Outcome Related Fee Structures for Arbitration
(HKLRC Consultation Paper)
On 17 December 2020, the Outcome Related Fee Structures for Arbitration Sub-committee of the Law Reform Commission ("Sub-committee") published a consultation paper proposing that the law in Hong Kong should be amended to permit lawyers to use outcome related fee structures ("ORFSs") for arbitration taking place in and outside Hong Kong.
The Sub-committee considers that the recommendations are made with the objective to preserve and promote Hong Kong’s competitiveness as a leading centre for arbitration service and to enable Hong Kong to compete on an even playing field with other popular arbitral seats which allow some form of ORFSs.
In the consultation paper, ORFS refers to an agreement between a lawyer and client, whereby the lawyer receives a financial benefit as agreed if the case is won. It includes several types of agreements, namely conditional fee agreements ("CFAs"), damages-based agreements ("DBAs") and hybrid damages-based agreements ("Hybrid DBAs").
There are two forms of CFA. One form is a "no win, no fee" arrangement where the lawyer charges no fee during the course of the proceedings and is paid only the success fee if the client’s case succeeds. Another form is a "no win, low fee" arrangement where the lawyer charges at the usual rate or at a discounted rate during the course of the proceedings, plus a success fee if the client’s case succeeds. For these two forms of arrangements, a success fee refers to an additional fee that the client agrees to pay the lawyer only upon the success of the case. It can be an agreed flat fee, or calculated as a percentage "uplift" on the fee charged during the course of the proceedings.
As for DBA, it is a form of "no win, no fee" arrangement. If the client’s case is unsuccessful, the lawyer charges no fee. In the event of success, under a DBA, the lawyers' fee is calculated by reference to the outcome of the proceedings, for example as a percentage of the amount awarded or recovered ("DBA Payment").
Hybrid DBA is a form of "no win, low fee" arrangement. The lawyer charges a fee for the legal services rendered (typically at a discounted rate) and, in the event of success, the DBA Payment.
At present, ORFSs are unlawful for litigation and arbitration proceedings in Hong Kong. However, major arbitral seats permit some form of ORFSs and there is a significant demand from clients for such arrangement.
The Sub-committee has reviewed the current position relating to ORFSs for arbitration in Hong Kong and studied the legal regimes and experiences of a number of other jurisdictions, such as Singapore, England and Wales, Australia, Mainland China and the United States of America. The Sub-committee has also made reference to the Law Reform Commission's previous study of conditional fees for proceedings (including arbitration) between 2003 and 2007 as well as third party funding for arbitration between 2013 and 2016.
Apart from recommending a lift of the prohibition on the use of ORFSs for arbitration for lawyers, the Sub-committee also makes recommendations on the operation of individual regimes relating to CFAs, DBAs and Hybrid DBAs.
For instance, the Sub-committee recommends that a cap should be placed on the success fees for the CFA regime as well as the DBA Payment for the DBA and Hybrid DBA regimes respectively.
The Sub-committee also recommends that a CFA, DBA, or Hybrid DBA should specify whether, and if so in what circumstances:
(a) a lawyer or client is entitled to terminate the fee agreement prior to the conclusion of arbitration; and if so
(b) any alternative basis (for example, hourly rates) on which the client should pay the lawyer in the event of such termination.
Moreover, the Sub-committee invites submissions on various aspects such as the appropriate safeguards to be put in place in the professional codes of conduct and in subsidiary legislation, whether personal injury claims should be treated differently from other claims in arbitration and whether any additional category/ies of claim should be treated differently from other claims that are submitted to arbitration if ORFSs for arbitration are introduced.
The recommendations in the consultation paper are intended to facilitate discussion and do not necessarily represent the Sub-committee’s final conclusions.
The Sub-committee would welcome views, comments and suggestions on any issues discussed in the consultation paper. The consultation period will end on 16 March 2021.
|Press Release (PDF) (MS Word)|
|Executive Summary (PDF) (MS Word)|
|Consultation Paper (PDF) (MS Word)|