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16 November 2017
In a recent decision, the Royal Court of Guernsey considered, for the first time in open court, the issue of whether an agreement with a third party to fund litigation would be void as a matter of Guernsey law on the basis that it was champertous.
It was successfully argued that a third-party funding arrangement between administration managers appointed under the Protection of Investors (Administration and Intervention) (Bailiwick of Guernsey) Ordinance 2008 and Manolete Partners PLC was valid under Guernsey law. Lieutenant Bailiff Hazel Marshall's judgment provides valuable guidance as to the contractual provisions that should be considered when third-party funding takes place.
The case related to two companies registered in Guernsey: Providence Investment Funds PCC Limited (PIF) and Providence Investment Management International Limited (PIMIL), placed in administration management by order of the Royal Court on August 9 2016. Philip Bowers, Alexander Adam and Andrew Isham of Deloitte LLP were appointed as their joint administration managers. Subsequently, the administration managers were appointed as joint liquidators of certain other companies that formed part of the Providence group. The demise of the Providence group was widely reported in the local and national media.
The administration managers, believing that there was a good case that the auditor of PIF and PIMIL had negligently failed in its duties, took the view that there would be no satisfactory solution to the matter without litigation. Unable to fund the litigation themselves, they looked at potential sources of third-party funding, which might enable them to issue proceedings against the auditor in compliance with their duty to act in the best interests of the creditors of PIF and PIMIL (most notably investors).
An agreement was drawn up between the administration managers and Manolete, a UK-based company specialising in insolvency litigation funding. The agreement was entered into on a conditional basis, subject to the court's approval of its terms.
The lieutenant bailiff's judgment considers the common law doctrines of maintenance and champerty:
Both maintenance and champerty are prohibited as a matter of public policy at common law on the basis that, should litigation be conducted for personal gain, champertous maintainers may be tempted to inflate damages, suppress evidence or influence witnesses.
Recently, certain exceptions to maintenance and champerty have been made in the name of improving or facilitating access to justice, particularly in the field of insolvency. In particular, the lieutenant bailiff referred to comments of Jones J in the Cayman Islands case In the Matter of ICP Strategic Credit Income Fund Limited and ICP Strategic Credit Income Master Fund Limited,(1) which she described as "well-established and unexceptionable expressions, in many modern jurisdictions, of the limits of the doctrine of champerty in a liquidation context", namely that:
However, the lieutenant bailiff sounded a note of caution in emphasising that Jones's judgment could not be taken as a general account of principles applying in Guernsey law.
The lieutenant bailiff's judgment clarifies the extent to which developments in English law in respect of maintenance and champerty will be followed in Guernsey. It clarifies that, in principle, Guernsey law will permit the assignment of a cause of action for value by a liquidator, and will also permit the entering into of a litigation funding agreement, notwithstanding the fact that maintenance and champerty are facets of Guernsey law.
The judgment also clarifies the key principles that the court will consider when deciding whether a third-party funding agreement amounts to maintenance or is champertous. The lieutenant bailiff held that there were two questions for the court to decide in respect of this application:
Is litigation funding appropriate?
The court followed the English case In re Longmeade Limited (in liquidation),(2) which held that the liquidators in that case (the lieutenant bailiff having accepted that the court's jurisdiction could be expected to operate on similar principles as with administration managers) should take the following matters into consideration when deciding whether to seek litigation funding:
On the basis that the administration managers appeared to have given proper consideration to such factors and that the decision to enter into a litigation funding agreement with Manolete was one which a reasonable administration manager could properly have made, the lieutenant bailiff was satisfied that the decision to enter into the litigation funding agreement was one which a reasonable administration manager could properly have made.
Is agreement champertous?
In order to determine whether the litigation funding agreement is champertous, the court will look at the amount of control that the litigation funder has over the conduct of the litigation. The relevant provisions taken into account by the court in this case were that:
The court held that none of the above amounted to control of operational decisions by Manolete. The most that could be said was that the provisions of the contract that required the joint administrators to follow their advocates' advice might constrain their decision making; however, the court held that this was perfectly reasonable and did not amount to control in any practical sense, but would in fact operate to prevent the administration managers from taking any ill-advised steps during the conduct of any litigation.
This case offers a precedent for future litigation funding agreements in Guernsey in an insolvency context. Notwithstanding the fact that a litigation funding agreement is in the funder's standard form (and may even be governed by English law), provided that it does not give the funder what could be seen as control over proceedings, it may be enforceable under Guernsey law.
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