Litigation Finance in Asia: “bring in the new, but build on the old”

Litigation Finance in Asia

By Oliver Gayner

On 10 January 2017, the Civil Law (Amendment) Bill (38/2016) passed its second reading before the Parliament of Singapore. The Bill abolishes the torts of maintenance and champerty, and for the first time makes it expressly lawful for a third party to fund dispute resolution proceedings in Singapore. For now, the changes apply to international arbitration proceedings only, but comments by Minister Indranee Rajah make it clear that if the arbitration pilot is successful further expansion will follow. During its passage, the Bill only received minor amendments and it will shortly have force of law once it has received the approval of the President and is published in the Government Gazette.

The passing of a new piece of legislation for the legal sector may not exactly set pulses racing, but viewed in context the new Bill is a significant development. The common law was historically antipathetic towards the worlds of finance and investment colliding with the justice system. However, the underlying public policy considerations have over the years turned on their head: traditional fears about weak courts needing protection from unscrupulous barons have morphed into an altogether more modern concern, which is that the civil justice system has simply become too expensive for many. Unaffordable justice is of course no justice at all. That may be axiomatic, but for years it has been a fact of life for many sufferers of wrongdoing across the common law world.

Policymakers in Singapore, and also in Hong Kong, are now looking to the future. Both jurisdictions (between whom there exists a healthy state of competition) have been reviewing litigation funding, as part of a drive to ensure their legal systems are internally effective as well as internationally competitive. In this regard, the policy makers are fortunate to have precedents to work with, thanks to a funding industry which is around 10 years old in England & Wales, and 20 years old in Australia. As Mahdev Mohan and Abraham Vergis have said in a recent article in GAR on the new Bill, third party litigation funding is now a “mature industry that has created, and continues to create, its own industry standards and practices”. Which begs the questions, what are those benchmarks, and what lessons can Hong Kong and Singapore learn from overseas?

The topic is a huge one, but here are a few brief observations born from my experience of funding in both jurisdictions, and the vast collective experience of colleagues at IMF:

  1. For regulation to be effective it must be proportionate to the risks. If the risks are high and the regulation weak, then regulatory incidents will not be prevented (Barings, Lehmans, RBS etc). Conversely, if the risks are low and the rules disproportionately tight, then there will be a deterrent to investment and the policy objective of promoting access to justice will backfire.
  2. Because litigation financing is non-recourse, the business of paying for other people to pursue their disputes is inherently self-regulating. If you back a bad claim, you lose your money. If you interfere with the administration of justice in some way, the courts have a wide range of powers to penalise you (contempt orders, third party costs orders and the like). If your funded parties are upset by the experience, you will not get repeat business and your goodwill will be worthless.
  3. For these reasons, the interests of funders, funded clients and the courts are actually far more aligned than may be immediately apparent. IMF’s funding agreements state, as a standard clause, that their “Overarching Purpose” is “the just resolution of claims and proceedings according to law and as quickly, inexpensively and efficiently as possible…” (cf. the overriding objective in English CPR 1 – “dealing with cases justly and at proportionate cost… ensuring that the parties are on an equal footing and ensuring that the matter is dealt with expeditiously and fairly”).
  4. Empirically, there is little to no evidence from 30 combined years of history in England & Wales and Australia of abuse of process by funders, along the lines suggested by Lord Denning in Re Trepca Mines Ltd (No 2) [1963] 1 Ch 199 (“to inflame the damages, to suppress evidence, or even to suborn witnesses…”) Commercial litigation funders are generally run by ex-lawyers who are no more likely to do these things wearing their funder’s hat than they would have in practice.
  5. It is thus unsurprising that, following the High Court’s decision in Fostif (2006) 229 CLR 386, Australia has adopted a light touch regulatory approach, embracing funding as a “legitimate response to a need in the market place” which brings “a welcome element of commercial objectivity” (Chief Justice French). The decision in Fostif put to an end years of satellite litigation concerning whether funding was an abuse of process, which was highly debilitating for all concerned. Currently, funders are exempt from regulation provided they maintain an adequate policy to protect clients from conflicts of interest – a simple and effective way of passing the regulatory burden onto the market participants.
  6. Similarly, in England & Wales the Jackson Reforms led to the creation of a voluntary Code of Conduct to regulate the use of funding, referred to by Lord Neuberger as “the lifeblood of the civil justice system”. And in the recent Court of Appeal decision in Excalibur [2016] EWCA Civ 1144 there were direct echoes of Fostif, almost exactly 10 years on – “litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest… [the ongoing review of cases by funders is] not just prudent but often essential”.
In both jurisdictions, the emphasis is rightly on commercial freedoms, so that parties are free to choose how to finance and manage their disputes, just as they are free to choose with whom to contract and where to resolve their differences.

The Law Reform Committee in Hong Kong and the Ministry of Justice in Singapore consulted extensively before publishing their proposals to permit arbitration funding, and in adopting “light touch” approaches have clearly played careful attention to the examples from overseas. The Singaporean bill is admirably short and focussed: the existence of funding should be disclosed, so that arbitrators can avoid conflicts, and funders must maintain sufficient levels of capital in order to be “qualifying”. Further details may be prescribed in guidelines, but overall the stage seems well set for growth, which should be to the benefit of the courts, clients, lawyers and funders alike.

To paraphrase Justice Kirby in Fostif: “the importance of access to justice, as a fundamental human right which ought to be readily available to all, is clearly a new consideration that stimulates fresh thinking”: but fresh thinking about the ideal justice system for the future is only improved by absorbing the hard earned lessons of the past.

If you would like to learn more about funding for arbitration in Asia, please contact us.