Hong Kong arbitration ban lifted on outcome-related fee structures

The change follows the passage of the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) Amendment Ordinance on 22 June 2022 and the introduction of new Arbitration (Outcome Related Fee Structures for Arbitration) Rules (Rules) which came into operation together with Divisions 3, 4 and 7 of Part 10B of the Arbitration Ordinance (Cap 609) on Friday 16 December 2022. This brings Hong Kong into line with most other international arbitration hubs.

The reform follows a public consultation exercise and a recommendation for change by the Law Reform Commission in December 2021.

Under an ORFS arrangement, a party can enter into an agreement with its legal representative in which the legal costs receivable by the lawyers depend upon the outcome of the arbitration – i.e. legal costs are payable if the party is successful in the dispute. What constitutes a successful outcome depends on what is defined by the parties in their agreement. The Rules now apply to arbitration proceedings as well as related court or mediation proceedings.

In Hong Kong, three types of ORFS structures are now available: conditional fee agreements (CFAs), damages-based agreements (DBAs) and hybrid damages-based agreements (hybrid DBAs).

The Rules also provide guidance and clarity to parties and legal representatives by prescribing the requirement of a ORFS agreement.

All types of ORFS agreements must be in writing and signed by the lawyers and the client and state:

• the matter to which the agreement relates, namely the entire arbitration or part of it;
• what circumstances the lawyer’s fees and expenses, or any part of them, are payable;
• that the lawyer has informed the client of the right to seek independent legal advice before entering into the agreement;
• the client may terminate the agreement during a period not less than seven days after the date of making the agreement;
• whether disbursements, including barristers’ fees, are to be paid by the client irrespective of the outcome of the matter;
• the grounds on which the agreement may be terminated before conclusion of the matter; and
• the alternative basis on which the lawyers are to be paid by the client in the event of an early termination.

ORFS not only places Hong Kong in line with other jurisdictions in the arena of international arbitration, clients will also benefit from more flexible fee structures – whether their arbitrations are seated in Hong Kong or they engage Hong Kong practitioners for arbitrations seated elsewhere.

In addition to the existing third-party funding option that has been in place in Hong Kong since 2019, given the potential costs of arbitration, the introduction of ORFS provides additional funding options for clients who may find it otherwise difficult to pursue what could be worthwhile claims, and this will allow them to mitigate risks by sharing risks with their lawyers.

As ORFS is a tried and tested mechanism in competing jurisdictions such as the UK with Singapore having rolled out a similar regime earlier this year, the introduction of ORFS in Hong Kong may help alleviate cash-flow issues or other costs pressure that would traditionally arise in an arbitration. Allowing ORFS will mean Hong Kong stays an attractive option for resolving disputes via arbitration. However, it is likely that there will be certain caveats to the roll-out of ORFS, so it remains to be seen how the Rules will play out in practice. In particular, parties and their legal representatives should be on the lookout and be specific in how “success” is defined in ORFS agreements, as this will trigger payment to the lawyers.

It is expected that ORFS will enhance the competitive position of Hong Kong as an international commercial arbitration hub. With increased demands from parties to arbitration for flexible fee structures, the introduction of ORFS will keep Hong Kong up to speed with the latest practice of international arbitration, and allow arbitrations seated in Hong Kong and related proceedings to be on a level playing field with competing jurisdictions that allow similar funding options.

Co-written by Bernice Shang of Pinsent Masons.