Hong Kong Law Reform Commission consultation on ‘outcome related fee structures’ for lawyers in arbitration – Omni Bridgeway submission
At present, Hong Kong lawyers are not permitted to charge legal fees based on the outcome of any proceedings. However, in some jurisdictions around the world, various forms of flexible financial solutions are permitted. As Hong Kong is a leading centre for arbitration and wishes to preserve and promote its competitiveness with other popular arbitral seats, the Law Reform Commission of Hong Kong (Commission) established a sub-committee to make recommendations regarding ‘Outcome Related Fee Structures’ (ORFS).
Hong Kong consultation
The Outcome Related Fee Structures for Arbitration Sub-committee of the Law Reform Commission (sub-committee) was formed to:
- review the current position relating to ORFSs for arbitration;
- consider whether reform is needed to the relevant law and regulatory framework; and
- if so, make recommendations for reform, as appropriate.
The sub-committee published a consultation paper in December 2020 containing a number of recommendations. The recommendations were interim conclusions to facilitate discussion. The sub-committee will publish a final report for the government’s consideration in due course.
Omni Bridgeway welcomed the opportunity to provide a submission in response to the paper. Omni Bridgeway has been active in the Hong Kong market for almost a decade, first in support of insolvency related disputes and more recently in support of international arbitrations seated in Hong Kong. In January 2018, Omni Bridgeway opened an office in Hong Kong and, for much of the time since, has been the only leading international dispute resolution funder with resources permanently on the ground.
What are ORFS?
For the purpose of the consultation paper, ORFS refers to an agreement between a lawyer and client, whereby the lawyer receives a financial benefit as agreed if the case is successful. It includes the following types of agreements:
- Conditional fee agreements (CFAs): There are two forms of CFAs:
- a "no win, no fee" arrangement where the lawyer charges no fee during the course of the proceedings and is paid only a success fee if the client’s case is successful; and
- a "no win, low fee" arrangement where the lawyer charges at the usual rate or at a discounted rate during the course of the proceedings, plus a success fee if the client’s case succeeds.
For both arrangements, a success fee refers to an additional fee that the client agrees to pay the lawyer only if the case is successful. It can be an agreed flat fee, or calculated as a percentage "uplift" on the fee charged during the course of the proceedings.
- Damages-based agreements (DBAs): These are a form of "no win, no fee" arrangement. If the client’s case is unsuccessful, the lawyer charges no fee. If the case is successful, under a DBA, the lawyers' fee is calculated by reference to the outcome of the proceedings, for example, as a percentage of the amount awarded or recovered (DBA Payment).
- Hybrid DBAs: This is a form of "no win, low fee" arrangement. The lawyer charges a fee for the legal services provided (usually at a discounted rate) and, if the case is successful, is entitled to a DBA Payment.
Currently, lawyers in Hong Kong are prohibited from entering into CFAs and DBAs for arbitration and litigation proceedings.
Omni Bridgeway’s submission
Omni Bridgeway supports lifting the prohibition on the use of both CFAs and DBAs by lawyers for arbitration taking place in and outside Hong Kong, provided the protections set out below are implemented in the ORFS regime to reduce potential risks to the integrity of the system.
Lawyers acting on any no-win-no-fee (or low-fee) basis:
- are effectively maintaining and funding the action; and
- have a direct economic interest in the outcome of the proceedings.
In this sense, they are acting in a capacity very similar to a third-party funder. However, unlike third-party funders, lawyers have substantial influence over the client’s conduct in the proceedings, given their role as trusted advisors and advocates. The potential for a lawyer to conduct the proceedings in his/her own interests is therefore far greater (whether consciously or sub-consciously) than for a third-party funder.
A lawyer acting on an ORFS basis should therefore be held to at least the same standards and requirements as third-party funders, with additional protections in place, for both clients and arbitral tribunals, to address the lawyer’s dual role as funder and adviser/advocate.
Important protections for clients
In Omni Bridgeway’s view, any ORFS regime should include certain protections for clients and arbitral tribunals. These are similar to the protections that apply in relation to arbitration cases funded by a third-party funder. They are:
- The ability of a tribunal to order disclosure of the existence of an ORFS (not the specific terms) if it considers it relevant to questions of counsel independence, conflicts of interest, security for costs or costs generally. This may include the terms of any associated ATE insurance policy.
- The ability of a tribunal to order costs against lawyers deemed to be maintaining unmeritorious actions on a ORFS basis. This is recommended to ensure and promote the integrity of the arbitral process given the significant influence that lawyers have over the conduct of proceedings and the relative ease with which they might facilitate unmeritorious claims.
- Minimum capital adequacy requirements when the lawyers are agreeing to fund costs other than their own legal fees, including exposure to adverse costs.
- Requirements to ensure clients receive clear and accessible information, and independent advice, in relation to the ORFS, their adverse costs exposure and any associated ATE insurance.
- Protection against potential divergence of interests: for example, independent advice should be available (at the lawyer’s cost) in respect of settlement discussions or other potential areas of divergence in interests between the lawyers acting on an ORFS basis and their clients.
- Reporting and complaints procedures.
Code of Practice for lawyers entering into an ORFS
These protections should be contained in a Code of Practice for Lawyers entering into ORFS for arbitration. The Code should be similar to the Code of Practice for Third Party Funding of Arbitration made under the Arbitration Ordinance.
Flexibility in ORFS arrangements
ORFS arrangements can place pressure on a law firm’s cash flow and therefore create substantial risks of law firm failure. Many lawyers in other jurisdictions operating on ORFS terms will use some form of back-finance to reduce risk, meet overheads and ensure viability pending the outcome of cases. Additional funding is often also required for the law firm to meet external costs including the costs of the arbitration, experts, travel and other disbursements. It is common for law firms to raise finance for these purposes by leveraging against their potential earnings on an ORFS basis.
Therefore, in Omni Bridgeway’s view, any ORFS regime should expressly permit law firms to share the fees generated on a ORFS basis with their own financiers, whether in a single case or across a portfolio of cases.
There will be significant variation in the nature of cases funded by ORFS, including the risk profile and economics, as well as the needs and motivation for parties seeking that funding. Therefore, any ORFS regime should include flexibility for the lawyers and clients in relation to:
- How fees are permitted to be structured (including caps, hybrids, minimum thresholds and co-funding scenarios).
- The types of cases that might be funded (whether for damages or some other commercial benefit, including defence costs).