HK aims to regain crown as favoured arbitration hub with outcome-related fee structure bill

Under the arrangement, lawyers can make more if their case succeeds.

Currently, lawyers handling arbitration cases in Hong Kong usually get paid by the hour under standard fees arrangements. But with the Law Reform Committee's (LRC) push to finally allow legal practitioners to enter into outcome-related fee structures (ORFS), lawyers can structure a fee arrangement that suits the specific client and the specific case.

Globally, clients are "moving away from hourly rates and towards sharing risk with their advisers," Kathryn Sanger, a partner at Herbert Smith Freehills and co-chair of the LRC's sub-committee that proposed the ORFS changes, told Hong Kong Business.

The establishment of the ORFS regime will, therefore, attract more clients to have their case arbitrated in Hong Kong, and put the city on the same playing field as its competitors—London, New York, Mainland China, and Singapore—which are already allowing similar fee agreements.

“The sooner we sort of play catch up, and this bill comes into force, as legislation, the better,” Mark West, partner at Reed Smith Richards Butler LLP, told Hong Kong Business.

Compared to Singapore and other top arbitral seats, Hong Kong's proposed ORFS regime is broader because it permits the full range of ORFS structures, namely Conditional Fee Agreement (CFA), Damages Based Agreement (DBA), and the Hybrid DBA.

In Singapore, where amendments to the law were recently introduced, only CFAs are permitted.

Three ORFS regimes 

Under a CFA, Sanger said clients agree to pay the lawyer an additional fee, known as a success fee, in the event of a successful outcome for the client , as determined by clients with their lawyers. 

"The success fee can be an agreed flat fee, or calculated as a percentage uplift on the lawyer’s usual fee or the fee that the lawyer would have charged if there were no CFA in place," she explained.

"The client may also pay fees during the life of the matter, typically at a discounted rate. Alternatively, lawyers and clients may agree on a “no win, no fee” CFA, where the client pays no fees at all unless the claim succeeds," she added.

For a DBA, lawyers will not charge their clients any fee during the life of the arbitration, and will only do so if the latter obtains a "financial benefit" from the case.

The DBA payment is typically a percentage of the money awarded to, or recovered by, the client or paid to settle the claim. It can include any other form of financial benefits, such as a physical asset, debt, or reduction in a sum claimed against the client.

Lastly, if parties agree on a Hybrid DBA, lawyers will be able to charge their clients some fees during the period of the arbitration, likely at a discounted rate, as well as a DBA payment in the event the client obtains a financial benefit

For arbitrations seated in or outside territory, lawyers can still charge success fees, as long as they are Hong Kong-based.

Lawyers and clients based outside Hong Kong can likewise take advantage of the new rules when working on a Hong Kong-seated case, said Sanger.

"In both cases, and in response to market demand, this provides maximim flexibility to lawyers in Hong Kong, and users of arbitration in the region," said Sanger.

Meanwhile, West warned that the proposed safeguards and restrictions that would be applicable to ORFS are susceptible to being “navigated,” especially under a hybrid damages based fee structure. For example, lawyers can, if the client agrees, apply an enhanced hourly rate to mitigate against the risk of the success not materializing.

“The law firm acting for the claimant may have its capital or its time costs, its unpaid time costs locked up for considerable periods of time, which obviously affects cash flow. Usually, they would factor that into their model and expect some sort of return on that as well,” West said. 

Sanger, however, said that this will “ultimately be a matter for lawyers to agree with their clients." 

Bearing a risk

Mark also underscored that lawyers who accept engagements on an ORFS basis bear the risk of reduced or no payment, depending on the arrangement, if the case proves to be unsuccessful.  

This was echoed by Sanger, saying ORFS arrangements are “generally riskier” for lawyers than standard hourly fees.

“With the latter, the lawyer is entitled to payment whether or not the client's case succeeds. Under an ORFS, the lawyer stands to make more if the case succeeds, but considerably less if the case fails,” she said.

“Where there is a ‘no win, no fee’ agreement, the lawyer risks receiving no fees if the claim does not succeed. For that reason, lawyers will usually offer outcome related fees only where they are confident that the merits of the case are relatively strong. In that sense, the amendments respond to increasing client demand, and clients' wishes for their lawyers also to have 'skin in the game',” she added.

It is not only lawyers that ORFS affect. Sanger said third-party funders may also see reduced demand. Third-party funders are large, highly capitalised entities that invest in disputes. They pay their client's legal fees and expenses in return for a percentage of any damages the client obtains at the end.

However, since third-party funding is only available for very high-value claims with strong prospects of success, relatively few cases will any way be suitable for third party funding; all the more if lawyers decide to and are able to fund their client's cases, Sanger noted.

West added, “These funders would be looking very closely at the merits of the claim and assessing that to determine the likelihood of success. In situations where the claim lacks sufficient merit, third-party funders or law firms acting on a contingency basis may well be reluctant to assume the risk. 

“In such cases law firms and/or third party funders (as the case may be) would look to mitigate against the contingent risk of non-payment by increasing the success fee payment but there will inevitably be a tipping point beyond which law firms and third party funders and may simply even decline to represent or fund the prospective client on an ORFS basis,” he said.

The big winner

Once the ORFS gets implemented, the biggest winner would be the clients.

According to Sanger, ORFS arrangements reduce the risks inherent in pursuing a commercial claim through arbitration, like cost and duration.

"Arbitration is expensive. With the typical commercial arbitration lasting 18 months to two years, legal fees can become significant," Sanger said.

West, for his part, said the regime limits how much the claimants have to “bear in terms of their own costs and how much they have to return, rebate, or refund to their funders.”

Funders will typically look for a return of 10%, 15%, or 20% in high-value arbitrations, meaning claims that run into hundreds of millions of dollars. In modest arbitrations, which run to around US$2m to US$5m, funders usually expect a return of anywhere from 50% to 70% of the award, leaving the claimant with very little; in which case “even if clients are successful, in a sense they still lose out” West said.

With the ORFS, Sanger said clients with strong claims but lack funds to pay their lawyers' standard rates for the duration of the case will now have a "greater access to justice."

"Outcome-related fees are structured so clients pay lower fees, or even no fees, whilst the case is going through arbitration. If the client succeeds, it will pay additional fees in the form of uplift on the lawyer's standard rates or a percentage of the damages that the arbitrator awards the client. If the client does not succeed, there is no extra to pay," Sanger explained.

ORFS will not only benefit clients on a low budget, but it can also help businesses which may want to use their cash or budget elsewhere whilst resolving a dispute.

"These clients increasingly seek ORFS as a way to manage the cost of arbitrating a dispute whilst continuing normal business activities," she said.

Whether individuals or businesses, ORFS allows parties to share the risk involved in bringing in arbitration with their lawyers, which, Sanger said, is attractive to clients both domestically and internationally.

Overall, West said the ORFS is still a big step forward for Hong Kong by  providing a useful set of guidelines and a framework for how arbitration funding can be done.