Law firms are typically asked to provide an opinion on the merits in the due diligence phase as well as regular reports to the funder to enable it to monitor the claim's progress, chances of success and compliance with the funding agreement once a case is funded.

Beyond this, the level of involvement varies between funders. Some prefer to provide strategic advice throughout the process, while others adopt a fully hands-off approach. For funders that take a more active role, arrangements to protect privilege and confidentiality should also be considered.

Availability of downside protection: In cost-shifting jurisdictions such as Hong Kong, and particularly in the context of international arbitration, litigants should consider whether the funder provides security for costs and adverse costs cover.

Enforcement capabilities: In the vast majority of cases, success for a litigant is not achieved simply by receipt of a judgment or an award in its favour; it is achieved on receipt of money in the bank. A funder's ability and experience in tracing, freezing and attaching assets in order to achieve monetary recovery – in other words, its ability to convert an entitlement to funds into their actual receipt – is a key factor to be considered when a litigant is choosing a funder.

5.3 What is the typical process for concluding the legal finance agreement?

Not all funders operate in the same way and what is outlined below only provides an example of how a funder might operate. As discussed in question 5.2, litigants should ask what the process will entail before engaging with a particular funder.

However, generally speaking, there are four stages in the process:

• Initial assessment: An initial assessment is conducted to obtain a balanced view of the case. This often involves:
• • a high-level assessment of the bases of the claim, merits and potential defences, the identity of the respondents and their ability to pay; and
  • a realistic estimate of the claim value and the amount of funding required.
• A confidentiality agreement or non-disclosure agreement is usually entered into at this stage to ensure confidentiality, protect privilege and allow for full and frank discussion.
• Term sheet: If the case is suitable for investment, the funder and funded party will usually sign a term sheet agreeing to indicative funding terms based on the initial assessment and risk profile of the case. The terms may include:
• • information on the proposed funded costs and the proposed return on investment; and
  • a short exclusivity period to conduct due diligence (if necessary).
• Further due diligence: If the funder considers it necessary, further due diligence may be undertaken, which involves a more detailed assessment of the general criteria considered by a funder discussed in question 5.1 above. Other key issues for assessment may include:
• • the quantification of damages;
  • litigation strategy and settlement prospects;
  • enforcement strategy (if required); and
  • likely contingencies.
• Funding decision: Following further due diligence or entry into the term sheet (if no further due diligence is required), a funding decision is reached. If approved, a formal offer to fund will be made in the form of a written funding agreement.

5.4 What terms does the legal finance agreement typically include?

A funder and the funded party are generally free to agree on the terms of the funding agreement.

However, for the third-party funding (TPF) of arbitration in Hong Kong, the Arbitration Code requires the funding agreement to set out and explain matters set out in Part 10A of the Arbitration Ordinance (AO) and the Arbitration Code. These include, without limitation, setting out:

• a Hong Kong address for service;
• all key features and terms of the proposed funding and funding agreement, including:
• • the costs to be funded; and
  • the return on investment and the priority of payments from any recoveries;
• continuous disclosure obligations;
• procedures for managing conflicts of interest;
• the funder's control and ongoing involvement in the matter, and in particular a commitment that the funder will not:
• • seek to influence the funded party or its legal representative to give control or conduct of the arbitration to the funder;
  • cause the funded party's legal representative to act in breach of professional duties; or
  • seek to influence the arbitration body and any arbitral institution involved;
• the funder's liability for costs, such as:
• • adverse party costs;
  • any premium for adverse costs insurance;
  • security for costs; and
  • any other relevant financial liability;
• grounds for termination of the funding agreement;
• a neutral, independent and effective dispute resolution mechanism for the settlement of any dispute arising under or in connection with the funding agreement; and
• a complaints procedure to address complaints against the funder.

5.5 Do any caps apply to the funder's fees?

There are no specific caps on a funder's fees imposed by Hong Kong law. Fees are a matter for agreement between the funder and the funded party.

However, for the TPF of arbitration, while the AO and the Arbitration Code do not prescribe limits on a funder's fees, the funder's liability for costs must be set out in the funding agreement. Liability for costs would include:

• liability for adverse party costs;
• any premium for adverse costs insurance;
• security for costs; and
• any other relevant financial liability.

5.6 Can the funder terminate the legal finance agreement before the litigation has ended? If so, under what circumstances and what are the implications?

Paragraph 2.13 of the Arbitration Code sets out the only three circumstances pursuant to which the funder may terminate the funding agreement – namely, where it reasonably:

• ceases to be satisfied about the merits of the case;
• believes that there has been a material adverse change in the prospects of success; or
• believes that the funded party has committed a material breach of the funding agreement.

Importantly, the funding agreement must not give the funder a discretionary right to terminate the funding agreement in the absence of such circumstances.

If the funder terminates the funding agreement, it remains liable for all funding obligations accrued to the date of termination unless the termination is due to a material breach as per Paragraph 2.13 of the Arbitration Code.

In addition, the Arbitration Code requires the funding agreement to set out the funded party's right to terminate the funding agreement if it reasonably believes that the funder has committed a material breach of the Arbitration Code or the funding agreement, which may lead to irreparable damage.

5.7 Under what circumstances (if any) must funding be approved by the court in advance?

Arbitration: For TPF of arbitration, while disclosure is required, prior approval of funding from the court (or the tribunal) is not necessary. Please also refer to question 8.1.

Litigation: For TPF of litigation, there is no general obligation on a funded party to seek the court's approval of the funding arrangement. In particular, the courts have confirmed that there is no need for liquidators to obtain the court's sanction to enter into a funding agreement, although in practice liquidators may nonetheless elect to do so.

Observations: The Law Reform Commission of Hong Kong (LRC) has acknowledged public comments arguing that it should be necessary for the funder and funded party to obtain sanction of the proposed funding arrangements from the tribunal, the court or any other relevant statutory authority.

However, the LRC considered that a 'light-touch' approach to its regulation of TPF should be adopted for an initial period of three years. It regarded this to be in line with international practice and in accordance with Hong Kong's needs and regulatory culture.

5.8 Have there been notable disputes arising from legal finance agreements, and if so, what can a litigant or counsel do to avoid such disputes?

Disputes: We are not aware of any disputes arising from legal finance agreements between funders and funded parties.

However, there have been cases considering whether TPF should be allowed in individual cases. For example, the Court of First Instance in Re A [2020] HKCU 705 addressed the issue of TPF in matrimonial proceedings. In this case, the husband made an application for pre-clearance approval of TPF for his legal costs based on the 'access to justice' exception.

The court carefully weighed the competing public policy considerations against the totality of the facts. It refused to grant a declaration that the proposed TPF of the husband was not a breach of the laws of champerty and maintenance. The court considered that such refusal was not disproportionate infringement or obstruction that would impair the essence of the right of access to justice.

Avoiding disputes: To avoid potential disputes involving funding, the funding agreement should ideally set out the agreement between the parties in detail, in particular with respect to costs and liabilities, to avoid potential future conflict.

The parties to the funding agreement should also ensure open and transparent communication throughout the process.

5.9 Is the funder bound to fund any counterclaims arising from the funded litigation?

Whether the funder is bound to fund any counterclaims arising from the funded litigation will depend on the terms of the funding agreement.

In particular, Paragraph 2.12 of the Arbitration Code requires funders to ensure that the funding agreement sets out whether, and if so to what extent, the funder is liable to the funded party to meet any other financial liability.

6 Purchasing a litigation claim, judgment or award

6.1 Can the funder purchase legal claims?

The purchase of legal claims in the insolvency context is permitted pursuant to Section 199(2)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO). This provision empowers liquidators to "sell the real and personal property and things in action of the company by public auction or private auction". This includes a cause of action.

In other contexts, however, a funder cannot purchase legal claims.

6.2 How does a funder purchase a claim out of an insolvency?

There is no formal method under Hong Kong legislation for a funder to purchase a claim out of insolvency. Development of the use of legal finance in the context of insolvency proceedings has primarily been through case law.

6.3 Are final judgments and/or mere causes of action assignable in your jurisdiction and is there a regulatory framework governing this?

Yes. In liquidation proceedings, the Hong Kong courts have acknowledged that a liquidator can assign an insolvent company's right of action, as part of a broader funding agreement under Section 199(2)(a) of the CWUMPO.

As noted in question 6.1, causes of action are otherwise generally not assignable to funders.

In Hong Kong, funders can purchase final judgments and awards.

7 Role of the funder

7.1 Can the funder influence the litigant's choice of counsel?

There is no general prohibition on a funder influencing the litigant's choice of counsel.

However, in the arbitration context, the Code of Practice for the Third Party Funding of Arbitration ('Arbitration Code') requires the funding agreement to set out and explain clearly the key features and terms of the proposed funding and the funding agreement, including the degree of control that the funder will have.

Under the Arbitration Code, funders are prohibited from:

• seeking to influence the funded party or its legal representatives to give control or conduct of the arbitration to the funder; and
• taking steps that cause or are likely to cause the funded party's legal representative to act in breach of professional duties.

Funders therefore cannot influence a litigant's choice of counsel to obtain control of the proceedings.

However, depending on the agreed level of their involvement, funders may suggest bringing in co-counsel or provide recommendations of suitable counsel (if none have yet been engaged) at the request of the funded party.

7.2 Can the funder attend and/or participate in the court proceedings?

Arbitration: We are not aware of any prohibitions on a funder attending and/or participating in arbitration proceedings, assuming that the parties and the tribunal agree. This is provided that the funder's role is disclosed and that the Arbitration Code is complied with. This means that the funder will not seek to influence the arbitral body and any arbitral institution involved, as discussed in question 7.1.

Typically, the funder will be interested in attending proceedings – albeit that the extent to which it wishes to do so will vary. Some funders may wish to attend all days of any hearings; others might attend key portions only; and still others may not attend at all, choosing to rely on updates from the lawyers and/or a review of the hearing transcript.

It is rare for a funder to participate in proceedings, although a requirement that it do so could arise in limited circumstances (eg, where a funder has undertaken to submit to the tribunal's jurisdiction in the context of a broader undertaking to pay for security for costs or other adverse costs). In practice, the arbitral tribunal will ask for a list of participants prior to a hearing, which should include the name of a representative from the funder if it is to attend. Whether a funder wishes to attend and/or participate will depend on the agreed level of involvement with the funded party and whether it can do so will be determined by the tribunal.

Litigation: Court proceedings in Hong Kong are generally open to the public. A funder can attend such hearings.

7.3 Can the funder influence the acceptance or terms of a proposed settlement agreement?

Ultimately, the funder cannot influence the funded party or its legal representative to give control or conduct of the arbitration to it. In practice, the level of influence that a funder has on the acceptance or terms of a proposed settlement agreement will depend on the scope of the funding agreement.

For example, some funding agreements may provide for an impartial third party to act as a referee or conduct an expert determination in the situation where the funder and funded party have different opinions on whether a proposed settlement agreement should be accepted.

7.4 In what other ways can the funder participate in, and exert influence on, the litigation?

The ways in which a funder can participate in and exert influence on the proceedings in question will depend on the terms of the funding agreement.

Arbitration: A funder's participation in and/or influence over an arbitration is subject to restrictions in the Arbitration Code.

Litigation: In the insolvency context, the Hong Kong courts have been clear that the funded party should retain control of the legal proceedings. For example, courts have criticised the exercise of excessive control over proceedings by funders. They have also expressed the view that there should be limits on the control exerted by funders. This is to ensure that there is limited risk of a funder pressuring liquidators or lawyers to conduct the litigation improperly.

With this in mind, funders will generally participate in proceedings where there are significant strategic steps being taken. These include the filing of pleadings or memorials, for example; and the funder's participation will typically involve the provision of high-level input and comments.

8 Ethical considerations

8.1 In what circumstances (if any) is it necessary to disclose a legal finance agreement to the court or to the opposition? What specific information must be disclosed?

Arbitration: Sections 98U and 98V of the Arbitration Ordinance (AO) require disclosure of the funding agreement and the end of the funding agreement (where it ends in a situation other than the end of the arbitration).

In terms of disclosure of the funding agreement, Section 98U of the AO provides that the funded party must give written notice to each party to the arbitration and the arbitration body of:

• the funding agreement being made; and
• the name of the funder.

Notice must be given for funding agreements made on or before the commencement of arbitration proceedings, or entered after the commencement of the arbitration, within 15 days of the funding agreement being made or entered into.

With respect to the end of the funding agreement:

• the funded party must give written notice of that fact and the date on which the funding agreement ended; and
• notice must be given to each party to the arbitration and the arbitration body (if any) within 15 days of the funding agreement ending.

Institutional arbitral rules may also have specific provisions on the disclosure of third-party funding (TPF) agreements. For example, Article 44 of the Hong Kong International Arbitration Centre's 2018 Administered Arbitration Rules requires a funded party to communicate by way of written notice to all other parties:

• that a funding agreement has been made; and
• of the identity of the funder.

Litigation: With respect to litigation, there is no general obligation on the litigant to disclose details of the funding arrangement to the court or the opposing party.

8.2 Are communications between the parties to the legal finance agreement subject to privilege in your jurisdiction?

Yes. Generally, the right to assert legal professional privilege is enshrined in Article 35 of the Basic Law. In this context, legal professional privilege includes both legal advice privilege and litigation privilege.

Of particular relevance in the TPF context is litigation privilege. This type of privilege applies to communications between a litigant and its legal representatives, or between one of them and third parties, made for the dominant purpose of actual or anticipated legal proceedings.

Common interest privilege may also apply, as the funder and funded party have a common interest in the outcome of the proceedings. However, this is not a freestanding form of privilege and requires the material in question to already be privileged.

To maintain privilege in any communication under Hong Kong law, the communication must remain confidential. Assuming that communications between a funder and the funded party are confidential (eg, subject to a suitable confidentiality arrangement), they should, in principle, be protected by litigation or common interest privilege.

In the arbitration context specifically, Section 98T of the AO permits a party to disclose information relating to the arbitration to a person without losing confidentiality, for the purpose of having or seeking TPF from the person.

Further, Paragraph 2.8 of the Arbitration Code requires a funder to observe the confidentiality and privilege of all information and documentation relating to the arbitration and the subject of the funding agreement to the extent that Hong Kong law permits.

8.3 Does the rule of attorney work product apply to documents generated for the purposes of securing legal finance in your jurisdiction?

As noted in question 8.2, litigation privilege covers communications made for the dominant purpose of actual or anticipated legal proceedings.

There is limited case law in Hong Kong on whether documents generated for the purpose of seeking funding are considered to be made for the dominant purpose of actual or anticipated legal proceedings.

8.4 In what circumstances (if any) do rules about fee-splitting impact on the use and practice of legal finance?

As discussed in question 3.5, solicitors are prohibited from sharing profits and fees with those who are not practising solicitors in Hong Kong under Rule 4 of the Solicitors Practice Rules (SPR) and Principle 4.16 of the Hong Kong Solicitors' Guide to Professional Conduct, subject to the exceptions set out in Rule 4 of the SPR and Parts 10A and 10B of the AO.

In addition, the majority of law firms do not have access to outside equity or long-term debt. As mentioned in question 3.1, this may be a significant hurdle to taking on such client risk. However, the use of legal finance (in particular, portfolio funding) can improve a law firm's access to finance and enable them to extend flexible fee arrangements to clients.

8.5 Do the doctrines of champerty and maintenance apply in your jurisdiction?

Yes, but there are a few recognised exceptions to the doctrines of champerty and maintenance, pursuant to which TPF is allowed. Please refer to questions 1.1, 1.2 and 2.1.

8.6 Are there any types of proceedings (family, private prosecutions) for which funding is not permitted?

Yes. TPF is generally not permitted for litigation proceedings, unless they fall under one of the recognised exceptions under Hong Kong law. Please refer to question 1.1.

9 Proceedings

9.1 What is the typical timeframe for first-instance proceedings in your jurisdiction?

Commencement of proceedings: Litigation proceedings in Hong Kong can be commenced by:

• writ of summons;
• originating summons;
• originating motion; or
• petition.

Most civil proceedings are brought by way of writ of summons. The writ should be served on the defendant alongside the acknowledgement of service form. It is usually accompanied by a statement of claim, although the plaintiff can also elect to serve this at a later date.

The defendant's response: Generally, the defendant has 14 days to file an acknowledgement of service indicating whether it intends to defend the claim.

The defendant must file and serve its defence to the plaintiff's claim (and its counterclaim, if any) within 28 days.

The plaintiff's reply: After the defence is served, the plaintiff may file a reply within 28 days (and defence to counterclaim, if any).

The timing varies slightly if the statement of claim is not served together with the writ of summons. Additionally, time extensions may be applied for with the court or agreed between the parties.

Discovery: Once the exchange of pleadings is complete, the parties go through the discovery process and prepare their evidence for trial.

Timetabling questionnaire: Parties must also file a timetabling questionnaire within 28 days of the close of pleadings. This generally covers their proposed case management directions and timetable.

Timing: The timeframe required for proceedings varies depending on a wide range of factors, such as:

• the complexity of the case;
• the number of interlocutory applications made;
• the duration of the trial;
• the need for expert evidence;
• the availability of judges; and
• the case management style.

Further, once judgment is obtained, more time may be required for enforcement.

It is common for proceedings to take at least 18 to 24 months to reach the trial stage.

The different courts of justice in Hong Kong have varying jurisdictions and powers, and adjudicate different types of cases. Examples include:

• the Court of Final Appeal;
• the Court of Appeal;
• the Court of First Instance;
• the District Court; and
• various tribunals such as:
• • the Competition Tribunal;
  • the Labour Tribunal; and
  • the Small Claims Tribunal.

9.2 What are the opportunities in the litigation process for a case to be struck out prior to a trial?

The court can, either of its own motion or on application by any party, strike out a pleading (or part of it) at any stage of the proceedings if it finds that the pleading:

• discloses no reasonable cause of action or defence;
• is scandalous, frivolous or vexatious;
• may prejudice, embarrass or delay the fair trial of the action; or
• is otherwise an abuse of the process of the court.

9.3 How much party discovery of evidence is permitted in your jurisdiction? Are there procedures for seeking or compelling evidence from non-parties?

Discovery: After the close of pleadings, the parties will proceed to discovery. Documents which are or have been in a party's possession, custody or power relating to matters in question in the action must be disclosed. This includes both paper and electronic media (Order 24, Rule 1 of the Rules of the High Court (RHC)).

Generally, the consideration as to whether to disclose turns on whether the document's disclosure:

• would help to prove or disprove a matter in issue;
• has the potential to allow the other party either to advance its own case or to damage the case of its adversary; or
• would lead to a train of enquiry that might result in either of the above.

However, the court can limit discovery to meet the overarching case management principles (Order 24, Rule 15A of the RHC).

Non-parties – summons: The court may order disclosure of specific documents or specific classes of documents which are or have been in the possession, custody or power of non-parties.

The party seeking such an order must make its application by way of summons, which must be served personally on the non-parties and every party to the action. The applicant must fulfil three requirements:

• The non-party is likely to have the documents sought in its possession, custody or power;
• The documents are relevant to an issue arising or likely to arise in the proceedings; and
• The order is necessary either for fairly disposing of the matter or for saving costs.

Non-parties – Norwich Pharmacal order: The court may also order a Norwich Pharmacal order. This is an order for the disclosure of certain documents or information that is made against a third party which is innocently or otherwise caught up in the acts of a potential defendant.

The provision of such information or documents means that the applicant (victim) can then identify and sue the defendant wrongdoer.

A Norwich Pharmacal order is granted only where necessary in the interests of justice.

9.4 Are interlocutory appeals (appeals of non-final judgments) permitted during proceedings in the first instance?

A party can appeal an interlocutory judgment. However, the Court of Appeal must generally grant leave to appeal (ie, permission to appeal) (Section 14AA of the High Court Ordinance (Cap 4)).

The application should be made to the judge who made the interlocutory decision within 14 days of the date of such decision.

If the judge refuses to grant leave, the party may further apply to the Court of Appeal for leave to appeal within 14 days of the date of such refusal.

The decision of the Court of Appeal on whether to grant or refuse leave is final and not appealable.

Leave to appeal may be given on such terms as to costs, security and so on as the relevant court thinks fit.

9.5 Are first-instance decisions commonly appealed in your jurisdiction? What is the typical timeframe for appeal proceedings?

It is relatively common for first-instance decisions to be appealed in Hong Kong.

The appeal procedure and timeframe differ depending on the decision and court.

Master: For decisions of a master, a party may appeal to a judge in chambers within 14 days.

District Court: For decisions on a final matter of a judge in the District Court, a party may apply to the judge within 28 days for leave to appeal to the Court of Appeal.

If the judge refuses to grant leave, the party may apply to the Court of Appeal for leave to appeal within 14 days of the date of the refusal.

Court of First Instance: For decisions on a final matter of a judge in the Court of First Instance, no leave to appeal to the Court of Appeal is required, except for appeals solely on the question of legal costs.

A party should serve a notice of appeal on the respondent and the court within 28 days from the date on which the judgment or order was sealed.

Court of Appeal: A party may also seek leave from the Court of Appeal or the Court of Final Appeal to appeal to the Court of Final Appeal for judgments handed down by the Court of Appeal.

Leave will be granted if, in the opinion of either court, the question involved in the appeal is one which, because of its great general or public importance, or otherwise, should be submitted to the Court of Final Appeal for decision.

Court of Final Appeal: Decisions of the Court of Final Appeal are final and non-appealable.

Appeal proceedings typically take six to 12 months from the date of the decision appealed, although this will vary depending on the nature of the action.

9.6 How are decisions typically enforced in your jurisdiction? What is the typical timeframe for enforcement proceedings?

Enforcement: There are a number of potential methods of enforcing a judgment against a judgment debtor, including:

• the imposition of a charging order over assets (ie, creating an interest in land or over securities, which secures the payment of money due under the judgment);
• the commencement of garnishee proceedings, whereby a third party pays the debt owed to the judgment debtor directly to the judgment creditor;
• an oral examination of the judgment debtor as to the assets available to satisfy the judgment;
• a prohibition order, preventing the judgment debtor from leaving Hong Kong;
• a writ of execution, directing the bailiff to seize and sell the judgment debtor's goods and chattels to satisfy the judgment debt; and
• a winding-up petition (where the judgment debtor is a company) or bankruptcy petition (where the judgment debtor is an individual).

Timing: The length of time it takes to enforce a judgment depends on the enforcement action(s) to be taken and whether enforcement is contested.

Generally, an uncontested enforcement action takes at least three months.

The limitation period for enforcement of judgments is 12 years from the date on which the judgment was rendered and six years for any arrears of interest in respect of any judgment debt (Section 4(4) of the Limitation Ordinance (Cap 347)).

9.7 Is there an automatic stay on enforcement pending appeal or under what circumstances is one granted? Are appeals from first instance granted as of right?

A pending appeal does not give rise to an automatic stay on enforcement of judgment. However, the court may exercise its discretion to grant a stay where:

• there is a reasonable prospect of success in the appeal; and
• the failure to grant the stay would result in the appeal, if successful, being nugatory.

Generally, an appeal lies as of right from a decision on a final matter from the Court of First Instance judge to the Court of Appeal.

Leave to appeal is required for other decisions.

10 Costs and insurance

10.1 Will the court order the losing party to pay the costs of the winning party? How else might costs be allocated between the parties and under what conditions?

Arbitration: Arbitral tribunals sitting in Hong Kong have broad discretion:

• to allocate as they see fit the costs of arbitral proceedings, including the fees and expenses of the tribunal; and
• to direct to whom, by whom and in what manner the costs are to be paid (Section 74 of the Arbitration Ordinance (AO)).

However, the tribunal must only allow costs that are reasonable in all the circumstances (Section 74(7)(a) of the AO).

It is usual for Hong Kong-seated arbitral tribunals to order that costs follow the event, but there is no universal practice.

Litigation: With respect to litigation, the court has discretion to make any order as to costs.

The general position under the Rules of the High Court (RHC) is that costs follow the event – that is, the losing party will be ordered to pay the winning party's costs (Order 62, Rule 3 of the RHC).

Alternatively, the court may make:

• no order as to costs (ie, the parties are responsible for their respective costs); or
• other costs orders tailored to the specific circumstances of the case (eg, the winning party which did not succeed on all claims pays part of the losing party's costs).

10.2 Are some or all of the costs of funding recoverable by the winning party?

With respect to arbitration, as discussed in question 10.1, arbitral tribunals sitting in Hong Kong have broad discretion to allocate the costs of the arbitration as they see fit.

Institutional arbitral rules may also include specific provisions. For example, the Hong Kong International Arbitration Centre's 2018 Administered Arbitration Rules provide that the arbitral tribunal may take into account any third-party funding (TPF) arrangement in determining all or part of the costs of the arbitration.

As to the recoverability of uplift fees, the AO provides that these are not recoverable unless there are "exceptional circumstances justifying the order" (Part 10B, Section 8ZU). While the arbitral tribunal therefore has the discretion to depart from the general rule, such departures are likely to be rare and the Law Reform Commission of Hong Kong (LRC) has stressed that the discretion should be exercised in "genuinely exceptional circumstances".

One example of 'exceptional circumstances' identified by the LRC is the English case of Essar Oilfields Services Limited v Norscot Rig Management Pvt Limited [2016] EWHC 2361, where the claimant was allowed to recover the costs of TPF given that the respondent had deliberately tried to hurt the claimant financially, with the aim of preventing it from being able to pursue a legitimate claim.

10.3 Can the court order costs against the litigation funder?

Arbitration: In arbitration, the tribunal cannot order a funder to pay adverse costs (ie, costs for or against any party to the proceedings or a non-party). This is because the funder is generally not a party to the arbitration agreement.

However, the tribunal may order adverse costs against the funded party, which may be 'reimbursed' by the funder depending on the terms of the funding agreement.

In particular, Paragraph 2.12 of the Code of Practice for the Third Party Funding of Arbitration ('Arbitration Code') requires funders to ensure that the funding agreement stipulates whether and to what extent the funder will be liable to the funded party for adverse costs orders made against the funded party.

Litigation: The Hong Kong courts may make an adverse costs order, which includes ordering costs against a funder as a non-party to the proceedings.

Generally, the courts consider whether:

• it is appropriate to join the non-party for the purpose of costs only; and
• it is in the interests of justice to make such an order.

However, the Court of First Instance in Re A [2020] HKCU 705 noted that the law on how to assess the quantum of adverse costs against a funder is unsettled. It also stated that in any event, reliance on adverse costs against the funder as a safeguard must be supported by an effective regime for disclosure of the existence of the TPF.

10.4 Can the court order security for costs? If so, in what circumstances will it generally do so and how is this calculated and provided?

Arbitration: Unless the parties agree otherwise, arbitral tribunals sitting in Hong Kong can order security for costs against a party to the arbitration.

However, tribunals may not make such an order only on the grounds that the claimant is not based in Hong Kong (Section 56(2) of the AO).

Whether a funder is obliged to 'reimburse' a funded party for security for costs will depend on the terms of the funding agreement, which must stipulate whether and to what extent the funder will be liable to the funded party for security for costs orders made against the funded party (Paragraph 2.12 of the Arbitration Code).

Some institutional arbitration rules, such as the HKIAC Rules, expressly provide that the tribunal may make an order requiring a party to provide security for the costs of the arbitration.

Litigation: With respect to litigation, a Hong Kong court is only permitted to order security for costs against the plaintiff (or the defendant in a counterclaim).

The court may do so if it appears to the court:

• that the plaintiff is ordinarily resident out of the jurisdiction;
• that the plaintiff (not being a plaintiff which is suing in a representative capacity) is a nominal plaintiff which is suing for the benefit of some other person and there is reason to believe that it will be unable to pay the costs of the defendant if ordered to do so;
• subject to the second bullet above, that the plaintiff's address is not stated in the writ or other originating process, or is incorrectly stated therein; or
• that the plaintiff has changed its address during the course of the proceedings with a view to evading the consequences of the litigation (Order 23, Rule 1 of the RHC).

The Hong Kong courts have expressed reservations regarding the availability of security for costs made directly against a funder, noting that there is no provision in the RHC that allows making of such an order.

However, it is open to the parties to agree in the funding agreement for the funder to reimburse the plaintiff for any amount paid into the court in compliance with a security for costs order.

Whether security for costs will be ordered and the amount of security awarded is ultimately a matter within the court's discretion.

Security for costs is usually provided by way of payment into court or bank guarantee.

10.5 Is security for costs commonly ordered in funded litigation?

Litigation: It is difficult to generalise the impact of funding on whether security for costs is ordered, as it is a matter for the court's discretion.

Based on case law, examples of factors considered by the Hong Kong courts include:

• a plaintiff's prospect of success;
• whether the defendant has an arguable defence;
• the plaintiff's impecuniosity;
• whether an order for security would stifle the plaintiff's claim; and
• whether there was any delay in making the application.

In the context of insolvency proceedings specifically, there is authority to the effect that where a plaintiff is an insolvent company, whether funded or not, an order for security for costs should be the appropriate and primary remedy of a defendant facing such a plaintiff. This is because there is a presumption that a plaintiff in liquidation is insolvent and unable to pay the defendant's costs.

However, a plaintiff may avoid an order for security for costs if it can show that it has some assets or some form of business against which an order for costs may be enforced.

Additionally, where the litigation is funded by the liquidators by way of a conditional fee arrangement, the liquidators may try to resist an application for security. This would be on the grounds that an order for security will stifle the company's claim.

Arbitration: Decisions in investment treaty arbitration have made it clear that the existence of TPF alone is not enough to justify ordering security for costs. Instead, arbitral tribunals consider, among other factors, whether there is a causal link between the existence of TPF and a party's potential inability to make payment pursuant to an adverse cost award.

The position in commercial arbitration is not as clear.

Some institutional arbitral rules go as far as requiring tribunals to specifically consider the existence of TPF when deciding on an application for security for costs.

However, examples of cases where security for costs applications were successful suggest that relevant factors include where the counterparty is in clear financial difficulty, which would result in, for example:

• a real risk of the applicant being unable to have its costs reimbursed;
• the applicant not having a reasonable chance of enforcing a future costs award in its favour; and
• the defendant being unable to pay the likely amount of an award.

Tribunals have also reportedly considered reliance on TPF to commence proceedings as evidence that the claimant would otherwise be unable to pay.

10.6 Is after-the-event (ATE) insurance allowed in your jurisdiction? If so, how mature is the market?

Permissibility of ATE insurance: ATE insurance is a contract of insurance between client and insurer, which:

• is taken out after the event giving rise to the proceedings in question; and
• provides reimbursement for a proportion of the client's fees, adverse costs and disbursements if the client's case is unsuccessful.

There is no legislative or regulatory prohibition on ATE insurance in Hong Kong.

Maturity of the market: Despite the absence of any legislative or regulatory prohibition on ATE insurance in Hong Kong, it is not common. The Court of First Instance discussed the lack of development in ATE insurance in Hong Kong in Natural Dairy (NZ) Holdings Ltd v Chen Keen [2020] HKCFI 2491, noting that "there is no evidence of any mature ATE insurance industry".

However, the LRC has considered that:

• the introduction of outcome-related fee structures for arbitration in Hong Kong may give rise to a new market in ATE insurance; and
• the insurance market may introduce products in light of such developments.

Some funders may provide a funded party with ATE insurance as part of the funding package, and this is another way in which the use of such policies in Hong Kong (particularly in arbitration) may increase. Whether ATE insurance is available for any particular case will depend on what the relevant funder offers and whether the funded party wishes to utilise ATE insurance.

Even in cases where ATE insurance is provided, this is typically obtained from insurers outside of Hong Kong. For example, a funder may engage external ATE insurance providers in the United Kingdom, where specialised ATE insurance providers exist.

As ATE insurance is not developed in Hong Kong, there are (as yet) no specialised providers in the region.

10.7 In what circumstances is ATE insurance typically used? What are the advantages and disadvantages?

Circumstances of use: ATE insurance is a type of legal expenses insurance purchased after a legal dispute arises. ATE insurance indemnifies a policyholder litigant against the liability to pay the opponent's costs and disbursements in the event that its case is lost. Given that Hong Kong is a cost-shifting jurisdiction, the use of ATE insurance is relevant in Hong Kong.

Advantages: ATE insurance removes the risk of a party being liable to pay the other side's costs if it is unsuccessful in proceedings.

If its existence is disclosed to the opposing party, ATE insurance may act as an incentive for the other side to settle, given its knowledge that the insurer has conducted a separate analysis of the merits of the case or defence and determined that there are reasonable prospects of success.

Both advantages can be magnified for parties if ATE insurance is used in conjunction with TPF. By using a combination of TPF and ATE insurance, a party offsets both:

• the burden of payment of its own litigation costs and expenses (which are met by the funder); and
• the risk of payment of adverse costs (which, if the policy responds, will be met by the insurer).

Likewise, the prospects of settlement can be significantly increased when a party discloses to its opponent that a sophisticated third-party commercial entity in the business of disputes has – following significant due diligence – concluded that its case is worth investing in.

Disadvantages: ATE insurance can be expensive and the litigant will need to assess whether taking out a policy is worth the financial risk in comparison to the risk of having to pay adverse costs in the event of loss.

Depending on the terms of the policy, if the likelihood of success falls under the insurer's minimum percentage, cover may be withdrawn.

Importantly, ATE insurance itself may not be sufficient to defeat an application for security for costs. Whether it can be raised as adequate security will depend on the terms of the insurance policy and the circumstances of the case – in particular, the likelihood of the insurance being avoided (such that it is not effective – for example, by reason of misrepresentation or non-disclosure). If easily avoided, it is unlikely to be considered sufficient protection and cannot assist the funded party in this regard.

Please see the discussion on security for costs in question 10.5.

10.8 What other types of insurance are available for litigants in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages?

Insurance for litigation costs is generally not common in Hong Kong. However, there are types of insurance that may cover the parties' legal costs, such as:

• professional indemnity insurance;
• management liability insurance; and
• warranty and indemnity insurance.

These types of insurance may specifically cover fees such as legal representation, damages and the other side's costs.

Professional indemnity insurance: Professional indemnity insurance protects certain professionals, such as legal and insurance professionals, from liability and potential costs and expenses that may arise from claims brought against them when rendering their professional services.

These claims include, among other things, breaches of statutory duties and/or common law duties such as negligence claims, defamation, copyright infringement or breaches of confidentiality.

Management liability insurance: Management liability insurance protects companies and their directors facing legal threats and claims. Potential claims will depend on the scope of the company and directors' work, but may include claims similar to those faced by professionals, as discussed above.

Warranty and indemnity insurance: Warranty and indemnity insurance protects buyers from losses arising from breaches of warranty and claims under tax indemnities (and potentially other equivalent provisions) given by sellers in the context of mergers and acquisitions. It can also be known as transactional risk insurance.

Advantages and disadvantages: The advantages and disadvantages of professional indemnity insurance and management liability insurance are similar.

If a risk covered by the insurance policy occurs, having these insurance policies in place is an effective risk management tool. The policy can:

• provide a secure source of financial redress; and
• save the insurance taker considerable expense if it faces claims from its clients.

The policy can also encourage insurance takers to operate with more confidence, resulting in better services and results for clients.

However, the premium for these insurance policies can be high.

The same is also true of warranty and indemnity insurance, the cost of which was historically perceived to be high in the Asian market, including in Hong Kong. The use of such policies has increased in recent years, but is still infrequent.

There are a number of post-completion advantages to the use of warranty and indemnity insurance, including:

• enabling sellers to have a clean exit;
• protecting the buyer-seller relationship by avoiding hostile legal disputes over warranty breaches; and
• reducing the buyer's risk in circumstances where it doubts the seller's financial standing post-closing of the transaction; the seller caps its exposure at a lower level or insists on a shorter claim period than the buyer is prepared to accept.

11 Trends and predictions

11.1 How would you describe the current legal finance landscape and prevailing trends in your jurisdiction?

We are seeing an upwards trajectory of greater awareness and acceptance of third-party funding (TPF) among corporates and law firms in Hong Kong. This is likely a function of both:

• the increased amount of time that TPF has been available for commercial disputes; and
• the efforts by funders and the legal industry to educate the wider community about its availability and benefits.

Further, the COVID-19 pandemic arguably helped to normalise, and possibly increase, the use of legal finance. This is because the pandemic has:

• caused a number of businesses initially in secure financial positions to lack the necessary funds to bring or defend claims; and
• created a greater sensitivity around spending existing resources on disputes.

There is thus now more consideration of other financing tools, such as TPF, as alternatives to a business's own funds. Funders are receiving more enquiries from wider varieties of parties and jurisdictions. We have also seen greater interest in portfolio financing and an increase in the use of enforcement funding. In many cases, parties have either:

• received judgments or awards and been unsuccessful in monetising them; or
• simply recognised from the outset that they require external assistance for enforcement.

Finally, in the arbitration space, with the gazettal of the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Ordinance ('Amendment Ordinance') and the Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap 609D) ('ORFS Rules'), we expect to see more alternative fee arrangements and opportunities for law firms to enter into portfolio arrangements with funders. This will cement Hong Kong's position as an attractive arbitration hub. According to the 2021 International Arbitration Survey released by Queen Mary University of London, Hong Kong is already the third most preferred seat for arbitration worldwide.

11.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

As discussed, the ORFS Rules came into effect on 16 December 2022. These rules enact the ORFS regime and specify the general conditions for, and termination of, various ORFS arrangements in arbitration and arbitration-related court, emergency arbitrator and mediation proceedings.

Amendments have also followed in the Hong Kong Solicitors' Guide to Professional Conduct and the Hong Kong Bar Association Code of Conduct to implement the amended provisions of the AO and the Legal Practitioners Ordinance that allow ORFS arrangements.

Further, on 16 August 2021, the Department of Justice launched a two-month public consultation to seek views on the draft Code of Practice for Third Party Funding of Mediation. This draft code sets out the practices and standards that funders are ordinarily expected to comply with in carrying on activities in connection with TPF of mediation in Hong Kong.

Aside from arbitration, many in the industry are keen for TPF in litigation to be allowed. This would ensure that the availability of TPF in the context of both dispute resolution mechanisms is aligned. However, we are not aware of any current proposals in the context of litigation.

12 Tips and traps

12.1 What would be your recommendations for the smooth progress of funded litigation in your jurisdiction and what potential pitfalls would you highlight?

There is no magic to putting forward a good case for funding. Ultimately, providing the funder with comprehensive and well-considered package of information, which covers the three criteria mentioned in question 5.1, will assist it with its assessment.

Once a case is funded, the funder and funded party alike must adhere to the obligations set out in the funding agreement. The relationship is, more often than not, a long-term one and the parties to the funding agreement, as well as legal counsel acting for the funded party, should:

• communicate regularly and openly about the progress of the case; and
• continually assess and re-evaluate the prospects of success and likely recovery.

Tips and traps:

• Litigants seeking funding should conduct careful due diligence on potential funders rather than merely seeking out the best price.
• An objective and frank assessment of any case proposed for investment is important and will facilitate a more efficient assessment of the suitability for funding of that case. Such an assessment will also help to establish a relationship of confidence and trust between the funder and funded party, as well as counsel engaged to conduct the case, at an early stage, which will serve all parties well throughout the entire funding relationship.
• A party which obtains third-party funding (TPF) should ensure that necessary disclosure is made in accordance with local laws and regulations. Even if not required, timely disclosure should also be considered by funded parties engaged in arbitration that intend to ask the tribunal to exercise its wide discretion to award costs to include TPF costs.
• Communication is key. A funded party should ensure timely and complete communication with the funder about progress of the case. For example, one point to consider is whether the funding agreement contains provisions requiring the funded party's legal representation to keep the funder up to date.
• Likewise, it is equally important that the funder ensure that the funded party remains aware of the funded costs incurred. Regular billing by counsel engaged to conduct the case is important to ensure that the agreed budget is not exceeded. To the extent that the budget deviates from what was originally assumed, the earlier this is brought to the attention of the funder, the better.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.