CIETAC HKAC’s draft guidelines on third-party funding for arbitration
The draft guidelines on third-party funding for arbitration published by CIETAC’s Hong Kong Arbitration Center will be a helpful resource for parties and tribunals unfamiliar with third-party funding. The draft guidelines define third-party funding and set out best practice and conduct for issues such as confidentiality, due diligence checks on funders, funders’ control over proceedings, conflicts of interest, security for costs, and disclosure of funding arrangements.
In 2015, Hong Kong ranked as one of the world’s most preferred and widely used arbitral seats of arbitration, alongside London, Paris, Singapore and Geneva.1 In the area of third-party funding, however, the position under Hong Kong law has always differed from its European counterparts. This seems set to change and, in anticipation, CIETAC’s Hong Kong Arbitration Center (CIETAC HKAC) released draft guidelines for third-party funding for arbitration.2
Hong Kong has traditionally been hostile to third-party funding, largely due to concerns over the doctrines of maintenance and champerty. However, a sub-committee of Hong Kong’s Law Reform Commission recently recommended that Hong Kong law be amended to clarify that third-party funding for arbitration is permitted.
It also proposed that a system of safeguards be established to protect against perceived risks of funding. Commonly raised concerns include that third-party funding could give rise to undisclosed conflicts of interest, or lead to breaches of confidentiality or to funders exercising excessive control over proceedings.
CIETAC HKAC’s draft guidelines attempt to address these concerns, setting out best practice and conduct including in respect of confidentiality, due diligence on funders, funders’ control over proceedings, conflicts of interest – both for parties and tribunals, security for costs, and disclosure of funding arrangements. The guidelines offer a practical approach to funding that should, in particular, be a helpful resource for parties and tribunals unfamiliar with such arrangements.
The public consultation period on the draft guidelines concluded on 19 July 2016. CIETAC HKAC is considering the responses received, however, we understand that the responses thus far have been overwhelmingly supportive.
|Key provisions of the CIETAC HKAC draft guidelines:
Third-party funding defined
Third-party funding is defined as when a professional third person or entity contributes funds or other material support to a party in arbitration and has a direct economic interest in the award to be rendered in the arbitration. However, the draft guidelines exclude situations where a party arranges financial support from a group company, procures insurance, and/or obtains legal services on a deferred or contingency basis.
Best practice and conduct
The draft guidelines set out principles of practice and conduct which parties are encouraged to observe. These are voluntary and non-binding.
Checks on the funder
A party seeking funding should satisfy itself that the funder is duly incorporated and has adequate capital.
Confidentiality and disclosure of communications
A party seeking funding or negotiating funding terms should consider whether communications with prospective funders may be discloseable in subsequent proceedings, should take early legal advice, conclude non-disclosure agreements with all prospective funders, and consider the effects of any applicable confidentiality provisions or laws.
A formal agreement
The terms of a funding arrangement should be set out in a formal agreement.
Funders’ control over proceedings
A party seeking funding should consider the nature and extent of the prospective funder’s control over proceedings, and termination and withdrawal provisions under the prospective terms, and take legal advice where necessary.
Party conflicts of interest
A funded party should disclose circumstances arising from any funding that might give rise to possible issues of conflict of interest under applicable laws and rules.
Tribunal conflicts of interest
A tribunal should, upon becoming aware of the existence of funding, consider its own independence and impartiality and take such steps as required under applicable laws or rules.
A tribunal may, where appropriate and in consideration of applicable laws or rules, invite or direct a funded party to disclose its funding.
Security for costs
A tribunal can consider the nature and extent of funding as a relevant factor when determining an application for security for costs.