Hong Kong and Singapore, the main headquarters for international arbitration in the Asia-Pacific, are both implementing reforms to allow parties to enter into performance-related fee structures (“ORFS”) with their lawyers for arbitrations and certain legal proceedings. These reforms will provide parties with welcome flexibility in how they fund their disputes by providing an alternative to traditional fee arrangements and third-party “TPF” funding options. Singapore’s reforms came into effect on May 4, 2022, while Hong Kong’s are expected to do so in the fourth quarter of 2022.
This note provides an overview of what parties can expect from these highly anticipated reforms, which are in line with best practices from other leading dispute resolution centers.
What are ORFS?
- ORFS, also known as “No-Win, No-Fee” and “No-Win, Low-Fee” arrangements, refer to an agreement between a lawyer and his client which conditions all or part of the amount payable by the client to the attorney on the outcome of the client’s litigation (for exampleif their claim or defense is successful).
- While ORFS have traditionally been banned in many jurisdictions, this is no longer the case. Major arbitration seats, including London, Paris, Geneva and New York, all now allow ORFS to varying degrees. For example, London allowed contingent fee agreements (CFAs) in the 1990s and damages-based agreements (DBAs) in 2013. The international trend of allowing parties to enter into ORFS recognizes:
- the growing demand from sophisticated users of dispute resolution for flexibility in how they fund their disputes and manage risk;
- the possibility for ORFS to improve access to justice for disenfranchised parties who would otherwise be unable to fund their disputes; and
- the potential of ORFS to improve the effectiveness of dispute resolution.
- ORFS fall into three main categories, which can be distinguished by how the client’s payment to their lawyer is calculated if successful (for examplesuccessful claim or defense):
- First, DWIs generally provide for the payment of a “result fee”, which may be either an agreed upon lump sum fee or a percentage “increase” in the attorney’s standard fee. CFAs can be structured as “no gain, no charge” or “no gain, reduced charge” arrangements, with no legal fees or reduced legal fees, respectively, due to the attorney if the positive outcome is not achieved .
- Second, DBAs (also known as contingency fee arrangements) provide that payment is calculated based on the financial benefit realized by the client, such as a percentage of the sum of liquidated damages awarded to the client or retrieved by it. No payment is due if the procedure fails (that’s to say“No gain, no fees”).
- Thirdhybrid DBAs provide that payment is calculated in the same way as a DBA, except that the lawyer is entitled to collect certain legal fees (usually at a reduced hourly rate) regardless of the outcome of the proceedings (that’s to say, “No gain, low cost”). For example, a hybrid DBA could allow the client to pay: (i) their lawyer’s fees at reduced hourly rates; and (ii) an amount representing 20% of the damages, if any, awarded to the customer.
Singapore CFA scheme
- On May 4, 2022, the new Singapore CFA scheme came into effect following Singapore’s enactment of the Legal Profession (Amendment) Act 2022 and the entry into force of the Legal Profession (Contingent Fee Agreement) Regulations 2022. The main features of the reform are presented below.
- Insight: qualified Singapore lawyers and registered foreign lawyers are authorized to enter into CFAs with clients relating to the same categories of disputes that already allow TPF in Singapore, namely:
- domestic and international arbitrations (whether inside or outside Singapore);
- Proceedings before the Singapore Court of International Trade; and
- any related legal and mediation proceedings.
- CFAs may condition all or part of the lawyer’s compensation (such as the lawyer’s normal hourly fees) and costs (such as lawyers’ disbursements) upon the occurrence of specific circumstances. As a result, “No-Win, No-Fee” and “No-Win, Low-Fee” CFAs are allowed. CFAs may also include an override fee. Currently, Singapore does not impose a cap or limit on uplift fees.
- Uplift costs are not recoverable in costs: the parties do not have the right to claim from the other party as costs an “uplift” greater than the amount that the client would have paid to his lawyer if there had been no DWI.
- CFA requirements: CFAs must comply with various requirements identified in the Act and Regulations, including that CFAs must be in writing and that clients have a cooling-off period of five days after signing the CFA.
- DBAs remain prohibited: CFA payments cannot be calculated as a percentage or proportion of the monetary damages awarded to the customer in the litigation. As a result, unlike the Hong Kong reforms, DBAs and Hybrid DBAs will remain banned in Singapore.
- CFA and TPF compatibility: While CFA and TPF will generally be used separately, there may be situations where a client wishes to combine them. For example, in the context of a “no-gain, low-cost” CFA, a TPF provider might be willing to fund the discounted legal fees that are payable to the attorney during the process. The law does not prohibit such arrangements.
Hong Kong CFA, DBA and Hybrid DBA scheme
- In March 2022, the Legislative Council of Hong Kong enacted the Arbitration and Legal Practitioners (Results-Related Fee Structures for Arbitration) Legislation (Amendment) Bill 2022. The bill establishes a framework for CFAs, DBAs and hybrid DBAs to participate in arbitration and related proceedings in Hong Kong. The bill largely adopts recommendations published in December 2021 by the Hong Kong Law Reform Commission Sub-Committee on Outcome Fee Structures for Arbitration following an extensive consultation process (to which Shearman & Sterling were proud to contribute ).
- Insight: Hong Kong’s reforms are similar to Singapore’s, except DBAs and hybrid DBAs will also be permitted. Hong Kong’s expansive approach should have the practical benefit of providing parties with greater flexibility in choosing a fee agreement best suited to their dispute.
- Once implemented, lawyers in Hong Kong, including attorneys, barristers and registered foreign attorneys, will be able to enter into CFAs, DBAs and hybrid DBAs for arbitration proceedings in or outside Hong Kong. , emergency arbitration proceedings and related legal and mediation proceedings. . The reforms would therefore allow parties to use ORFS throughout the lifecycle of an arbitration, including for arbitration-related legal proceedings such as setting aside or enforcing awards.
- Capping of uplift fees and DBA payments: unlike the uncapped CFA regime in Singapore, Hong Kong proposes to impose a cap of 100% of normal court fees on the maximum amount of surcharge fees that parties and their lawyer can agree in a CFA, and a cap 50% of liquidated damages awarded to customer on DBA payments.
- ORFS payments are recoverable in exceptional cases: Hong Kong adopts a default rule similar to Singapore’s, whereby any augmentation fees (or DBA payments) in excess of normal legal fees shall not be recoverable from the losing party. However, unlike in Singapore, arbitral tribunals will have discretion to award augmentation fees or DBA payments in “exceptional circumstances” (e.g. where the losing party’s conduct has contributed to the impecuniosity of the party winner).
- When can parties enter ORFS: the bill is expected to pass in the fourth quarter of 2022 with subsidiary legislation implementing additional rules and safeguards. We will provide an update when this happens.