Mainland China
At present, due to the lack of any specific legal provisions regarding third-party funding (TPF) under Chinese law, the practice is generally considered not prohibited in Mainland China.
Litigation
The limited number of TPF litigation cases that are publicly reported demonstrate different approaches taken by Chinese courts. Some courts have upheld the validity of litigation funding agreements on the basis that there is no contravening legal provision. In 2022, the Shanghai Second Intermediate People’s Court rejected the validity of a TPF agreement for litigation because it contradicted the prevailing value of investing in the real economy, could encourage reckless litigation, and excluded alternatives to resolving the disputes harmoniously. This decision was based on the court’s findings regarding the TPF agreement in this specific case.
Arbitration
TPF is explicitly recognised in the arbitration rules of several major Chinese arbitration institutions. The 2024 CIETAC Arbitration Rules, the CIETAC Investment Arbitration Rules, the 2024 SHIAC Arbitration Rules, the 2023 SHAC Arbitration Rules, and the 2019 BJAC Investment Arbitration Rules contain provisions regarding the use of TPF in arbitration proceedings. Chinese courts have also upheld the viability of TPF agreements in arbitration so long as any relevant rules (including the applicable arbitration rules) are complied with.
Hong Kong
The common law doctrines of maintenance and champerty remain in force in Hong Kong, with the result that TPF for litigation is in principle not permitted save in limited circumstances. In the field of arbitration, however, there have been major developments in recent years, and TPF for arbitration and related court proceedings is now permitted.
Litigation
TPF for litigation is, save in limited circumstances, against the old common law rules of maintenance and champerty. Maintenance occurs when a third party, who has neither an interest in the action nor any other motive recognised by the law as justifying such interference, officiously intermeddles in litigation by assisting or encouraging a party with, for instance, financial support. Champerty is a particular kind of maintenance. It occurs when the unconnected third party maintaining an action takes a share of the proceeds of the litigation. Said doctrines are torts and indictable offences punishable by imprisonment and a fine.
Generally speaking, it is both maintenance and champerty when a third party funds a legal action in return for a portion of the proceeds of the litigation, and, therefore, unlawful in Hong Kong.
This notwithstanding, the courts of Hong Kong have recognised limited exceptions to the general prohibition for litigation funding, which fall into three categories:
Arbitration
Since 1 February 2019, for arbitration seated in Hong Kong, TPF for the arbitration proceedings and the related court proceedings in Hong Kong is permitted. For arbitration seated outside of Hong Kong, TPF for legal services in Hong Kong is permitted.
Mainland China
At present, there are no binding rules regarding TPF under Chinese law.
Hong Kong
TPF for arbitration and ancillary court proceedings is governed by the rules set out in Part 10A of the Hong Kong Arbitration Ordinance (HKAO).
Mainland China
Notwithstanding the relevant arbitration rules of the Chinese arbitral institutions as set out in 1.1 Legality of Litigation Funding, there is no widely followed non-legal body of rules regarding TPF in China.
Hong Kong
The regulatory framework for TPF is supplemented by the Code of Practice for Third-Party Funding of Arbitration (the “TPF Code”). The TPF Code sets out the practices and standards with which third-party funders are ordinarily expected to comply with. The TPF Code provides guidance on, inter alia, capital adequacy, conflicts, confidentiality, costs, control, disclosure and grounds for termination.
Failure to comply with the TPF Code does not, in and of itself, render any person liable to any judicial or other proceedings, but it can be taken into account if it is relevant to a question being decided by the court or an arbitral tribunal.
Mainland China
At present, there are no particular rules in China applicable when TPF is provided to a specific type of counterparty such as consumers.
Hong Kong
There are no other particular rules as litigation funding remains in principle impermissible in Hong Kong.
Mainland China
The number of cases involving TPF agreements that are publicly reported is very limited. In (2021) Hu 02 Min Zhong No 10224, the Shanghai Second Intermediate People’s Court rejected the validity of a TPF agreement for litigation because, inter alia, the said agreement contained clauses which:
It was held that the TPF agreement in this case compromised the order and fairness of the litigation proceedings by preventing recusal, affecting equality of arms, and removing the necessary court oversight. Clauses with similar effects, individually and collectively, may constitute grounds for Chinese courts to deny the validity of TPF agreements.
Hong Kong
For arbitration, a funding agreement should not impede the funded party’s compliance with its disclosure obligations under the HKAO.
Mainland China
There are no binding rules on the disclosure of litigation funding in China. However, the Shanghai Second Intermediate People’s Court’s decision in (2021) Hu 02 Min Zhong No 10224 suggests that confidentiality clauses barring disclosure of the funding agreement from the court and the opposing party are likely invalid. This indicates that Chinese courts may order parties to make disclosure regarding funding agreements.
Hong Kong
There exists no general obligation in litigation to disclose any funding arrangements to the court or the opposing party.
For TPF in arbitration, the HKAO provides that the funded party must give written notice to the other party of the arbitration and the administrative arbitration body regarding the existence of a funding agreement and the name of the third-party funder.
Mainland China
There is currently no legal framework for issuing cost orders against third-party funders in litigation or arbitration in China. The funders’ liability for adverse costs, if any, depends on the specific funding agreements.
Pursuant to Article 29 of the Measures on the Payment of Litigation Fees, litigation fees shall be awarded as adverse costs unless the victorious party volunteers to pay. Litigation fees include an application fee, a case acceptance fee, and other expenses. Lawyers’ fees, however, are normally borne by the party appointing the lawyers, with limited statutory exceptions where lawyers’ fees can be awarded as part of adverse costs.
Hong Kong
Courts and arbitral tribunals have broad discretion to make costs orders as they see fit, including adverse costs orders, following the prevailing principle that costs follow the event.
Litigation
Courts can make costs orders against non-parties under the High Court Ordinance (Cap. 4) and the Rules of the High Court (Cap. 4A). To make a cost order vis-à-vis a non-party, that person or entity must, save in limited circumstances, be joined as a party to the proceedings for the purpose of costs only. The threshold is high – the court would make such an order only if it is “in the interests of justice to do so”.
In Hydrotech Waterproofing Solutions Limited v Shun Yuen Construction Company [2023] HKCFI 601, the Court of First Instance affirmed that, while the court would not readily impose costs orders on non-parties, a litigation funder who not only funded the proceedings but substantially controlled and/or benefitted from the proceedings can be made liable to pay adverse costs orders.
With respect to recoverable percentages of the legal costs, the winning party can typically expect to recover 50% to 65% of its solicitors’ costs and 80% to 100% of the disbursements incurred (including barristers’ fees, if any) if costs are taxed on a party and party basis.
Arbitration
The HKAO is silent on arbitral tribunal’s authority to issue adverse costs orders against non-parties, including third-party funders. The TPF Code provides that the funding agreement must state whether, and if so to what extent, the funder is liable towards the funded party for adverse costs orders. While third-party funders usually agree to cover at least a part of adverse costs where applicable, liability for adverse costs is typically subject to negotiation of the individual funding agreements.
Rules of the leading arbitral institutions, including the HKIAC, usually empower arbitral tribunals to take into consideration any TPF agreements when determining all or part of the costs award.
Mainland China
There is no mechanism regarding security for costs in China, including in the context of TPF.
Hong Kong
Litigation
Pursuant to the Rules of the High Court (Cap 4A), the court may order a plaintiff to give security for the defendant’s costs if the plaintiff resides out of the jurisdiction, if s/he is only suing for the benefit of some other person and there is reason to believe that s/he will be unable to pay the costs, if the plaintiff’s address is not stated/incorrectly stated, or if the plaintiff has changed his/her address during the proceedings with a view to evading the consequences of the litigation.
The court is unable to make an order directly against a third-party funder for security of costs.
Arbitration
Under the HKAO, unless the parties have agreed otherwise, the arbitral tribunal can make an order for the claimant to give security for the costs. The arbitral tribunal is, however, unauthorised to make an order directly against a third-party funder for security of costs.
Mainland China
After the event (ATE) insurance is not commonly offered or used in China.
Hong Kong
ATE insurance is available in Hong Kong to cover the eventuality of adverse costs but is not yet widely used. Now that outcome-related fee structures are allowed in arbitration and arbitration-related court proceedings, the use of ATE insurance may increase.
Mainland China
In China, contingency fees were first legalised and regulated by the 2006 Measures on Lawyers’ Fees. In December 2021, the Ministry of Justice, National Development and Reform Commission, and State Administration for Market Regulation issued the Opinions on Further Regulating Lawyer Service Fees, which contain stricter regulations on the use of contingency fees.
Contingency fees are prohibited in criminal cases, administrative litigation cases, state compensation cases, mass litigation cases, marriage and inheritance cases, as well as cases involving claims for social insurance benefits, minimum livelihood guarantees, alimony, child support, maintenance fees, relief funds, workers’ compensation, and labour remuneration.
Contingency fee agreements must be in writing and clearly state the definition of contingency fees, the scope of prohibition, and the maximum fee limits. Lawyers are not allowed to make unreasonable fee agreements that exclude or restrict litigants’ rights or impose any punitive conditions.
The maximum amount of contingency fees that are permissible follows a progressive fee structure which sets out the highest possible fee ratios according to the total amounts in dispute:
Hong Kong
For arbitration and arbitration-related court proceedings, alternative fee structures are available. There are three main categories of alternative fee structures:
CFAs generally provide for a “success fee” payment, which can be calculated as a percentage “uplift” on the lawyers’ standard fees. CFAs can be structured either as “no win, no fee” or “no win, low fee” with no or reduced legal fees subject to the outcome of the dispute.
DBAs provide for fees to be calculated by reference to the financial benefit achieved by the client. No payment would be due if the claims are unsuccessful (ie, “no win, no fee”).
Hybrid DBAs provide for fees to be calculated in the same manner as a DBA, except that the lawyer is entitled to be paid certain legal fees irrespective of the outcome of the proceedings (ie, “no win, low fee”).
Mainland China
There is no specific regulation that prohibits third-party funders from sharing fees with lawyers in China.
Hong Kong
Pursuant to the Solicitors Practice Rules (Cap. 159) and the Hong Kong Solicitors’ Guide to Professional Conduct, a lawyer shall not share or agree to share profit costs with any person not being a solicitor, including any third-party funder.
The TPF Code provides that the funder shall not seek to influence the lawyers to give control or conduct of the arbitration to the funder except to the extent permitted by law and shall not take any steps to cause the funded party’s lawyers to act in breach of professional duties. The spirit of this guidance is against fee sharing between lawyers and funders.
Mainland China
Non-lawyer ownership in law firms is generally not allowed in China. Pursuant to the Measures on the Administration of Law Firms (amended in 2018), the founders, founding partners, or new partners of a law firm must be lawyers within the meaning of the Lawyers Law.
Pursuant to the 2019 Measures on Lawyers in Hainan Economic Zone, in the Hainan Economic Zone, non-lawyer professionals such as registered accountants, registered tax agents, registered cost engineers, and patent agents may become partners in special general partnership law firms. However, their capital contribution and proportion of partners cannot exceed 25% of the law firm, and they are not allowed to serve as the head of the law firm.
Hong Kong
Non-lawyers are not permitted to be partners in Hong Kong law firms.
Mainland China
Legal fees are subject to a VAT rate of 6%.
Hong Kong
No GST or VAT is levied on legal fees.
Mainland China
Non-resident companies are subject to withholding taxes on any income generated in China. China imposes a withholding tax rate of 10% on income from, inter alia, the provision of services.
China has concluded double taxation treaties with Ireland and Luxembourg, which may lower the actual withholding tax rate if the relevant requirements are met.
Hong Kong
There is generally no restriction regarding the transfer of funds in the form of returns to a third-party funder from Hong Kong to the Cayman Islands, Delaware, Guernsey, Ireland, Jersey or Luxembourg.
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