Acting the part

The Private Funding of Legal Services Act is expected to come into force in the Cayman Islands in the very near future, having been approved by parliament in December 2020. The act will mark a significant development in the legal services industry, bringing certainty and clarity to the availability of alternative means of funding disputes in the jurisdiction.

The Cayman Islands is a leading global financial centre, serving as a hub for investment funds, trusts, insurance and reinsurance vehicles, and capital markets transactions. Cayman Islands companies account for around half of the 2,000 or so companies listed on the Hong Kong Stock Exchange, and for just under half of the Exchange’s market capitalisation. There are hundreds of other Cayman Islands companies listed on other major stock exchanges around the world.

Large commercial disputes, insolvencies and restructures inevitably follow financial activity on this scale, and the courts of the Cayman Islands regularly serve as a venue for matters that capture global attention. Over 129 days in 2017, the Grand Court heard the Ahmad Hamad Algosaibi & Brothers Company’s claim for US$9.2 billion arising from the collapse of an estimated US$1 trillion Ponzi scheme. More than 10 years after the Madoff fraud was uncovered, the contentious liquidations of several Cayman Islands domiciled Madoff feeder funds continue to wind their way through the appellate courts in search of recoveries for investors. More recently, the multi-billion dollar Abraaj Group was placed in liquidation by the Grand Court following allegations of mismanagement.

The impact of Covid-19 on the global economy is likely to drive an increase in the jurisdiction’s workload. From that perspective, the act arrives at a good time, not only for the impecunious but also for savvy litigants wishing to defray the costs and risks of pursuing good claims.

Prior to the act, the common law offences of champerty and maintenance had stymied the development of alternative funding arrangements. The public policy in favour of facilitating access to justice provided the basis for a series of decisions of the Grand Court by which it approved of "conditional fee agreements" between attorneys and their impecunious clients, whereby the client would pay the attorney’s usual fee plus an uplift only if successful. "Contingent fee agreements", whereby the attorneys are paid a percentage of any recoveries, were not permitted. Third party funding was generally considered impermissible outside of the company liquidation scenario (where the liquidator exercises a statutory power to sell company property, which includes claims) until 2017, when the Grand Court permitted such an arrangement between a funder and a well-heeled client. The common law position as a result was that the Grand Court could approve appropriately structured third-party funding arrangements on a case by case basis having regard to (among other things) the degree of control over the litigation exercised by the funder on one hand and the client on the other, potential prejudice to the defendant, the reasonableness of the profit potentially accruing to the funder, and the financial capacity of the funder itself.

The general expectation post 2017 was that third-party funding would become a common feature of the local litigation landscape. A number of established US and UK based funders, many of whom had already funded company liquidation claims, showed interest. The reality on the ground was much more tepid. The requirement to seek the Grand Court’s approval of such arrangements was (fairly) seen as clunky because approval could only be sought once the litigation had commenced and on notice to the defendant. The slowly developing The case law did not set clear parameters for acceptable funding arrangements, so there was the risk that the funder might invest significant resources getting a case off the ground only to have the arrangement rejected by the court. It also gave an opportunity for the defendant to glean the economic pressure points of the funder and claimant at the outset of the litigation and incorporate them into a defensive strategy. And the costs of a fiercely contested application for approval could change the economic viability of smaller claims.

The New Act

The new act will provide a straight-forward statutory framework for these funding arrangements, removing the barriers and uncertainty that existed previously, and making them much more attractive. The act adopts a laissez-faire approach to third party funding, similar to the approaches in the UK and Australia where initial concerns of rogue operators and unmeritorious litigation have proven to be misplaced.

With the introduction of the act, the legal position in the Cayman Islands will be as follows:

• Funding arrangements will be permitted in civil proceedings (including proceedings in the Financial Services Division of the Grand Court, which is the division that specifically caters for the jurisdiction’s financial disputes) and arbitration proceedings, but not in criminal proceedings and certain family law proceedings. The act will extend to pre-proceedings advice, where that advice is in anticipation of or in contemplation of proceedings.
• The criminal and civil offences of champerty and maintenance will be repealed, however laws regarding contracts that offend public policy are expressly preserved.
• Third party funding agreements will be permitted. These agreements must be in writing and comply with any prescribed requirements (as at the time of writing, no draft regulations have been published). The return to the funder must consist of either: the costs of the proceeding plus a further amount calculated by reference to the funder’s anticipated expenditure, or a percentage of the amount or the value of the property recovered in the proceedings. There will not be a cap on how much the funder is permitted to recover, and the sanction of the court will not be needed.
• "Contingency fee agreements" between Cayman Islands attorneys and litigants will be permitted. "Contingency fee agreements" for the purposes of the act are agreements where the remuneration payable to the attorney is wholly or partly contingent on a successful outcome in the proceeding, bringing under one umbrella the previously distinguished conditional and contingent fee agreements. In relation to a fee agreement that operates as a traditional conditional fee agreement, the success fee cannot be calculated by reference to the percentage of any award or property recovered in the proceedings, so practically this would usually be an uplift calculated by reference to the attorney’s normal fees. Any success fee component payable to the attorney cannot exceed 100 per cent of the attorney’s normal fees; in respect of money claims, a prescribed percentage (to be provided for in the yet to be published regulations – an initial draft circulated when the bill was first proposed provided for a figure of 33.3 per cent) of the amount awarded (excluding any awards for costs). In relation to fee agreements that are contingent fee agreements based on recoveries, the amount payable to the attorney cannot exceed a prescribed percentage (to be provided for in the yet to be published regulations) of the amount or value of the property recovered. These caps will keep attorney fees proportionate to both the work performed and the value of the underlying claim. A "contingency fee agreement" within those parameters does not need the approval of the court, however the court can approve a higher cap (having regard to the nature and complexity of the proceeding, and the expense or risk involved) of up to 40 per cent of the amount awarded or property recovered. The agreement must be in writing and provide the client with a 14-day cooling off period.

The act will give cabinet, in consultation with the chief justice of the Grand Court and the local legal practitioners body, a wide discretion to prescribe regulations in relation to both third-party funding and contingency fee agreements. At the time of writing, no draft regulations have been published, and we will wait to see them with interest. The act also clarifies a number of grey areas that had not been tested at common law. For example, the act provides that third-party funding can be obtained for pre-litigation advice, and for claims pursued in arbitration.

With the introduction of the Act, the Cayman Islands will stand apart from the other main offshore jurisdictions, where the position is not legislated for and the availability of litigation funding outside of the company liquidation context varies depending on common law development. Appropriately structured third-party funding is available in Bermuda and Jersey with the court’s approval, is generally not available in Hong Kong, and the position appears to be untested in the British Virgin Islands (albeit obiter judicial commentary is generally supportive).

This article was originally published by Litigation Funding on 15 February 2021.