Development of third-party litigation funding in Asia

August 2018  |  EXPERT BRIEFING  |  LITIGATION & DISPUTE RESOLUTION

financierworldwide.com

 

The use of third-party funding (TPF) is well-established in jurisdictions such as the US, UK and Australia. TPF in these jurisdictions has enjoyed, and continues to enjoy, significant growth. In a 2015 market analysis of the TPF market in the UK by Justice Not Profit, it was estimated, based on publicly available information, that the total assets under management by 16 third-party funders operating in the UK had grown 743 percent since 2009, and were in excess of £1.5bn.

In comparison, the TPF market and the use of TPF is only in an embryonic stage in Asian jurisdictions. While this is understandable in certain jurisdictions (particularly common law jurisdictions) where, historically, there have been laws against maintenance and champerty, the infancy or even dearth of TPF activity in jurisdictions where no such prohibitions exist, at least not expressly, bears alternative explanations.

What is TPF?

Put simply, TPF is an arrangement where the costs and expenses incurred by a party to a dispute are funded by a third-party which has no connection with the dispute; in return, the third party is given a share of any money that the party may recover out of the dispute.

While there have been no empirical studies conducted, it is understood that the standard market rate is 30 percent of any money recovered, or three times the amount of funds disbursed. Of course, this may vary depending on numerous factors, such as the funder’s assessment of the party’s chances of success in the dispute, chances of recovery if the party is successful and the quantum in dispute.

Increasingly, TPF is not limited to the funding of a dispute from its inception through to when enforcement is sought – this being the ‘traditional’ and most common form of funding. The products offered today by most third-party funders are varied. A party to a dispute or a third-party funder may choose to fund only a part of a dispute, for example preliminary challenges to the jurisdiction of the court or arbitral tribunal to hear a dispute, the enforcement of a court judgment or arbitral award, or, most interestingly, interlocutory applications such as security for costs. Additionally, some third-party funders work with insurance companies to offer before the event insurance (insurance taken out before a dispute arises in respect of legal costs that may be incurred at a later time) or after the event insurance (insurance to protect a party in dispute in respect of any adverse costs ordered against them).

Singapore and Hong Kong

Any discussion of TPF in Singapore and Hong Kong ought to take place side-by-side. This is not just because of the close similarities shared by the legal systems of these two jurisdictions, but also their common aspiration to be the leading hub for dispute resolution in Asia and internationally.

For starters, both Singapore and Hong Kong were British colonies and thus inherited the British common law legal system and along with that, the doctrines of champerty and maintenance (which used to form part of the English law prior to their abolition via the Criminal Law Act 1967).

For many years, the existence of these doctrines cast serious doubt as to whether TPF was permitted in these jurisdictions.

In Singapore, the courts have always recognised the common law exception to the doctrines of champerty and maintenance that assignment of choses in action will not be struck down for being champertous or savouring of maintenance so long as the assignee has a genuine commercial interest in the action. However, whether third-party funders (in the form as we know them today) can be said to have a genuine commercial interest in an action and hence, fall within this common law exception (there is certainly a prima facie argument for it) is a question that has unfortunately never been the subject of a reported decision.

The Hong Kong courts have gone a little further and have held that the doctrines of champerty and maintenance do not prohibit TPF in litigation in certain exceptions, notably where there is a legitimate interest in the outcome of the litigation, to enable the litigant to have access to justice or if the litigation falls within a defined category of proceedings. However, given the limited nature of these exceptions, this would not have created a conducive market for the growth of TPF.

Furthermore, as a result of seemingly inconsistent decisions by the Hong Kong courts, it was unclear if these exceptions applied to TPF in arbitration, even though there is no appreciable, principled difference as to why TPF should be allowed in one but not the other.

The recent introduction in Singapore of the Civil Law (Amendment) Act 2017 and in Hong Kong of the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 have been significant. While there are differences in the specific provisions of these two pieces of legislation (such as the requirements for the disclosure of the existence of TPF), their general effect is the same – to make clear that the doctrines of champerty and maintenance do not apply to arbitration and that TPF in arbitration is permitted. In Singapore, this is further subject to the Civil Law (Third Party Funding) Regulations 2017 which sets out certain criteria that have to be met for a third-party funder and funding arrangement to come within the ambit of the Civil Law (Amendment) Act 2017.

That these two pieces of legislation have come on the heels of each other is no coincidence. It is no secret that both Singapore and Hong Kong have a common aspiration to be the premier, leading hub for international arbitration not just in Asia, but internationally. Given the increasing prevalence of the use of TPF in international arbitration, especially in high-value, investor-state claims, recognising TPF as a commercial reality of international arbitration today is an inevitability in this race.

Indeed, in her parliamentary speech introducing the Civil Law (Amendment) Bill 2017, Indranee Rajah S.C., Senior Minister of State of Law said: “Singapore is now one of the top five most preferred seats of arbitration in the world, alongside London, Paris, Geneva and Hong Kong. But we are not resting on our laurels. We will need to stay responsive to business and constantly adapt what we do to better serve their needs.”

While the introduction of these legislative measures is laudable and heralds exciting times ahead for the international arbitration scene in Singapore and Hong Kong, it remains to be seen if these jurisdictions will go one step further and permit TPF for court litigation proceedings (and in the case of Hong Kong, beyond the limited exceptions currently recognised). Public consultations are currently underway in Singapore in respect of a possible expansion of TPF into new areas.

India

It is important to note that there is no legislation in India that prohibits TPF. Since 1955, the Indian courts have held that the rigid common law doctrines of maintenance and champerty do not apply in India. Amendments carried out to the Code of Civil Procedure by a few states in India provide that when a plaintiff is financed by a person not a party to the suit, an order may be made requiring security for costs from the plaintiff, thereby suggesting that TPF is not prohibited per se. In a recently decided case, the Supreme Court observed that “there appeared to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation”.

While the growth of TPF in India has hitherto been slow, in recent times the conversation surrounding TPF and the voices calling for positive legislative endorsement and support for TPF in India have grown significantly.

Japan and South Korea

In the case of Japan and Korea, while there are likewise no legislative prohibitions against TPF, there is, however, legislation that should be taken into account when contemplating any TPF arrangements in (and with persons and corporate entities from) these jurisdictions.

Article 72 of the Japanese Attorney Act prohibits any person other than an attorney or a legal professional firm from providing legal services for compensation.

At first blush, third-party funders would not be caught by this provision. However, thought will have to be given to the degree of control and involvement that a third-party funder may exercise over funded proceedings to remain clear of this provision.

Article 34 of the Korean Attorney-at-Law Act prohibits non-attorneys from introducing or referring a party in a dispute to a specific attorney (for the purposes of obtaining representation) in exchange for monetary or other benefits and further prohibits the sharing of fees earned by attorneys with non-attorneys.

Additionally, Article 6 of the Korean Trust Act prohibits the creation of any trust whose main purpose is litigation. In this regard, some commentators have noted that any TPF arrangement that is deemed an entrustment of a lawsuit will be deemed null and void.

These provisions of the Korean Law will likewise have to be borne in mind in structuring any TPF arrangements in Korea or involving Korean parties.

In light of the prevailing, and apparently permissive legislative and legal landscape, as well as the potential for growth of TPF in these jurisdictions, it surprising that TPF has not received more attention or has not grown more significantly than it has.

It is unlikely that this can be attributed to any inherent characteristics of a civil law legal system – given that other civil law jurisdictions (such as Germany) boast a healthy and robust TPF market. Possible explanations may lie in the relatively less litigious nature of Japanese and Korean societies, and that third-party funders which tend to come from English-speaking countries may find it difficult to enter the Japanese and Korean market where generally, language and cultural barriers to entry for foreign businesses in most industries have been, and to a large extent remain, high.

Conclusion

While the development of TPF in Asia has hitherto been slow, given the recent legislative developments in Singapore and Hong Kong, it is expected that the pace of this development will change and these legislative developments will positively influence the growth of TPF in other Asian jurisdictions, such as Japan and Korea.

Apart from offering a means by which impecunious litigants may pursue meritorious claims, TPF is also an effective financial risk management tool for litigants that are able to fund their own claims but are concerned about costs. The costs of dispute resolution, especially where the claims are complex, are often high, and for litigants with meritorious claims, TPF is something that should most certainly be considered. With the future growth of TPF in Asia, it is the users of legal services that will ultimately benefit.

 

Koh Swee Yen and Tiong Teck Wee are partners at WongPartnership LLP. Ms Swee Yen can be contacted on +65 (64) 166 876 or by email: sweeyen.koh@wongpartnership.com. Mr Teck Wee can be contacted on +65 (64) 168 112 or by email: teckwee.tiong@wongpartnership.com.

© Financier Worldwide


BY

Koh Swee Yen and Tiong Teck Wee

WongPartnership LLP


©2001-2018 Financier Worldwide Ltd. All rights reserved.