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Effective 16 December 2022, lawyers in Hong Kong are permitted to fund clients for whom they act in an arbitration by entering into outcome-related fee structures (ORFS), such as conditional and contingency fee arrangements.

The new regime answers an increasing client demand for more flexible fee arrangements and is an important step for maintaining and promoting Hong Kong’s competitiveness with other major arbitral seats where similar fee arrangements are allowed.

The new regime

The new regime permits three types of ORFS for arbitration: (i) conditional fee agreements (“CFA”), (ii) damages-based agreements (“DBA”), and (iii) hybrid damages-based agreements (“Hybrid DBA”).

In essence, lawyers are paid (i) a success fee if they achieve a successful outcome (but otherwise no / low fee) under CFAs; (ii) a percentage of their clients’ financial benefit obtained from the arbitration under DBAs; or (iii) a combination of both under Hybrid DBAs. Under CFAs, clients will be free to agree with their lawyers as to the circumstances that constitute a “successful outcome” of the matter.

Such arrangements were previously prohibited under the common law offences of champerty and maintenance. Following a series of consultation and enactments, 16 December 2022 marked the day of the full implementation of the ORFS regime for arbitration (including related court or mediation proceedings and proceedings before an emergency arbitrator) seated in Hong Kong and arbitration seated elsewhere but in which Hong Kong practitioners are engaged.

ORFS provides lawyers and clients with greater flexibility when agreeing retainers and increases funding options for clients wishing to arbitrate disputes. It promotes financial management as clients may have a better idea of the costs to be incurred for budgeting purposes. It also helps clients to mitigate their risks by sharing risk with their lawyers. 

Notably, this new regime in Hong Kong offers a broader range of ORFS than the Singapore regime, which offers CFAs only. This new development will no doubt enhance Hong Kong’s status as a leading arbitral hub in the world, and is expected to bolster the number of funded claims and arbitrations in Hong Kong.

In depth: the outcome-related fee structures

The new ORFS regime for arbitration was incorporated into Hong Kong law by amendments to the Arbitration Ordinance (Cap. 609) (the “Ordinance”) and the Legal Practitioners Ordinance (Cap. 159), as well as the making of the Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Cap. 609D) (the “Rules”). The regime has been fully implemented as of 16 December 2022.

Except for personal injury claims, lawyers may now enter into the following types of ORFS for arbitration:

  • CFA:

Lawyers are paid a success fee if their client achieves a “successful outcome” in the arbitration. If the outcome is unsuccessful, then the lawyers receive either no legal fees or reduced legal fees. The payable success fee must be expressed as a percentage of the “benchmark fee” (i.e. the fee that the lawyer would have charged the client if there were no ORFS arrangement).

What constitutes a successful outcome is a matter to be agreed, and must be stated in CFAs. A successful outcome typically includes any “financial benefit” the client may obtain. A financial benefit is broadly defined to include money or money’s worth, i.e. any consideration reducible to a monetary value. It includes an amount owed under the award or settlement agreement, as well as any avoidance or reduction of a potential liability (where a claim is successfully defended).

The “uplift” component of a success fee cannot exceed 100% of the benchmark fee. In other words, the most lawyers can be paid under a CFA is double their usual fees.

  • DBA:

No fees are charged in the course of the arbitration, but the lawyers are paid a DBA payment, i.e. a portion of the financial benefit received by the client in the arbitration. It must be calculated by reference to the financial benefit and is payable by the client in addition to any recoverable lawyer’s costs. The DBA payment is capped at 50% of the financial benefit.

The DBA must state details relating to the financial benefit; basis for calculating the DBA payment; when the DBA payment becomes payable; and any arrangements with respect to barrister’s fees.

  • Hybrid DBA:

The client pays a fee in any event (capped at 50% of the irrecoverable costs) (the Fee Cap) for the legal services rendered. If the client obtains a financial benefit, then the client also pays a DBA payment capped at 50% of the financial benefit obtained by the client.

If the payable DBA payment is less than the Fee Cap, the lawyers may elect to be paid the Fee Cap in place of the DBA payment.

Apart from satisfying the requirements for a DBA, the Hybrid DBA must also state the fees applicable in the course of the arbitration and the benchmark fee.

Other requirements specified by the Rules

The Rules also specify the general requirements with respect to all types of ORFS agreements. For instance, such agreements must (i) be in writing and signed by the lawyer and the client; (ii) state the matter to which the agreement relates; (iii) state in what circumstances the lawyer’s fees and expenses, and whether disbursements, are payable; (iv) state that the lawyer has informed the client of the right to seek independent legal advice; (v) state that the client may terminate the agreement within a cooling-off period of not less than 7 days by written notice without incurring liability; and (vi) state the grounds on which the agreement may be terminated and how lawyers’ fees are to be paid in such circumstances.

The legislations also contain various safeguards, including a limitation on the recovery of costs by the successful party. The default position is that arbitral tribunals may not order the uplift component of a success fee to be paid to the winning party. However, they may still order those costs to be paid if there are exceptional circumstances justifying the ordering of those costs.

Conclusion

The ORFS regime is a welcoming development, and can facilitates access to justice as clients who have legitimate claims but lack the financial resources may now pursue them.

Author

Gary Seib is a partner in the Dispute Resolution team at Baker McKenzie Hong Kong. Gary previously served as the global chair of the Firm's Dispute Resolution practice (2009 - 2014) and before that as Asia Pacific chair of the practice (2006 - 2009). He is one of the first lawyers to be granted Solicitor Advocate status before the Hong Kong courts and is ranked as Eminent Practitioner and one of the leading lawyers in his field by top legal directories, including Chambers Asia, Chambers Global, Asia Pacific Legal 500 and IFLR 1000. Gary has written numerous articles for publications in Australia and Hong Kong on topics ranging from insolvency and corporate rescue, corporate compliance investigations and enforcement to fraud risk, insider trading and market misconduct. He has also written and spoken extensively on corporate compliance, risk management and cross-border dispute resolution. Gary can be reached at Gary.Seib@bakermckenzie.com and +85228462112.

Author

Philipp Hanusch is a partner in Baker McKenzie’s International Arbitration Team in Hong Kong and a member of the Firm’s Asia-Pacific International Arbitration Steering Committee. Philipp specialises in international commercial arbitration with a focus on shareholder, joint venture and M&A disputes. He has represented parties in arbitrations under various rules, including the HKIAC Rules, ICC Rules, CIETAC Rules, ICDR Rules and UNCITRAL Arbitration Rules. He is on the HKIAC List of Arbitrators and a member of the ICC-HK Standing Committee on Arbitration and ADR. He has been repeatedly appointed as arbitrator under the ICC Rules and HKIAC Rules. Philipp can be reached at Philipp.Hanusch@bakermckenzie.com and +852 2846 1665.

Author

Clement Chui is a senior associate in Baker McKenzie’s Hong Kong office. He advises on private wealth-related disputes, shareholders’ / commercial disputes, the recovery and tracing of proceeds of cyber frauds, and arbitration-related issues including ORFS / third-party funding arrangements. He also handles contentious regulatory matters involving the SFC, the HKMA, the SEHK, and the ICAC; conduct compliance-related internal investigations / risk assessments; and advise on ABC (concerning the POBO, the FCPA, and the UK Bribery Act) and AML issues. Clement can be reached at Clement.Chui@bakermckenzie.com and +852 2846 2494.

Author

James Ng is an associate in Baker McKenzie's Hong Kong office. He has represented parties in arbitrations involving construction, corporate, intellectual property and general commercial disputes under the HKIAC Rules, ICC Rules, SIAC Rules, ICADR Rules and UNCITRAL Arbitration Rules. James Ng can be reached at James.Ng@bakermckenzie.com and + 852 2846 2925.