Hong Kong has long been recognised as the gateway to the People’s Republic of China (PRC) for international companies looking to take advantage of the huge business opportunities available in the PRC. Increased business activities inevitably leads to an increase in the number of disputes being generated.
Foreign entrants to the Chinese market often prefer to avoid litigation in PRC courts as a means to settle any disputes arising under their contracts and, as such, will often agree to arbitration. They will normally seek a seat which is not in mainland China and Hong Kong is seen as an acceptable compromise to be used as an arbitral seat. Somewhat paradoxically, PRC parties accept Hong Kong because it is a Special Administrative Region of China and non-PRC parties accept it because it is not part of China.
In December 2018, the final piece of the legislative puzzle to permit funding of arbitrations seated in Hong Kong (as well as arbitration related litigation) was put in place when the Hong Kong Department of Justice issued its much-anticipated Code of Practice for Third Party Funding of Arbitration. The changes went live on 1 February 2019 and since then funders have no doubt seen an uptick in the number of applications for funding from parties involved in Hong Kong-seated arbitrations.
Different funders have different risk appetites and funding criteria. One aspect of the application assessment process which is clearly common to all funders is, perhaps counter intuitively, starting at the end by considering how a claimant (and therefore the funder) is going to get paid when the case is won. Having a favourable arbitration award is of no use if it cannot be enforced against the respondent’s assets.
Whilst enforcement in China is improving given (i) the general deeper understanding of commercial arbitration amongst PRC judges and (ii) the fact that any refusal to enforce an award by a lower court must be sanctioned by the Supreme People’s Court, there are still huge elements of risk involved. For example, respondents could and often did dissipate their assets whilst an arbitration was ongoing, leaving their opponent with no recourse even if they prevailed in the dispute. This additional risk would often cause a headache for professional funders when assessing applications.
However, the landscape has recently shifted for funders considering applications to fund arbitrations seated in Hong Kong against opponents with assets in China. At the beginning of April 2019, Hong Kong and the PRC announced a bilateral arrangement pursuant to which courts in China will recognise and enforce interim measures ordered in support of arbitrations with a Hong Kong seat.
The arrangement has not come into force yet (and no date has been announced for when this will happen) but from a funder’s perspective, as well as the applicants whose cases funders are seeking to support, this is good news.
The risks associated with enforcing against assets in China can be mitigated or at least be regarded as less serious in circumstances where there is a government introduced mechanism in place by which, for example, a tribunal ordered freezing injunction can be effectively and properly enforced by the PRC courts. Provided there is no successful challenge to the provisional measures by the respondent, the assets should remain untouched as the arbitration runs its course and thus be available for enforcement once the claimant prevails. The arrangement may also lead to greater conditionality in funding agreements whereby a funder will require such a ‘safety net’ to be put in place over the assets before they agree to fund a case unconditionally but that does not diminish the fact that claimants are likely to have greater prospects of getting their cases supported by funding when the new arrangement goes live.
Many will undoubtedly be monitoring closely for when the arrangement does come into force and which arbitral institutions it will apply to (this is yet to be confirmed although you would expect the ICC and HKIAC to make the list). The decision to fund a case ultimately comes down to a funder’s criteria and this arrangement, when active, is likely to allow more cases to meet the requirements and risk appetites of professional funders considering applications to support Hong Kong seated arbitrations.
Roger Milburn is an Investment Manager employed by LCM (an Australian based litigation funder listed on the London Stock Exchange) located in LCM’s Singapore office.