Singapore: Spotlight On: Third Party Funding In Singapore And Hong Kong

Last Updated: 12 February 2018
Article by Eugene Tan

Third party funding (TPF) in arbitral and related proceedings is becoming increasingly popular, with Singapore relaxing its policies against TPF and Hong Kong laying the ground work to introduce TPF in their respective jurisdictions. Set out below is a summary of the steps taken in both jurisdictions and what this will mean for parties to arbitration agreements seated in these regions.

SINGAPORE: THIRD PARTY FUNDING IN INTERNATIONAL ARBITRATION: SHARPENING SINGAPORE'S EDGE AS A LEADING ARBITRATION SEAT

Introduction

Third party funding refers to the funding of legal proceedings in return for financial reward, by a third party that does not otherwise have an interest in those proceedings. The third party funder typically obtains a percentage of the damages awarded or the settlement sum, as its reward. Third party funding has been on the rise over the last decade with numerous jurisdictions embracing and/or widening their policies on the same. It is also well received by major arbitration seats around the world including London, Paris and Geneva. This is especially so in international commercial arbitration, where the costs of such proceedings can be substantial and, on some occasions, prohibitive.

On 10 January 2017, the Singapore Parliament passed the Civil Law (Amendment) Bill (No. 38/2016) ("Bill") permitting, amongst other things, third party funding for international arbitration and related proceedings in Singapore1. The Bill is a key piece of legislation and undoubtedly sharpens Singapore's competitive edge as a leading arbitration seat. The Bill introduces the following three key changes to Singapore's legal landscape:

  • Abolishing the common law tort of maintenance and champerty in Singapore, and legalising third party funding arrangements in international arbitration and related proceedings in Singapore;
  • Regulating third party funders; and
  • Clarifying a legal practitioner's professional duties when a third party funder is involved.

Legalisation of Third Party Funding Arrangements for International Arbitration and Related Proceedings

Third party funding is historically considered as wrongful under the tort of maintenance and champerty. Briefly, maintenance is the "support of claims by a stranger without just cause", and champerty is "an aggravated form of maintenance where the support is in return for a share of proceeds"2. Champertous arrangements, which include third party funding arrangements, are therefore unenforceable under contract law as being contrary to public policy3.

The Bill addresses this by abolishing the common law tort of maintenance and champerty, and legalising the use of third party funding arrangements in relation to certain prescribed dispute resolution proceedings. The Bill read with the Civil Law (Third Party Funding) Regulations 2016 (Cap. 43, No. S 000) ("Regulations") presently prescribes the following dispute resolution proceedings:

  • International arbitration proceedings;
  • Court proceedings arising from or out of the international arbitration proceedings;
  • Mediation proceedings arising out of or in connection with international arbitration proceedings;
  • Application for a stay of proceedings referred to in section 6 of Singapore's International Arbitration Act (Cap. 143A, 2002 Rev Ed); and
  • Proceedings for or in connection with the enforcement of an award or a foreign award under Singapore's International Arbitration Act.

Whether or not the above categories of permitted dispute resolution proceedings will be expanded remains to be seen, and will depend on further assessment by the Singapore Government.

Regulation of Third Party Funders

The Bill, read with the Regulations, prescribe that third party funding can only be provided by "qualified Third Party Funders". Regulation 4 of the Regulations provides that the third party funder must satisfy and continue to satisfy at all times, the following requirements:

  • The third party funder carries on the principal business, in Singapore or elsewhere, of the funding of the costs of dispute resolution proceedings to which the third party funder is not a party;
  • The third party funder has access to funds immediately within its control, including within a parent corporation or the third party funder's subsidiary, sufficient to fund the dispute resolution proceedings in Singapore;
  • The funds referred to in requirement (b) above must be invested, pursuant to a third-party funding contract, to enable a funded party to meet the costs (including pre-action costs) of prescribed dispute resolution proceedings.

Senior Minister of State for Law Ms Indranee Rajah stated during the second reading of the Bill on 10 January 2017 that the implementation of the above criteria will ensure, amongst other things, that "only professional funders whose principal business is funding claims will be allowed".

Measures were also implemented by the Bill to safeguard each party's rights in a third party funding agreement. Should the third party funder's qualification lapse, or it fail to comply with the above requirements, the Bill prescribes that it will be disqualified and will not be able to enforce its rights under its funding agreements (whether by court proceedings or arbitration proceedings). This would include the third party funder's right to receive a share of damages, should the claim succeed.

Clarification of a Legal Practitioner's Professional Duties

Legal practitioners in Singapore are still prohibited from entering into a champertous arrangement with their client. However, the Bill amends Section 107 of the Legal Profession Act (Cap. 161) to permit Singapore legal practitioners to:

  • introduce, or refer, third party funders to their clients, so long as the legal practitioner does not receive any direct financial benefit from the introduction or referral; and
  • advise on, negotiate, draft, and act in a dispute arising out of and/or in connection with their client's third party funding contract.

In addition, to minimise if not eliminate any potential conflicts of interests, Senior Minister of State for Law Ms Indranee Rajah indicated, during the second reading of the Bill on 10 January 2017, that amendments will be made to Singapore's legal professional conduct rules to require legal practitioners to disclose the existence of any third party funding which their client is receiving.

Such measures are already in place for international investment arbitrations administered under the auspices of the Singapore International Arbitration Centre ("SIAC"). On 1 January 2017, SIAC introduced the SIAC Investment Arbitration Rules 2017 ("SIAC IA Rules"). The SIAC IA Rules provide that the arbitral tribunal in an international investment arbitration may order the disclosure of the existence of a party's third party funding arrangement and/or the identity of the third party funder and, where appropriate, details of the third party funder's interest in the outcome of the proceedings, and/ or whether or not the third party funder has committed to undertake adverse costs liability. It is likely that the general SIAC rules will be amended to include similar provisions with respect to international arbitration proceedings.

Why consider third party funding?

Third party funding, if available, provides certain advantages.

Arbitrations can be expensive affairs. Third party funding allows the sharing of the risks involved in pursuing a claim. In addition, the presence of a third party funder with deep pockets may, in some instances, encourage early settlement of a claim.

Claimants with the means to arbitrate may prefer to divert some of the risk associated with a costly arbitration, and forgo a portion of any damages recovered. Doing so may free up money for the company to invest elsewhere.

In addition, third party funders can bring a more objective and commercial perspective in assessing a dispute, and are likely to have no emotional or historical attachments to the claim when assessing its merits. It's a wholly commercial proposition for them and they will assess the risk and merits of the claim from that perspective. Third party funders usually conduct extensive and thorough due diligence and carry out their own risk assessment of the merits of the claim before agreeing to provide funding. They generally provide funding for claims with:

  • good prospects of success;
  • likelihood of an award for a quantum of damages commensurate with the risk of financing the litigation costs;
  • a respondent who is able to meet the claim, costs and interest; and
  • high chance of enforcement.

Very often, this objective assessment will assist the claimant in understanding its case better and even provide a different perspective to its case strategy. In some instances, as mentioned above, it may even encourage early settlement once the other party is made aware that the claim has the backing of a third party funder.

However, the main disadvantage to a claimant of third party funding is the cost of such funding. Third party funders generally share revenue on a "net" basis. Most third party funders will also require that they get repaid first, before the funded party receives any of the money recovered. Moreover, the costs involved in engaging a third party funder, and any associated negotiations, are generally costs thrown away and not recoverable from the losing party even in a successful arbitration.

That said, recent case law from the UK suggests that arbitral tribunals have the jurisdiction to award costs of a party's third party funding, although this would be subject to the overall requirement of reasonableness as an "important check and balance"4. It remains to be seen whether the Singapore Courts will adopt a similar approach.

On that note, the SIAC IA Rules already provide that the arbitral tribunal in an international investment arbitration may take into account any third party funding arrangements in (a) apportioning the costs of the arbitration, and (b) ordering in its Award that all or part of the legal or other costs of a Party be paid by another Party. We have not to date received any indication as to whether the general SIAC rules will be amended to include similar provisions with respect to international arbitration proceedings.

What to look out for when entering into a third party funding arrangement

A well-crafted third party funding contract is paramount. Such a contract will generally provide for, amongst other things, an alignment of interests in the outcome of the arbitration, the management of the expectations of all parties involved, and ultimately an equitable and just distribution of the damages awarded or the settlement sum.

Issues regarding privilege and confidentiality also need to be managed properly early on when entering into third party funding arrangements. It would be sensible to enter into a non-disclosure agreement at the earliest opportunity. This is the case even when providing the potential third party funder with the first batch of documents/information. Of course, parties should also consider entering into a common interest agreement subsequently once the third party funding arrangement is finalised. A third party funding contract that achieves the above goals will give the party seeking such funding a real opportunity in the arbitration to realise the benefit of any resulting success.

Footnotes

1 Civil Law (Third-Party Funding) Regulations 2016 (Cap. 43, No. S 000), Regulation 3. It should be noted that the Bill is not yet in force, and will only come into operation on a date to be notified in the Government Gazette.

2 The Singapore Ministry of Law, "Public Consultation on the Draft Civil Law (Amendment) Bill 2016 and Civil Law (Third Party Funding) Regulations 2016", <https://www.mlaw.gov.sg/content/minlaw/en/news/public-consultations/public-consultation-on-the-draft-civil-law-- The Singapore Ministry of Law, "Public Consultation on the Draft Civil Law (Amendment) Bill 2016 and Civil Law (Third Party Funding) Regulations 2016", amendment--bill-2016.html>

3 Otech Pakistan Pvt Ltd v Clough Engineering Ltd and another [2007] 1 SLR(R) 989 (SGCA), at [32].

4 Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd [2016] EWHC 2361 (Comm).

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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