Regulation

Overview

Is third-party litigation funding permitted? Is it commonly used?

Third-party litigation funding agreements are not commonly used in the Cayman Islands, except when the plaintiff (or counterclaimant) is a company in official liquidation. This is because, outside the context of an official liquidation, they are void for illegality on the grounds of maintenance and champerty. Maintenance is the giving of assistance or encouragement to a litigant by someone without an interest in the proceedings or any legally recognised motive. Champerty is a form of maintenance by which assistance is provided in consideration for a share of the proceeds. Champerty and maintenance (which is also a tort) remain offences under the common law of the Cayman Islands, although there have been no prosecutions in the jurisdiction for either offence. This contrasts with the position in England, where both offences were abolished by statute in 1967. See, generally, in this regard Quayum v Hexagon Trust Company (Cayman Islands) Limited [2002] CILR 161.

Third-party litigation funding is, however, common, and has been judicially endorsed on many occasions, in the context of litigation brought by Cayman Islands companies in official liquidation. This is because liquidators have a statutory power to sell the ‘fruits of an action’ to a third-party funder, and the court has recognised that the exercise of this power constitutes a ‘special statutory exemption’ conferring immunity on what would otherwise be a prima facie champertous agreement. The same principles should apply to an action brought in Cayman by a foreign company in liquidation where the foreign liquidator or trustee has sold the fruits of the action pursuant to a similar statutory power of sale, although we are not aware of any case in which this issue has been considered by the Cayman court.

The exercise of a liquidator’s power to sell the fruits of an action is subject to the approval of the court and to various restrictions.

In particular, it is only possible for a liquidator to enter into a third-party litigation funding agreement in respect of claims that vest in, and are brought in the name of, the company. He or she cannot do so in respect of statutory claims that vest in him or her as liquidator (such as preference claims), because those claims do not form part of the company’s property and any assignment of the liquidator’s fiduciary power in that regard would be contrary to Cayman Islands public policy.

Further, the Cayman court will not permit a liquidator to enter into a third-party litigation funding agreement that provides the third party with the right to control or interfere with the litigation. Any such agreement would fall outside the scope of the ‘special statutory exemption’ and would therefore be void for illegality on the grounds of maintenance and champerty. However, an outright sale of a cause of action by an official liquidator, by way of legal assignment, where the price is expressed to be a percentage of the proceeds of the action, is a valid exercise of the liquidator’s statutory power of sale, provided that it is sanctioned by the court. See, generally, in this regard In the Matter of ICP Strategic Credit Income Fund Limited [2014 (1) CILR 314].

There have historically been relatively few arbitrations in the Cayman Islands, although the Arbitration Law has recently been re-enacted to encompass the UNCITRAL Model Rules with a view to encouraging it. Accordingly, the question whether the common law principles of maintenance and champerty apply to arbitration proceedings has not been considered by the Cayman court. It is likely, however, that the Cayman court would follow the decision of Sir Richard Scott VC in Bevan Ashford v Geoff Yeandle [1999] 2 Ch 239, in which it was held that the doctrines of maintenance and champerty did apply to arbitration proceedings. In that case, it was held that a conditional fee agreement in relation to arbitration proceedings that would otherwise have been unenforceable would not be declared invalid since the public policy objections to maintenance and champerty had been removed in that jurisdiction. However, in the Cayman Islands, the public policy objection has not yet been overruled by relevant legislation, so it is likely that third-party litigation funding in relation to an arbitration (unless used by a liquidator with court sanction) would be unenforceable. Given the relative infrequency of arbitrations in the Cayman Islands, we have confined our answers to the following questions to litigation proceedings.

Restrictions on funding fees

Are there limits on the fees and interest funders can charge?

There is currently no statutory limit on such fees or interest, nor is there any firm judicial guidance in this regard.

However, as noted above, a liquidator requires the court’s sanction to sell the proceeds of a claim pursuant to a third-party litigation funding agreement (see question 1). To obtain that sanction, he or she will need to satisfy the court that (among other things) he or she has taken reasonable care to obtain the best price available for the claim in the circumstances (see, for example, In the Matter of Trident Microsystems (Far East) Limited [2012] (1) CILR 424). The court will ordinarily expect the liquidator to have sought funding proposals from the stakeholders in the liquidation, and potentially also from third-party funders, and in so doing to have satisfied him or herself that the proposed funding terms are the best available in the circumstances. To the extent that there are competing funding proposals, this will necessarily operate to limit the amount of fees and interest that are charged. But even if the proposed funding agreement represents the best or only terms that were offered or that the liquidator was able to negotiate, the approval of the agreement remains a matter for the court’s discretion based on the facts and circumstances of the case, and the court may direct the liquidator to explore alternative funding options if it regards the proposed fees or interest as excessive.

Specific rules for litigation funding

Are there any specific legislative or regulatory provisions applicable to third-party litigation funding?

Not currently, but a draft bill has been circulated in respect of a law to regulate the private funding of litigation (the draft bill). If a law was enacted in the form of the draft bill, it would (among other things) repeal any offences under the common law of maintenance and champerty, and impose (as yet unspecified) limits on the amount payable to a third-party funder.

Progress with the draft legislation has, however, been slow and it is unclear whether the bill will proceed, at least in its current form.

Legal advice

Do specific professional or ethical rules apply to lawyers advising clients in relation to third-party litigation funding?

Not currently. The draft bill proposes that no cause of action may be wholly or partially assigned by the client to the attorney who is acting for him or her.

Regulators

Do any public bodies have any particular interest in or oversight over third-party litigation funding?

At present, consideration of third-party funding lies in the hands of the judges, both as a result of the Quayum line of cases and, in insolvency proceedings, as a result of section 110(2)(a) of the Companies Law (2016 Revision), which requires official liquidators of a company to obtain the court’s approval of any such arrangement undertaken on behalf of the estate.