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The Changing Landscape of Litigation Funding in the Cayman Islands

February 2020 Sarah McLennan

The litigation funding landscape in the Cayman Islands is changing. Whilst maintenance and champerty are still both crimes and torts, draft legislation has been prepared which would abolish them and permit funding. In the meantime, the Caymanian judiciary has acknowledged that, provided adequate protections are in place, funding can facilitate better access to justice, and has blessed different funding arrangements.

Maintenance involves the procurement by direct or indirect financial assistance of another person to institute or carry on or defend civil proceedings without lawful justification. Champerty is an aggravated form of maintenance related to the support of litigation by an unrelated third party in return for a share of the proceeds. These doctrines were developed at common law as safeguards to prevent frivolous litigation and the corruption of the public justice system through the meddling of unrelated parties. In modern times, as the legal profession developed and procedural rules improved to better protect the integrity of the justice system, several common law jurisdictions (including England and Wales) abolished the crimes and torts of maintenance and champerty.

In the Cayman Islands, the courts recognise that the common law must evolve to meet the needs of society. In A Company v A Funder (unreported, 23 November 2017), despite the continued existence of champerty and maintenance offences, the Grand Court welcomed litigation funding with open arms. The Grand Court confirmed that commercial funding of litigation is not necessarily contrary to public policy. On the contrary, third party litigation funding may promote access to justice and have an important role to play in the modern justice system. Segal J noted that:

“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 court held that, as a matter of principle, a funding agreement will not be unlawful by reason of maintenance and champerty if it does not have a tendency to corrupt public justice. Whether or not an agreement had such a tendency would depend on a number of features, including:

  • The extent to which the funder controls the litigation.
  • The ability of the funder to terminate the funding agreement at will or without reasonable cause.
  • The level of communication between the funded party and the solicitor.
  • The prejudice likely to be suffered by a defendant if the claim fails.
  • The extent to which the funded party is provided with information about, and is able to make informed decisions concerning, the litigation.
  • The amount of profit that the funder stands to make.
  • Whether or not the funder is a professional funder, and is regulated.

The court needs to give sanction but, provided that the agreement, taking into account the factors above, does not corrupt public justice by giving the funder control over the litigation, the agreement should be sanctioned. Given that a sophisticated funding environment has developed in other common law jurisdictions, this should now be possible in Cayman.

Liquidators have the benefit of a statutory exception when funding is sought to fund a claim that vests in the company. As liquidators have the right to sell the fruits of an action, they can effectively do so to a third party funder by letting them take a share in any proceeds. The right to do this is subject to court approval, and to various restrictions. Only claims that are brought by the liquidator on behalf of the company can be funded this way, not claims that vest in the liquidator and arise soley because of their appointment (like preference and wrongful trading claims, for example). The court expects the liquidator to take reasonable care to obtain the best price and, as to be expected, the funder is not permitted to interfere with the litigation.

Litigation funding, of course, comprises other products and means of funding. After the event (ATE) insurance is permitted, yet seems to be rarely used at present.

Contingency fees are still not permitted in the Cayman Islands, and although the use of conditional fee agreements (CFAs) is allowed, they are rarely used and require the court’s sanction.

The Private Funding of Legal Services Bill 2015 permits contingency fees and CFAs save in respect of criminal, quasi-criminal and family proceedings. Sanction is not required, provided that statutory limits placed on fees, either on a percentage of recoveries or uplifted hourly rate, are not exceeded. If the uplift exceeds the statutory limit, court approval is required.

Whereas, formerly, claims with merit may not have been able to be pursued in Cayman due to a lack of funding, the potential to access third party funding is likely to lead to the rapid development of a sophisticated funding environment, and more litigation being pursued, particularly when the draft legislation is enacted.

 


Sarah McLennan
Associate

Cayman Islands   +1 345 814 7882


This piece first appeared on the Practical Law Dispute Resolution Blog on 5 February 2020 and a link to the original article can be found here: http://disputeresolutionblog.practicallaw.com/the-changing-landscape-of-litigation-funding-in-the-cayman-islands/

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