Singapore: Are Asian Arbitral Centres Going To Surpass The Old Continent?

Last Updated: 7 November 2017
Article by Vannin Capital

By Yasmin Mohammad Senior Counsel, Vannin Capital And Tom Mcdonald Counsel, Vannin Capital

We have observed much movement and fast paced progress from the Asian dispute resolution centres in the past few months. In this article, we look at two of the main jurisdictions where the availability of third party funding is evolving.

SINGAPORE HAS PLACED ITSELF No1

Historically, save for some limited exceptions (e.g., in the context of insolvency), third party funding (TPF) of disputes has been restricted under Singaporean law. These restrictions arise largely from the common law torts of maintenance and champerty, which have their origins in medieval England. Until just a couple of days ago, were a party to enter into a third party funding arrangement in Singapore:

  • the underlying agreement would be unenforceable;
  • the funder and the funded party could be sued for damages (in tort) by the defendant; and
  • a lawyer who assisted the funded party to enter into the funding arrangement may be the subject of disciplinary action.

However, this has all changed for international arbitrations brought in Singapore.

As a leading global centre for international arbitration, Singapore is the first to have crystallised its plans to approve third party funding of disputes on 10 January 2017 when the Amendment to the Civil Law permitting third party funding was passed.

Stepping back a couple of months, on 7 November 2016, Singapore's Ministry of Law submitted to Parliament a Bill amending the Civil Law permitting TPF of international arbitration. The changes will also apply to Court proceedings to the extent that they relate to international arbitration (e.g., taking enforcement steps), but will not, currently, extend to domestic litigation. However, the Bill takes the important step of abolishing the common law of champerty and maintenance in Singapore as a whole. This development reflects the increasing interest by lawyers and their clients in Singapore about TPF and demonstrates Singapore's continuing concern to create a competitive business environment for its residents, as Mark Mangan, partner at Dechert in Singapore comments:

"The Singapore government has once again demonstrated that it is sensitive to the needs of the international arbitration community. Many of our clients, and I'm sure those of others, have in recent times been increasingly interested in the use of TPF to help manage the costs and risks of arbitration. Some have even gone so far as choosing alternative jurisdictions to Singapore for resolving their international commercial disputes in an effort to gain access to this important risk management tool. Thus, the new legislation is timely and will help Singapore keep pace with other leading seats for international arbitration."

Singaporean international arbitration practitioners welcome this development and wish for it to be extended to litigation as confirms KOH Swee Yen, partner at Wong Partnership in Singapore:

"The legislative amendments in Singapore to allow for third party funding in international arbitrations and related court proceedings are no doubt a welcome development to litigants and lawyers. Although this is presently limited to international arbitrations and related court proceedings, there is avenue for the Minister, by way of regulations, to prescribe other categories of proceedings that could be funded. In the future, one may see third party funding being extended to the Singapore International Commercial Court, as yet another step towards cementing Singapore's position not just as a leading international arbitration hub, but also as a prime destination for international commercial dispute resolution."

It is yet unconfirmed at the time we are reporting to what extent the passed legislation conforms to the Bill. We understand only minor amendments were made. The Bill proposed a certain structure to permit third party funding. For instance, certain requirements will be imposed in order for an entity to be considered a "qualifying Third Party Funder" under the Act. These include that the funder has access to sufficient funds immediately within its control to fund the proceedings. Importantly, the funder must also carry on the principal business, in Singapore or elsewhere, of providing funding for dispute resolution processes. In other words, only 'professional' funders will be welcome to operate in Singapore which is an important condition when observing the issues that have arisen in the past when inexperienced and amateur ad hoc funders meddled with expensive and complicated procedures. Cleary, this condition will close the gates to those that approach funding with a careless attraction to high returns without having implemented all the necessary steps of a stringent due diligence process and the necessary checks and balances taking account the objective merits of a dispute and ethical rules.

Dovetailing with the new legislation is, a new Working Group under the auspices of the Singapore Institute of Arbitrators and the leadership Mr Chan Leng Sun S.C. which is considering production of guidelines for third party funders operating in Singapore. It remains to be seen whether these guidelines will go further than the requirements for qualifying Third Party Funders included in the legislation. However, the fact of the Working Group and its focus on TPF emphasises further the seriousness with which Singapore as an international dispute resolution centre is viewing the continuing development of TPF in the region and the international dispute resolution more generally.

In addition, changes are also proposed to the Legal Profession Act to allow lawyers to recommend third party funders and provide related funding advice to clients, so long as the lawyer does not receive any direct financial benefit in doing so.

It is important to note the great speed at which Singapore has made these amendments to its law and to highlight the clear commitment of the Government to aid its remarkable arbitration community to continue to impose its importance on the global map of arbitral seats.

Yasmin Mohammad is honoured to be discussing these developments and answering questions about the funding market globally at the next Litigation Conference organised by the Law Society of Singapore on 20 & 21 April 2017.

HONG KONG

To be fair, the push towards reform in Hong Kong has been equally strongwilled and efficient.

On 30 December 2016, the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill opening the way to the use of third party funding in Hong Kong was officially published. It is unclear yet when it will it will be discussed by Parliament. Hong Kong is therefore coming to the end of a rich and methodical process of consultation leading to the preparation of the Bill. By way of background, on 12 October 2016, the Final Report of the Hong Kong Law Reform Commission Sub- Committee (the Commission) on Third Party Funding was issued delivering to the Government to the legal community the results of a full consultation with all stakeholders. This process started in June 2013 when the Sub-Committee chaired by Ms Kim Rooney was set up to review the position relating to third party funding in the context of arbitration proceedings. She was mandated to consider whether reform was needed, and if so, to make recommendations for reform as required.

On 19 October 2015, the Commission released a consultation paper proposing that third party funding for arbitration taking place in Hong Kong should be permitted under Hong Kong law and seeking comments and suggestions from the legal community.

As set out in the 12 October 2016 Final Report, 97% of the participants in the consultation process including arbitrators, users, government bodies, solicitors/barristers and arbitral institutions, expressed their clear desire to see Hong Kong lift any ambiguities as to the legality of third party funding in their legal framework.

Briana Young, Foreign Legal Consultant at Herbert Smith Freehills in Hong Kong echoes heartily and one can imagine that the legislative changes happening in parallel in Singapore can only enhance the local practitioners' enthusiasm:

"I fully support the proposed reforms. Opening the door to third party funding will help Hong Kong maintain its status as one of the world's leading arbitral seats."

As expected, safeguarding Hong Kong's competitive edge is at the heart of this overwhelming vote for third party funding. Frances van Eupen, partner at Allen & Overy in Hong Kong confirms the impatience of the legal community:

"It has taken three years since the Law Reform sub-committee was originally set up to accommodate the consultation process and produce the report recommending changes to the Arbitration Ordinance to make it clear that third party funding of arbitration in Hong Kong is permitted. I hope that the amendments will be implemented in a much shorter timeframe! Especially given the report recognises these reforms are necessary to enhance Hong Kong's competitive position as an international arbitration centre."

The righteous impatience of arbitration practitioners has been heard and it is now only a matter of days until the Bill is passed into law.

The Final Report made three major recommendations beyond the inceptive one to legalise third party funding which the Bill has followed very closely.

1. Informed regulation

The first is perhaps the most interesting from a scientific point of view. After much debate on the need for regulation of third party funding and third party funders, the Commission, on the contrary, advised the Ministry not to regulate for an initial period. It was agreed to observe the conduct of various participants and to decide at a later stage whether formal regulation was really needed and to what extent. This was an excellent decision in our view (however admittedly and understandably biased) as most criticisms and calls for regulation usually stem from purely academic examination and only too rarely from a truly informed vantage point. This approach also mirrors that of most other jurisdictions. Overregulation (especially at the outset) would hinder the use of third party funding in Hong Kong.

Comparisons between Singapore and Hong Kong are naturally in everyone's minds as comments Frances van Eupen:

" In my view the endorsement of a "light touch" approach makes sense. Among other things, Singapore has just made changes expressly permitting third party funding for arbitration, and observers will no doubt be quick to draw comparisons between the approach adopted in the two jurisdictions. So better to wait, watch and learn, than over-regulate from the start."

2. 'Enthusiastic amateurs' not welcome

Second, the Commission recommended to follow the example of the Association of Third Party Funders (ALF) of which Vannin Capital is one of only seven members and to issue a Code of Practice (the Code) ensuring ethical, financial and professional conduct towards users. The Code would not have any judicial or legislative authority but any breach of it would be persuasive evidence in judicial or arbitral proceedings against a third party funder.

This recommendation which we supported fully was also followed. It will ensure that only professional, reputable funders are able to provide services in Hong Kong.

More specifically, the Commission has recommended that the Code addresses:

  • the capital adequacy of the funder,
  • conflicts of interest,
  • costs and adverse costs,
  • control of the arbitration by the funder,
  • grounds for termination of the funding, and
  • that each of these matters are also dealt with clearly in any funding agreement.

3. Disclosure and identity

Finally, the Bill has also followed the Commission's recommendation that parties be required to disclose the existence of a funding agreement and the identity of the funder. This recommendation is finding its way in other rules and documents as the remedy to potential conflicts of interests between third party funders and arbitrators in particular. This concern is prevalent in conversations about third party funding despite the fact that such conflicts with a tribunal have not to date arisen in practice because funders take much care to avoid creating a situation of conflict that would endanger their investment.

Seasoned practitioners, like Frances van Eupen, take a similar view:

"The stated purpose of this provision is to minimise the possibility of conflicts of interest being the subject of a challenge. But the report did not really seek to de-construct that justification. I would expect an experienced and reputable funder to be alive to this issue and incentivised to minimise the scope for an arbitrator or award to be challenged based on any connection between an arbitrator and funder of one of the parties. And I think the approach adopted in the IBA Guidelines on Conflicts of Interest (i.e. to require the parties to disclose any relationship between an arbitrator and an entity with a direct economic interest in the award, including a third party funder) would have been a potentially viable alternative to a blanket requirement requiring parties to disclose that they are funded and the identity of the funder in all cases."

Most recently, the Comprehensive Economic and Trade Agreement (CETA) entered into between Canada and the European Union provides that the fact of and identity of the funder will need to be disclosed at the earliest opportunity. The commission also considered whether the funding agreement should be disclosed along with the identity of the funder. As Briana Young rightly points out, the motivations of those seeking to see a funding agreement are questionable:

"The LRC has struck a sensible balance by proposing disclosure of the fact that a party is funded, and the name of the funder, but not the details of the funding agreement. The funder's involvement in proceedings is relevant, not least for identifying conflicts, and everyone involved in the arbitration should be aware of that involvement. However, there is no need to disclose the details of the funding agreement; that is a private matter between the funder and the funded party. Also, given the rise of so-called "guerrilla tactics" in arbitration, there is a real risk that disclosing any more detail could lead to dubious tactics by the non-funded party; this clearly isn't something that Hong Kong wants to facilitate."

The requirement to disclose however gives rise to another danger being that such disclosure encourages automatic security for costs applications simply because a funder is present in a dispute. A security for cost application or the knowledge that such an application is sure to be made thus increases the cost of funding for a claimant when ATE insurance then needs to be provided. Cost is the biggest criticism of arbitration, so implementing a requirement that has the effect of driving up the cost of that litigation or arbitration with systematic provisions of ATE insurance is not rendering a public service, especially not for impecunious claimants.

Vannin Capital works mostly with clients who are well capitalised and which are in a position to fund their own cases – however, they recognise that third party funding can support their business as an important part of their financial toolkit either as part of their legal spend strategy and/or to manage their cash flow. As a matter of practice, Vannin Capital offers ATE insurance to cover these risks for claimants and consequentially, for respondents. To date, Tribunals have accepted the proof of ATE insurance as coverage for a security for cost order.

Ignoring cost implications, as a professional third party funder, we are as a general rule, favourable for the fact of funding and our identity to be disclosed. Whether and when the fact of funding and our identity is disclosed normally comes down to a strategic decision made by the claimant and their lawyers in relation to the strategy pursued.

Therefore, the jurisdictions that preserve this strategic option will no doubt obtain (or maintain) a competitive edge. That being said, the possibility for a claimant to reclaim from the respondent the cost of funding (i.e., the funder's premium) is now an interesting incentive for the claimant (impecunious or wellcapitalised) to disclose in any event that it is being funded. We examine this exciting new development in an interview with Erin Miller Rankin, Partner at Freshfields Bruckhaus Deringer in Dubai, on page 30.

SOUTH KOREA

South Korea is catching up rapidly as an attractive arbitral centre. The ambition of the South Korean market is also apparent from their approach to third party funding. The civil law background of this flourishing jurisdiction has certainly facilitated the conversation as there are no concepts of champerty and maintenance to overcome.

Therefore, the examination of third party funding has started directly with a commercial analysis of the benefits for the parties to arbitrations as opposed to hypothetical legal or ethical impediments. For this reason, amongst others having to do with the great quality of the local counsel and the clear desire to promote international arbitration, it is unmistakable to all commentators that South Korea will no doubt compete seriously with Singapore and Hong Kong in a very near future as the most attractive arbitral centre of the region.

We had a first-hand opportunity to observe the interest and sophistication of the Korean legal community during the Seoul Arbitration Week in October last year. Professor Joongi Kim (Professor of Law Vice President for International Affairs Yonsei University) organised a lively session on third party funding under the auspices of the Korean Council for International Arbitration (KOCIA), Korean In- House Counsel Association, Korea Chamber of Commerce to which Yasmin Mohammad was honoured to participate. In our next edition of Funding in Focus we will examine this promising jurisdiction in detail.

Originally published in Funding In Focus, Issue 4: 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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