Litigation Funding 2024 Comparisons

Litigation funding has been permitted in respect of certain categories of dispute resolution in Singapore since the amendment of the Civil Law Act in 2017 which, in effect, abolished the torts of maintenance and champerty. However, litigation funding is subject to certain regulations, including specific criteria that must be met by third-party funders. This is to ensure that litigation funding does not compromise the integrity of the legal process or lead to conflicts of interest.

International Arbitration

In 2017, Singapore passed the Civil Law (Amendment) Act 2017, which abolished historic champerty and maintenance rules (Sections 5A and 5B Civil Law Act), together with the Civil Law (Third-Party Funding) Regulations 2017 (Civil Law TPF Regs) which permitted the use of litigation funding as follows:

• international arbitration proceedings;
• court proceedings arising from or out of or in any way connected with international arbitration proceedings;
• mediation proceedings arising out of or in any way connected with international arbitration proceedings;
• application for a stay of proceedings referred to in section 6 of the International Arbitration Act and any other application for the enforcement of an arbitration agreement; and
• proceedings for or in connection with the enforcement of an award or a foreign award under the International Arbitration Act.

Domestic Arbitration, SICC Proceedings and Insolvency

Following a public consultation in 2018 by the Ministry of Law, Singapore, the third-party funding framework was expanded to include more categories of proceedings under the Civil Law (Third-Party Funding) (Amendment) Regulations 2021 with effect from 28 June 2021, as follows:

• Domestic arbitration and related court proceedings.
• Court proceedings commenced in the Singapore International Commercial Court (“SICC”) so long as those proceedings remain in the SICC.
• Appeal proceedings arising from any decision made in proceedings commenced in the SICC so long as those proceedings remain in the SICC.
• Court proceedings in the insolvency context (ie, subject to the Singapore courts’ approval, a liquidator can enter into third-party funding agreements).
• Related mediation proceedings.

Strict criteria for third-party funders

However, there are strict criteria for third-party funders who may only provide funding if they meet the following qualifications:

• paid-up share capital of not less than SGD5 million or the equivalent amount in foreign currency; or
• not less than SGD5 million, or the equivalent amount in foreign currency in managed assets

(Regulation 4, Civil Law TPF Regs).

The definition of “managed assets” is set out in Regulation 4(2) of the Civil Law TPF Regs.

Entities that do not meet the criteria to fund, or funders who do not comply with requirements imposed on them, will not be able to enforce their rights under the third-party funding arrangement. This would include their right to receive a share of the damages in the event the claim succeeds.

However, the funder will still be obliged to fulfil its obligations to the claimant in respect of the third-party funding agreement, including its obligation to fund the claim as the rights of any other party as against the funder under the third-party funding agreement are not affected. The court or Arbitral Tribunal may grant relief to the funders on their application if the non-compliance was due to inadvertence or some other sufficient cause, or if it is just and equitable to do so.

Lawyers authority to act in relation to third-party funding arrangements

At the same time as the introduction of litigation funding into the jurisdiction, the Legal Profession Act 1966 (LPA), Section 107, Part 3A, clarified the following:

• Lawyers are allowed to introduce or refer funders to their clients.
• Lawyers are also allowed to advise or act for their clients in relation to the third-party funding contract.
• Lawyers are not allowed to receive direct financial benefit from the introduction or referral of the funder.

The Legal Profession (Professional Conduct) Rules 2015 (Part 5A Rules Applicable to Third-Party Funding) set out the following rules:

Duty to disclose funding agreement

A legal practitioner must disclose to the court and the other parties involved in the proceedings the existence of any third-party funding agreement that they have entered as well as the identity and address of the third-party funder. Disclosure must be made as soon as practicable after entering into the agreement or becoming aware that funding has been provided or offered.

The purpose of this requirement is to ensure transparency and prevent potential conflicts of interest that may arise from third-party funding arrangements. By disclosing such agreements, parties can maintain the integrity of the legal process and uphold ethical standards within the legal profession.

Prohibition against financial and other interests in third-party funder

Legal practitioners must not hold any share or other ownership interest, directly or indirectly in any third-party funder which has entered into a third-party funding agreement with their client or their law practice.

This prohibition is designed to maintain the integrity and independence of legal representation and to prevent conflicts of interest. Essentially, it ensures that lawyers are not financially incentivised to prioritise the interests of third-party funders over those of their clients.

The third-party funding framework is supplemented by best practices and guidelines for lawyers and third-party funders.

Singapore Institute of Arbitrators (SIArb) Guidelines

SIArb have issued guidelines specifically for third-party funders. These aim to promote best practices among funders who intend to provide funding to parties in Singapore-seated international arbitrations. They set out expectations of transparency and accountability between the funder and funded party, and encourage funders to behave with high ethical standards towards so as to uphold the integrity of international arbitration in Singapore.

Singapore International Arbitration Centre (SIAC) Practice Note

For international arbitration proceedings, the SIAC Rules may apply. SIAC has issued a Practice Note that sets out standards of practice and conduct to be observed by arbitrators in respect of arbitration proceedings administered by the SIAC under the SIAC Rules in cases involving external funding.

The Law Society of Singapore (Law Society) Guidelines

The Law Society has also issued a guidance note, directed principally at legal practitioners, setting out best practices for those who refer, advise or act for clients who obtain third-party funding.

SIArb recommends that interested parties should review all of these guidelines together to obtain a comprehensive overview of current issues pertaining to third-party funding in Singapore.

It is also important to be aware of the following:

Singapore Code of Civil Procedure

The Code of Civil Procedure provides the procedural framework for civil litigation in Singapore. While it does not directly address third-party funding, it contains provisions related to case management, disclosure of funding arrangements, and the conduct of parties and their legal representatives.

Legal Profession Act

The Legal Profession Act sets out the regulatory framework for legal practitioners in Singapore. While it primarily governs the conduct of lawyers, certain provisions indirectly affect third-party funding arrangements, particularly regarding conflicts of interest and professional ethics.

Common Law Principles

In addition to statutory regulations, common law principles and judicial decisions may also influence the application and interpretation of third-party funding arrangements in Singapore courts and tribunals.

Legal finance is not considered as a type of consumer credit in Singapore, and applicable rules are the same, whether funding is provided to an individual or a corporate entity.

Courts in Singapore generally uphold the principle of freedom of contract but may intervene if terms are deemed unfair, contrary to public policy, or in violation of applicable laws, including in relation to the level of control exerted by the litigation funder.

See 1.2 Rules and Regulations on Litigation Funding regarding the practitioner’s duty to disclose funding agreements.

In addition to this, the SIAC Investment Arbitration Rules expressly grant the tribunal the discretionary power to order disclosure as per the Legal Profession (Professional Conduct) Rules but goes further to allow the tribunal to order:

• disclosure of the details of the third-party funder’s interest in the outcome of the proceedings (where appropriate); and/or
• whether the third-party funder has agreed to be liable for adverse costs.

This indicates that the tribunal can take into account third-party funding arrangements when apportioning the costs of the arbitration and in making any applicable costs orders against parties. However, it is likely that tribunals would require good grounds such as an application for security for costs, before directing such additional details to be disclosed.

The general principle in Singapore is that costs follow the event, which means that the unsuccessful party usually bears the costs of the successful party.

The rules governing the award of adverse costs in Singapore are primarily outlined in the Rules of Court for civil litigation matters and the Arbitration Act for arbitration proceedings.

The court or arbitrator has discretion in awarding costs. They will consider various factors such as the conduct of the parties, the complexity of the case, any offers to settle, and the reasonableness of the parties’ actions throughout the proceedings.

Costs orders can be made at various stages of the proceedings, including after trial or final determination of the case. Additionally, interim costs orders can be made during the course of proceedings to cover expenses up to that point.

Indemnity Costs

In cases where a party’s conduct is particularly unreasonable or where they have been guilty of misconduct, the court or arbitrator may order the losing party to pay costs on an indemnity basis. Indemnity costs are usually higher than standard costs and cover more of the successful party’s legal expenses.

The rules governing security for costs in Singapore are primarily found in the Rules of Court (Order 9, Rule 12) and sets out the procedure for applying for security for costs.

A Defendant may make an application for the Claimant to provide security for costs on grounds that:

• the Claimant is ordinarily outside the jurisdiction;
• there is reason to believe that the Claimant will be unable to pay the costs of the defendant if ordered to do so;
• the Claimant’s address is not stated or is wrongly stated in the originating application or has changed its address during the course of the proceedings so as to evade the consequences of litigation.

In determining the application, the court will consider whether it is just and fair in the circumstances to ordered the plaintiff to provide security for costs and the extent of such security.

SICC

In relation to proceedings in the Singapore International Commercial Court, security for costs may also be ordered against the funder with whom the claimant has a third-party funding contract.

Form of Security

In addition to an upfront payment of funds, an undertaking from a litigation funder may be a suitable form of security (see Hyflux Ltd (in compulsory liquidation) and others v Lum Ooi Lin [2023] SGHC 113), as well as after the event insurance.

After the event insurance (“ATE”), also known as adverse costs insurance, is permitted in Singapore and may be available to address a security for costs order.

Adverse costs insurance is an insurance product used to manage the financial risk of litigation. It provides a party to a dispute with cover for adverse costs exposure in exchange for payment of a premium. It is also known as “after the event” insurance because the policy is taken out after the dispute arises and responds if the policyholder’s dispute concludes unsuccessfully.

Insurers can also provide security instruments to meet the security for costs requests of defendants, including anti-avoidance endorsements or Deeds of Indemnity.

There are now several insurers actively insuring disputes in Singapore, as well as insuring litigation funders who may provide an adverse costs indemnity as part of the third-party funding contract.

Conditional Fee Agreement (CFA)

Since May 2022, parties can enter into a CFA with law firms in Singapore, under the Legal Profession (Conditional Fee Agreement) Regulations 2022 (CFA Regs). This provides an additional option, alongside traditional fee agreements provided for under the LPA.

Definition

A CFA is defined in the LPA as “an agreement relating to the whole or any part of the remuneration and costs in respect of contentious proceedings (whether relating to proceedings in Singapore or any state or territory outside Singapore) conducted by a solicitor, a foreign lawyer or a law practice entity, which provides for the remuneration and costs or any part of them to be payable only in specified circumstances, and may provide for an uplift fee” (Part 8A, Section 115A).

Uplift fees

A key feature of the CFA framework is that uplift fees may be provided. An uplift fee refers to the fees payable to the lawyer in specified circumstances, that are higher than what would otherwise be payable if there were no CFA. Such uplift fees can be in the form of a gross sum or hourly rate, and are unrelated to the sum of damages awarded to the client.

Permitted Categories

CFAs are not permitted in all types of proceedings – they can only be used in the prescribed categories of proceedings permitted for litigation funding. These categories of proceedings usually involve more commercially sophisticated clients, which therefore reduces the risk of abuse by lawyers.

However, the Ministry of Law has stated that it will continue to review the litigation funding landscape to determine whether the CFA framework should be extended to other categories of proceedings, including domestic proceedings.

Terms of the CFA

The CFA Regulations specify that the following terms must be included in the CFA:

• The particulars of the specified circumstances in which remuneration and costs or any part of them are payable to the lawyer under the CFA.
• The particulars of any uplift fee, if applicable.
• That lawyers and clients must comply with the cooling-off period of five days after a CFA is entered into, during which either party may terminate the agreement via a written notice.
• That any variation of the CFA must be in writing and expressly agreed to by all parties to the CFA. For variation related to costs issues, there is also a cooling-off period of three days after the CFA is varied, during which either party may terminate the variation agreement via a written notice.
• That on the termination of the CFA during the cooling-off period, the client is not liable for any remuneration or costs incurred during the cooling-off period except those incurred for any service performed during the cooling-off period that was expressly instructed by or agreed to by the client.

Contingency Fee Agreements

The law prohibits uplift fees from being calculated as a percentage or proportion of the amount awarded to a client in damages or recovered in a dispute. Such damages based agreements (referred to as Contingency Fee Agreements) therefore continue to be banned in Singapore.

Guidance Note

The Law Society has issued a helpful guidance note for practitioners on the use of CFAs. This note includes some illustrations of a CFA in practice, advise on structuring, confidentiality and terminating a CFA.

Rule 49B of the Legal Profession (Professional Conduct) Rules sets out a prohibition against lawyers (or a law practice) having a financial or other interest in a third-party funder.

At the same time, a lawyer (or a law practice) must not receive any commission or fee, or any share of the proceeds of a claim, from a third-party funder. However, this does not prohibit lawyers from receiving any fees, disbursements or expenses payable by the client and as part of a third-party funding contract.

The Legal Profession Act (LPA) governs the legal sector in Singapore, and it traditionally prohibited non-lawyers from owning equity in law firms, to ensure that law firms were managed and controlled by legal professionals with the necessary expertise and ethical obligations.

In 2015, amendments were made to the LPA, introducing significant changes to the ownership structure of law firms in Singapore. Law practices can now form Legal Disciplinary Practices, a form of alternative business structure where non-lawyers are allowed to become partners, directors or shareholders, or to share in the profits of the law practice subject to prescribed limits. Such individuals:

• can own up to 25% of a law firm’s shares or partnership interests;
• must be employees of the firm; and
• must be registered with the LSRA as regulated non-practitioners.

The law firm can only deliver legal services. Alternative business structures providing multi-disciplinary services that go beyond just legal services are currently not permitted.

The Goods and Services Tax (GST) is applicable to the provision of legal services by law firms and lawyers, except where services are provided to an overseas person or entity.

The current standard rate of GST in Singapore is 9%.

In many cases, clients who are registered for GST themselves can reclaim the GST paid on legal fees as an input tax credit. This means that the GST paid on legal fees is treated as an expense incurred in the course of the client's business activities, and they can offset this amount against the GST they collect on their own sales.

Whether withholding tax is payable will depend on the specific terms of an agreement and whether payment is construed under Singapore law as the payment of interest or, alternatively, whether it can be treated as a capital payment. If returns paid under a third-party funding contract are construed as interest, withholding tax may be applicable.

Specifically, withholding tax may be applied to any interest paid to a non-resident company in connection with any loan at a rate of 15%, unless a lower treaty rate applies.

Under the relevant treaties, the applicable rate would reduce to 12% in relation to a body corporate registered in Guernsey or Jersey; 5% in relation to Ireland; and 0% in relation to Luxembourg.