Outcome Related Fee Structures in Arbitration in Hong Kong

Introduction

Types of ORFS

ORFSs are usually categorised as follows:

Conditional fee agreements (CFAs) are agreements under which the legal fees of a lawyer are only payable in the event of a successful outcome for the client in the matter¹. They typically take the form of a “no win, no fee” or “no win, less fee” arrangement.

Damages-based agreements (DBAs), also known as contingency fees, are agreements under which the legal fees of a lawyer are only payable in the event the client obtains a financial benefit in the matter, and the amounts payable under such arrangements are calculated by reference to the financial benefit obtained by the client².

There are also hybrid damages-based agreements (Hybrid DBAs), under which fees under a DBA would be payable on top of the legal fees (whether discounted or not) rendered during the course of the matter³.

These additional legal fees payable under ORFSs are generally referred to as “uplift fees”.

Background of reforms

In December 2020, the Law Reform Commission of Hong Kong published a Consultation Paper on Outcome Related Fee Structures for Arbitration⁴. Subsequently, the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Ordinance (the HK Ordinance) was gazetted on 30 June 2022 with parts of it coming into operation on the same day. The remaining parts took effect together with the newly gazetted Arbitration (Outcome Related Fee Structures for Arbitration) Rules (the HK Rules) on 16 December 2022⁵.

The Singapore process began much earlier in August 2019⁶ , when the Ministry of Law began a public consultation on proposed legislative amendments which allowed for conditional fee arrangements. The relevant bill was passed by the Singapore Parliament in January 2022 and the Legal Profession (Amendment) Act 2022 (the Singapore Act) became effective on 4 May 2022⁷.

What are the features of the ORFS regime in Hong Kong

The HK Ordinance added a new Part 10B of the Arbitration Ordinance which provides for a great variety of ORFSs which may be adopted in arbitration proceedings. The regime in Hong Kong is deliberately broad.  It includes all of CFAs, DBAs as well as Hybrid DBAs. However, under the Singapore Act, only CFAs are permitted. DBAs or Hybrid DBAs remain illegal.

Whilst the use of ORFSs is permitted in a wider range of proceedings in other jurisdictions (e.g. in England & Wales, where the ORFS regime covers all court and arbitration proceedings other than criminal and family proceedings⁸), the ORFS regimes in Hong Kong and Singapore are more limited. In Hong Kong, ORFSs can be used in all arbitration proceedings (including proceedings before an emergency arbitrator, related court proceedings and mediation proceedings) except where it relates to a personal injuries claim⁹. Likewise, the regime in Singapore only covers international and domestic arbitration proceedings, certain proceedings in the Singapore International Commercial Court and related court and mediation proceedings¹⁰.

In terms of the regulatory bodies, an Advisory Body on Outcome Related Fee Structures for Arbitration was set up in Hong Kong on 15 July 2022¹¹, and the Hong Kong Secretary for Justice may also appoint an authorized body to issue a code of practice¹². In Singapore, there is not yet any similar organization so currently the Singaporean Minister for Law and the courts would regulate the regime¹³.

Other notable differences between the Hong Kong and the Singapore regimes are in relation to “uplift fees”. Firstly, there are caps imposed on “uplift fees” in the event of success under the HK Rules¹⁴, following the Law Reform Commission’s recommendations¹⁵. For CFAs, a cap is imposed at 100% of benchmark fees, i.e. the fees that the lawyer would have charged the client for the matter if no ORFS arrangement had been made for the matter16. This is to protect clients from overcharging. The lawyer under a CFA agreement in Hong Kong can charge no fees at all or a discounted fee, depending on the terms of the agreement. Success is also subject to agreement between the lawyer and the client for each CFA agreement, that is, it could be success for the whole arbitration or part of an arbitration. The cap is just a maximum such that the exact percentage uplift for each CFA is something to be negotiated between the client and the lawyer. For DBAs and Hybrid DBAs, where the client has succeeded in obtaining the damages won or a financial benefit in the matter, the cap would be at 50% of the value of the same. Financial benefit is defined deliberately broadly under the HK regime. It could be money or money’s worth, so that it could for example be damages awarded or damages saved or the reduction of a debt so that the arrangement can be applicable to claimants and respondents. For a successful claimant, if the DBA payment is higher than what the respondent would be liable for with costs being assessed in the conventional way, the claimant instead of the respondent would be have to pay the lawyer the difference. In other words, the DBA would not result in a higher costs exposure for the respondent.

Where there are multiple DBAs or Hybrid DBAs, the maximum aggregate sum of DBA payments should not exceed 50% of the financial benefit¹⁷. Contrastingly, there is no cap imposed on “uplift fees” for Singapore. Secondly, Singapore prohibits entirely the recovery of “uplift fees” from the losing party, but there is leeway for this in Hong Kong if the arbitral tribunal considers that there are exceptional circumstances justifying the ordering of such costs¹⁸.

For unsuccessful Hybrid DBAs, the legal fees payable under the Hong Kong rules would be capped at 50% of the irrecoverable costs incurred (which by definition means any portion of the benchmark fee that is not recoverable from any other party¹⁹) (the “Capped Amount”). Further, if the DBA payment of a successful Hybrid DBA is so low that it is lower than the Capped Amount, then the lawyer has the ability to elect to keep the Capped Amount, instead of the DBA payment²⁰. This is to avoid a perverse situation where there is more incentive for the lawyer to be unsuccessful than to be successful.

There are statutory safeguards under the Hong Kong regime which must be observed for the ORFS agreement to be valid and effective.  These include:

1. The agreement must be in writing;
2. It must be signed by the lawyer and the client and relate to the lawyer’s fees and expenses;
3. It must specify the matter to which the agreement relates;
4. The client must have the opportunity to seek independent legal advice;
5. There must be a 7-day cooling off period for the client after making the agreement, where the client may terminate the agreement by written notice without incurring liability;
6. The agreement must specify the basis on which the same may be terminated; and
7. The treatment of disbursements must be specified.

Potential effects of the new regime

Conclusion

Ultimately, the actual impacts of ORFSs will need to be monitored, not just in Hong Kong but in jurisdictions around the world which allow such arrangements.  Law reform agencies are expected to closely scrutinize the development of their respective regimes to determine if any changes ought to be implemented, such as to provide for more stringent rules to prevent abuse of the system and to protect parties intending to adopt ORFSs. In order to enjoy the payment flexibility brought by ORFSs, clients should carefully follow the applicable laws and regulations in their respective jurisdictions and are recommended to seek professional advice in applying ORFSs to their legal fee arrangements.