The Singapore Law Gazette

Third-Party Funding – Taking Stock

Third-party funding is commonly acknowledged to have started in Australia, from where it spread to United Kingdom, the United States and parts of Europe. Yet, the external financing of disputes remained on the fringe of the dispute eco-system and seldom featured in the strategic and commercial considerations of Asian disputants for many years. This has changed in the last two years.

The catalyst for the significant increase in the presence of funders and talk about funding originated from the twin centres of arbitration in Asia, Singapore and Hong Kong. This article traces the introduction of third-party legislation in these two jurisdictions, followed by an assessment of the status quo.

Legislative Changes

The stumbling block to third-party funding in common law jurisdictions such as Singapore and Hong Kong had been the public policy against maintenance and champerty. This prohibitive doctrine does not apply in civil law jurisdictions such as China but third-party funding has been slow to take off there. With the growth of interest in dispute resolution on the back of China’s Belt and Road initiative, that too is changing.

Singapore

The policy against maintenance and champerty was examined by the Court of Appeal in Law Society of Singapore v Kurubalan s/o Manickam Rengaraju [2013] 4 SLR 91. In this case, a Singapore advocate and solicitor was sanctioned for accepting a contingency fee for work done in Queensland, Australia. At [40], Menon CJ summarised the concept succinctly as follows:

“Maintenance is defined as officious intermeddling in litigation (see Hill v Archbold [1968] 1 QB 686 at 693) and champerty is a particular form of maintenance “where one party agrees to aid another to bring a claim on the basis that the person who gives the aid shall receive a share of what may be recovered in the action”: Otech Pakistan Pvt Ltd v Clough Engineering Ltd [2007] 1 SLR(R) 989 (Otech Pakistan) at [32].”

In that case, Menon CJ expressed the Court of Appeal’s view on the dangers of champerty even while he sensed the winds of change, at [45]–[46]:

45. In our view, one of the key elements in effectively representing a client’s interest is the ability of the lawyer to maintain a sufficient sense of detachment so as to be able to discharge his duty to the court. That duty is ultimately paramount and trumps all other duties. It follows that the considerations most engaged by the offence of champerty are those concerning the administration of justice and the related need to safeguard confidence in and the honour of the profession that is tasked with the vital role of assisting the judiciary in their mission: see Ravindra Samuel ([37] supra) at [12]. But these are not static principles; with the passage of time comes a better understanding of how these should be appreciated and weighed with new considerations…

46. There is an emerging trend in some jurisdictions towards recognising that champertous fee agreements properly regulated can help indigent litigants gain access to justice… So too, in Singapore, has there been some push to reform the law in this direction. But we reiterate two points: first, it is for Parliament, rather than the courts, to decide whether and when such a reform is to be undertaken; and second, any such reform would almost certainly feature carefully drawn parameters that regulate the extent to which such fee arrangements would be permitted and this makes it a subject more suited for the legislature rather than for the courts to develop.

That legislative reform in Singapore started in 2016. Public consultation on proposed legislative changes commenced in June 2016. At the Second Reading of the Civil (Amendment) Bill 2016, Senior Minister of State for Law, Indranee Rajah SC (as she then was), pointed out that there are two aspects of maintenance and champerty: the common law tort of champerty and maintenance, and the contractual principle that agreements affected by maintenance and champerty are void as contrary to public policy. The Civil Law Act abolished the tort of champerty and maintenance (Section 5A). Contracts affected by maintenance and champerty remain contrary to public policy or are otherwise illegal, but an exception is made for a third-party funding contract.

Section 5B(10) of the Civil Law Act defines a “Third-Party Funder” as “a person who carries on the business of funding all or part of the costs of dispute resolution proceedings to which the person is not a party.” A third-party funding contract which enjoys recognition under the new legislation is not contrary to policy or otherwise illegal by reason that it is a contract for maintenance or champerty (Section 5B(2)). That contract is defined as “a contract or agreement by a party or potential party to dispute resolution proceedings with a Third‐Party Funder for the funding of all or part of the costs of the proceedings in return for a share or other interest in the proceeds or potential proceeds of the proceedings to which the party or potential party may become entitled.”

The “prescribed dispute resolution proceedings” are described in Regulation 3 of the Civil Law (Third-Party Funding) Regulations 2016 (2016 Regulations) as follows:

1. International arbitration proceedings;
2. Court proceedings arising from or out of the international arbitration proceedings;
3. Mediation proceedings arising out of or in connection with international arbitration proceedings;
4. Application for a stay of proceedings referred to in section 6 of the International Arbitration Act;
5. Proceedings for or in connection with the enforcement of an award or a foreign award under the International Arbitration Act.

The qualifications required for “a qualifying Third-Party Funder” are stipulated in Regulation 4 of the 2016 Regulations. These are as follows:

1. The Third-Party Funder carries on the principal business, in Singapore or elsewhere, of the funding of the costs of dispute resolution proceedings to which the Third-Party Funder is not a party;
2. The Third-Party Funder has access to funds immediately within its control, including within a parent corporation or the Third-Party Funder’s subsidiary, sufficient to fund the dispute resolution proceedings in Singapore;
3. The funds referred to in paragraph (b) must be invested, pursuant to a third-party funding contract, to enable a funded party to meet the costs (including pre-action costs) of prescribed dispute resolution proceedings.

A funder who does not meet these requirements runs the risk of its rights not being enforceable under Section 5B(4) of the Civil Law Act, even while Section 5B(7) preserves the rights of other parties (such as the party being funded) against the funder in respect of the funding contract.

Where the duties of a solicitor are concerned, Section 107(1) of the Legal Profession Act (LPA) prohibits contingency fees or the purchase by a solicitor of any interest of a party in any suit, action or contentious proceedings. Section 107(3A) clarifies that this section does not prohibit a solicitor from referring a third-party funder to a client, advising or drafting the funding contract or acting on behalf of the client in any dispute arising out of the funding contract. However, the Legal Profession (Professional Conduct) Rules 2017 (LPPC Rules) prohibits a legal practitioner from holding, directly or indirectly, any share in a third-party funder which the practitioner has introduced to the client or which has a funding contract with his or her client (Rule 49B(1)). A legal practitioner must not receive any commission or share of proceeds from such a third-party funder (Rule 49B(2)) but may receive any fee, disbursement or expense payable by the client for the provision of legal services (Rule 49B(3)). Rule 49A requires a legal practitioner to disclose to the court or tribunal, and to every other party to those proceedings the existence of any third-party funding contract and the identity and address of the funder.

It may be noted that the LPA refers to a “solicitor”, which means a solicitor of the Supreme Court under Section 2(1) LPA (the profession in Singapore being fused, every solicitor of the Supreme Court is an advocate of the Supreme Court, and vice-versa). The LPPC Rules refer to a “legal practitioner”. Rule 3(8) LPPC Rules provides that the third-party funding provisions, which are in Part 5A, apply to the following legal practitioners:

1. Every solicitor who has in force a practising certificate or is registered under Section 36F of the Act;
2. Every person admitted under Section 15 of the Act (ad hoc admission of a Queen’s Counsel); and
3. Every regulated foreign lawyer;

The Law Society has issued a Guidance Note 10.1.1 that “sets out best practices for lawyers who refer, advise or act for clients who obtain third-party funding” and helpfully guides practitioners through what they can and cannot do in relation to third-party funding.

There are two “soft-law” instruments from the private sector that supplement these statutes. The first is the Singapore International Arbitration Centre (SIAC) Third-Party Funding Practice Note PN-01/17 dated 31 March 2017. The Practice Note deals with three points specific to a third-party funder (described as an “External Funder” in the Practice Note):

1. A potential arbitrator must disclose any relationship, whether direct or indirect, with an External Funder.
2. The Tribunal has power to order disclosure of any funding relationship between a party and an External Funder. The Tribunal shall also immediately disclose any relationship, whether direct or indirect, with an External Funder, that may be discovered or arises during the arbitration proceedings.
3. The Tribunal may take into account the existence of any External Funder in apportioning the costs of the arbitration but the involvement of an External Funder alone shall not be taken as an indication of the financial status of a party.

The other instrument is the SIArb Guidelines for Third-Party Funders from the Singapore Institute of Arbitrators (SIArb). The SIArb Guidelines aim to promote best practices among funders. They do not seek to prescribe the terms of a funding contract, but recommends conduct that leads to “transparency and accountability between the Funder and Funded Party.” For example, they set out steps that a funder shall take prior to executing a funding contract, such as advising the party interested in funding to seek independent legal advice on the terms of the funding contract. The SIArb Guidelines have other sections providing a checklist of points that should be addressed in the funding contract, on the need for the funder to have adequate financial resources, on the preservation of confidentiality and privilege in documents, on conflicts of interest and the disclosure of funding.

SIArb may not have regulatory power over funders, but it is heartening to note that nine leading third-party funders have expressed their support for the SIArb Third-Party Funding Guidelines on the SIArb website. In alphabetical order, they are: Augusta Ventures Ltd, Balance Legal Capital LLP, Burford Capital, Calunius Capital LLP, Harbour Litigation Funding, IMF Bentham, La Francaise IC2, Litigation Capital Management (LCM) and Woodsford Litigation Funding.

Developments were not only led by Parliament. In 2018, the Singapore High Court approved a liquidator’s contract with a funder under Section 272(2)(c) read with Section 272(3) of the Companies Act, in Solvadis Commodity Chemicals GmbH v Affert Resources Pte Ltd [2018] SGHC 210. Under this contract, the liquidator assigned the company’s right of recovery of receivables as well as causes of action against certain persons who had conspired with other third parties in relation to these receivables. These rights could not be further assigned. In return for the assignment, the company received an initial sum, to be followed by between 40–50% of the sums recovered. Audrey Lim JC agreed with the observations by Chua JC (as he then was) in Re Vanguard Energy Pte Ltd [2015] 4 SLR 597 that the “property” which a liquidator may sell under Section 272(2)(c) of the Companies Act includes a company’s causes of action and that Section 272(2)(c) is a statutory exception to the doctrine of maintenance and champerty.

In Re Vanguard, the sale was of the proceeds of the company’s cause of action. In Solvadis, Audrey Lim JC authorised the sale of the company’s present and future causes of action. She cautioned that a liquidator cannot sell rights of action that vest solely in the liquidator by reason of the statutory power conferred on him, such as the right to bring proceedings under avoidance law, eg, transactions at an undervalue. In exercising the court’s control in Section 272(3) over a liquidator’s power of sale in Section 272(2), the overarching consideration is whether the liquidator is acting bona fide or in good faith. Audrey Lim JC accepted as a guide the non-exhaustive list of factors enumerated by the Australian courts in determining the bona fides of a liquidator’s exercise of its powers, for example in Van Der Velde (Liquidators), in the matter of Launcells Feedlot Systems Pty Ltd (in liq)) [2014] FCA 1309.

Just before the Solvadis judgment, in a decision made on 11 September 2018, Chua Lee Meng J allowed IMF Bentham to fund investigations and potential claims led by the liquidators of Trikomsel Pte Ltd and Trikomsel Singapore Pte Ltd. This arose from the collapse of PT Trikomsel Oke Tbk, which left Singapore bondholders facing losses of hundreds of millions of dollars. At the time of writing, no written judgment has been rendered yet.

Hong Kong SAR

The common law of Hong Kong is closely similar to that of Singapore since both spring from the English legal system. Hence, the doctrine of maintenance and champerty exists in Hong Kong as it did in Singapore.

The Law Reform Commission of Hong Kong started consultation on third-party funding in 2013, long before Singapore did in 2016. Its report recommending the exclusion of arbitration and mediation from the doctrine of maintenance and champerty was released in October 2016. By that time, Singapore had completed its very short consultation period and was on the cusp of presenting the legislative amendments for First Reading in Parliament.

The Arbitration and Mediation Legislation (Third-Party Funding) (Amendment) Ordinance Order No 6 of 2017 was passed by the Hong Kong Legislative Council on 14 June 2017. A new Part 10A on Third-Party Funding was introduced in the Arbitration Ordinance. Part 10A was imported into the Mediation Ordinance by Section 7A, with mutatis mutandis changes to substitute “arbitration” for “mediation”. Part 10A came into operation on 23 June 2017 but without the substantive provisions of the amending legislation. It is missing Division 3 which is the significant part that excludes the application of the tort and common law offences of maintenance and champerty from third-party funding of arbitration. It is also missing Division 5 which contains safeguards such as disclosure obligations. Division 4 is in place and provides that a code of practice may be issued by an authorised body to set out “the practices and standards with which third-party funders are ordinarily expected to comply in carrying on activities in connection with third-party funding of arbitration.” However, the code of practice remains in draft form. The public consultation ended on 31 October 2018. It is expected that the code of practice will be finalised next year, following which Divisions 3 and 5 will then come into effect.

While the third-party funding framework in Hong Kong is still awaiting implementation, the new Hong Kong International Arbitration Centre (HKIAC) Administered Arbitration Rules 2018 has already introduced a disclosure provision. Article 44 requires a funded party to disclose the fact that a funding agreement has been made and the identity of the funder. The extent of disclosure required is similar to that required of a Singapore legal practitioner under Rule 49A of the LPPC Rules.

Status in 2018

Third-Party Funders’ Perspectives

There has been a lot of buzz around third-party funding since Singapore opened the door to it in 2017.

The engagement between the regulatory authorities, the Law Society and the arbitration community represented by SIAC and SIArb, has resulted in an eco-system that is viewed favourably by corporates, practitioners and funders. This strengthens Singapore’s standing as a dispute resolution hub and has encouraged leading funders to set up bases in Singapore.

For the purpose of this article, a number of funders were asked for their perspectives on the funding scene.

Mr Tom Glasgow, Chief Investment Officer (Asia) for IMF Bentham, explains why IMF Bentham opened its office in Singapore in April 2017:

“IMF Bentham had been active in Asia for many years, primarily in the Hong Kong insolvency market. The 2017 legislation facilitating arbitration funding in Singapore and Hong Kong was a significant further draw-card. Singapore was our preferred choice as a regional hub given the close proximity to our headquarters in Australia and the positive framework for litigation funding that has emerged here. That decision has been reaffirmed by the steady growth of our business and our Asia-based team both in Singapore and in Hong Kong.”

Mr Quentin Pak, a Director of Burford Capital who is also based in Singapore shares similar optimism:

“Burford has for years been open about our commitment to the broad Asia-Pacific region and to Singapore specifically. The reasons are fairly obvious: Singapore was already a key dispute resolution centre for the tremendous volume of commercial litigation and arbitration that occurs in Asia, and it was a preferred venue for international arbitration even before the March 2017 legislative moves that opened the door to third-party funding in relation to international arbitration and related proceedings. Having observed the development of the market in the past nine months since we opened our office here, we are all the more confident in the opportunity and all the more committed to building a robust business in the region with Singapore as a beachhead.”

Mr Glasgow speaks of seeing “a steady, and recently exponential, number of funding applications” since IMF Bentham opened its Singapore office. Another funder, Litigation Capital Management Ltd would have opened an office in Singapore by the time this article is published.

Other funders have also encountered growing interest among corporations. The interest has spread beyond Singapore and Hong Kong. Mr Pak says that the implementation of the funding framework “has raised the general end-user awareness and understanding of legal finance as a tool for dispute resolution, and its impact has been felt beyond the confines of Singapore-seated international arbitrations. We have worked with a number of clients in Singapore and other Asian countries that are considering third-party funding for proceedings brought in other international dispute resolution centres where funding is available.”

Ms Ruth Stackpool-Moore, Managing Director of Asia Dispute Funding, a Singapore-incorporated entity which is exclusive broker to Harbour Litigation Funding, says that positive developments are seen in Dubai as well as Singapore and Hong Kong. Her reference to Dubai is a timely reminder that Singapore and Hong Kong are not the only jurisdictions making progress in this area. Another funder, Omni Bridgeway has just partnered the International Finance Corporation, part of the World Bank, in jointly making available US$100 million to establish an investment vehicle based in Dubai. It will target distressed asset recovery and dispute resolution funding in the Middle East, North Africa and Central Asia.

Ms Stackpool-Moore observes that the positive developments in these jurisdictions “have further consolidated acceptance globally”. Mr Glasgow shares that roughly 60% of the applications received by IMF Bentham for funding “relate to international arbitration, both commercial and treaty cases, seated in Singapore and elsewhere. These matters have involved parties throughout the Asia region, with a concentration of Chinese and Indian parties.” Both Mr Glasgow and Mr Pak mention insolvency-related actions as the other significant sector for funding applications.

All the funders stress that funding is not just for the impecunious disputant. It is a form of legal finance available to hedge risks and free up funds for other business purposes, even for financially sound corporations. Ms Stackpool-Moore has experienced an increase in direct enquiries from corporates “who require more flexibility and seek funding at different times of the process and with different purposes in mind.” Mr Pak is working on educating corporate stakeholders on the impact of legal finance on “risk diversification and accounting benefits.”

Issues to Watch

As a reality check, Mr Pak points out that third-party funding is still at a nascent stage of development. In-house legal advisers and finance managers have yet to latch on to this option in droves. As with all new products or new dispute resolution offerings, it takes time for the volume to build up.

There is also a risk that poor behaviour on the part of any funders may set back the trend towards regulatory relaxation. This is why it is in the interest of professional funders to maintain good practices. Ms Stackpool-Moore is well aware of this and cautions against bad apples:

“There is an increase in the number of funders, some of which have no funding experience, insufficient capital or who act as brokers — not funders — in that they source cases first, then seek investors. It is therefore very important for parties considering funding to do sufficient due diligence on the funder they are considering partnering with.”

The qualifying criteria in Regulation 4 of the 2016 Regulations, described above, are intended to act as a filter against adventurers.

Time may also see some legal aspects of the third-party framework being tested or clarified. Issues of definition and parameters may eventually come before the courts, unless pre-empted by legislative foresight and intervention.

Many of these issues are comprehensively examined in the Report of the International Council for Commercial Arbitration (ICCA)-Queen Mary University of London Task Force on Third-Party Funding in International Arbitration which was published in April 2018. The report took five years of work and spans 272 pages. This is made more commendable by the distillation of all those deliberations into succinct conclusions on four key issues: Disclosure, Privilege, Costs and Security for Costs in an Appendix titled the “ICCA-Queen Mary Task Force Principles on Third-Party Funding. There is also a useful “Best Practices” section (comparable to the SIArb Guidelines).

The very definition of a third-party funder may become an issue as different instruments define this differently. In Singapore, the enabling statute requires that the funder be one “who carries on the business of funding all or part of the costs of dispute resolution proceedings”, so only professional third-party funders are recognised. The funding contract is one where the funder gets “a share or other interest in the proceeds or potential proceeds of the proceedings to which the party or potential party may become entitled”. While this may not be intended, one may query whether a literal reading of this definition excludes the funding of parties who are defending a claim. A successful defence will not yield any proceeds to be shared. By comparison, Section 98G of the Hong Kong Arbitration Ordinance defines third-party funding as one where the funder receives “a financial benefit only if the arbitration is successful within the meaning of the funding agreement.” Funders usually fund claimants, not respondents, so this question may not arise that often. What would seem to be clear from either the Singapore or Hong Kong definition is that the regime does not apply to insurance cover where the insurer does not receive any benefit contingent on the success of the arbitration. There could be some insurance arrangements where the insurer takes a stake in the outcome, as noted in the ICCA-Queen Mary Report, but these will have to considered as and when they arise.

The other areas where concerns have been expressed are the absence in Singapore of specific statutory exceptions to the loss of privilege where documents are shared with third-party funders. Save for disclosure of the existence of the funding and the identity of the funder to the tribunal, funding contracts should provide for confidentiality and the preservation of privilege where it exists. This is recommended in paragraph 5 of the SIArb Guidelines. The Law Society Guidance Note reminds practitioners of their duty of confidentiality to the client when providing information about the claim to the funder. Therefore, it is best that the funding contract and the scope of authority from the client are clear on the disclosure of documents. There may be circumstances where privilege is lost by disclosure to a third-party, such as a funder, notwithstanding any non-disclosure agreement. It would help to have statutory confirmation that the sharing of privileged materials with a funder would not be deemed to be a waiver of privilege.

The requirement of disclosure continues to divide the funders on the one hand and the regulators on the other. Third-party funders question why, in principle, they are singled out when there could be so many ways that a party gets funding without anyone asking about its source of funds. An example is after-the-event or before-the-event insurance, or in the maritime industry, “Protection and Indemnity” (P&I) cover or “Freight, Demurrage and Defence” (FD&D). Many will say that what differentiates third-party funding from other sources is the purchase by a stranger to the dispute of a stake in the dispute. The ICCA-Queen Mary Report discusses this in detail. A separate concern expressed by legal practitioners regulated by the LPA is the obligation of disclosure imposed on them rather than on the third-party funders or on the funded party. The LPA can only regulate legal practitioners, not funders or funded parties. Nonetheless, it is possible for general legislation such as the Civil Law Act and the 2016 Regulations to extend the obligation of disclosure beyond Singapore solicitors. As noted above, the HKIAC Administered Arbitration Rules 2018 puts the obligation on the funded party.

The current legislation in Singapore is merely Version 1 of tentative steps towards the liberalisation of third-party funding. In Singapore, one may ask if the restriction of third-party funding to international arbitration is doctrinally and practically warranted. Parties may opt for an international arbitration that would otherwise come under the International Arbitration Act to be conducted under the Arbitration Act. Conversely, parties may opt for a domestic arbitration to be conducted under the International Arbitration Act. Even domestic arbitration cases can involve huge amounts between sophisticated multinationals based in Singapore. Some views have also been expressed that third-party funding should be permitted for litigation under the Singapore International Commercial Court. Another area where third-party funding could enhance access to justice is in representative or class actions.

Third-party funding adds to the myriad of offerings available in Singapore as a leading dispute resolution hub. In Hong Kong too, the framework is being gradually and slowly developed. If user experience remains positive and fears of the moral hazards associated with third-party funding recede, it is likely that third-party funding will be permitted for other areas of dispute beyond arbitration and insolvency. On the other hand, any controversy that surfaces may have a dampening effect on liberalisation. Notwithstanding this, a more probable scenario is that unanticipated problems that arise will be addressed by targeted legislative amendments rather than a reversion to the pre-2017 age of prohibition. The door has opened. It is unlikely to close again.