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18 January 2018
The Grand Court of the Cayman Islands recently released its ruling in A Company v A Funder (unreported, November 23 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.
Like many other common law jurisdictions, the Cayman Islands applies 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 of the litigation proceeds. The origins of these torts are ancient. They were used as a tool of oppression by the wealthy and were developed at a time when the laws lacked due process and the judiciary lacked independence. These ancient torts fetter modern-day litigants' ability to use any form of litigation funding in the absence of legislative intervention or permission by the court.
However, unlike other jurisdictions, the Cayman Islands did not abolish or otherwise temper 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 were 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 permitting agreements that would otherwise offend the torts.
The business of litigation funding is thriving in many other jurisdictions across the world. Australia, the United States and the United Kingdom 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 favourable approach to appropriately formulated third-party litigation agreements.
While litigation funding in its various forms was formerly associated only 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 associated 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.
The plaintiff was a well-resourced Korean company that operated internationally. It was the victim of a complex fraud and obtained a New York arbitration award in its favour against the fraudsters. The fraudsters, unsurprisingly, did not comply with the terms of the award, but instead dispersed the proceeds of the fraud globally.
The plaintiff entered into a funding agreement with a UK-based commercial litigation funder, by which the funder provided financing and 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 worldwide. 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 a 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 different historical context).
What an appropriately formulated funding agreement is 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 for protecting its investment and maximising returns on 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 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."
While the door has been opened, a plaintiff which 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).
It is believed that any future applications on this topic before the Grand Court will see the principles further developed. However, the door to third-party litigation funding is now open and will remain so.
For further information on this topic please contact Nick Hoffman or Lachlan Greig at Harney Westwood & Riegels' Grand Cayman office by telephone (+1 345 949 8599) or email (firstname.lastname@example.org or email@example.com). The Harneys website can be accessed at www.harneys.com.
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