Third-Party Funding Disclosure and Security for Costs in Asian Arbitrations: SIAC Rule 38 vs. Hong Kong Part 10A (Cap. 609)

Third-Party Funding Disclosure and Security for Costs in Asian Arbitrations: SIAC Rule 38 vs. Hong Kong Part 10A (Cap. 609)

The growth of third-party funding (TPF) in Asia has reshaped cross-border commercial litigation and international arbitration. Singapore and Hong Kong, the region's leading arbitral seats, have moved away from historical common law prohibitions against maintenance and champerty. Both legal systems now maintain active legislative and institutional frameworks that recognize litigation finance as a legitimate tool for risk management and access to justice.

However, the expansion of commercial dispute financing has turned transparency into a contentious tactical issue.

When a funded party initiates arbitral proceedings, the counterparty's procedural strategy often shifts toward securing two outcomes: full disclosure of the underlying funding arrangement and an immediate application for security for costs. The strategic friction centers on two distinct regulatory approaches.

While the Singapore International Arbitration Centre (SIAC) balances funding transparency through institutional rules under SIAC Rule 38, Hong Kong enforces mandatory statutory disclosure under Part 10A of the Arbitration Ordinance (Cap. 609).

Understanding how arbitral tribunals handle this disclosure alongside applications for security for costs is critical for corporate general counsels, investment committees, and international arbitration practitioners operating in the Asia-Pacific corridor.

Section 1: The SIAC Approach to TPF Disclosure

Under the SIAC Rules (Rule 38), the institution establishes a structured mechanism governing third-party funding, emphasizing conflicts of interest, case management, and costs allocation.

1. Mandatory Baseline Disclosure: Rule 38.1 and 38.2

Under SIAC Rule 38.1, a funded party must disclose the existence of any third-party funding agreement, as well as the identity and contact details of the third-party funder.

• Procedural Timing: Disclosure must be made in the Notice of Arbitration or the Response, or as soon as practicable after concluding a funding agreement during ongoing proceedings.
• Continuing Notification: Under Rule 38.2, the funded party has a continuing obligation to notify the tribunal, all opposing parties, and the SIAC Registrar of any subsequent changes to the funding agreement.

2. Tribunal Powers to Order Extended Disclosure: Rule 38.4

The arbitral tribunal is not limited to passive receipt of basic notice. Under Rule 38.4, the tribunal may:

• Order the verified disclosure of the existence and identity of the funder;
• Solicit the formal views of the parties regarding funding transparency; and
• Issue targeted disclosure orders concerning the funding arrangement, including details of the third-party funder's financial interest in the outcome of the dispute.

This rule allows the tribunal to evaluate whether a commercial funder holds a direct interest in the claim proceeds without requiring the disclosure of privileged work product or confidential legal advice.

3. Conflict Prevention and Statutory Sanctions: Rules 38.3, 38.6, and 38.7

• Conflict of Interest Restrictions (Rule 38.3): After the arbitral tribunal is formally constituted, a party is prohibited from entering into any third-party funding agreement that could give rise to a conflict of interest with any sitting arbitrator. If such a conflict emerges, the tribunal possesses express authority to direct the party to withdraw from the funding agreement.
• Cost Apportionment (Rule 38.6): The tribunal may take the existence of a third-party funding agreement into account when apportioning the costs of the arbitration in its final award.
• Sanctions for Non-Compliance (Rule 38.7): If a party fails to comply with its disclosure obligations or defies a procedural disclosure order, the tribunal may issue sanctions, award damages, or make adverse cost determinations against that party.

Section 2: Hong Kong's Statutory Regime Under Part 10A (Cap. 609)

In contrast to Singapore's institution-led approach under the SIAC Rules, Hong Kong embeds third-party funding disclosure directly into primary legislation.

1. The Statutory Disclosure Mandate: Sections 98U and 98V

The Arbitration Ordinance (Cap. 609), Part 10A governs dispute funding through statutory mandates rather than institutional discretion:

• Section 98U (Disclosure of Funding Agreement): If a third-party funding agreement is executed on or before the commencement of the arbitration, the funded party must give written notice of the fact that the agreement has been made and the identity of the third-party funder upon commencement. If the agreement is made after commencement, written notice must be submitted within 15 days of entering into the agreement.
• Mandatory Recipients: The written notice must be served concurrently on:
1. Every other party to the arbitration; and
2. The arbitration body (which includes the arbitral tribunal or, if the tribunal is not yet constituted, the administering arbitral institution such as HKIAC).
• Section 98V (Disclosure of Termination): If the third-party funding agreement terminates before the conclusion of the arbitration, the funded party must issue written notice of the termination to the same parties within 15 days of the termination taking effect.

2. The Hong Kong Code of Practice Requirements

Under Section 98P of Cap. 609, the authorized advisory body issued the Code of Practice for Third Party Funding of Arbitration:

• Capital Adequacy: Funders must maintain minimum access to capital of at least HK$20 million and demonstrate the capacity to satisfy debts across a 36-month operational horizon.
• Funder Duty to Remind: The Code requires the third-party funder to remind the funded party in writing of its continual obligation to disclose funding details under Sections 98U and 98V.
• Non-Interference with Counsel: Funders are prohibited from directing the conduct of the arbitration or causing legal counsel to breach their professional and ethical duties.

3. Legal Consequences of Non-Compliance: Section 98W

Under Section 98W of Cap. 609, a failure to comply with Part 10A or the Code of Practice does not, of itself, render the third-party funding agreement void or illegal.

However, non-compliance can be taken into account by the arbitral tribunal or a Hong Kong court in any relevant procedural decision, including adverse cost determinations, negative evidentiary inferences, or the evaluation of applications for security for costs.

Section 3: The Security for Costs Interplay

Once a funding agreement is disclosed, respondents frequently file an application for security for costs, arguing that the claimant lacks assets to satisfy an adverse costs award.

The critical legal question remains: Does the existence of a third-party funder automatically justify ordering security for costs?

1. The SIAC and Singapore Principle: Rule 38.5

The SIAC Rules clarify this issue directly. Under SIAC Rule 38.5:

• No Presumption of Impecuniosity: The rule explicitly provides that the disclosure and existence of a third-party funding agreement on its own shall not be taken as an indication of the financial status of a party.
• Commercial entities regularly seek non-recourse funding for liquidity management, balance-sheet hedging, and corporate risk mitigation rather than mere poverty or impending insolvency.
• The High Threshold for Security: Under Singapore law and SIAC practice, an applicant for security for costs must prove an independent, substantiated risk that a future adverse costs award will be uncollectable. The respondent must point to objective financial evidence, such as balance-sheet insolvency, ongoing liquidation proceedings, or the fraudulent dissipation of operational capital.

2. The Hong Kong Standard: Multi-Factorial Discretion

Arbitral tribunals seated in Hong Kong handle applications for security for costs under Section 56 of the Arbitration Ordinance (Cap. 609) and Article 24 of the 2024 HKIAC Rules:

• Relevant Factor, Not Determinative Ground: Hong Kong courts and seated tribunals hold that while the existence of third-party funding is a relevant factor, it is insufficient on its own to warrant an order for security for costs.
• The Arkin Considerations: Tribunals examine whether the claimant was created as an asset-less special-purpose vehicle (SPV) specifically to shelter the commercial funder from adverse cost exposure.
• The Role of Adverse Costs Indemnities and ATE Insurance: If the funding agreement contains an explicit contractual indemnity covering adverse costs, or if the funded claimant secures After-the-Event (ATE) legal expense insurance backed by an international insurer with a top-tier credit rating, tribunals routinely dismiss security applications. The ATE insurance policy provides sufficient security against non-payment.

3. Direct Jurisdiction Over the Funder

Neither the SIAC Rules nor Hong Kong's Arbitration Ordinance grants an arbitral tribunal the automatic jurisdictional power to order an external funder to directly pay security for costs into an escrow account.

Because the funder is not a signatory to the underlying arbitration agreement, the arbitral tribunal lacks in personam jurisdiction over it.

Consequently, tribunals issue security for costs orders against the funded claimant directly. If the claimant (or its backing funder) fails to deposit the ordered security within the prescribed window, the tribunal enforces compliance by staying the arbitral proceedings or dismissing the claim.

Section 4: Strategic Comparative Matrix: SIAC vs. Hong Kong

This comparative matrix outlines the regulatory frameworks governing third-party funding across both jurisdictions:

1. Primary Regulatory Anchor

• SIAC Framework: Institutional arbitration rules under SIAC Rule 38 (Part of the 7th Edition Rules).
• Hong Kong Framework: Primary statute under Arbitration Ordinance (Cap. 609), Part 10A, supplemented by the statutory Code of Practice and HKIAC Rules (Article 44 and 45).

2. Disclosure Trigger

• SIAC Framework: Mandatory disclosure of the existence of the agreement and the identity and contact details of the funder. Discretionary power under Rule 38.4 to order disclosure of the funder's financial interest.
• Hong Kong Framework: Mandatory statutory disclosure of the funding agreement's existence and the funder's full name. Terms of the funding agreement remain confidential unless ordered by the tribunal or required by law.

3. Timing and Notice Requirements

• SIAC Framework: Must be disclosed in the Notice of Arbitration or Response, or as soon as practicable upon concluding the agreement. Subsequent amendments require continuing notice.
• Hong Kong Framework: Strict statutory deadline. Notice must be served upon the commencement of the arbitration, or within 15 days of executing the funding agreement during ongoing proceedings. Termination also requires notice within 15 days.

4. Recipient Obligations

• SIAC Framework: Notice delivered to the Arbitral Tribunal, all other parties to the arbitration, and the SIAC Registrar.
• Hong Kong Framework: Notice delivered to each opposing party and the arbitration body (the tribunal or administering arbitral institution).

5. Presumption on Financial Impecuniosity

• SIAC Framework: Express statutory clarification under Rule 38.5 stating that the existence of funding does not indicate financial weakness.
• Hong Kong Framework: Settled jurisprudence confirming that funding does not create a presumption of insolvency; the applicant must independently prove risk of default.

6. Tribunal Discretion on Cost Allocation

• SIAC Framework: Under Rule 38.6, the tribunal may consider the funding arrangement when determining and apportioning costs in the final award.
• Hong Kong Framework: Under the Arbitration Ordinance and HKIAC Rules, tribunals take funding compliance and non-disclosure into account when assessing final cost awards.

Section 5: Risk-Management Checklist for Funded Parties

To secure non-recourse third-party funding in Singapore or Hong Kong without exposing the underlying claim to procedural disruption, corporate legal teams should follow this four-step checklist:

1. Verify Potential Arbitrator Conflicts Before Signing: Under SIAC Rule 38.3, entering into a funding agreement that creates a conflict of interest with an already appointed arbitrator can result in an order compelling withdrawal from the agreement. Always conduct conflict clearances between the funder, its investment committee members, and the appointed arbitral tribunal prior to finalizing the funding contract.
2. Calendar the 15-Day Statutory Hong Kong Notice Window: In Hong Kong-seated arbitrations, ensure that formal written notice disclosing the existence and identity of the funder is dispatched to all parties and the arbitral registry within 15 days of contract execution. Missing this statutory window creates regulatory exposure under Cap. 609 that respondents can exploit to seek cost sanctions.
3. Draft Narrow Financial Disclosure Protections: Under SIAC Rule 38.4, tribunals can order disclosure of the funder's financial interest. Ensure the litigation funding agreement contains clear confidentiality provisions stating that commercial funding rates, legal budgets, and pricing models remain privileged, restricting mandatory disclosures strictly to what the tribunal expressly directs.
4. Structure Adverse Costs and Security Protection In Advance: To defeat opportunistic applications for security for costs, require the commercial funder to provide a contractual indemnity for adverse costs within the master agreement. Pair this arrangement with an After-the-Event (ATE) insurance policy issued by a rated insurer. When an opponent moves for security for costs, presenting an active ATE policy typically satisfies the tribunal that an adverse costs award will be honored, preventing procedural delays.

 

Both Singapore and Hong Kong provide structured environments for funded international arbitrations. By maintaining disciplined compliance with SIAC Rule 38 and Hong Kong Part 10A, corporate claimants can secure capital while protecting their cases against procedural challenges.

 

Disclaimer: This article is for informational purposes only and does not constitute formal legal or professional arbitration or litigation funding advice.