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Report advocates arbitration ‘success fees’

By Arthur Chan

Hong Kong, 28 December 2021: Major changes in the way lawyers are paid for arbitration cases – including the option of tying their fee to a successful outcome – appear likely to be implemented in Hong Kong. The move would bring the city into line with most of the world’s leading arbitral seats, including England and Wales where such practices have been permitted since the 1990s.

The new regulations are recommended in a report released earlier this month by the Law Reform Commission of Hong Kong and have received a favourable response from the Department of Justice. Supporters say the proposals will increase access to justice and enhance this city’s status as a global arbitration hub.

Background

Arbitration is a practical and cost-effective alternative method of settling a wide range of civil and commercial disagreements. Parties submit their dispute to a tribunal usually comprising one or three independent arbitrators. The process offers privacy and greater flexibility and is often more cost-effective than court proceedings.

Internationally, arbitration awards are enforceable in more than 150 jurisdictions, including Hong Kong, due to the application of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Hong Kong is recognised as a global arbitration hub. Earlier this year, the city was ranked as the third most preferred place for arbitration in the world in a survey by Queen Mary University of London and White & Case International Arbitration. Further, the Hong Kong International Arbitration Centre (HKIAC) was the world’s third most preferred arbitral institution.

The HKIAC’s caseload has increased significantly in recent times, culminating in a record-breaking year in 2020 when it received 318 arbitration filings, the highest number in more than a decade. The total amount in dispute was almost HK$69 billion, a record high since figures were first published in 2011. Almost three-quarters of the cases were international, featuring parties from 45 jurisdictions.

At present, lawyers in Hong Kong are not allowed to charge clients a fee based on the outcome of arbitration or litigation proceedings. However, with the exception of Singapore – where a framework to introduce such measures has been proposed, but not yet implemented – all major arbitral seats permit some form of outcome-related fee structures (ORFSs).

Commission’s proposals

The Law Reform Commission set up a subcommittee to examine the issue. It published a consultation paper a year ago and the public responses were overwhelmingly supportive of the proposed reforms, leading to the Commission’s final recommendations this month. It proposes three types of agreement:

  • Conditional fee agreement: The client agrees to pay the lawyer an additional fee, known as a success fee, only payable in the event of a successful outcome. It can be a flat fee or calculated as a percentage uplift – capped at 100% – on the fee the lawyer would have charged. Barristers are also subject to the same 100% cap.
  • Damages-based agreement: The lawyer receives payment only if the client obtains a “financial benefit” in the matter, with the fee capped at 50% of that amount.
  • Hybrid damages-based agreement: The lawyer agrees to be paid a damages-based payment only in the event the client obtains a “financial benefit” – again capped at 50% – and also fees (typically discounted) for legal services rendered.

The Commission recommends the relevant legislation should specify the principal grounds upon which the agreement can be terminated by the lawyer. However, the Commission does not consider it necessary to set out statutory grounds on which the client may terminate an ORFS, saying it should be a matter for agreement with the lawyer in accordance with basic contractual principles, so as to provide maximum flexibility for the benefit of the client. Further, the agreement should be subject to a minimum “cooling off” period of seven days during which the client may terminate it by written notice.

The Commission also recommends personal injury claims should be excluded from the new ORFS regime. It notes concerns that “vulnerable” personal injury victims could be open to exploitation while also recognising this exclusion could prevent some victims from pursuing claims against their insurers. The Commission therefore suggests this measure should be reviewed two to three years after the new regime has been implemented.

Comments

The Department of Justice is on record as saying it will arrange for legislative amendments after careful consideration of the proposals. As such, it seems likely the Commission’s recommendations will be adopted into law without too much alteration.

The reforms will have obvious benefits for clients who might not otherwise be able to afford regular legal fees, thus improving access to justice. Further, the new regulations will align Hong Kong with most other major international arbitration centres and enhance its competitiveness, given that demand for flexible fee arrangement is increasing.

Arthur Chan has been an Associate with BC&C since 2018. He deals with Criminal Matters while also covering Civil and Commercial Litigation, and handles cases involving personal injury and employment issues. He can be contacted at Arthur@boasecohencollins.com.

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