Introduction

The world of international arbitration is demanding innovation. The COVID-19 pandemic has pushed the practice to adopt modern methods in a changing world. It comes with little surprise that the new expectations for innovative fee models and financing disputes calls for same attention. The Queen Mary Survey of 2021[1] has highlighted cost as one of the biggest concerns of arbitration users along with time. While there are many ways to reduce costs, and often there is a discussion on forgoing certain steps and submissions to minimize costs, this could be at the expense of comprising the depth of some cases, specifically regarding more complex cases such as construction cases which most often involves multiples submissions and involvement of various experts. Therefore, the arbitration practice needs to accommodate various options for funding disputes and managing costs since flexibility goes to the core of arbitration’s attractiveness as a form of dispute resolution.

In an ever-evolving environment where parties now have funding tools like Litigation Finance and Litigation Expense Insurance, the Outcome Related Fee Structures (ORFS) are rapidly becoming another method of choice for parties with meritorious claims but not enough finances for starting arbitration. Leading arbitration seats have embraced these new funding structures, and this is still a developing area.

This article reflects on the recent developments in ORFS and what is means for the future legal and arbitration practice.

What are ORFS?

The ORFS is an agreement where payment of the lawyer’s fee is conditional on the outcome. There could be various ways payment can be linked to outcome, depending on how the outcome is defined. Essentially, it gives flexibility to the clients and their lawyers to come up with different fee options. Generally, there are three types of ORFS: (i) Conditional fee agreement (CFA), (ii) Damages-based agreement (DBA) and the Hybrid Damages-based agreement (Hybrid DBA). Each is briefly explained below.

The CFA

Under a CFA, the client pays the lawyer the fees in the event of a successful outcome. This arrangement is sometimes called ‘No-win, No Fee’ where the lawyer does not get paid if the case is unsuccessful. Recently, the ‘No-win, Low-Fee’ models have also surfaced under this category where the client pays a reduced or discounted fee with an uplift in the event of a successful outcome. Conversely, it is also termed as ‘Win, more fees’.

The DBA

Under a DBA, the lawyer charges a payment upon a successful claim where such payment is calculated based on the damages recovered by the client, usually as percentage of the damages awarded.

Hybrid DBA:

Under a hybrid DBA, the lawyer receives legal fees for the legal service rendered along with a payment based on the outcome or damages awarded.

The recent developments in ORFS – Shifting gears

Traditionally, the common law rules of Maintenance and Champerty prohibited lawyers from entering into agreements providing for payment of lawyers’ fees only in the event of success. However, recognition of DBAs in the USA dates to 1853 and its use has become prevalent over the years. Other leading jurisdictions such as England and Wales, France and Canada also allow ORFs with certain exceptions and limitations. For example, in England and Wales, ORFS except for Hybrid DBAs are now allowed in both litigation and arbitration. Recently, leading jurisdictions in the Asia, the Singapore and Hong Kong have introduced major developments by allowing the use of ORFs in different extents.

Singapore, which historically prohibited the use of ORFS based on common law rules of Maintenance and Champerty, have now allowed the use of CFAs with the enactment of Singapore’s enactment of the Legal Profession (Amendment) Act 2022 on 4 May 2022 and the coming into force of the Legal Profession (Conditional Fee Agreement) Regulations 2022. The Singaporean CFAs regime allows for CFAs to be used in international and domestic arbitration, Singapore International Commercial Court Proceedings and related court and mediation proceedings. It also allows an uplift of fee imposing no cap or limit. Though the uplift fees are not recoverable in costs. Also, there are certain requirements imposed which include the CFAs to be in writing and five days ‘cooling-off’ period during which the parties can terminate the agreement.  The DBAs are still not allowed in Singapore.

In Hong Kong, the Legislative Council enacted the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Bill 2022 following the recommendations issued in December 2021 by the Hong Kong Law Reform Commission Sub-committee on Outcome Related Fee Structures for Arbitration. On 30 June 2022, the new Arbitration Ordinance setting out the framework for ORFS in Hong Kong was gazetted.[2] Main provisions relating the ORFS are not operational yet.

The Hong Kong OFRS regime goes one step further than the Singapore by allowing broad categories of OFRS which includes the CFAs, DBAs and Hybrid DBAs. The OFRS are however only allowed in arbitration and related proceedings (such as enforcement) in Hong Kong. In contrast to the CFA regime in Singapore, Hong Kong Bill caps the maximum CFA uplift fee at 100% of normal fees, and a cap of 50% of the DBA payments. However, like Singapore, it provides for non-recoverability of uplift fees or the DBA payments over the normal fees. Though it provides flexibility compared to Singapore’s rules by granting tribunals the power to award the uplift fees or percentage fees in exceptional circumstances.

To become competitive as an arbitration hub requires adaptability of changing needs of arbitration users where clients are increasingly looking for optimized fee arrangements based on cost sharing and outcome-based, coupled with funding schemes in some instances. The steps taken by Singapore and Hong Kong reinforces their continued status as the leading arbitration seats. Not only does these changes cater to the increasing demands of dispute resolution users for alternative fee structures but it also addresses issues of access of justice where parties with meritorious claims unable to fund their disputes can choose these alternative funding schemes and also potentially enhance efficiency in dispute resolution

Changing legal landscape – A future legal practice?

Under the ORFS, structures such as CFAs, DBAs and Hybrid DBAs have made their way in giving parties alternative fee arrangement options besides traditional pricing models. Other alternate fee arrangements such as fixed fee, blended rates and hybrid fixed fee and hourly structures have made the rounds in the legal practice before, however these engagement models are gaining traction due to new market realities that required further alignment interests between the various claim stakeholders – a pattern which seems to expand with third party funders who are providing claim monetisation offerings beyond the traditional financing schemes. The 2022 Wolters Kluwer 2022 Future Ready Lawyer Survey[3] highlights the top areas where legal departments expect the greatest change which include greater use of alternative fee arrangement which increased to 86% compared to the 78% in 2021.

Leading common law jurisdictions have identified the needs of the growing demand of the arbitration users and have endeavoured to overcome challenges relating to issues of maintenance and champerty rules, conflict of interest – and avoiding misuse of success fee models by laying down specific requirements, caps and limitations in varying degrees. Civil Law countries like France have also embraced OFRS, yet in some other civil law jurisdictions the OFRS still pose a challenge, such as the UAE where lawyers are prohibited to accept success fees due to reasons of public policy. Several jurisdictions are showing growing appetite for innovative legal engagement methods. Sometimes, this is done is through gradual steps and introduction through institutional rules rather than express provisions in law, such as the recent introduction of the Third-Party Funding provisions under the Dubai International Arbitration Centre Rules of 2022. Singapore and Hong Kong who long before introduced Third Party Funding Regulations, are pushing the envelope further with respect to the CFA and OFRS schemes respectively.  These provisions relating to CFAs in Singapore are compatible with its Third-Party Funding rules, thus opening up further options of using CFAs along with funding options. Sophisticated dispute resolution users are exploring combinations of OFRS and funding options, making lawyers their true funding partners by having skin in the dispute.

Conclusion

With the right legislation and safeguards in place to allow OFRS and innovative fee models in arbitration, arbitration can live up to market players’ expectations as an efficient flexible offering. The wider dispute resolution methods can benefit from a broader application of ORFS in litigation as well. The recent developments in the OFRS sphere in leading arbitration seats, is seeing the role of lawyers to be maturing into a true service partner beyond their traditional advisory status; national regulatory schemes will eventually follow. Arguably, it can be expected that law firms take an increasing entrepreneurial approach, have more skin in the game, and lead again the future of legal practice.

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[1] 2021 International Arbitration Survey: Adapting arbitration to a changing world (Queen Mary University of London and White & Case)

[2] Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Ordinance 2022 – Ordinance No. 6 of 2022, issued on 30 June 2022, available at https://www.gld.gov.hk/egazette/pdf/20222626/es1202226266.pdf.

[3] The 2022 Wolters Kluwer Future Ready Lawyer Survey: Leading Change Report (Wolters Kluwer, 2022).

By: Shadha Zawawi