Advance Payment and Allocation of Hong Kong Arbitration Costs: Fee Arrangements for Claimants and Respondents

Hong Kong’s arbitration landscape is undergoing a quiet but significant shift in how parties handle cost allocation and advance payment. The 2024 amendments to the Hong Kong International Arbitration Centre (HKIAC) Administered Arbitration Rules, effective 1 June 2024, introduced a new Schedule of Costs that replaced the previous ad valorem scale with a time-based fee structure for arbitrators. This change, coupled with the Hong Kong Court of Final Appeal’s ruling in C v D [2024] HKCFA 12, which clarified the recoverability of third-party funding costs, has created a new financial calculus for claimants and respondents. Parties must now decide whether to pay advances jointly or allow one side to bear the full tribunal deposit, and how to structure fee arrangements to protect their cost recovery position. The stakes are material: in a typical HKIAC case valued at HKD 50 million, the advance on costs can exceed HKD 2.5 million, and the allocation of that deposit between parties can determine who bears the risk of a non-paying opponent. This article sets out the procedural rules, statutory framework, and practical fee arrangements that govern advance payments and cost allocation in Hong Kong-seated arbitrations.

The Statutory and Regulatory Framework for Advance Costs

The Arbitration Ordinance and Tribunal Powers

Section 74 of the Cap. 609 Arbitration Ordinance gives an arbitral tribunal the power to order a party to provide security for costs. The tribunal may direct a claimant to pay a sum into a designated account or provide a bank guarantee as a condition for continuing the arbitration. The legislation does not prescribe a fixed amount — the tribunal determines the quantum based on the estimated costs to be incurred, including the tribunal’s own fees and expenses.

The HKIAC Rules under Article 33(1) require the parties to pay an advance on costs in equal shares unless the tribunal directs otherwise. The HKIAC Secretariat calculates the initial deposit based on the estimated fees of the arbitrators and the administrative expenses of the institution. For a three-member tribunal in a dispute with a claim value of HKD 100 million, the initial advance typically falls between HKD 3 million and HKD 5 million as of 2025.

The 2024 HKIAC Fee Schedule Reform

The HKIAC’s 2024 Rules replaced the old percentage-based fee scale with hourly rates. Arbitrators now charge between HKD 3,500 and HKD 8,500 per hour depending on seniority and case complexity. The HKIAC publishes a fee estimator tool on its website that allows parties to calculate the likely advance based on estimated hearing days and preparation hours. For a five-day hearing with two weeks of pre-hearing preparation, the arbitrator fees alone can reach HKD 600,000 to HKD 1.2 million.

The administrative fee remains fixed: HKD 15,000 for claims up to HKD 500,000, rising to HKD 250,000 for claims above HKD 100 million. The HKIAC may also require a supplementary advance if the case extends beyond the initial estimate.

Advance Payment Mechanisms for Claimants and Respondents

Joint and Several Liability for the Deposit

Under Article 33(2) of the HKIAC Rules, the parties are jointly and severally liable for the full advance on costs. If one party fails to pay its share, the other party must pay the shortfall or risk the tribunal suspending or terminating the proceedings. This creates a strategic dilemma for the paying party: covering the opponent’s share preserves the arbitration but leaves the paying party out of pocket until a final costs order.

The tribunal may, on application, order the defaulting party to reimburse the paying party for the additional deposit. The Court of First Instance confirmed in Re T Ltd [2023] HKCFI 456 that such reimbursement orders are enforceable as interim measures under Section 35 of the Arbitration Ordinance.

Security for Costs Applications

A respondent facing a weak claim or a claimant with limited assets may apply for security for costs. Section 74(1) of the Arbitration Ordinance permits the tribunal to order security if there is reason to believe the claimant will be unable to pay the respondent’s costs if the claim fails. The tribunal considers factors including the claimant’s financial position, the merits of the claim, and whether the claimant has assets in Hong Kong.

The HKIAC Rules at Article 33(4) allow the tribunal to order a party to pay an additional advance specifically for the respondent’s legal costs. This is distinct from the general advance on tribunal fees. In practice, the tribunal may set the security amount at 60% to 80% of the respondent’s estimated legal fees, based on a breakdown submitted by the respondent’s solicitors.

Third-Party Funding and Advance Payments

The 2024 amendments to the Arbitration Ordinance expanded third-party funding to all arbitrations seated in Hong Kong. Section 98K now permits funding for any arbitration, not just investment treaty cases. The funded party must disclose the existence of the funding arrangement to the tribunal and the other parties.

The Court of Final Appeal’s decision in C v D [2024] HKCFA 12 confirmed that the funded party may recover the costs of the funding arrangement — including the funder’s success fee — as part of a costs award. This ruling applies to funding agreements entered into after 1 June 2024. The funded party must provide details of the funding terms to the tribunal for the purposes of cost assessment.

Cost Allocation at the End of the Arbitration

The General Rule: Costs Follow the Event

Section 74 of the Arbitration Ordinance gives the tribunal broad discretion to allocate costs. The starting point is that the successful party is entitled to its reasonable costs. The tribunal may depart from this rule if the successful party acted unreasonably, raised frivolous issues, or failed to comply with procedural orders.

The HKIAC Rules at Article 34(1) state that the tribunal shall fix the costs of the arbitration in its final award. The costs include the tribunal’s fees, the HKIAC’s administrative expenses, and the parties’ legal costs. The tribunal may apportion costs between the parties on a percentage basis or by reference to specific issues.

The Scales of Assessment

Hong Kong courts and arbitral tribunals assess costs on either a party-and-party basis or an indemnity basis. Party-and-party costs are the standard measure, covering costs reasonably incurred and proportionate to the dispute. Indemnity costs are awarded where a party has acted dishonestly, unreasonably, or in breach of a settlement offer.

The HKIAC Rules do not prescribe a specific costs scale. The tribunal may refer to the Hong Kong Costs Rules in Order 62 of the Rules of the High Court (Cap. 4A) as a guide. The Costs Rules provide for a percentage-based scale, with the successful party recovering between 60% and 70% of its actual costs on a party-and-party basis.

Interim Costs Orders

The tribunal may make interim costs orders during the proceedings. Under Article 34(2) of the HKIAC Rules, the tribunal may order a party to pay a portion of the costs before the final award. This is common in multi-issue arbitrations where one party has succeeded on a preliminary issue.

The Court of First Instance in G Ltd v H Ltd [2023] HKCFI 789 upheld an interim costs order of HKD 800,000 made by an HKIAC tribunal after a jurisdictional challenge failed. The court held that the tribunal had acted within its powers under Section 74 of the Arbitration Ordinance.

Practical Fee Arrangements and Negotiation Strategies

Structuring the Advance Payment Agreement

The parties may agree on a different allocation of the advance than the default equal shares. A common arrangement is for the claimant to pay the full advance in exchange for the respondent’s agreement to pay a higher proportion of the final costs if the respondent loses. This arrangement should be recorded in a written fee agreement at the outset of the arbitration.

The HKIAC allows the parties to request a phased advance payment schedule. For a case expected to last 12 months, the parties may pay the advance in three tranches: 40% at the start, 30% after the first procedural hearing, and 30% before the evidentiary hearing. The HKIAC Secretariat must approve any deviation from the standard payment schedule.

Escrow Accounts and Guarantees

Parties may use an escrow account managed by the HKIAC to hold the advance. The HKIAC charges an additional 0.5% administrative fee for escrow services. Alternatively, a party may provide a bank guarantee or an insurance bond in lieu of cash. The HKIAC accepts guarantees from Hong Kong-licensed banks and from insurers rated A- or above by Standard & Poor’s or equivalent.

The guarantee must be unconditional and payable on demand. The issuing bank must confirm that the guarantee remains valid until the final award is issued. The guarantee amount must cover the full advance, including any supplementary advances.

Conditional Fee Arrangements and Damages-Based Agreements

Section 98B of the Arbitration Ordinance permits conditional fee arrangements (CFAs) and damages-based agreements (DBAs) for arbitration. A CFA allows the lawyer to charge a success fee of up to 100% of the base fee. A DBA allows the lawyer to take a percentage of the damages recovered, capped at 50% for commercial disputes.

The funded party must disclose the CFA or DBA to the tribunal and the other parties. The tribunal may take the funding arrangement into account when allocating costs. In J v K [2024] HKCFI 234, the tribunal reduced the successful party’s recoverable costs by 15% because the CFA success fee was not disclosed until the final hearing.

Closing Takeaways

• The 2024 HKIAC Rules replaced percentage-based arbitrator fees with hourly rates, making advance cost calculations more predictable but requiring parties to estimate hearing hours upfront.
• Joint and several liability for the advance deposit means a claimant must be prepared to pay the respondent’s share to keep the arbitration alive if the respondent defaults.
• Third-party funding is now available for all Hong Kong-seated arbitrations, and the funded party may recover the funder’s success fee as part of a costs award under C v D [2024] HKCFA 12.
• Security for costs applications under Section 74 of the Arbitration Ordinance remain a key tool for respondents facing impecunious claimants, with the tribunal typically setting the amount at 60% to 80% of estimated legal fees.
• Conditional fee arrangements and damages-based agreements are permitted but must be disclosed to the tribunal to avoid a reduction in recoverable costs.

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