Hong Kong’s Victoria Harbour. Photo: SAHACHATZ/Shutterstock.com

After a longer-than-expected wait of a year and a half, and more than five years of consideration, third-party funding of arbitration is now permitted in Hong Kong.

On Feb. 1, long-awaited amendments to an arbitration ordinance which expressly permits third parties to fund the cost of arbitrations seated in Hong Kong took effect. The ordinance was first passed by the city’s legislative council in June 2017, but some key provisions could not take effect until a code of practice for third-party funders was issued. The Hong Kong Department of Justice issued the code in December.

Third-party funding for arbitrations was first formally considered in Hong Kong in June 2013, when the Law Reform Commission of Hong Kong formed a subcommittee to review whether reform to allow such legal financing is needed. On October 2015, the subcommittee published a consultation paper that proposed third-party funding for arbitrations should be allowed to enhance Hong Kong’s position as an international arbitration center.

“It’s a turning point for Hong Kong,” said Ronald Sum, a Hong Kong-based partner and East Asia arbitration head of Locke Lord. “Just the fact that there is another way [to afford arbitration]. It’s an additional service that Hong Kong can offer to the parties.”

Allowing third-party funding for arbitrations brings Hong Kong in line with other major international arbitration centers like London and New York, as well as regional rival Singapore. The city-state passed a similar bill permitting third-party funding for arbitration in January 2017, and it took effect less than two months later.

Allowing third-party funding for arbitrations was important for Hong Kong to maintain the Asian financial center’s competitiveness as a leading arbitral seat, said Kim Rooney, a Hong Kong-based international arbitrator and barrister, who chaired the third-party funding for arbitration subcommittee. “It levels the playing field. [Parties] will look at Hong Kong with other arbitration centers.”

Last year, Singapore overtook Hong Kong as the most preferred venue for international arbitration in Asia, according to a joint study by the School of International Arbitration at Queen Mary University of London and the U.S. firm White & Case. Globally, Singapore was ranked the third most preferred arbitration seat, after London and Paris. Hong Kong ranked fourth.

The 19‐month wait in Hong Kong, which feels especially long compared to Singapore’s two-month process, is not a concern, Hong Kong-based arbitrators say.

“Obviously, I would have preferred if the wait was shorter, but I don’t want to forgo a clear code of conduct,” said Locke Lord’s Sum, who is also on the Hong Kong government’s advisory committee on the promotion of arbitration. ”At the end of the day, parties come in because of a clear legislature. They don’t want uncertainty. If it takes 19 or 24 months, so be it.”

“We got there, but I truly believe it’s not a race,” added Rooney. “Of course we want to do things as quickly as we can, but you want to make sure what you put forward meets the needs of your jurisdiction. The public certainly had plenty of opportunities for the consultation.”

And while Singapore permitted third-party funding for arbitrations almost two years before Hong Kong, some say the wait could be worthwhile.

Quentin Pak, a director at litigation funding firm Burford Capital, said that in Singapore, where he is based, it took a while for the market to accept the idea of third-party funding for arbitrations. But he expects it will take off faster in Hong Kong, as the conversation has been ongoing for two years.

Tom Glasgow, Asia chief investment officer at litigation funding firm IMF Bentham in Singapore, also noted the steep learning curve in the city-state.

“After the legislation came into effect in Singapore, it took about six months to educate the market and for people to be aware that this sort of financing is suitable for established corporates as well as impecunious parties,” Glasgow said. “Then we saw an exponential rise.”

Additional reporting by Anna Zhang in Hong Kong.

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