In a bid to burnish its reputation as a global arbitration powerhouse, Hong Kong has recently heralded a new regime that allows locally based lawyers to charge a broad range of success fees for arbitration seated in or outside the Chinese city, upon agreement with their clients.
Lawyers applaud the Outcome Related Fee Structures for Arbitration (ORFSA) regime as comprehensive, which offers parties greater flexibility in managing legal costs. But it remains to be seen whether the regime will be extended to civil proceedings in court. Parties are also advised to acknowledge and comply with key provisions for the new agreements to effect.
WHAT’S THE BACKGROUND LEADING UP TO THE CHANGES?
The new legal fee structure entered into effect on Dec. 16, 2022, after Hong Kong enacted legislations that remove the restrictions on contingency fee arrangements in arbitration.
Prior to that, lawyers were not permitted to offer success fees – or outcome-related fees, which allow the client to pay discounted rates (or no fees at all) during the case in return for an additional sum if the client wins.
“That put Hong Kong at a disadvantage compared to most other leading arbitral seats, where success fees are permitted,” says Kathryn Sanger, an international arbitration partner at Herbert Smith Freehills. She also sits on the government’s advisory body overseeing the ORFSA regime.
Because of that, Sanger hails the latest fee structure reform as a boon to Hong Kong’s strength as one of the world’s top arbitral seats.
“The regime enhances clients’ ability to manage their budgets and cash flow, while sharing risk with their lawyers,” she says. “For lawyers, the upside is fee flexibility, and additional fees if they help clients succeed.”
Apart from lawyers and their clients, respondents in some arbitration proceedings are also set to benefit. “Traditionally, success fees are associated with clients who cannot afford to bring a claim without external assistance. Increasingly, success fees are used by parties – including large corporates - who are solvent, but prefer to deploy their cash elsewhere, or share risk and reward with their lawyers,” adds Sanger.
WHAT FEE OPTIONS ARE PERMITTED BY THE NEW LAW?
A board range of fee options are now permitted under the new rules, including conditional fee agreements (CFAs). Under this arrangement, “the client agrees to pay the lawyer an additional fee, known as a success fee, only if there is a successful outcome in the arbitration,” explains Sanger. “Alternatively, lawyers and clients may agree a ‘no win, no fee’ CFA.”
Another fee option is damages-based agreements (DBAs), which reward the lawyer payment only if the client obtains a “financial benefit” in the arbitration. “Typically, it will be a percentage of the money awarded to the client or paid to settle the claim. It can include any other form of financial benefit, such as a physical asset, debt or reduction in a sum claimed against the client,” notes Sanger.
A combination of both options, known as hybrid DBAs, are also covered by the new regime. Together with Hong Kong’s long-awaited third-party funding framework, Sanger believes the fee structure reform can make the city stand out against rival arbitration centres in the region.
“Hong Kong offers a greater range of success fees than any other major seat, including Singapore, which permits CFAs only,” says Sanger. “Clients all over the world are demanding greater fee flexibility and want their lawyers to have some ‘skin in the game’. Hong Kong has met that demand face on.”
WHAT SHOULD ARBITRATING PARTIES LOOK OUT FOR?
Following the implementation of the ORFSA regime, Sanger anticipates an uptick in Hong Kong-seated arbitrations.
“HKIAC (Hong Kong International Arbitration Centre) has seen record case numbers in the last few years, across a range of sectors including energy, technology, finance, manufacturing and more. We expect that to continue. Data also suggests that parties are starting to choose arbitration over litigation in Hong Kong in order to take advantage of this reform,” says Sanger, who serves on the HKIAC Executive Committee.
She suggests that lawyers and clients should familiarise themselves with the updated fee arrangements before proceeding for the new rules to be enforceable.
For example, these agreements “impose conditions such as a requirement that the fee agreement be in writing, and that lawyers inform clients of their right to take independent legal advice before signing the fee agreement,” explains Sanger.
On the other hand, “clients must acknowledge in writing that they accept and understand the nature of the agreement,” she says, adding that there are also limits on the amount of success fees the lawyer can charge, among other conditions.
Looking ahead, Sanger is confident that the rising volume of arbitrations in Hong Kong involving the ORFSA regime can provide an empirical glimpse into the effectiveness of its operation and regulation.