Third-party funding regulation impeding Asian legal market
THIRD-PARTY funding - which offers an alternative way to fund a legal claim - has traditionally been met with suspicion and scepticism. Third-party funding allows a commercial fund with no prior connection to the case (the "third party") to finance the cost of legal proceedings, whether in litigation or arbitration. In return, they receive a share of any damages. This is contrasted with traditional funding methods, in which the party or a related company pays these costs.
For hundreds of years, funding another party's claim was a crime, with concerns that the third party in question may take the opportunity to inflame damages, suppress evidence or suborn witnesses. The notion of a party "gambling" on the outcome of litigation was considered problematic, as third-party funding could distort justice and damage the integrity of the judicial process. While England abolished the common-law crime in 1967, it remained largely unlawful in Singapore and Hong Kong.
In recent years, we have seen this type of funding become increasingly popular across jurisdictions in Europe, the United States and Australia. One argument in favour of third-party funding is that it provides access to justice by enabling a party to enforce its rights in a dispute. Even when a party to a dispute is solvent, this funding method offers commercial options for how risk is allocated, and the claim is collateralised. This frees up capital which may have been tied to the dispute for other business objectives.
Asia's legal landscape is now responding to the increasing global prevalence of third-party funding of international arbitration. Singapore closed the consultation for draft legislation legalising third-party funding for international arbitration in July. Hong Kong's Law Reform Commission has recommended legislative reform.
These reforms have been the topic of ongoing discussion in recent years and have been the subject of some controversy. In many jurisdictions, there has been a level of consensus around the development of third-party funding. The prevention of this type of funding initially made sense for various policy reasons. However, there has been an about-face with many now seeing that the use of third-party funding actually supports the development of a society governed by the rule of law.
In both Hong Kong and Singapore, the judiciary has made some headway in tackling the old common-law prohibition. Third-party funding is permitted in Hong Kong when it is being used by liquidators to pursue claims on behalf of insolvent companies. In Singapore, the Court of Appeal decided that the prohibition applies to arbitration, but also recently suggested that third-party funding might be possible in certain situations.
White & Case's 2015 International Arbitration Survey, conducted with Queen Mary University London, showed that Singapore and Hong Kong are now the third and fourth most preferred venues for international arbitration. Both jurisdictions need to maintain this momentum; it is becoming apparent that third-party funding is an area in which reform is needed to stay ahead of other arbitration centres. Singapore, while recognising the need to protect its judicial system from abuse, also sees that third-party funding work is currently going to other international arbitration centres.
Singapore's path to reform would require that the common-law restrictions on third-party funding be abolished. It would also specify that third-party funding in international arbitration and related court and mediation proceedings would not be "contrary to public policy or otherwise illegal".
This is a significant legal reform; normally, funded parties would face risks arbitrating in a jurisdiction in which third-party funding is prohibited. Following reform, lawyers would be able to recommend third-party funders and negotiate these funding agreements. By publishing draft legislation, Singapore could be seen to have leapfrogged into the lead ahead of Hong Kong for now - but this advantage is unlikely to last. Hong Kong's Law Reform Commission issued its consultation paper on third-party funding for arbitration in late 2015 and ended the consultation period in February, with draft legislation expected in Hong Kong by the end of this year.
These are long anticipated and welcome developments for international arbitration in Asia - although for now, nothing has changed and the nature of the expected amendments remains unclear. But law firms, parties and funds should prepare for the changes to come. In 2015, several major funds launched offices in Hong Kong, and we expect to see the same in Singapore. At this stage, we do not know how these jurisdictions will regulate third-party funding, with Singapore expected to impose a duty to disclose the identity of any third-party funders. The current form of third-party funding regulation in Asia is holding the market back. When this barrier is released, we anticipate rapid growth in how this market develops.
