Worldwide: The View From Abroad

Last Updated: 2 November 2017
Article by Vannin Capital

Written by: Frances Van Eupen, partner, Allen & Overy

Competition between jurisdictions in Asia keen to promote themselves as hubs for international arbitration is flourishing: Hong Kong and Singapore remain at the forefront, but other contenders like South Korea are emerging. The leading institutions with origins in the region, the Hong Kong International Arbitration Centre (HKIAC) and Singapore International Arbitration Centre (SIAC) have seen significant growth in their caseloads over the last 10 years, and demonstrated that they are at the forefront of innovation in arbitral procedure. The future of arbitration in the region looks bright.

Growth of international arbitration in Asia

The growth of international arbitration in Asia is evident from a number of sources. Perhaps the simplest way of demonstrating such growth is through statistics. The two main regional hubs have seen significant growth in terms of caseload over the last 10 years: new cases handled by SIAC have grown from 74 in 2005, to 160 in 2009, to 222 in 2014, with the cases now handled by the HKIAC and SIAC predominantly international in nature. In 2014, 93% of the HKIAC's new administered arbitrations were international, featuring parties from 38 jurisdictions (by comparison, in 2011, 65% of the HKIAC's cases were international).

Indeed it would no longer be right to characterise HKIAC and SIAC as regional institutions: they now have a place on the global stage. The quality of their case management services and secretariats rivals that of other global players. Both have been active in making revisions to their rules and procedures, not just reflecting the evolution of international arbitration practice, but often leading the way in terms of innovation. For example, in July 2015 the HKIAC announced a new system that allows users to evaluate the conduct of their arbitral proceedings and the performance of arbitrators. It would not be surprising if other institutions follow.

There are other indicators of growth. The presence of institutions with origins from outside Asia has increased over the last 10 years. In 2008 the International Commerce Centre (ICC) opened a branch of its secretariat in Hong Kong, and a liaison office in Singapore. The London Court of International Arbitration (LCIA) opened its first independent subsidiary in India in 2009. In May 2013 the Seoul International Dispute Resolution Centre was established and a number of international institutions have a presence there, including the ICC, SIAC, HKIAC, the American Arbitration Association (AAA) the International Centre for Dispute Resolution (ICDR), and the LCIA. Similarly the number of law firms seeking to establish an international arbitration practice in the region has grown significantly, particularly in the last two to three years.

This growth is attributable to a number of factors.

Governments in the region have recognised the benefits of promoting their jurisdictions as centres for international arbitration. In 2008 the Secretary for Justice of Hong Kong publicly stated that it was a "policy objective" to strengthen Hong Kong as a centre for arbitration. Since then the Arbitration Ordinance in Hong Kong has been significantly revised and, in combination with an independent, experienced and pro-arbitration judiciary, Hong Kong has cultivated the right legislative and judicial environment in which international arbitration can flourish. Users are becoming more sophisticated and varied. Whereas historically parties in Asia commonly chose an established seat outside the region, including in particular London, they are now much keener to resolve disputes within the region. This has been a major factor driving growth. A further factor has been the growth in the popularity of arbitration among a wider variety of users. For example, banks and financial institutions have historically preferred to resolve their disputes in the courts, but within Asia are increasingly relying on arbitration to resolve disputes (particularly for ISDA agreements, in private wealth management and private equity). The expansion of arbitration into new sectors has also contributed to growth.

The enforcement benefits of the New York Convention are often cited as a key reason for the popularity of arbitration. This benefit is all the more real within Asia, where there is no widespread cross-border enforcement mechanism for the enforcement of court judgments (unlike within the EU and across states in the USA). As a result, the increase in cross border disputes is a key driver underlying the growth of arbitration in the region. The growth in cross border disputes within Asia has in turn been driven by increasing cross border transactions and investment. The United Nations Convention on Trade and Development (UNCTAD) reports that Foreign Direct Investment (FDI) inflows across Asia have increased from 15.9% of the world total in 2008 to 31% in 2014, and that China has surpassed the US to become the largest FDI recipient in the world. Similarly FDI UNCTAD figures reveal that FDI outflows across Asia have increased from 9.8% of the world total in 2008 to 28.3% in 2014. There is every sign this trend will continue. The Asian Development Bank estimates that investment in infrastructure across Asia will exceed $8 trillion between 2010 and 2020, and of course big infrastructure projects often spawn complex disputes.

Against this background, the future of international arbitration in Asia looks bright. Yet, to stay at the forefront of international dispute resolution, it is necessary to evolve in line with user demands and international practice. And if jurisdictions within the region want to remain competitive into the future, one important area which merits attention is the use of third-party funding.

Third-party funding in Asia

The growing enthusiasm for third-party funding which was identified in the first "Funding in Focus" series gives food for thought. 52% of in-house respondents said they would be open to using third-party funding. This reflects a significant level of potential demand and so, if arbitration hubs want to continue attracting business in the longer term, they will need to ensure they have a framework in place which permits users to have access to third-party funding.

Currently the position with respect to the permissibility of third-party funding across Asia is somewhat patchy. But there is momentum towards reform, particularly in Hong Kong. Perhaps this is best reflected by the fact that two funders (Burford Capital and Harbour Litigation Funding) have announced they are launching in Hong Kong with a view to financing arbitration (and certain other types of claims) throughout the region. Other funders, including Vannin Capital, service this market from outside the region.

In Hong Kong, principles of maintenance and champerty apply, by virtue of section 3 of the Application of English Law Ordinance (Cap 88), which imported common law and rules of equity into Hong Kong, and remain applicable by virtue of Article 8 of the Basic Law. However, judicial pronouncements have narrowed the scope of the doctrines, and sought to confine the doctrine of champerty to litigation proceedings.

In particular, in Cannonway Consultants Ltd v Kenworth Engineering Ltd [1995] 1 HKC 179, Kaplan J (as he then was) rendered a judgment in which he considered the history of champerty (whose precise origins are difficult to trace but whose importance by medieval times was clear) and concluded that it was not appropriate to extend the doctrine from the public justice system to the private consensual system of arbitration in circumstances where the reasons for its introduction had long since passed. In a prescient observation he noted that "to subject international parties to a rule of law which is not applicable in many other jurisdictions will be to make Hong Kong a less desirable venue for international arbitration".

In Unruh v Seeberger & Anor [2007] 2 HKC 609, the Hong Kong Court of Final Appeal examined the evolution in the concepts of maintenance and champerty and observed that their prohibition involves "a value judgement that certain conduct should be considered 'officious intermeddling' in someone else's litigation... which deserves to be made unlawful. Unsurprisingly, the content of that value judgement has fundamentally changed, reflecting the radical development of society in general and of the legal system in particular over the last 700 years." The Court of Appeal concluded that it would be inappropriate for the Hong Kong courts to strike down an agreement on the grounds of maintenance or champerty in circumstances where mature commercial parties had chosen to arbitrate in a jurisdiction (the Netherlands) which does not recognise those concepts.

In light of these and other judicial pronouncements, as well as calls for consideration of this issue by the Hong Kong legal community, the Law Reform Commission established a sub-committee, chaired by Kim Rooney, to consider the use of third-party funding in arbitrations in Hong Kong and whether reform is needed. Their report is due to be published soon; indeed speculation is rife that it will be published in time for Hong Kong arbitration week in October. Of course we will have to see precisely what the sub-committee recommends, but there is certainly momentum towards reform.

In Singapore, third-party funding arrangements are normally unenforceable in both litigation and arbitration proceedings, subject to limited exceptions. In the 2007 case of Otech Pakistan Pvt Ltd v Cough Engineering Ltd [2007] 1 SLR (R) 989, the Court of Appeal concluded that the law of champerty applies to all types of disputes, whether the parties have chosen to refer them to the courts or to a private system like arbitration. The court observed that "the concerns that the course of justice should not be perverted and that claims should not be brought on a speculation or for extravagant amounts apply just as much to arbitration as they do to litigation."

The more recent decision of the Singapore High Court in Re: Vanguard Energy Pte Ltd [2015] SGHC 156 perhaps demonstrates a greater willingness on the part of the Singaporean judiciary to tolerate funding arrangements, although the decision was focused on funding in the context of insolvency proceedings under section 272(2)(c) of the Companies Act (Cap 50).

During a speech in August 2013, Chief Justice Menon observed that the growth of thirdparty funding in Asia and associated issues "will reach Asia" and called for appropriate regulation. In 2014 the Law Reform Committee of the Singapore Academy of Law prepared a report which concluded that litigation funding ought to be permissible subject to regulation. The sense is that the tide in Singapore is gradually turning.

The permissibility of third-party funding at the seat of arbitration is only part of the picture. Claimants considering using third-party funding would be well advised to consider whether it is permissible at the likely place of enforcement, in order to try to minimise potential difficulties at the enforcement stage. Among other potential issues, it is possible that a court might refuse to enforce a foreign award procured in circumstances where the claimant was funded by a third party, if doctrines of maintenance and champerty apply in that country, and the court concludes it would be contrary to public policy to enforce the award pursuant to Article V (2)(b) of the New York Convention.

Unfortunately, in a number of jurisdictions in Asia, the permissibility of third-party funding in arbitration is not expressly addressed in domestic legislation and the issue has not been tested in the local courts. India, Indonesia and Vietnam are among such countries. As a result, while it is right to say that the use of third-party funding in Asia is likely to grow, the level of growth, particularly in respect of regional disputes, is uncertain.

Originally published in Funding In Focus, November 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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