Supply and Demand: Third Party Funding in China

The healthy rise of third-party funding markets at the international level also draws the attention of Chinese financial markets, with the establishment of professional third party funders and their increasing pursuit of third party funding. However, an undeniable fact is that third party funding has still not moved to the center stage of the domestic litigation and arbitration market. The supporting environment for third party funding, both at the legislation level and practice level, is not mature enough.

In this article, we will only focus on the domestic dispute resolution environment and the demand for a step forward in this area.

RISING DEMAND FOR FUNDING IN THE PRC

1) From the perspective of claim holders

i . The increasing amount of litigation and arbitration cases

According to the Annual Report 2016 by the Supreme People's Court of the People's Republic of China (the SPC), during the whole year of 2016, the amount of cases accepted by the courts at all levels had exceeded 23 million. Cases resolved reached approximately 19.7 million, with the total dispute amount totaling Rmb4.98 trillion. According to the report publicly available on the SPC's website, the first half of 2017 saw a potential new round of growth in the number of cases accepted by all levels the courts as the number exceeded 14 million.

The area of arbitration has also seen a leap in the number of arbitration applications. As stated in the 2015 report on arbitration work in the PRC by the State Council Legislative Affairs Office, 244 arbitration commissions in the PRC had accepted a total number of 136,924 cases with an increase of 23,264 cases compared to the previous year. The total amount in disputes had reached Rmb411.2 billion with an increase of Rmb145.6 billion at the increase rate of 55% compared to the previous year.

ii . The rising costs for dispute resolution processes from the perspective of claim-holders

Litigation costs (excluding attorney fees)

In recent years, with the rising costs of litigation and the additional number of constraints being placed on corporate legal budgets, it is not surprising that the demand for an alternative way to finance legal matters has become increasingly higher.

Generally, the primary cost for claim holders would be the case acceptance fees with the related court. According to the Measures for the Payment of Litigation Fees (诉讼费用交纳办法) promulgated by the State Council in 2006, the standard for acceptance fees is as follows:

Schedule of case acceptance fee (currency: Rmb)

The 2006 version is the revision of the Measures on the Litigation Charges of People's Courts (人民法院诉讼收费办法) promulgated in 1989 by the SPC. We can easily find a modification that for dispute amounts lower than Rmb1,302,500, the new 2007 standard would charge less than the 1989 version, while for dispute amounts higher than this number, the 2007 standard would charge higher. This modification undeniably reduced the litigation cost for individuals as their dispute amount would generally not be as high as those of corporate entities. For example, if the dispute amount is Rmb100 million, the case acceptance fee for the first instance would be Rmb919,000. If the case goes to the appellate court, the acceptance fee in the second instance would be the same if the dispute amount remains unchanged.

Along with the development of economics and inflation in recent years, the amount in controversy in commercial affairs has been increasing steadily. According to the Supreme People's Court, Circular on Revising the Standards for the Jurisdiction of Higher People's Courts and Intermediate People's Courts over Civil and Commercial Cases at First Instance (最高人民法院关于调整高级人民法院和中级人民法院 管辖第一审民商事案件标准的通知) (the Circular), the Higher People's Court of Beijing, Shanghai, Jiangsu, Zhejiang or Guangdong shall have jurisdiction over a civil or commercial case of the first instance where the subject matter of the action has a value of not less than Rmb500 million. An intermediate people's court in the jurisdiction thereof shall have jurisdiction over a civil or commercial case of the first instance where the subject matter of the action has a value of not less than Rmb100 million. The Circular above also serves as evidence proving that the judicial institutions have also recognized the increasing trend in the controversy amount.

Arbitration costs (excluding attorney fees)

According to the PRC Arbitration Law (中华人民共和国仲裁法), institutional arbitration is the only legitimate choice under Chinese law as ad hoc arbitration is not yet allowed. While filing for application with arbitration institutions, the applicant must pay the arbitration fee following the regulations of certain arbitration institutions. The arbitration fee generally includes the case acceptance fee and the remuneration of the arbitrator(s). Taking CIETAC for example, it enacted fee schedules aiming at domestic and international arbitration respectively. Below is the fee schedule for international arbitration:

CIETAC Arbitration Fee Schedule I

The charging method and standard

According to Article 4 of the National Development and Reform Commission and Ministry of Justice, Measures for the Administration of Lawyers' Fees (国家发展和改革委员会、司法部律师收费管理办法) (the Lawyers' Fees Measures) effective in 2006, “the lawyers' fees shall be subject to government-guided pricing and market-regulated pricing”.

According to Article 5 of the Lawyers' Fees Measures, a law firm shall implement government-guided pricing for providing the legal services in legal matters including but not limited to civil cases. According to Article 11 and Article 13 of the Lawyers' Fees Measures, while handling any civil cases involving property relationship, if the client is still required to pay the attorney fee on a contingent basis after being informed of the governmentguided pricing, the law firm may charge fees on the basis of risk agency with a fee cap of 30% of the amount in dispute.

The year of 2014 witnessed a change in the area of government-guiding pricing. According to Section 4, Article 1 of the National Development and Reform Commission, Circular on Decontrolling the Prices of Some Services (国家发展和改革委员会关于放开部分服务价格的通知), apart from criminal cases, part of the civil cases, administrative cases, state compensation cases, other legal services by the law firm could be charged on a market-regulated basis.

Along with the lift of governmental restrictions on attorney fees, it is not surprising that the costs for engagement of outstanding legal services would rise accordingly in such a competitive market. China Elite once conducted a survey which provided a glimpse of the ever-rising service fees: the average revenue per lawyer at the top 30 Chinese firms was Rmb833,000 in 2014, which doubled that of the Beijing average of 410,000 in 2013 and quadrupled the national average of Rmb200,000 in that year.

iii . Demand for risk management

As noted above, attorney fees on a contingent basis is accepted under Chinese law. Unless the parties are confident with the result of the case in relation to property and have abundant cash flow, they would generally be inclined to choose the contingency fee arrangements as the attorney fee is coterminous with the proceeds from the case results which would encourage the attorneys to do their best. On the contingent basis, lawyers actually have shared part of the risks through sparing the parties investment before the winning result. However, with the increasing demand for risk management, the parties are not more satisfied with such a method as the arbitration/litigation fees also exert a heavy burden on them.

2) From the respective of investors

Along with the fast development of the Chinese economy, investors with abundant cash flow are seeking alternative capital outlets. Unlike the traditional volatile and unpredictable financial markets, the returns in the dispute finance industry generally do not correlate to the traditional markets. Therefore, it would not be surprising that dispute finance would attract more attention from these types of investors.

INADEQUATE SUPPLY FOR TPF IN THE PRC

In conjunction with the worldwide growth of TPF and the domestic market requirements noted above, entities providing dispute finance have begun to mushroom. For certain reasons, information publicly available about these companies is limited. This table below just list the basic information obtained publicly:

The DSLC was established through the cooperation of investors and legal professionals. The company is operated following the model of venture capital, namely, obtaining proceeds through risk sharing. An investment committee within the DSLC was constituted to assess each funding application with the professional evaluation opinions from external experts. Once accepted, the company will provide a whole-process management for the case to ensure funding security.

The sources of investment are coming from the shareholders. Until July, 2017, the company has completed its first-round financing, with the admission of development funds for small and medium-sized enterprises. By September, 2017, the company had funded 84 cases with a total amount in dispute of Rmb2 billion. The amount invested had exceeded Rmb11 million.

CONCLUSION

As analyzed above, with the ever-increasing demand for dispute financing, third party funding entities in Chinese market still have room to develop alongside the market's steady growth.

Written in October 2017

Mr. Chen Tong,

partner of V&T Law Firm,

specializes in dispute resolution.

Tel: +86 755 83026786

Email: [email protected]