Funding Law Suits in Offshore Jurisdictions

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1 Funding Law Suits in Offshore Jurisdictions Nigel Sanders, Ogier Introduction The funding of lawsuits is a perennial issue in many jurisdictions, particularly those offshore jurisdictions where there are professional limitations on the basis upon which lawyers can charge for contentious work (typically derived from the English common law position). As a result consideration is continually being given to the ways and means by which litigants are able to afford to bring their cases to justice. This comes into particularly sharp relief in those offshore jurisdictions where the starting point in both litigation (and usually in arbitration) is that the loser pays the winner's legal costs. The courts in many offshore jurisdictions have addressed the issues that litigation funding throws up, including in the Caribbean and the Channel Islands, with particular focus emphasis on funding of claims by third party funders. For would be parties to litigation and arbitration, whilst what is permissible from a legal position is clearly central to determining their options, the commercial reality of what funding can provide will be equally important. In England many changes have been made to the costs landscape over recent years; however, despite the close links that many offshore jurisdictions have to the UK, those developments (largely through statutory changes) have no direct application. Accordingly offshore courts have had to consider and rule upon funding arrangements that have been adopted, applying local law and interpreting local professional rules. As a consequence, there is a growing body of case law (particularly in the Cayman Islands and in Jersey in the Channel Islands) on this subject and a growing range of funding arrangements that are being entered into. Forms of litigation funding There are a number "products" that are available and adopted and therefore it is important to understand in broad terms what they entail. The hackneyed expression "no win no fee" covers a multitude of possible arrangements. As a basic and generalized premise (each jurisdiction would need to be considered by reference to their own rules) a lawyer not charging unless he or she wins the case. It offers little commercial incentive, however, and if a case were undertaken on that basis the client would presumably be required to fund disbursements (court fees, experts fees etc). We tend to hear of two principle types of "no win no fee" arrangements: conditional fee agreement (CFA) and contingency fee (also known as damage based agreement). A CFA typically provides for a lawyer not charging for work unless successful in which

2 case a pre-agreed uplift will be applied to those fees (often ranging from an additional 25% of the charge to anything up to 100% depending on the risk assessed at the outset). Contingency fees (as will be readily familiar to a North American reader) provide the lawyer taking a percentage of the proceeds of the claim contingent upon success. In broad terms, third party funding will ordinarily involve the funder (usually an investment fund created to invest in litigation) providing financing for the costs of the claimant in exchange for a percentage return of the proceeds of the claim (typically ratcheted to increase as the case advances). In order to protect against the potential downside of losing the claim, after the event insurance (ATE) will ordinarily be purchased to provide cover for an adverse costs award against unsuccessful party that has secured a CFA or third party funding. Cayman Islands The main forms of litigation funding were considered by the Cayman Islands Courts, in the decision of Mr Justice Jones in In the Matter of ICP Strategic Credit Income Fund Limited and ICP Strategic Credit Income Master Fund Limited (Unreported,4 April 2014). There, liquidators of two Cayman funds sought Court sanction to pursue litigation in New York, to be funded on the terms of a contingency fee arrangement with New York lawyers. Earlier, in Quayum -v- Haxagon Trust Company (Cayman Islands) Limited [2002] CILR 161 the Grand Court had held that contingency fees were contrary to public policy, in view of the lawyer's potential conflict of interest. That principle in Quayum was followed in ICP but Jones J sanctioned the liquidators' proposed course of action on the basis that contingency fee agreements (defined narrowly as an agreement whereby the "law firm's right to be remunerated arises only if the litigation is successful and is limited to a share of the proceeds of the claim") are lawful in New York, and because the agreement was to be performed wholly outside the Cayman Islands. Public policy considerations were not that wide. However, what ICP makes clear is that there will be a degree of detailed scrutiny that will be carried out with regard to the terms of such agreement - including, for example, considerations of control of the litigation, reporting obligations on the lawyers and importantly the provisions relating to settlement/withdrawal where the potential conflict of interest can come into sharp focus. The Court in ICP also held that a third party funding arrangement where the funder takes an assignment of some of the proceeds of a cause of action in exchange for funding the costs, is a valid exercise of the liquidator's powers relating to the company's property, provided the funder cannot control or interfere with the conduct of the litigation. The Grand Court confirmed that when considering whether a funding agreement is unlawful on grounds of maintenance or champerty, the question is whether the agreement has a tendency to corrupt public justice. The Grand Court indicated that it will adopt a flexible approach. Specifically, however, claims vested in the liquidator personally (such as those to set aside preferences) could not be sold or assigned as this would amount to a surrender of the liquidator's fiduciary powers. In Quayum conditional fee agreements were upheld as not being champertous, although uplifts in such agreements are not recoverable from the losing party in the Cayman Islands (Cayman Islands Court of Appeal in Latoya -v- Attorney General (Unreported, 14 February 2012)). Very recently the Grand Court considered whether a funding arrangement could be used as a means of providing security for costs. In Caribbean Islands Development Ltd. (in official liquidation) v First Caribbean International Bank (Cayman) Limited (Unreported, 8 October 2014) the insolvent plaintiff company

3 acting by its liquidators had commenced proceedings against the defendant bank. The Grand Court had made an order in March 2014 that the plaintiff provide security for the defendant's costs (in the form of a cash deposit or a guarantee from a Class A local Cayman bank) in order to be permitted to continue the action. The liquidators failed to provide the security in time and the defendant applied for the dismissal of the proceedings for that failure. In defending the dismissal application, the liquidators sought retrospective relief from the previous court deadline and further, to be allowed to provide the security in the form of an indemnity bond and ATE insurance from a UK based. The Grand Court dismissed the liquidators' defence of the application and thus the proceedings. In so doing, the Court reiterated the principle that in the Cayman Islands, the usual form for security for costs is a cash deposit in an escrow account at a bank within the jurisdiction and under the Court's control. Thus it would appear that the Grand Court has closed the door to security for costs orders being met by foreign insurance options such as a bond and ATE cover. British Virgin Islands In the British Virgin Islands, third party funding of litigation, particularly of claims by liquidators is becoming more prevalent. As with Guernsey, there does not appear to be any decided authority on the point, but in Hugh Brown & Associates (Pty) Ltd v Kermas Limited [2011] (BVIHCV(COM)) Bannister J was prepared (without deciding the point) to proceed on the assumption that third party funding whereby the funder would receive a share of any award was permissible. In that case, the presence of a funding arrangement had not been disclosed to the BVI Court. The view, albeit without decided authority, has been that this is a strong indication that litigation funding is lawful in the BVI. It would seem that that view prevails as more liquidators are looking to third party funding, albeit under English law there exists in any event an insolvency exception to rules against champerty and maintenance (in so far as the disposal of assets is concerned). Jersey In Jersey, the Royal Court has held that third-party litigation funding is permissible, in appropriate circumstances. The Royal Court first confirmed in In re Valetta Trust [2012] 1 JLR 1 that Jersey law and English law on the concept of champerty are no different. In that case, funding was needed for a breach of trust claim against a former trustee who had allegedly sold trust assets at an undervalue. The validity of the third party funding agreement was considered and confirmed in a non-adversarial directions application. The Court held that third party funding agreements are in principle enforceable as a matter of public policy stressing the importance of access to justice, commenting that the "funding agreement does not have any tendency to corrupt or adversely affect the purity of justice [but] facilitates access to justice by plaintiffs who would not otherwise be able to afford to bring the litigation in question." Following Valetta, the Royal Court considered third party funding arrangements in greater detail and with the benefit of adversarial argument in the case of Barclays Wealth Trustees (Jersey) Limited as trustee of the R2R Bulgaria Property Fund & Others v Equity Trust (Jersey) Limited & Others [2013] JRC094. That case involved a claim against former trustees for breach of trust and duty. The Court again concluded (having considered a 1635 Ordinance and a 1771 Code) that an agreement to fund another party s litigation for a share of the proceeds was not champertous and would be enforceable on public policy grounds. The 1635 and 1771 provisions were held to prohibit the assignment of a claim in respect of which proceedings were already commenced and did not extend to agreements to provide funding for the bringing of proceedings.

4 It must be noted, however, that there is not carte blanche for funding agreements of any nature. The Royal Court will want to see that the claimant retains control of the litigation and that the purity of justice is not harmed. Equally public policy considerations can only go so far: conditional fee agreements are not part of Jersey law, and the principle that Advocates, as officers of the court conducting litigation should not put themselves in a position where personal interests could conflict with the duties owed to the Court, remain in full vigour Guernsey In Guernsey, the position is similar and whilst there are no reported authorities, the underlying reasoning in Jersey in Valetta and Barclays Wealth has been adopted. Professional conduct rules prevent lawyers taking cases on a contingency or conditional fees basis, but third party funding is becoming more common. Typical funded cases in Guernsey are those brought by liquidators (whether funded by creditors, members or third parties) against directors, managers or other third party service providers, or breach of trust claims. Public policy considerations regarding the availability of justice appear to prevail in Guernsey. A warning for funders In the very recent English decision in Excalibur Ventures LLC v Texas Keystone Inc and others [2014] EWHC 3436 (Comm), third party funders of the claimant's wholly unsuccessful USD1.6bn claim were joined to the proceedings for the purposes of costs applications and were ultimately held liable to meet the successful defendant's costs. The English Court (as to the offshore courts referred to above) have a wide discretion with regard to costs orders, which can include making them against third parties. The question will be is whether, in all the circumstances, it is just to make the order. Where a non-party funds the proceedings and in so doing substantially controls or is to benefit from them, the English court can require that, if the proceedings fail, the will pay the successful party s costs. Here the claim could not have been brought without the funders' assistance (which ran to 14m as well as funding security for costs at 17m) and they stood to benefit from its success to at levels involving a multiple of their investment. That will be on the same basis as the funded party (in this case on an indemnity basis). The only saving grace for the funders was the limit of liability by reference to each of their contributions and only in respect of costs incurred after they had provided the funding. Further reform The indication from these jurisdictions is that third party funding is accepted and recognized as valid, dependent upon the question of the level of the funder's control. There are certainly commercial funders operating in the market in those jurisdictions. The position on conditional and contingency fees would appear to be most clearly settled in Cayman but the consistency of approach to the issues of principle on third party funding would suggest that the other jurisdictions are likely to follow suit. There is a Cayman Islands Law Reform Commission report expected on the topic of conditional and contingency fee agreements. Review is also the flavour of the month in Jersey where there is currently a review being carried out by the State of Jersey into access to justice, and it will remain to be seen what, if any, further developments there are in Jersey concerning how litigation may or may not be funded or supporting going forward.

5 Key Dispute Resolution Contacts British Virgin Islands Richard de Lacy QC T E [email protected] Cayman Islands Richard de Lacy QC T E [email protected] Rachael Reynolds T E [email protected] Guernsey Simon Davies T E [email protected] Employment Law Restructuring & Mathew Newman T E [email protected] Hong Kong Ray Ng Advocate T E [email protected] Jersey Edward Mackereth T E [email protected] Nigel Sanders T E [email protected] Nick Williams T E [email protected] Luxembourg Fabien Debroise T E [email protected]