The Grand Court of the Cayman Islands recently released its ruling in A Company v A Funder (unreported, 23 November 2017, Justice Segal).
The Grand Court’s ruling represents a significant development for the jurisdiction, opening the door to third party funding of litigation in the Cayman Islands.
Harneys is proud to have acted for the applicant and to be at the forefront of this developing area of law in the Cayman Islands. The Harneys team comprised Nick Hoffman, James Noble and Lachlan Greig.
Barriers to litigation funding in the Cayman Islands: the torts of champerty and maintenance
Like many other common law jurisdictions, the Cayman Islands received into its laws the English law torts of maintenance and champerty.
Maintenance is the act of giving assistance or encouragement to a party to litigation by a person who has no interest in the outcome, or any motive recognised by law as justifying such interference. Champerty is an aggravated form of maintenance because the assistance or encouragement is given in exchange for a share in the proceeds of the litigation. The origins of these torts are ancient and developed at a time where the laws lacked due process, and the judiciary lacked independence, and were used as a tool of oppression by the wealthy. These ancient torts fetter the ability of modern day litigants to utilise any form of litigation funding in the absence of legislative intervention or sanction by the court.
Unlike other jurisdictions however, the Cayman Islands had not abolished or otherwise tempered the effect of the torts through legislative intervention. The Cayman Islands Law Reform Commission released a discussion paper in 2015 with a view to promoting legislative reform, but with no progress made thereafter. Minor in-roads had been made by a series of Grand Court decisions that permitted impecunious claimants to enter into conditional fee agreements with Cayman Islands attorneys. The public policy of facilitating access to justice by impecunious claimants was said to justify sanctioning agreements that would otherwise offend the torts.
The business of litigation funding is thriving in many jurisdictions
The business of litigation funding is thriving in many other jurisdictions across the world. Australia, the U.S. and the U.K. have well developed and sophisticated markets for litigation funding. Hong Kong recently changed its laws to permit third party funding in arbitration (although, not yet, in litigation). In recent cases in Bermuda and Jersey, the courts have approved third party funding in the absence of legislative intervention, a judicial recognition of the modern tide. While yet to be tested in the British Virgin Islands, judicial obiter suggests a favorable approach to appropriately formulated third party litigation agreements.
While litigation funding in its various forms was formerly only associated with facilitating access to justice by impecunious claimants, businesses operating in the modern commercial environment are looking for new ways to manage the costs and risks association with litigation, while continuing to expend capital on core business requirements and investment (rather than legal bills). Third party litigation funding can fulfil that objective and the demand for litigation funding is on the rise.
A Company v A Funder: The Grand Court opens the door
The plaintiff is a well-resourced Korean company that operates internationally. It was the victim of a complex fraud and obtained a New York arbitration award in its favor against the fraudsters. The fraudsters, unsurprisingly, did not comply with the terms of the award but instead dispersed the proceeds of the fraud across the world.
The plaintiff entered into a funding agreement with a U.K based commercial litigation funder, by which the funder provided financing and also its specialist expertise in asset tracing. While the plaintiff was capable of funding the litigation itself, it sought funding from the commercial funder with a view to managing the risk and costs typically associated with litigation.
With the benefit of the funding, the plaintiff commenced proceedings in jurisdictions across the world. Discovery in proceedings in New York led the plaintiff to trace assets to the Cayman Islands.
Before commencing proceedings for the recognition of its arbitral award in the Cayman Islands and subsequent enforcement against the relevant assets by way of freezing order, the plaintiff sought a declaration from the Grand Court to the effect that the funding agreement it had entered into was lawful, and that the commencement of legal proceedings in the Cayman Islands using the funds provided under the funding agreement would not be unlawful by reason of the torts of champerty and maintenance.
The overarching argument advanced by the plaintiff was that an appropriately formulated third party funding agreement would not corrupt public justice and the integrity of the litigation process (public policy objectives to which the torts of champerty and maintenance were originally directed towards ensuring, albeit in a very different historical context).
What will be an appropriately formulated funding agreement depends on the surrounding circumstances of the particular agreement. The risk to public justice and the integrity of the litigation process in the context of a modern commercial environment is that the funder’s prospects and motivation of protecting its investment and maximizing returns upon a successful outcome may tempt the funder to interfere with the litigation process improperly.
The Court was guided by the Cayman Islands cases that had considered conditional fee agreements with attorneys and also the assistance provided in the case law of other common law jurisdictions, particularly Bermuda and Jersey. The Court set out the following key principles to be considered when determining whether a funding agreement might pose a public policy risk:
- The degree of control that the funder has over the conduct of the litigation. The Court recognized that there was a fair balance to be struck in order to accommodate the funder’s legitimate financial interest in the outcome of the litigation.
- Related to the concept of control, the ability of the funder to terminate the funding agreement at will or without reasonable cause. The Court’s concern here is to ensure that termination rights of the funder cannot be used as an indirect method of exerting control over the funded party.
- The funder’s rights to instruct the attorneys acting in the litigation (again, another element of control).
- Potential prejudice to the defendants if the claim fails. There is a risk of abuse if the funder is not obliged to meet any adverse costs order against the funded party, because the funder may pursue, or require the funded party to pursue, an aggressive strategy free of the downside risk of that strategy. There is also the potential prejudice to the defendant if the funded party cannot pay the costs order.
- The profit or premium to the funder under the funding agreement. The risk is greater where the funded party receives little benefit from a successful outcome in the litigation.
- Whether the funder is a professional funder and whether it is regulated.
The Court concluded that:
The principles outlined above apply to ensure that any such funding must not have a tendency to corrupt public justice and to protect the integrity of the litigation process in this jurisdiction. Provided that these principles are respected and these important policy goals are achieved then commercial funding of litigation, which can promote access to justice, should not be objectionable or subject to enhanced requirements or restraints… Cayman has an important, world-class court system and litigation culture and there is no reason why responsible, properly regulated commercial litigation funding undertaken in accordance with the principles I have set out should not have a place in this jurisdiction.
The future of litigation funding in the Cayman Islands
While the door has been opened, a plaintiff who seeks to commence litigation in the Cayman Islands with funds provided under a funding agreement will need to seek the Court’s approval of the particular agreement in question. The Court indicated that any future application should be on notice to the Attorney General and that its views were necessarily preliminary (the application had been brought on an ex parte basis given the nature of the relief that would subsequently be sought against the fraudsters; accordingly the Court did not have the benefit of any contradictor).
In the authors’ view, any future applications on this topic before the Grand Court will see the principles further developed, however it is safe to say that the door to third party litigation funding is now firmly open and will remain so.