Hong Kong and Singapore expand arbitration funding opportunities

Hong Kong and Singapore, the leading international arbitral tribunals in the Asia-Pacific region, have both implemented reforms that allow parties to enter into outcome-based fee structures (ORFSs) with their attorneys for arbitrations and certain court proceedings. Hong Kong’s reforms came into force on December 16, 2022, and Singapore’s on May 4, 2022.

ORFSs offers parties welcome alternatives to traditional fee agreements and third party funding (TPF) for funding their disputes.

This notice provides an overview of what parties can expect from these much-anticipated reforms, which are in line with best practice in other major dispute resolution hubs.

What are ORFS?

  • ORFSs, also known as “no-win, no-fee” and “no-win, low-fee” agreements, refer to an agreement between an attorney and his client that covers all or part of the client’s the amount to be paid is conditional on the lawyer’s work on the outcome of the client’s litigation (e.g. if their claim or defense is successful).
  • While ORFS have traditionally been banned in many jurisdictions, this is no longer the case. Major arbitration seats, including London, Paris, Geneva and New York, now allow all ORFSs to varying degrees. For example, London allowed contingent fee agreements (CFAs) in the 1990s and loss-based agreements (DTAs) in 2013. The international trend of allowing parties to enter into ORFSs recognizes that:
    • the growing demand from advanced users of dispute resolution for flexibility in their dispute funding and risk management;
    • the potential for ORFS to improve access to justice for impoverished parties who would otherwise be unable to fund their disputes; and
    • the potential for ORFS to increase efficiency in dispute resolution.
  • ORFSs fall into three main categories, which can be distinguished according to how the client’s payment to their attorney is calculated when a successful outcome is achieved (e.g., a lawsuit or defense is successful):
  • First, CFAs generally provide for a “contingency fee” that can be calculated as a “mark-up” percentage of attorney’s standard fees. CFAs can be structured as either “no-win, no-fee” or “no-win, low-fee” agreements, with no attorney’s fees or reduced attorney’s fees incurred if the successful outcome is not achieved.
  • second, DTAs (also known as contingency fee agreements) provide that payment is calculated in relation to the financial benefit achieved by the customer, for example as a percentage of the amount of damages awarded or recovered from the customer. No payment is due if the proceeding is unsuccessful (ie “No-Win, No-Fee”).
  • thirdHybrid DBAs provide that the payment is calculated in the same manner as a DBA, except that the attorney is entitled to payment of certain attorneys’ fees (typically at a reduced hourly rate) regardless of the outcome of the case (i.e. “No -Win, Low-Fee”). For example, a hybrid DBA could provide for the client: (i) its attorneys’ fees at reduced hourly rates; and (ii) an amount equal to 30% of the damages, if any, awarded to Customer.

Singapore’s CFA regime

  • On 4 May 2022, Singapore’s new CFA regime came into effect following the passage of Singapore’s Legal Profession (Amendment) Act 2022 and the entry into force of the Legal Profession (Conditional Fee Agreement) Regulations 2022. The main features of the reform are listed below.
  • overview: Both Singapore qualified attorneys and registered foreign attorneys are permitted to enter into CFAs with clients in respect of the same categories of disputes that TPF already allow in Singapore, namely:
    • domestic and international arbitrations (whether based in or outside of Singapore);
    • Proceedings before the Singapore International Commercial Court; and
    • all related court and mediation proceedings.
  • CFAs may condition all or a portion of attorney’s fees (eg, attorney’s standard hourly rates) and expenses (eg, attorneys’ out-of-pocket expenses) upon the occurrence of certain circumstances. Accordingly, both no-win, no-fee and no-win, low-fee CFAs are permitted. CFAs may also include an uplift fee. There is currently no cap or cap on uplift fees in Singapore.
  • Uplift fees are non-refundable: The parties are not entitled to claim from the other side an “increase” in costs that exceeds the amount that the client would have paid to his attorney if there had been no CFA.
  • CFA Requirements: CFAs must comply with various requirements set out in the law and regulations, including that CFAs be in writing and that customers have a five-day cooling-off period after signing the CFA.
  • DBAs remain banned: CFA payments cannot be calculated as a percentage or portion of the financial damages awarded to the client in the dispute. Accordingly, contrary to the Hong Kong reforms, DBAs and hybrid DBAs remain prohibited in Singapore.
  • Compatibility of CFAs and TPF: While CFAs and TPF are generally used separately, there may be situations where a customer may want to combine them. For example, in the context of a “no-win, low-fee” CFA, a TPF provider might be willing to fund the discounted attorney’s fees to be paid to the attorney during the proceeding. The law does not prohibit such agreements.

Hong Kong’s CFA, DBA and Hybrid DBA regime

  • On December 16, 2022, Hong Kong’s new rule allowing CFAs, DBAs and hybrid DBAs for arbitration and related proceedings came into effect under the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Ordinance 2022 and the Arbitration (Outcome Related Fee Structures for Arbitration) Rules 2022. The new regime largely adopts recommendations issued in December 2021 by the Hong Kong Law Reform Commission Subcommittee on Outcome Related Fee Structures for Arbitration, following an extensive consultation process (in which Shearman & Sterling proudly participated eager to contribute).
  • overview: Hong Kong’s reforms are similar to Singapore’s, except that DBAs and hybrid DBAs are also allowed. Hong Kong’s expansionary approach should have the practical benefit of giving parties more flexibility to choose a fee arrangement that best suits their dispute.
  • Hong Kong attorneys, including solicitors, barristers and registered foreign attorneys, are now permitted to enter into CFAs, DBAs and hybrid DBAs for arbitrations located in or outside Hong Kong, summary arbitrations, and related court and mediation proceedings. The reforms therefore allow parties to use ORFSs throughout the lifecycle of an arbitration, including for arbitration-related court proceedings such as setting aside or enforcing arbitral awards.
  • Caps on uplift fees and DBA payments: Unlike Singapore’s uncapped CFA regime, Hong Kong has capped 100% of normal attorneys’ fees for the maximum amount of escalation fees that parties and their attorneys can agree to in a CFA, and capped 50% of damages accruing to the Awarded to customers for DBA payments.
  • ORFS payments are exceptionally recoverable: Hong Kong applies a similar standard rule to Singapore that any uplift fees (or DBA payments) in excess of normal legal fees should be non-recoverable by the losing party. Unlike Singapore, however, arbitral tribunals have discretion to award filing fees or DTT payments in “extraordinary circumstances” (e.g., where the losing party’s conduct has contributed to the victor’s indebtedness).