Arbitration and Litigation Funding in Singapore and Hong Kong

Arbitration and Litigation Funding in Singapore and Hong Kong

The use of litigation funding is expanding rapidly across the legal world.

The use of litigation and arbitration funding is expanding rapidly across the legal world.

This trend has accelerated as the key actors in dispute resolution proceedings become familiar with litigation funding and its many advantages. Sophisticated claimants appreciate how funding can help them manage costs and offset legal risk; entrepreneurial lawyers recognise how third-party funding can help them expand their practice and offer clients flexibility on fees; and forward-thinking judges and arbitrators acknowledge the positive role that litigation funding plays in ‘unlocking’ meritorious claims and fostering access to justice.

Until recently, use of litigation funding was largely confined to certain common law jurisdictions such as the United Kingdom, Australia and the United States, but in the last few years there has been rapid expansion in its use. This growth trend, though not entirely countercyclical, is largely uncorrelated to wider macroeconomic activity, which has led the litigation funding industry to develop from a niche product allowing access-to-justice for capital-constrained claimants, to a more encompassing risk hedging device attractive to well-resourced businesses.

Litigation funding is now increasingly being used in disputes in continental Europe, Latin America, various offshore jurisdictions and, importantly, Asia. In recent times, Singapore and Hong Kong have built on their reputation as well-established arbitral seats, making significant investments in their international arbitration ‘infrastructure’, and establishing themselves as ‘go to’ venues for arbitration in Asia. These jurisdictions have also benefitted from the growth of emerging markets in Asia, where West-to-East capital flow, often to fund mega-infrastructure and energy projects has not only generated capital, but also increased the number of Asian parties involved in high-stakes disputes in the region.

To remain competitive on the global arbitration stage, however, Hong Kong and Singapore have been playing catch-up when it comes to litigation funding, but encouragingly they have indicated a willingness to embrace it. Recent changes in the law in Hong Kong and Singapore have demonstrated that the region is adept at embracing fast-paced change and shedding the historical constraints that made it less attractive and competitive as a disputes venue.

Woodsford is excited by the opportunities presented by these changes and is looking forward to continuing to expand its business in the region.

You can read our whitepaper, Arbitration and Litigation Funding in Singapore and Hong Kong below or you can download the PDF here

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Arbitration and Litigation Funding in Singapore and Hong Kong

Woodsford Litigation Funding Insight

The use of litigation funding is expanding rapidly across the legal world.

The use of litigation and arbitration funding is expanding rapidly across the legal world.

This trend has accelerated as the key actors in dispute resolution proceedings become familiar with litigation funding and its many advantages. Sophisticated claimants appreciate how funding can help them manage costs and offset legal risk; entrepreneurial lawyers recognise how third-party funding can help them expand their practice and offer clients flexibility on fees; and forward-thinking judges and arbitrators acknowledge the positive role that litigation funding plays in ‘unlocking’ meritorious claims and fostering access to justice.

Until recently, use of litigation funding was largely confined to certain common law jurisdictions such as the United Kingdom, Australia and the United States, but in the last few years there has been rapid expansion in its use. This growth trend, though not entirely countercyclical, is largely uncorrelated to wider macroeconomic activity, which has led the litigation funding industry to develop from a niche product allowing access-to-justice for capital-constrained claimants, to a more encompassing risk hedging device attractive to well-resourced businesses.

Litigation funding is now increasingly being used in disputes in continental Europe, Latin America, various offshore jurisdictions and, importantly, Asia. In recent times, Singapore and Hong Kong have built on their reputation as well-established arbitral seats, making significant investments in their international arbitration ‘infrastructure’, and establishing themselves as ‘go to’ venues for arbitration in Asia. These jurisdictions have also benefitted from the growth of emerging markets in Asia, where West-to-East capital flow, often to fund mega-infrastructure and energy projects has not only generated capital, but also increased the number of Asian parties involved in high-stakes disputes in the region.

To remain competitive on the global arbitration stage, however, Hong Kong and Singapore have been playing catch-up when it comes to litigation funding, but encouragingly they have indicated a willingness to embrace it. Recent changes in the law in Hong Kong and Singapore have demonstrated that the region is adept at embracing fast-paced change and shedding the historical constraints that made it less attractive and competitive as a disputes venue.

Woodsford is excited by the opportunities presented by these changes and is looking forward to continuing to expand its business in the region.

What is litigation funding?

Litigation funding, also known as ‘litigation finance’ or ‘third party funding’, is simply an alternative means for a claimant to fund the costs of a legal dispute, including litigation and arbitration. A third-party funder, otherwise unconnected to the dispute, usually enters into an agreement with a prospective claimant or law firm to provide funds for the claimant’s legal costs, in return for a share of the award in the event that the claim is successful. The investment by the funder is typically non-recourse which means that if the claim is lost, the claimant is not liable to reimburse the funder’s investment. In essence, the third-party funder can shoulder the costs risk in a dispute rather than the claimant.

Since its inception, litigation funding has developed from case-by-case funding for impecunious claimants into portfolio financing for both well-resourced corporates and law firms. In essence, litigation funders have capital to deploy into any contentious situation which, in time, may generate a return.

What are the advantages of litigation funding?

Aside from enabling an impecunious claimant to advance a claim which might otherwise be stymied due to lack of resource, or allowing a well-resourced company to hedge its legal costs risk, litigation funding can also have substantial strategic benefits and change the dynamic of a dispute. For example, a funded claimant will often be able to achieve a better settlement outcome more quickly than an unfunded claimant. This is principally because the defendant, upon becoming aware of the claimant’s funding, will appreciate that the common defendant tactic of depleting a claimant’s resources to stifle a claim would likely fail. A funded claimant is also less likely to feel any financial pressure to accept a ‘lowball’ settlement offer.

Further, the support of a sophisticated professional funder, such as Woodsford, signals to a tribunal and the defendant that an objective third party with substantial expertise and experience in disputes, is willing to risk its own capital because of the merits of the underlying claim and the prospects of making a recovery. Although the conduct and control of a funded claim rests firmly in the hands of the claimant (and its lawyers), a funder like Woodsford, which is staffed by expert litigators with decades of international law firm experience, can also be a valuable resource to the claimant team throughout the life of the claim. For example, Woodsford often assists the claimant’s legal team with key strategic decisions and, if required, can attend mediations or other settlement discussions, which often helps the claimant to demonstrate its financial strength and that it has the ‘stomach’ for what may become a lengthy dispute.

What are the recent changes in Asia?

Singapore
Since Singapore’s Parliament passed the Civil Law Amendment Act and the Civil Law (Third Party Funding) Regulations 2017, the common law tort of champerty and maintenance has been abolished to permit third party funding in respect of international arbitration and associated proceedings (for example, enforcement proceedings in the Singapore Courts and mediation proceedings in connection with international arbitration). The third-party funding framework has been firmly incorporated into Singapore’s arbitration community. The Singapore International Arbitration Centre’s (“SIAC”) practice directions set out guidelines on disclosure to avoid conflicts and ensure arbitrator impartiality. SIAC has released its own guidelines which inform best practices for parties’ conduct in a third-party funding scenario, including recommendations about confidentiality, the interests of funders, contract formation and the financial obligations of funders. The Law Society of Singapore has also issued a guidance note with respect to third party funding, which addresses matters of disclosure, conflicts of interest, recommended terms of the funding agreement and solicitors’ obligations to clients where a third-party funder is involved.

More recently, Singapore’s third-party funding legislation is widening in scope and will potentially open the door to third-party funding of litigation proceedings. The Ministry of Law held public consultations on the implementation of the third-party funding regulations in 2018. After receiving positive feedback on whether the ‘safe harbour’ of third-party funding should be expanded into new areas, the Ministry of Law announced an intended expansion of the third-party funding legislation to domestic arbitration and the Singapore International Commercial Court (“SICC”) and related proceedings. As with the SIAC practice directions, the SICC now explicitly makes allowances for the apportionment of costs to a non-party, such as a third-party funder, in its Rules of Court Order 110 Rule 46(3)(c).

In parallel to the legislative reforms, developments in case law have found that funding agreements were not against public policy in bankruptcy and insolvency proceedings (Re Fan Kow Hin (2018) SGHC 257). The rationale in Re Fan Kow Hin is important, as it could be used to allow courts to uphold funding agreements in proceedings not covered by the Civil Law Amendment Act so long as they do not offend the principles of champerty and maintenance. With the legal climate in Singapore now more receptive to third-party funding, funders of commercial disputes may be able to benefit from the ratio in Re Fan Kow Hin (2018) SGHC 257 if they meet the criteria of “interest”. The criteria require funders to have a sufficient interest in the outcome of the litigation and that the conduct is not offensive to public policy. It is only a matter of time as to when this interpretation will be tested by a third-party funder.

Hong Kong
In 2013, Hong Kong’s Law Reform Commission launched a public consultation on whether to permit third-party funding for international arbitration seated in Hong Kong. That process culminated in October 2016 with a recommendation to allow it, subject to developing an appropriate regulatory regime within the first three years of it being permitted. On 14 June 2017, following approval of the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2017, a new Part 10A (ss.98E – 98W) was added to the Arbitration Ordinance, and a new s.7A to the Mediation Ordinance. These new provisions of the Arbitration Ordinance, like the amendments in Singapore, provide that the doctrines of champerty and maintenance no longer apply to third party funding of arbitration or related court or mediation proceedings. Interestingly, unlike in Singapore, no distinction is made in Hong Kong between domestic and international arbitration; funding is now permitted in both.

In 2019 the Code of Practice that set out binding standards for third-party funders carrying out third party funding activities came into effect. The Code of Practice addresses matters such as capital adequacy requirements, confidentiality, disclosure, conflicts of interest and guidelines around funding agreements. While the apportionment of costs to third-party funders is not covered in the Arbitration Ordinance, HKIAC Rules provide for tribunals to consider third-party funding agreements in determining the costs of the arbitration. This brings Hong Kong in line with Singapore where SIArb and SIAC have also put in place practice notes and guidelines.

In May 2020 the High Court of Hong Kong handed down written reasons for the Decision in the matter of Patrick Cowley and Lui Yee Man, Joint and Several Liquidators of the Company [2020] HKCFI 922. The Decision confirmed that liquidators of an insolvent company do not need to obtain the court’s approval before entering into a litigation funding agreement and, for this reason, the circumstances liquidators can seek the court’s direction as to whether or not they may enter a funding agreement are limited.

Regulation

Both Hong Kong and Singapore gave preliminary indications that they will adopt a ‘light touch’ towards the regulation of the third-party funding industry. In England and Wales, the ‘home’ of litigation funding, the most reputable funders are self-regulated through their membership of the Association of Litigation Funders, which prescribes a Code of Conduct for its members. Woodsford considers this level of ‘regulation’ to be appropriate for the industry, as litigation funders already operate in a ‘hyper-regulated’ environment: the more reputable funders are often staffed by lawyers who themselves are professionally qualified and subject to the regulatory regime for lawyers in the jurisdiction of their qualification; funders fund lawyers who are themselves regulated by their professional bodies; and, above all, funded cases proceed before judges and arbitrators who have significant oversight of the conduct of funders in relation to any given matter.

As a result of this ‘hyper-regulated environment’, there have been remarkably few reported cases where a funder and a funded party have ended up in dispute. Where a dispute has occurred, it has typically resulted from a claimant doing a deal with a ‘less reputable or inexperienced’ funder or where the claimant itself has breached its obligations under a funding agreement.

In 2018, the Singapore High Court set out a list of determinative factors in evaluating the conduct of liquidators in pursuing a third-party funded claim in the case of Solvadis Commodity Chemicals Gmbh v Affert Resources Pte Ltd. These include the nature and complexity of the matter, risks involved, prospects of success, amount of costs likely to be incurred, the extent to which the funder would contribute to costs or towards any order for security of costs, the making of the funding agreement, the funder’s premium, and the extent to which the liquidators canvassed funding options, among other considerations. This judgment shows that Singapore’s courts are mindful of issues of transparency and negotiating in good faith, and are able to set their own standards at common law on the same matters that SIArb and SIAC have already addressed in relation to arbitration.

There is therefore unlikely to be any need for a formal regulatory regime, but it remains to be seen how the authorities in Hong Kong and Singapore will tackle this issue. In the meantime, and in any event, claimants and their lawyers should ensure that they do business with reputable professional funders with significant experience, like Woodsford, to avoid any potential pitfalls.

Is further change required?

Singapore has indicated a willingness to further liberalise its funding regime beyond what the current legislation allows, which means that funding of domestic court litigation could very well be a reality. It remains to be seen if litigation funding will be met with any impediments in domestic courts, after recent developments have allowed for such funding in domestic arbitrations and at the SICC.

In 2015, the Singapore High Court held in the case of Re Vanguard Energy that a liquidator was permitted to sell a cause of action to a third party under the statutory insolvency regime of Singapore without contravening the doctrines of champerty and maintenance. Re Vanguard Energy signaled a significant shift in Singapore’s approach to third-party funding, with ensuing cases further expanding the scope in Re Fan Kow Hin in 2018. Although the court has elaborated this solution at common law, it is untested, but with the Ministry of Law indicating its intent to expand the scope even further, further changes in legislation may very well be forthcoming. In the meantime, Re Fan Kow Hin may be relied on as an authority for classes of cases that for which third-party funding is permissible to fill in the gaps that the 2017 legislation does not address.

As matters stand in Hong Kong, third-party funding is generally not permitted in relation to domestic litigation (which is unrelated to arbitration proceedings). There are three limited exceptions to this general prohibition, namely (1) ‘common interest’ cases, involving third parties with a legitimate interest in the outcome of the litigation; (2) where ‘access to justice’ considerations apply; and (3) a miscellaneous category, including insolvency litigation, which were set out in the case of Unruh v Seeberger in 2007. Although the second of these three exceptions could, in theory, apply to a number of potentially fundable cases, where the claimant is impecunious and unable to afford its own legal representation without the assistance of third party funding, the judgments in Raafat Imam v Life (China) Co Ltd [2018] HKEC 2237 and another anonymised judgment handed down earlier this year suggest that the Hong Kong Judiciary is reluctant to allow the public policy of access to justice to prevail over the prohibition on champerty and maintenance. It therefore remains unclear what type of case (if any) would qualify for the access to justice exception highlighted by the Hong Kong Court of Final Appeal in 2007. The third exception in Unruh – insolvency cases – is where funding has been most commonly used to date, but this is of little assistance to solvent claimants which need funding to access justice owing to their impecuniosity or cash flow issues.

In addition to the prohibitions on third-party funding of domestic litigation in both Hong Kong and Singapore, the lawyers based there are presently prevented from acting for clients on a contingent basis, i.e. where the lawyer agrees to forgo payment of some or all of its fees in return for payment of those fees and an uplift or a percentage of the damages (a ‘success fee’) if the claim ultimately succeeds. Funders are often attracted to claims where the claimant’s lawyer demonstrates their belief in the merits of the case by also ‘investing’ in the claim in this way. Lawyers’ contingency fee structures also ensure that their interests are aligned with their client’s (and the funder’s) and serve as a further layer of due diligence for the claimant’s case, which in turn ensures that only meritorious cases are brought.

It has been suggested in some quarters that third-party funding and lawyers’ contingency fees can promote and encourage the filing of unmeritorious or frivolous claims, but there is little, if any, evidence to support this contention. In fact, the opposite is often true and is the view more commonly held by experienced practitioners. As long ago as 2016, international law firm Freshfields commented:

“To our ears, the concern sometimes expressed that funding breathes life into unmeritorious claims rings false. On the contrary, the involvement of a funder adds an additional layer of diligence at an early stage of the process, leading to greater rigour in risk and cost-benefit assessments. In fact, it is not uncommon for one firm to advise the funder on the merits of the case and another to run the claim. This brings with it greater objectivity that would, if anything, tend to weed out less meritorious cases.”

We at Woodsford could not agree more.

What does the future hold for funding in Asia?

Hong Kong and Singapore are already two of the five most preferred arbitral seats globally. Since 2010, the number of arbitrations filed at the HKIAC, being Hong Kong’s premier arbitral institution, has remained steady (between 250 and 300 each year). In the same period, the number of cases commenced at the SIAC has increased steadily from approximately 200 a year to almost 350 in 2017 and a record 479 in 2019. It is likely that the recent legislative changes will lead to a significant boost in these numbers over the coming years, as the availability of funding enhances the appeal of both jurisdictions. Asian-based corporates which may previously have nominated London, Paris or Geneva as the seat for dispute resolution under their commercial contracts may now be encouraged to nominate somewhere closer to home, namely Hong Kong or Singapore, in light of the new funding-friendly regimes. That said, it will likely take some time for those contracts to become the subject of disputes.

The Singapore International Commercial Court expands the dispute resolution options in Singapore, and the apparent availability of third-party funding to parties appearing before the SICC also serves to solidify Singapore’s status as a dispute resolution hub in Asia and globally.

Aside from being better equipped to compete on the international arbitration stage, the recent changes in Hong Kong and Singapore have demonstrated a commitment to the principle of party autonomy and ‘access to justice’ in arbitration and raised the profile of the judicial system in both jurisdictions. Practitioners are also likely to benefit significantly, as caseloads increase and the size of the disputes being litigated in the area grows. This in turn should have a positive impact on the legal services industry in those jurisdictions and the economy generally. Singapore is truly pushing forward to become a leading hub for dispute resolution – competing with the likes of New York, Paris and London – as it has promised to broaden the list of ‘permitted proceedings’. The new funding options will likely be applied in practice before any new legislation is introduced. The foundations have been laid for Singapore courts to allow this, and the indications all point to legislative change to follow in the very near future.

Practical tips for lawyers and their firms

When a lawyer’s client requires or may otherwise benefit from funding for its claim, it is incumbent upon the lawyer not only to advise the client as to the availability of funding, but also to provide a useful steer as to which funders to use and which to avoid. In this regard, lawyers should select only established funders, which are familiar with the practice of dispute resolution.

In terms of obtaining funding, most reputable funders’ processes are similar. The process usually starts with a submission of key documents which provide the funder with an overview of the factual background, a legal analysis of the arguments likely to be advanced by the parties and the prospects of those arguments succeeding, an analysis of the likely quantum of the claim and a costs estimate demonstrating the amount of funding required to take the case to conclusion. That information will allow the funder to undertake a preliminary risk assessment and, if it is interested in the case, put forward some indicative commercial terms. Woodsford aims to do this within 72 hours of receiving the above information.

If the indicative terms can be agreed with the claimant, most funders will then seek a period of exclusivity, ordinarily 4 – 6 weeks, to carry out more thorough due diligence, occasionally with the assistance of external counsel, and conclude a funding agreement.

Conclusion

With a small number of exceptions, litigation funding is permitted, if not encouraged, around the world. Where barriers do continue to exist, they are gradually being dismantled and replaced with funding-friendly regimes. While most common law jurisdictions have historically prohibited litigation funding, those prohibitions continue to be lifted. The traditional centre for the common law, the courts of England and Wales, now positively embrace litigation funding as a tool promoting access to justice, as do their contemporaries in the United States, Australia and New Zealand. Singapore has begun to erode the limitations on third-party funding in its domestic courts, and more formal codification is expected to follow. Woodsford, as a global litigation funder, is excited about the recent changes in Hong Kong and Singapore and the opportunities that they present – for funders, lawyers and claimants alike, and of course for the jurisdictions themselves. Woodsford is looking forward to working with lawyers and arbitrators in the region and we stand ready, willing and able to contribute to access to justice in the region through the funding of meritorious claims.

About the authors

Charlie Morris is Woodsford’s Chief Investment Officer for EMEA and Asia-Pacific.

Charlie is an English-qualified senior lawyer with significant experience of handling high-value international litigation and arbitration across a wide range of sectors, both in his capacity as a lawyer and as a litigation funder. As Chief Investment Officer, Charlie has overall responsibility for Woodsford’s investments outside of the United States. Before joining Woodsford in March 2016, Charlie was a lawyer at London disputes boutique Enyo Law LLP, having qualified previously at international firm Addleshaw Goddard LLP.

Charlie splits his time between Singapore, Hong Kong and London.

Franca Ciambella is a Consultant for Woodsford, based in Singapore. Trained in law and business in Canada, New York and Singapore, Franca is a member of the Quebec, Canada Bar and in 2010, was one of the first foreign lawyers to gain full admission to the Singapore Bar. Her legal career of 30 years encompasses 17 years of international private practice, including as the Managing Partner of the Singapore office of Stikeman Elliott and a Legal Associate at Norton Rose, seven years as  General Counsel for Asia Pacific for Tyco International Ltd (a US based Fortune 500 corporation), acting as a technical advisor on regional economic integration to high levels of government in ASEAN, carrying on a mediation practice, and in 2010, founding the Singapore based law firm Consilium Law Corporation.

For further information email Charlie (cmorris@woodsfordlf.com) or Franca (fciambella@woodsfordlf.com) directly.