Hong Kong has taken a step intended to enhance its position as an international dispute resolution hub by introducing third party funding to arbitration and mediation cases, bringing the city up to par with jurisdictions including Australia, England and Wales, various European jurisdiction and the United States.

Third party funding, sometimes also known as litigation finance, allows a third party – with no prior connection to the case – to foot the bill for the costs of the proceedings. In exchange, the third party receives a share of any damages awarded.

The law, known as the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017, was passed by the Hong Kong Legislative Council on June 14, 2017.

“The Third Party Funding Law greatly adds to the attractiveness of Hong Kong as a major international arbitration centre,” says Chloe Lee, founder of Chloe Lee & Co in Hong Kong. Lee notes that the Third Party Funding Law clarifies that the common law doctrines of maintenance and champerty do not apply to third party funding of arbitration and mediation;

“Without this clarification in law, Hong Kong was lagging behind the pro-litigation financing trend around the globe, notwithstanding that litigation funding in an insolvency case is permissible and was utilized to unreel the Akai insolvency aftermath,” she says.

Lee explains that champerty and maintenance are century-old doctrines in common law to preclude frivolous litigation and avoid a non-party to encourage a lawsuit or finance a lawsuit so as to get a share in the outcome. “The champerty and maintenance crimes [have been] abolished in England since 1967, but no corresponding reform took place in Hong Kong until now.”

Lee says that societal needs have driven the changes to allow third party financing of litigation.

“Third party finance of litigation is seen to be possibly helpful to take care of a party’s heavy legal costs burden so as to enable the party to enforce its rights,” she says. “Even in case of a solvent party, [it is] useful for risk management and for freeing up the party’s finance tie-up in the lawsuit. Third party funding is generally welcome by all, including litigation funders, litigation lawyers, parties involved in disputes as well as the general public.”

The Third Party Funding Law, however, cannot be looked at in isolation without also considering complementary legislation, the Arbitration (Amendment) Ordinance 2017 (IP Arbitrability Law), which was passed on the same day.

“The IP Arbitrability Law clarifies that IP disputes may be resolved by arbitration and that it is not contrary to the public policy of Hong Kong to enforce arbitral awards involving IP rights,” Lee says. “The clarification will hopefully help to attract parties, local as well as international, to resolve their IP disputes by arbitration in Hong Kong and to facilitate the consequent arbitral awards in Hong Kong.”

IP arbitration and mediation cases were rare in Hong Kong in the past, says Lee, but in recent years, Lee has witnessed a growing trend of parties resolving their IP disputes via arbitration or mediation.

“Our firm represents a few SMEs, including some rising fashion designers who typically find it hard to stage a David-against-Goliath fight even if they find an entrenched big player having copied their designs, mainly because of the prohibitive costs of litigation,” she tells Asia IP. “Costs of an arbitration or a mediation can still be daunting to a budding designer. A third party funding possibility for arbitration or mediation of IP disputes will probably lessen the financial burden on innovative start-ups who may have a need to enforce their IP rights and to help [convince] them to do so, choosing Hong Kong as the venue.”

Will the new system work as intended? Lee says it will.

“I believe that with proper and wellplanned implementation, including the setting up of a competent authorized body to oversee the third party funding system and ample education for the public on the subject, the system should work, provided that we have sufficient choices of third party funders in Hong Kong,” Lee says. “I know of one third party funder from London which set up an office in Hong Kong a few years ago, but I am unsure if there are other such fund providers.”

She notes that supply and demand need to be balanced to enable the evolution of a good ecosystem. “I see the demand existing in Hong Kong. Creative business start-ups will likely need IP arbitration and mediation funding; there should be at least a few different funders so that one can really have choices to pick and choose, and the whole system could develop progressively.”