Out-Law / Your Daily Need-To-Know

Outcome-related fee structures proposed for Hong Kong arbitration

Out-Law News | 21 Dec 2021 | 3:07 am | 2 min. read

The prohibition on lawyers using outcome-related fee structures (ORFSs) in arbitration and related court proceedings conducted in and outside of Hong Kong Special Administrative Region (SAR) has been proposed to be removed by the Law Reform Commission (LRC) of Hong Kong SAR.

The recommendation is contained in a report by the LRC produced following a public consultation.

International arbitration expert Dr Dean Lewis of Pinsent Masons said: “The recommendation of the Law Reform Commission is to be welcomed by the arbitration community. Access to justice should be a bulwark of any judicial system and outcome related fees will give greater access to those companies who otherwise might be deterred from embarking upon a potentially financially damaging arbitration.”

The term ORFS covers three types of agreement between a lawyer and a client: conditional fee agreements (CFAs), damages-based agreements (DBAs) and hybrid damages-based agreements (hybrid DBAs).

A CFA is an agreement for a client to pay a lawyer an additional fee, known as a success fee, which can only be paid if the client's claim is successful. The success fee can be an agreed fixed fee or a percentage uplift on the fee charged by the lawyer if there is no ORFS in the proceedings.

A DBA means an agreement between a lawyer and a client by which the lawyer is paid only if the client receives an "economic benefit" in the matter. The fee is calculated by reference to the percentage of any monetary award or settlement agreement obtained by the client in or through the arbitration proceedings.

A hybrid DBA refers to an agreement between a lawyer and a client under which the lawyer agrees with the client to be paid a DBA payment only if the client receives a financial benefit in the matter, together with a fee, usually discounted, for legal services provided during the course of the matter.

The LRC suggested that success fees should be set by reference to the fees that lawyers would charge their clients without an arbitration related ORFS and capped at 100%. It also suggested the DBA payment should be payable in accordance with the terms agreed between lawyer and client wherever a "financial benefit", broadly defined, is obtained by the client, based on the value of, and capped at 50% of, that financial benefit.

The report suggested that the relevant legislation should provide, on a “non-exhaustive” basis, the main reasons why a lawyer may terminate an ORFS before the conclusion of the arbitration, and that the LRC does not consider it necessary to provide statutory reasons why a client may terminate an ORFS before the conclusion of the arbitration.

An arbitrated ORFS should be void and unenforceable where a personal injury claim is involved. The report recommends that claims in categories other than personal injury claims are treated no differently from other claims submitted to arbitration.

To get lawyers to be permitted to use ORFSs, the report suggested that “clear and simple” amendments should be made to the Arbitration Ordinance (Cap 609), the Legal Practitioners Ordinance (Cap 159), the Hong Kong Solicitors' Guide to Professional Conduct, and the Hong Kong Bar Association's Code of Conduct.

The report also suggested that the more detailed legislative framework and the specific safeguards which form part of the ORFS regime for arbitration should be set out in subsidiary legislation. Proposed safeguards include that the ORFS must be in writing and signed by the client, that the lawyer should inform clients that they have the right to get independent legal advice, and the ORFS should be limited to a cooling-off period for at least seven days.

The LRC’s Outcome Related Fee Structures for Arbitration Sub-committee issued its consultation paper in December 2020.