Success Fees in Arbitration

The Hong Kong Government has proposed legislation to permit success fees and other outcome related fee structures (“ORFSA”) for arbitration. The legislation will override common law doctrines of maintenance, champerty and barratry which prohibit lawyers from charging fees conditional upon success in arbitral proceedings. Should you wish to find out more about these proposals or if you would like advice or representation in respect of arbitration, please contact one of our dispute resolution lawyers.

On March 22, 2022, the Hong Kong Government introduced the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Bill 2022 (“Success Fee Arbitration Bill”). The Success Fee Arbitration Bill proposes to amend both the Arbitration Ordinance (“AO”) and the Legal Practitioners Ordinance (“LPO”) to provide for the validity and enforceability of certain outcome related fee structure arrangements (“ORFSA”) in relation to arbitration fees, also known as contingency fees or success fees, and to establish a regulatory framework to govern such arrangements.

Hong Kong is currently one of the leading arbitration centres around the world, ranking as the 3^rd most popular arbitral seat, in a 2021 study conducted by Queen Mary University. It is an ideal arbitral seat for business transactions involving a mainland Chinese counterparty for a number of reasons, including the fact that it is a special administrative region of the People’s Republic of China with its own distinct laws, a common law legal system that operates in both English and Chinese and a well regarded professional judiciary that is independent of mainland China. It has its own bilateral arrangements with mainland China for interim judicial measures to support arbitral proceedings and for the enforcement of arbitral awards. It offers world class infrastructure, a deep pool of legal talent and the flexibility to choose from a global bench of arbitrators.

The introduction of OFRSA reflects Hong Kong’s ongoing efforts to maintain leadership as an arbitral seat. OFRSA enables commercial parties to take a significant portion of the costs of arbitration off their books and incentivizes them to select Hong Kong as the arbitral seat for dispute resolution. At the same time, OFRSA encourages lawyers to assess cases carefully to weed out weak claims.

Enforceability of OFRSA

Historically, OFRSA were prohibited in Hong Kong under the common law offences of maintenance, champerty and barratry and their related torts. These offences were specifically preserved under the LPO.

The Success Fee Arbitration Bill aims to provide that these offences no longer apply to OFRSA in arbitration proceedings. It provides for the validity and enforceability of such arrangements in arbitration proceedings, amending the LPO so that legal practitioners, including Hong Kong solicitors and barristers, are no longer restricted from being remunerated under OFRSA by reason of those offences in respect of arbitration proceedings.

To qualify for relief from common law restrictions, the Success Fee Arbitration Bill sets 3 conditions. First, the OFRSA must be made between a lawyer and a client for arbitration. Secondly, the OFRSA must fall within one of three defined categories. Thirdly, the OFRSA must comply with all applicable regulatory conditions.

Scope of Arbitral Proceedings

The Success Fee Arbitration Bill allows for the enforcement of OFRSA only in respect of “arbitration” proceedings. However, the term “arbitration” is broadly defined to include arbitration-related court proceedings, proceedings before an emergency arbitrator and mediation proceedings. Thus, for example, OFRSA may govern the remuneration of a lawyer where the lawyer represents the client in court proceedings ancillary to an arbitral proceeding, in proceedings before an emergency arbitrator before the arbitral tribunal has been constituted in accordance with the arbitration agreement and in mediation proceedings with a view to settling a dispute to which an arbitration agreement applies.

As proposed, the Success Fee Arbitration Bill does not extend enforceability of OFRSA to personal injury claims.

Types of Success Fee Arrangements

The Success Fee Arbitration Bill establishes three categories of OFRSA which qualify for enforceability, namely conditional fee arrangements, damages based agreements and hybrid damages based agreements.

Conditional Fee Agreements

In a conditional fee agreement (“CFA”), the client agrees to pay the lawyer a fee (i.e. a success fee) only if there is a successful outcome for the client. For this purpose, the client and the lawyer are free to agree upon the definition of a “successful outcome”.

Success fees must be calculated by reference to the fee that the lawyer would otherwise have charged the client if there were no OFRSA (i.e. “benchmark” costs) and can, for example, be structured as an agreed flat fee or as a percentage uplift on the fees the lawyer would have otherwise charged but for the conditional fee agreement. It is contemplated that a success fee should be subject to a cap of no more than 100% of the benchmark costs and it remains to be seen whether implementing rules or a code of practice will be issued in this regard.

Damages-Based Agreements

In a damages based agreement (“DBA”), the client agrees to pay the lawyer a fee (i.e. a DBA payment) only if the client obtains a financial benefit (“DBA payment”), such fee to be calculated by reference to the financial benefit obtained by the client. In a typical damages based agreement, the lawyer will receive a percentage of the money awarded to the client or paid to the client to settle the claim. Like success fees in CFAs, it is contemplated that a DBA payment should be subject to a cap of no more than 50% of the financial benefit received by the client.

Hybrid Damages Based Agreements

In a hybrid damages based agreement, the client agrees to pay the lawyer one fee if and only if the client obtains a financial benefit in the arbitration, such fee to be calculated by reference to the financial benefit, and another fee, usually calculated at a discount, for the legal services rendered during the course of the arbitration. In a hybrid damages based agreement, the lawyer may, for example, charge the client on an ongoing basis at a discounted rate and then, if the client succeeds in the arbitration, the lawyer may receive an uplift through a percentage of the damages awarded to the client.

Regulation of Success Fee Arrangements

The Success Fee Arbitration Bill contemplates the formation of an advisory body to establish, in consultation with the Secretary for Justice and with the prior approval of the Chief Justice, rules to regulate OFRSA. ORFSA must meet conditions to be set out in rules to qualify for enforceability and validity.

Similarly, the bill contemplates the establishment of an authorized body to issue a code of practice setting out the practices and standards with which lawyers who enter into OFRSA are ordinarily expected to comply.

Confidentiality

Arbitral proceedings generally enjoy confidentiality and privacy. However, as with third party funding of arbitrations in Hong Kong, the Success Fee Arbitration Bill contemplates that a party to an arbitration may disclose information relating to the arbitration for the purpose of entering into or seeking to enter into OFRSA and that a lawyer who enters into OFRSA must give notice of such arrangement to other parties to the arbitration as well as to the arbitration body.

Cost Awards

The Success Fee Arbitration Bill provides that except in exceptional circumstances, an arbitral tribunal should not award costs in favour of a party to an OFRSA where such an award would require a party to pay the success fees of the winning party or any amount of the fee that exceeds what the losing party would normally be expected to bear if there were not ORFSA.

It is unclear whether jurisdictions which may not permit OFRSA will enforce an award resulting from arbitral proceedings which were funded via OFRSA. For instance, the New York Convention of Enforcement of Arbitral Awards 1958 provides that recognition and enforcement may be refused when “the award would be contrary to the public policy of that country.”