Two is Company but Three is a Crowd
ALSA National Chapter: Hong Kong
Third party funding refers to the act of providing financial assistance to a beneficiary, to cover legal expenses, in exchange for a percentage of any positive awards obtained. Traditionally, the concept of third party funding in common law jurisdictions has been fervently discussed in the context of litigation, wherein it encountered fierce opposition due to its potential to promote frivolous claims. Furthermore, due to its direct correlation with the notions of champerty and maintenance it was also considered to be parasitic and unethical as it reduced the administration of justice into little more than an investment vehicle. However, this position has since been revised as all common law jurisdictions have either abolished or relaxed their domestic regulations against third party funding. Subsequently, the idea of third party funding has become increasingly popular in the realm of international arbitration as stakeholders have begun to see great potential in its ability to invigorate commercial activity and to create a level playing field.
Despite these promises however, there still remains, much to be wary of. Saint Bernard of Clairvaux once opined that “The road to hell is paved with good intentions,” and with regard to Hong Kong’s recent legalization of third party funding in arbitral proceedings, truer words have never been spoken. While third party funders bring with them a number of public and commercial benefits, they can simultaneously jeopardize the fairness of arbitral proceedings and the enforceability of awards. Bearing these concerns in mind, this article will [I] identify the rationale behind third party funding in arbitration; while [II] evaluating whether or not the new reform can effectively reconcile potential areas of concern.
First and foremost, it is believed that the introduction of third party funding will add greater vigor to the Hong Kong arbitration community. This happens by ensuring that weaker parties have access to justice and by promoting effective case management.
Access to justice
According to Lord Phillips MR in Gulf Azov Shipping Co Ltd v Idisi  “Public policy now recognizes that it is desirable, in order to facilitate access to justice, that third parties should provide assistance designed to ensure that those who are involved in [legal disputes] have the benefit of legal representation.” The 17th Chief Justice of Canada, Beverley McLachlin further stated that access to justice is a fundamental right rather than an accessory and that there can be no true justice without access to it.
Such principles are well reflected by the Hong Kong Judiciary wherein the presence of a judge is always guaranteed, and duty lawyers are provided to litigants who lack the financial means of acquiring their own legal representation. However, no such luxuries exist in arbitration where it is incumbent upon the parties to fund the proceedings from their own pockets. Subsequently, weaker parties are placed in a particularly precarious position as they face comparatively greater financial risks in hiring arbitrators and in obtaining competent lawyers to effectively represent their interests. Therein, third party funders can help weaker parties to shoulder this burden and eliminate “the risk of a world where only rich claimants are entitled to justice.”
Effective case management
Third party funders can also provide the additional benefit of promoting effective case management. First, third party funding provides funded parties with a more objective perspective on the merits of a claim as funders will undoubtedly carry out due diligence measures and allocate pundits to give advice on the likelihood of success before they are willing to invest. Having this second opinion could therefore equip the party seeking funding with a understanding of their chances for success.
Apart from this, the funded party will also be placed in a better bargaining position thereby enhancing the efficiency of the proceedings. Financially strong opponents often seek to delay arbitral proceedings in an attempt to financially drain weaker opposing parties. This can often be observed in the case of investor state arbitrations. However, with the knowledge that a party is funded, stronger parties would be less likely to apply such measures of attrition as their financial might can be easily matched. Because of this, it would become more practical for them to move towards a resolution. Therein, third party funders can help to deter defensive posturing while pushing for more efficient proceedings and the reduction of legal costs altogether.
However, third party funders are more than just lifelines for weaker parties engaged in legal battles more powerful counterparts. Due to the recent global financial crisis, numerous financial institutions have been searching for new investment opportunities, such as those which are highly abundant in international arbitration, where large amounts of money are often at stake. Accordingly, third party funding has also become desirable even amongst larger corporations, with deep financial reserves, that are looking to mitigate their commercial risks. Ergo, the increased cash flow and presence of another stakeholder to watch over the case allows them to refocus more of their efforts and resources away from their legal headaches and back on the operations of their companies. Consequently, the prospect of third party funding can help to enhance Hong Kong’s appeal as a forum for dispute resolution and help it to keep pace with rival arbitration hubs which have passed similar reforms in recent years.
However, the benefits of third party funding extend beyond arbitration as it has positive implications in the area of litigation. At present, Hong Kong’s judiciary remains horribly overburdened by both an exorbitant number of cases and a lack of qualified judges. However, regardless of this situation, it remains imperative for the courts to maintain the high standards of their proceedings meaning that the attention paid to each case cannot be reduced for the sake of efficiency. Therefore, making arbitration more accessible through third party funding is particularly helpful because it can help to alleviate this burden without compromising the quality of adjudication associated with either method of dispute resolution.
Potential areas of concern
Despite all of the good which they can bring about, the financial gains to be made from third party funding means that there will always be an incentive for prospective funders to “stack the odds in their favor.” Third party funders are therefore double-edged swordsand bring with them a number of concerns that cannot be overlooked and although regulations have been drafted to prevent abuse, their effectiveness remains untested and doubtful at best.
Commercial profits trump public interest
According to former Justice Minister Lord Faulks QC “The trouble is there’s a risk that the whole thing becomes about a commercial transaction rather than a dispute … it could become the corporate equivalent of [ambulance chasing].”  At heart, third party finders will always be looking to gain significant returns on their investments. They are also businesses which are free to cherry pick which cases they are willing or unwilling to fund. Because of this, parties claiming for relatively smaller awards, such as those who are embroiled in employment disputes, and are genuinely in need of third party funding, are actually less likely to receive it. In kind, the notion of promoting public interest by providing access to justice for weaker parties will likely become secondary to commercial interests.
Dissemination of sensitive information
The first area of concern is born from the fact that parties seeking funding will likely need to discuss the particulars of their cases with a number of potential funders before they can finally strike a suitable agreement. Therefore, to protect the confidentiality of the proceedings, Section 98(S), in conjunction with Section 18 of the Amended Hong Kong Arbitration Ordinance indicates that information relating to the arbitral proceedings can be communicated to external persons for the sake of finding a third party funder. Pursuant to this, recipients of such information will be bound to keep it confidential unless they are forced to disclose it to pursue a legal right or interest, to enforce or challenge an award, or obliged by a government authority to make disclosure.
Realistically however, such a regulation can prove difficult to enforce. The act of negotiating with numerous prospective funders in itself counterintuitively promotes the dissemination of sensitive information and moreover, if a violation of confidentiality were to take place, it may not be possible to pinpoint the source of leakage. Section 98V indicates that non-compliance with Division 5 does not subject any person who leaks information to liability, but only takes that leak into consideration if it is relevant to a question being decided by the tribunal. However, even if it is not related to a relevant question, the leakage of other kinds of information, can still be detrimental and the absence of a rigid punishment leaves companies in a vulnerable position, exposed to severe negligence or even foul play.
Furthermore, Section 98S is silent as to whether or not counsel for the party seeking funding would be breaching attorney-client privilege by disclosing such information in the interest of finding a funder without prior consent. Even if consent to disclose was obtained from the party seeking funding, another question arises as to whether or not it is necessary to obtain consent from the opposing party whose information is also part and parcel to the case. If this were the case, such a requirement would bring about greater troubles by creating an opportunity for the opposing party to object to the disclosure, cause inconvenience and delay the proceedings.
Secret identities and concealment of corruption
As previously iterated, third party funding becomes especially troublesome when funders are able to conceal their identities, such as in the case of shell companies. Usually, where a third party funder establishes a pattern of consistently funding claims which involve the same arbitrator, one would be able to immediately ascertain the existence of bias and quickly re-work the composition of a tribunal. However, where funders can operate inconspicuously, such patterns are left undetected and such proceedings are left susceptible to abuse and corruption. In this way, a third party funder can take on the role of a hidden puppet master, carefully tugging at the strings of a conspiring arbitrator, and choreographing the outcome of the case.
Section 98T(1)(b) attempts to address this concern by stipulating that the name of all third party funders must be disclosed before a legal funding agreement can transpire. Section 98U further stipulates that parties must inform the tribunal of when a funding agreement comes to an end.Prima facie, this looks to be a viable solution as it promotes transparency would remove all doubt as to whether or not connections exist between the tribunal and any third parties funding the case. However, this new amendment lacks depth and fails to account for other potential measures of deception.
First, it remains possible for funding to take place through a shell company which is associated with a nominated shareholder but is in fact controlled by a silent investor. As long as the nominated shareholder agrees to sign a declaration of trust, the silent investor will still be entitled to all of the profits earned from the funding agreement with minimal risk of having his or her identity revealed. From a more pragmatic perspective however, even if new regulations were put in place to prevent such an occurrence, the very lack of in-depth regulations and jurisprudential development on this subject makes it that much easier for silent investors to cheat.
All declarations of trusts can be privy to the parties meaning there is no duty to disclose them. In addition, detecting the existence of such an arrangement is terribly complicated and would require additional time and resources to facilitate. Declarations of trust do not fall within the scope of forensic audits as they are not financial documents but instead pertain to the administration and composition of the company. In that regard, discerning the composition of a shell company would need to be done through other means such as formal investigations which can only be brought about where valid or justifiable concerns exist. To make matters worse, Hong Kong laws remain silent as to whether or not offshore companies are allowed to provide funding, thus further questions as to the transparency and legitimacy of such modifications to domestic arbitral proceedings.
Accountability for reliability, quality of services
For many parties, arbitration can be an arduous and financially taxing process. However, the introduction of a third party funder can create further complications unless proper legislation or case law is in place to hold funders accountable for the reliability of their services.
Furthermore, third party funders can potentially meddle with the proceedings. As third party funders have a financial interest in the outcome of the case, they are more likely to keep a careful watch over the proceedings and provide additional support when necessary. However, this also means that the third party funder may choose to adopt a strategy which may be risky or less favourable to the party being funded, for the sake of pursuing greater profits. Eventually, funded parties may be forced to comply to prevent the risk of having their funding revoked.
However, as per Section 98O and 98P of the Amended Arbitration Ordinance, a code of practice can be issued by an authorized body, meaning a person appointed by the secretary of justice pursuant to Section 98W, to ensure that third party funders comply with their duties in a fair and responsible manner.
The first set of measures prohibit third party funders from advertising their services in a misleading manner and from engaging in funding agreements where a funder has insufficient financial resources. By doing this, funded parties would not have to worry as much about working with a third party funder which will run out of funds and be unable to support them in the midst of an arbitration. It also prevents situations of foul play in which false third party funders can intentionally establish agreements in order to sabotage the funded parties’ claims, and prevent them from working with legitimate funders.
Furthermore, the code stipulates that funding agreements should clearly stipulate how much control a funder is allowed to exercise over the proceedings and whether or not a funded party will be liable for adverse costs. It is also indicated that third parties should both agree as to under what conditions a third party funder will be allowed to terminate the agreement or withhold arbitration funding.
Such guidelines also reduce the probability of a conflict by advising prospective funders to obtain independent legal advice before entering into funding agreements. By creating these standards, pre-contractual communication between prospective funders and parties seeking funding is encouraged and by ensuring that they are both familiarized with the circumstances surrounding a proceeding, both will be more likely to find funding opportunities which are suitable for them.
Balance is key
All in all, a majority of the issues surrounding the implementation of third party funding seem to have transpired due to a lack of legislative controls over the funders themselves. However, this should not take away from the necessary change they bring about the Hong Kong arbitration community. It is also easy to forget that third party funders also have a heavy burden to take on in that they will need to pay out large sums of money with no guarantee of a return. Because of this, to manage the conduct of third party funders too stringently may deter them from wanting to invest in third party funding altogether. Third party funding remains crucial in preventing stronger parties from having a legal basis to take advantage of weaker parties. Furthermore, although no set of regulations and enforcement mechanisms can possibly be made full proof, the new amendments to Hong Kong’s Arbitration Ordinance nevertheless help to mitigate these concerns but establishing guidelines and punishments for corruption and abuse
 ‘What is third party funding?’(Francis Wilks & Jones) <https://www.franciswilksandjones.co.uk/site/our_services/litigation-funding/qanda_litf/further-information-lf/what-is-third-party-funding.html> accessed 30 March 2018.
 The Law Reform Commission of Hong Kong, Third Party Funding for Arbitration,(2015).
  EWCA Civ 292.
 Lucianna Ciccocioppo, ‘There is no justice without access to justice: Chief Justice Beverley McLachlin’ (University of Toronto, Faculty of Law, 11 November 2011) <https://www.law.utoronto.ca/news/there-no-justice-without-access-justice-chief-justice-beverley-mclachlin> accessed 10th March 2017 understanding of how to approach its claim in a more strategic and pragmatic manner. It also acts as a screening process for claims which are unmeritorious.
 The Law Reform Commission of Hong Kong (n 2).
 ‘Third-party funding in arbitration – the funders’ perspective’ (Norton Rose Fulbright, September 2016)<http://www.nortonrosefulbright.com/knowledge/publications/142435/third-party-funding-in-arbitration-the-f unders-perspective> accessed 25th March 2018.
 The Law Reform Commission of Hong Kong (n 2).
 ‘Court Waiting Times’ HKSAR Government Press Releases (Hong Kong, 2014) <http://www.info.gov.hk/gia/general/201406/18/P201406180425.htm> accessed 15th March 2017.
 Bernard Chan, ‘Why Hong Kong must pay its judges more’, South China Morning Post (Hong Kong, 19 January, 2017) <http://www.scmp.com/comment/insight-opinion/article/2063507/why-hong-kong-must-pay-its-judges-more> accessed 1 April 2018.
 Merriam-Webster <https://www.merriam-webster.com/dictionary/double-edged%20sword> accessed 24 April 2018 ‘something that has or can have both favorable and unfavorable consequence’.
 Anna Isaac, ‘Backing Both David and Goliath: How Litigation Funding is Changing’ The Telegraph (17 Jan 2018) <https://www.telegraph.co.uk/business/2018/01/17/backing-david-goliath-litigation-funding-changing/> accessed 2 April 2018.
 Arbitration (Amendment) Ordinance (2017) (Hong Kong).
 ibid s 98V.
 Merriam-Webster (n 11).
 Arbitration (Amendment) Ordinance (n 13) s 98T.
 ibid s 98U.
 Merriam-Webster (n 11).
 Step Hong Kong, ‘What is a Trust?’ (2015) <https://www.step.org/sites/default/files/Branches/hongkong/Leaflets/What_is_a_trust_HK2015.pdf> > accessed 30 March 2018.
 Trustee Ordinance (Cap. 29) (Hong Kong).
 Trust Law (Amendment) Ordinance (2013) (Hong Kong).
 Arbitration Ordinance (Cap. 609) (Hong Kong).
 ibid s 98O, 98P, 98W.
 ibid s 98P.