Third-Party Funders for Hong Kong Arbitration Costs: How to Find Arbitration Financing Institutions

In 2024, the Hong Kong government published its proposed amendments to the Arbitration Ordinance (Cap. 609) that would explicitly permit third-party funding (TPF) for all arbitrations seated in Hong Kong. This followed a 2022-2023 consultation that showed overwhelming industry support. The current law, amended in 2017, only allows TPF for arbitration related to “proceedings under the law of another jurisdiction” and certain investor-state disputes. The 2024 Bill, expected to pass in 2025, removes these restrictions. For a commercial party facing a six-figure arbitration bill, this change is not theoretical. The Hong Kong International Arbitration Centre (HKIAC) reported 500 new arbitration cases in 2023, with an average dispute value of HK$75 million. Many parties, particularly SMEs and start-ups, cannot sustain that cost out of pocket. Third-party funders — commercial entities that pay legal fees in exchange for a share of the award — are now actively marketing to Hong Kong users. This article explains the legal framework, the types of funders operating in Hong Kong, and the practical steps to secure arbitration financing.

The Legal Framework for Third-Party Funding in Hong Kong Arbitration

The 2017 Amendments and the Common Law Position

The Arbitration Ordinance (Cap. 609) was amended in 2017 to add sections 98J to 98R. These provisions expressly permit TPF for arbitration in Hong Kong, but only for “arbitration proceedings under the law of another jurisdiction” and “proceedings that are related to arbitration under the law of another jurisdiction.” The practical effect was narrow: most commercial arbitrations seated in Hong Kong under Hong Kong law were not covered. At common law, TPF could constitute champerty and maintenance — a tort and a crime that prohibited a third party with no legitimate interest from funding litigation. The 2017 amendments created a statutory safe harbour for the limited category of funded arbitration. The common law prohibition remained in place for other cases, creating uncertainty for funders and parties alike.

The 2024 Amendment Bill: What It Changes

The Arbitration (Amendment) Bill 2024, published on 19 July 2024, proposes to repeal sections 98J to 98R and replace them with a new Part 10A. The new provisions will permit TPF for all arbitrations seated in Hong Kong, regardless of the governing law of the arbitration agreement. The Bill also extends the permission to all proceedings arising out of or in connection with the arbitration, including court applications for interim measures and enforcement. The Bill introduces mandatory disclosure obligations: the funded party must notify the other party and the arbitral tribunal of the existence of a funding agreement and the identity of the funder. Failure to disclose does not invalidate the funding agreement but may result in adverse cost orders.

The Role of the Hong Kong Code of Practice

The 2024 Bill requires the Chief Justice to issue a Code of Practice for third-party funders. The Code, published in draft in December 2024, sets minimum capital adequacy requirements for funders. A funder must maintain a minimum capital of HK$20 million or an equivalent amount in a recognised currency. The Code also requires funders to have a written funding agreement that clearly states the funder’s liability for adverse costs, the circumstances under which the funder may terminate funding, and the funder’s control over the conduct of the arbitration. The Code does not apply to funders based outside Hong Kong who fund a Hong Kong-seated arbitration, but those funders must still comply with the Ordinance’s disclosure obligations.

Types of Third-Party Funders Operating in Hong Kong

Commercial Litigation Funders

Commercial funders are the most visible category. These are typically specialist investment firms that fund arbitration in exchange for a percentage of the award, usually between 20% and 40%. Examples include Burford Capital, Omni Bridgeway, and Therium. Burford Capital reported in its 2023 annual results that it had deployed over US$2.5 billion in capital globally, with Asia-Pacific representing approximately 15% of its portfolio. These funders conduct rigorous due diligence on the merits of the case, the enforceability of any award, and the financial standing of the opposing party. They typically require the funded party to retain a law firm on a conditional fee arrangement, and they will not fund cases where the claim is below US$5 million.

Law Firm-Financed Litigation Funding

A smaller but growing category is law firm-financed TPF. Some Hong Kong law firms have established captive funding vehicles or have entered into preferred partnerships with funders. The Law Society of Hong Kong issued a Practice Direction on 1 January 2024 clarifying that a solicitor may not act as a funder for a client, but may introduce a client to a funder provided the solicitor does not receive a referral fee. Some firms now offer “litigation finance” as a service line, where they manage the relationship between the funder and the client. The cost to the client is typically higher than direct funding, as the law firm takes a share of the funder’s return.

Specialised Funders for Specific Sectors

Some funders focus on specific industries. For construction disputes, funders like Harbour Litigation Funding have a dedicated infrastructure team. For shareholder disputes, funders such as LCM Funding (UK) have a separate team for financial services claims. In Hong Kong, the Construction Industry Council reported in 2024 that construction arbitration cases account for approximately 40% of HKIAC’s caseload. Funders with sector expertise can assess the technical merits of a claim more quickly than generalist funders. They also understand the specific cost structures of each sector, which affects the funding terms.

How to Find and Secure Arbitration Financing

Step 1: Assess Your Case Against Funder Criteria

Funders apply a consistent set of criteria. The claim must have a strong legal and factual basis. The funder will review the pleadings, the evidence, and the legal opinions. The claim must be for a minimum amount, typically US$5 million to US$10 million for a single case. The funder will assess the opposing party’s ability to pay the award. If the opposing party is insolvent or has no assets in a jurisdiction where the award can be enforced, the funder will decline. The funder will also assess the cost-to-claim ratio. A claim of HK$10 million with estimated costs of HK$3 million has a 30% cost ratio, which is at the upper limit of what most funders will accept.

Step 2: Prepare a Funding Proposal

The funding proposal is a confidential document that summarises the case. It should include: a case summary with the key facts and legal issues; a damages analysis with a range of recoverable amounts; a cost budget that breaks down legal fees, expert fees, and disbursements; an enforcement analysis that identifies the opposing party’s assets; and a timeline showing the expected duration of the arbitration. The proposal should be prepared by the law firm, not the client. Funders expect a professional standard of presentation. The proposal should also include a conflict check: the funder must not have a pre-existing relationship with the opposing party or the tribunal.

Step 3: Approach Multiple Funders

Do not approach a single funder. The funding market is competitive, and multiple funders will give you negotiating leverage. Approach between three and five funders. Funders typically respond within two to four weeks with an initial indication of interest. If multiple funders express interest, you can invite them to submit a formal term sheet. The term sheet will set out the funding percentage, the conditions for termination, and the funder’s control rights. The funded party should negotiate the term sheet with the assistance of its law firm. The law firm must ensure that the funder does not have the right to settle the case without the client’s consent. The Hong Kong Code of Practice requires that the funding agreement state that the funded party retains control over the conduct of the arbitration.

Step 4: Finalise the Funding Agreement

The funding agreement is a contract between the funder and the funded party. It must comply with the Code of Practice. The agreement must state: the funder’s liability for adverse costs; the circumstances under which the funder may terminate funding; the funder’s rights to information about the case; the funding percentage or other fee structure; and the dispute resolution mechanism for disputes between the funder and the funded party. The funded party should seek independent legal advice on the agreement. The law firm acting in the arbitration cannot also advise on the funding agreement, as there is a conflict of interest. The funded party should retain a separate solicitor for this purpose.

Risks and Limitations of Third-Party Funding

The Funder Can Terminate Funding

Most funding agreements give the funder the right to terminate funding if the case no longer meets the funder’s criteria. Common termination events include: a material change in the facts or law; a breach of the funding agreement by the funded party; or a determination that the claim is no longer commercially viable. If the funder terminates, the funded party must either find a new funder or pay the legal fees itself. The funded party should negotiate a termination notice period of at least 30 days. The agreement should also state that the funder remains liable for costs incurred before the termination date.

The Funder May Require Security for Costs

The arbitral tribunal has the power to order the funded party to provide security for costs. The tribunal will consider the funder’s financial standing and the funded party’s ability to pay. If the funder is not a recognised entity under the Code of Practice, the tribunal may order the funded party to provide security. The funded party should ensure that the funder is a recognised entity or has a strong financial standing. The funder should provide a letter of undertaking to the tribunal confirming its financial commitment.

The Funded Party Must Disclose the Funding

The 2024 Bill requires the funded party to disclose the existence of the funding agreement. The disclosure must be made in writing to the other party and the arbitral tribunal. The funded party must also disclose the identity of the funder. The tribunal may order further disclosure of the funding terms if it considers it necessary for the proper conduct of the arbitration. The funded party should prepare a disclosure letter at the same time as the funding agreement is signed. The letter should state that the funding is provided by a recognised funder and that the funder has no control over the conduct of the arbitration.

Actionable Takeaways

• Before approaching a funder, ensure your claim is for at least HK$40 million and has a strong legal basis with a clear enforcement path.
• Prepare a professional funding proposal through your law firm, including a detailed cost budget and an enforcement analysis.
• Approach at least three funders simultaneously to create competition and improve your funding terms.
• Negotiate a termination notice period of at least 30 days and ensure the funder accepts liability for adverse costs.
• Disclose the funding to the opposing party and the tribunal immediately upon signing the funding agreement, using a standard disclosure letter.

This does not constitute legal advice. Consult a solicitor for your specific case.