Hong Kong Permits Outcome Related Fee Structures in Arbitration

On December 16, 2022, Hong Kong’s new regime permitting outcome related fee structures (“ORFS”) in arbitration and arbitration-related court proceedings came into force. This follows a recommendation for change by the Law Reform Commission in December 2021. The Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap. 609D) (the “Rules”), together with the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Ordinance 2022 (the “Amended Ordinance”), set out the detailed requirements and provide guidance and clarity regarding the use of ORFS agreements in Hong Kong. This new development is important as it brings Hong Kong in line with the practice of rival arbitration seats such as Singapore, and other common law jurisdictions such as Australia and England and Wales. The ORFS regime in Hong Kong will further strengthen the competitive position of Hong Kong as a hub for international commercial dispute resolution. 

Hong Kong

The common law rules of champerty and maintenance as applied in Hong Kong generally prohibit third parties from assisting or maintaining litigation by providing financial assistance in return for a share of the proceeds.

The new ORFS regime is an exception to the rules of champerty and maintenance. It applies only to arbitration proceedings and arbitration-related court proceedings; conditional fee arrangements remain prohibited in other types of Hong Kong court proceedings. Under the new ORFS regime, clients and their lawyers can agree to three categories of alternative fee structures: (a) conditional fee arrangements (“CFAs”); (b) damages-based agreements (“DBAs”); and (c) hybrid damages-based agreements (“Hybrid DBAs”). 

• CFAs: In a CFA, the lawyer agrees to be paid a success fee (usually calculated as an “uplift” on the standard or “benchmark” fee that would otherwise be payable) only in the event of a successful outcome for the client in the matter. CFAs typically take two forms: (a) a “no win, no fee” arrangement, i.e., where no legal fees are payable unless the claim of the client is successful, or (b) a “no win, low fee” arrangement, i.e., where legal fees are only payable at a set rate (usually discounted), with a success fee payable if there is a “successful outcome” for the client. The lawyer and client are free to agree in the CFA agreement on what constitutes a successful outcome of the matter to which the agreement relates – which typically would include any financial benefit that the client may obtain. It is advisable for parties to clearly set out and define the circumstances that would constitute a successful outcome of the matter. For example, the CFA should account for whether reaching a settlement, partial success, or avoidance or reduction of a potential liability constitute a successful outcome from the client’s perspective.
• DBAs: In a DBA, the client only pays the lawyer if the client obtains a financial benefit in the matter. For DBAs, the lawyer’s fee is usually calculated by reference to the financial benefit obtained, such as a percentage of the money sum awarded to the client.
• Hybrid DBAs: In a Hybrid DBA, the client pays the lawyer a combination of (a) a percentage of the financial benefit it obtains in the matter and (b) an unconditional payment in the event of a successful outcome.

The Amended Ordinance also imposes various safeguards to protect the client’s interests, and to prevent lawyers from overcharging and/or abusing the ORFS regime. For example, the Amended Ordinance imposes a statutory cap on the amount of uplift fees (i.e., the portion of the total fee payable by the client in the event of a successful outcome that exceeds the benchmark fee). For CFAs, the uplift fee cannot exceed 100% of the benchmark fee. For DBAs and Hybrid DBAs, the lawyers’ fee cannot exceed 50% of the financial benefit that is obtained by the client in the matter. Other statutory safeguards in the Amended Ordinance include the following:

• the ORFS agreement must be in writing and signed by the lawyer and the client;
• the ORFS agreement must specify the following: (a) the matter to which the ORFS agreement relates, e.g., the arbitration or part of it, (b) the circumstances in which the lawyer’s fees and expenses are payable, and (c) the treatment of disbursements (e.g., whether disbursements such as barristers’ fees are to be paid irrespective of the outcome of the matter);
• the client must have the opportunity to seek independent legal advice, and the ORFS agreement must state that the lawyer has informed the client of this right prior to entering into the ORFS agreement;
• there must be a 7-day cooling off period for the client after entering into the ORFS agreement, and the client may terminate the agreement by written notice during this period without incurring liability;
• the ORFS agreement must specify the basis on which it may be terminated, and the alternative basis (e.g., hourly rate) on which the lawyer is to be paid in the event of a termination;
• before entering into the ORFS agreement, the lawyer must inform the client that the default position is that an arbitral tribunal may not order the uplift component of a success fee to be paid to the winning party, although an arbitral tribunal may order those costs to be paid in exceptional circumstances; and
• before entering into the ORFS agreement, the lawyer must also inform the client that the client might be ordered by an arbitral tribunal to pay the costs of the winning party.

Singapore

Hong Kong’s new ORFS regime brings Hong Kong in line with the practice of rival arbitration seat Singapore, which introduced a CFA framework in May 2022 by passing the Legal Profession (Amendment) Act 2022 (the “LPA Amendment”). The LPA Amendment defines a CFA as an agreement between lawyers and clients where the whole or part of the legal fees and costs of contentious proceedings are payable only in specified circumstances. Lawyers and clients can agree to, for example, a “no win, no fee,” a “no win, low fee,” or an “uplift fee” arrangement. Mirroring the third-party funding regime in Singapore, CFAs can be entered into for (i) international and domestic arbitration proceedings, as well as arbitration-related court and mediation proceedings and (ii) certain Singapore International Commercial Court proceedings and related mediation proceedings.

There are, however, two key differences between Hong Kong’s ORFS regime and Singapore’s CFA framework. First, DBAs remain prohibited in Singapore. Second, Singapore does not impose any statutory cap on the amount of uplift fees, although professional conduct rules will continue to apply to prevent lawyers from overcharging clients.

Conclusion

The ORFS reform is a welcome development for Hong Kong and represents an additional step to diversify fee options for lawyers and clients following the legalization of third-party funding for arbitration and related proceedings in 2019. Parties are free to structure an ORFS agreement to suit their needs within the confines of the regime. As with all funding arrangements, the terms of an ORFS agreement should be the subject of careful negotiation between parties and their attorneys, taking into account various factors such as the complexity of the work and the risks assumed by both parties under the ORFS agreement. ORFS agreements can potentially align lawyers’ interests with clients’ commercial objectives by allowing for a share in any successful outcome and allowing flexibility in allocating risks. The ORFS regime, if used properly, can also enhance access to justice and the pursuit of meritorious claims. Similar regimes have found success in other jurisdictions such as New York, London, and Paris, and should help Hong Kong maintain its competitiveness as a leading international arbitration seat.