Legal development

Hong Kong enacts new rules permitting outcome related fee structures

22 November 2022

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    Singapore enacted amendments to its Legal Profession Act earlier this year, allowing lawyers and clients to enter into conditional fee agreements (CFAs) for certain types of contentious matters, including in arbitration proceedings (see our update here). Hong Kong has now followed, with amendments to its Arbitration Ordinance and a new set of Arbitration (Outcome Related Fee Structures for Arbitration) Rules to come into operation on 16 December 2022, allowing the use of various outcome-related fee structures (ORFS) in arbitration proceedings. While confined to only arbitration and related proceedings, these legislative amendments arguably go further than those introduced in Singapore by permitting not only CFAs, but also other types of OFRS such as damages based agreements (DBAs) and hybrid damages based agreements (Hybrid DBAs).

    The new rules are a welcome response to the demands of arbitration users, and help Hong Kong maintain its competitiveness as a global centre for international arbitration.

    What are ORFS?

    ORFS are alternative fee arrangements whereby the lawyer and their client agree that the lawyer's fee is conditional on the outcome of a contentious matter, and the lawyer receives a financial benefit if the proceedings are successful within the meaning of the agreement.

    Until now, lawyers in Hong Kong were prohibited from charging fees related to the outcome of their work on contentious matters. The new amendments will lift this prohibition for arbitration and related proceedings, providing lawyers and their clients with greater flexibility to adopt the appropriate fee arrangements to suit their needs.

    What types of ORFS are permitted?

    The new rules permit three types of ORFS, each of which is subject to certain conditions including as to maximum limits, as summarised below.

    ORFS Type APPLICABLE conditions maximum limits

    Conditional Fee Agreement (CFA)

    An agreed success fee is charged if a successful outcome is achieved. If proceedings are unsuccessful, the lawyer receives no legal fees ("No-Win, No-Fee") or reduced legal fees ("No-Win, Low-Fee").
    1. The success fee must be expressed as a percentage of the benchmark fee (i.e. the fee that would have been charged if no ORFS agreement had been made for the matter).
    2. The CFA must provide that the uplift element must not exceed 100% of the benchmark fee.
    3. The CFA must state what constitutes a "successful outcome".
    		 Uplift element ≤100% of benchmark fee

    Damages Based Agreement (DBA)

    No fees are charged during the course of the arbitration, and the lawyer receives a percentage of the financial benefit obtained by the client in the matter ("DBA payment").

    1. The DBA payment must be calculated by reference to the financial benefit obtained by the client, not exceed 50% of the financial benefit obtained by the client, and be payable in addition to any recoverable lawyer's costs.
    2. The DBA must state the "financial benefit" to which the agreement relates, the basis for calculating the DBA payment, when the DBA payment becomes payable by the client, and whether barristers’ fees are included in the DBA payment.
    		 DBA payment ≤50% of financial benefit obtained by the client

    Hybrid Damages Based Agreement (Hybrid DBA)

    Some fees are charged during the course of the arbitration (usually at a discount), and lawyer is paid an additional DBA payment in the event the client obtains a financial benefit.

    The hybrid DBA must:

    1. Satisfy the specific conditions for DBAs above.
    2. State the fees applicable during the course of the matter.
      State the benchmark fee.
    3. Provide the cap the client is to pay in the event of no financial benefit, being not more than 50% of the irrevocable costs.
    4. Provide that where the DBA payment in the event of obtaining a financial benefit is less than the capped amount, the lawyer may elect to retain the capped amount instead.

    Capped fees payable in the event that no financial benefit is obtained ≤50% of irrecoverable costs

    DBA payment ≤50% of financial benefit obtained by the client (but lawyer may elect to retain capped fees if they are higher)

    The rules also require all ORFS agreements, regardless of the type of structure involved, to:

    1. be in writing and signed by the lawyer and the client;
    2. state the arbitration or any part of it to which the agreement relates;
    3. state the circumstances lawyers’ fees and expenses are payable, and whether disbursements are payable;
    4. state that the lawyer has informed the client of the right to seek independent legal advice;
    5. state a cooling-off period of not less than 7 days; and
    6. state the grounds for early termination and, if so, the alternative basis for paying the lawyer in such event.

    How to benefit from the new rules?

    The new rules apply to arbitration proceedings, as well as related court or mediation proceedings. Clients can benefit from these more flexible fee arrangements, both in respect of arbitrations seated in Hong Kong and by engaging Hong Kong practitioners in arbitrations seated elsewhere.

    The new rules provide an additional funding option for clients, in addition to third party funding (see our Quick Guide here) which has been permitted in Hong Kong since February 2019. Besides benefiting clients who may otherwise be unable to fund arbitration for meritorious claims, they will also allow those with the funds to arbitrate to lay off some of the risk associated with costly arbitration and free up the funds for use elsewhere, thereby alleviating some of the costs pressures and cash-flow issues that may arise as a result of engaging in arbitration.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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