Law Reform Commission recommends outcome related fee structures for Hong Kong arbitrations

Earlier this week the Law Reform Commission of Hong Kong published a long-awaited report on “Outcome Related Fee Structures for Arbitration” in which it recommended that the law be amended to lift the prohibitions on the use of outcome related fee structures (ORFSs) by lawyers in arbitrations and related court proceedings.

If the proposals are adopted, this will put Hong Kong in line with other global arbitration hubs, improve the options available for parties and advance access to justice.

The recommendations in the report

At present, lawyers are prohibited under Hong Kong law from entering into ORFSs for litigation and arbitration proceedings. However, most other arbitral seats permit some form of ORFSs, with Singapore already in the process of implementing its own framework to introduce conditional fee arrangements.

The report proposes the lifting of restrictions on the use of three different types of agreements between lawyers and clients:

• Conditional fee arrangements (CFAs): An agreement under which the lawyer agrees with the client to be paid a fee uplift, otherwise known as a success fee, in the event of a successful outcome of a claim or proceedings.
  
  
• Damages-based agreements (DBAs): An agreement for the lawyer to receive payment only if the client obtains a “financial benefit” in the matter, usually calculated by a percentage of any monetary award or settlement.
  
  
• Hybrid damages-based agreements (Hybrid DBAs): An agreement for the lawyer to receive a DBA payment only if the client obtains a financial benefit in the matter and also fees (typically discounted) for legal services rendered during the course of the matter.

This would bring Hong Kong in line with the current position in England and Wales as well as other key legal regimes.

The implications for lawyers and companies

Having more legal fee structure options available is demonstrably beneficial for both law firms and their clients. Clients are increasingly pushing back against the traditional law firm hourly fee model and demanding firms be more competitive in winning their business, for instance, by offering alternative fee arrangements.

The availability of CFAs and DBAs would go some way in enabling law firms to provide clients with greater access to counsel and tribunals whilst removing any economic impediments that may otherwise prevent meritorious claims from being brought.

However, from a law firm’s perspective, DBAs in particular could create an extraordinary financial obligation and risk of outright capital loss to the firm whose clients may well lose, however meritorious their claims. The financial risk that law firms assume in representing a client on a contingent basis will make legal finance an increasingly vital tool. The overwhelming majority of law firms are cash-in, cash-out partnerships without access to outside equity or long-term debt. This creates a significant hurdle to their taking on more client risk.

If the proposals are adopted in Hong Kong, with the broadening of the rules in both Hong Kong and Singapore, alternative fee arrangements will become increasingly popular in the coming years and there will be opportunities for law firms and legal finance providers in Hong Kong to partner to share risk and manage related costs.

Since the opening of our Singapore office in 2017, Burford has received numerous funding inquiries from the region. As the largest and best capitalized global provider of legal finance with a track record of funding alternative fee arrangements globally in jurisdictions where these arrangements are widely accepted, Burford is well positioned to provide legal risk management and financing solutions to law firms and their clients.