January, 2023 - Hong Kong introduces ‘outcome related fee structures’ for arbitration proceedings
- Date: 18/01/2023
The historic doctrines of champerty and maintenance, which essentially prohibit third-party litigation and arbitration funding, have been amended and/or phased out in a number of jurisdictions, including England and Wales. Hong Kong has recently taken steps to relax its laws by amending the existing legislation to permit contingency based fee arrangements in the majority of arbitration proceedings (except those relating to criminal or family matters).
On 22nd June, 2022, Hong Kong enacted legislation which amended the existing Arbitration Ordinance (Cap. 609) to remove the prohibition on contingency fee arrangements in arbitration. The Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap. 609D) were published on 11th November, 2022 and the new legal fees regime came into force on 16th December, 2022.
The new regime applies to arbitrations seated in and outside of Hong Kong and permits three different types of outcome related fee structure (“ORFS”) agreements as follows:
- Conditional Fee Agreement (CFA)
Under a CFA, the lawyer will receive a success fee if their client achieves a successful outcome in the arbitration, such outcome having been agreed with the client and stated in the CFA arrangement. A successful outcome could be any financial benefit the client may obtain. The fee must be expressed as a percentage of a benchmark fee that the lawyer would have charged the client had there been no ORFS arrangement in place. In any event, the success fee cannot exceed 100% of the benchmark fee (i.e. the maximum of the uplift will only be double the standard fee).
- Damages-based agreement (DBA)
Under a DBA, the lawyer is paid an agreed percentage of the financial benefit received by the client in the arbitration. The percentage must be calculated by reference to the financial benefit plus any recoverable lawyer's fees. The DBA payment cannot exceed 50% of the financial benefit and the agreement must provide full details of the financial benefit, including the calculation of DBA payment, payment schedule and whether barrister's fees are included.
- Hybrid Damages-based Agreement (Hybrid DBA)
A Hybrid DBA will entitle the lawyer to receive a capped fee equating to 50% of the irrecoverable costs, even in the event of an unsuccessful case. If the client obtains a financial benefit the lawyer will receive a DBA payment capped at 50% of the financial benefit obtained by the client. If the DBA payment is less than the capped fee, the lawyer may elect to receive the capped fee instead of the DBA payment. There must be an agreement which satisfies the DBA specific conditions and stipulates the fees applicable during the arbitration and the benchmark fee.
All of the three ORFS agreements are subject to general conditions which require that the agreement must:
- be in writing and signed by the lawyer and the client;
- state the matter to which the agreement relates;
- set out the circumstances in which the fees and expenses are payable;
- provide that the client has the right to seek independent legal advice before entering into the agreement;
- state what disbursements (including barristers’ fees) are to be paid irrespective of the outcome;
- stipulate the grounds on which the agreement may be terminated and how fees are to be paid, as such; and
- allow a 7 day cooling-off period whereby termination within this period is without liability.
At present, the new ORFS regime is confined to arbitration and related proceedings. Unlike many other jurisdictions, it does not extend to court proceedings. However, the variety of fee arrangements under the new law appears to be more considered (e.g. fee cap or uplift) than other jurisdictions. This radical change of arbitration law will undoubtedly enhance Hong Kong’s status as one of the main arbitration centres in South East Asia.