Private Funding of Legal Services Act, 2020: the codification and expansion of litigation funding in the Cayman Islands
08 January 2021
The Private Funding of Legal Services Act, 2020 (the Act), which was gazetted on 7 January 2021 but is not yet in force, seeks to codify the guidelines surrounding litigation funding in the Cayman Islands, previously determined on a case-by-case basis by the court including by reference to the anachronistic principles of champerty and maintenance. The widened access to litigation funding introduced by the Act brings the Cayman Islands into line with onshore jurisdictions such as the United Kingdom and the United States which have well-developed litigation funding markets and providers.
The Act abolishes the offences of champerty and maintenance and provides welcome certainty for litigants looking to manage the expense of litigating in the Cayman Islands.
History of litigation funding in the Cayman Islands
Historically the use of litigation funding in the Cayman Islands was deemed to be prohibited by the archaic English doctrines of champerty and maintenance, which were both crimes and torts. Whilst the genealogy of these doctrines is beyond the scope of this note, by way of brief explanation: maintenance involves the provision of assistance or encouragement to a litigant by a person who has no legitimate interest in the outcome of the proceedings, or a motive recognised by law so as to justify their interference. Champerty has been described as an aggravated form of maintenance in which the assistance or encouragement is provided in exchange for a share in the proceeds of the litigation. Although champerty and maintenance were abolished as crimes and torts in England and Wales in 1967, they remained relevant because contractual terms which breached the rules against champerty and maintenance were still unenforceable as a matter of public policy. In the Cayman Islands, both maintenance and champerty remain crimes and torts until the Act comes into force.
Litigation funding agreements fall into three general categories: i) Conditional Fee Agreements, in which the client agrees to pay an uplift on the attorney's standard fees in the event of success, but the attorney is (typically) paid nothing if the case is lost; (ii) Contingency Fee Agreements, in which the attorney receives a percentage of the sum(s) recovered by the client in the event of success, and nothing if the case is lost; and (iii) Third Party Funding Agreements, where a third party agrees to fund all or part of the costs of a client's case in exchange for payment on agreed terms.
In recent years, the Cayman Islands courts have taken a pragmatic approach, having established useful guidelines for litigants looking to rely upon Third Party Funding Agreements1 . The Cayman courts were also sympathetic to the use of Conditional Fee Agreements by liquidators to pursue meritorious claims that could not otherwise be pursued for want of funding. While helpful, these guidelines still required each case to be considered individually on its merits. The introduction of the Act specifies the circumstances in which litigation funding, including on a contingency fee basis (which was previously unavailable), will be available to litigants, generally without court approval.
The key elements of the Act
Champerty and maintenance
Section 17 of the Act repeals the offences of champerty and maintenance under the common law, save where the cause of action accrued before the Act comes into force, so this provision will not have retrospective effect.
'Contingency fee agreement'
The Act permits the use of 'contingency fee agreements', save in respect of criminal (or quasi-criminal) proceedings, or proceedings in respect of the care of a child or any order under the Children Act (2012 Revision).
Section 3 of the Act essentially defines a contingency fee agreement as an agreement in which the remuneration paid to the attorney for their legal services provided to or on behalf of the client is contingent, in whole or in part, on the successful outcome of the matter at hand. This definition therefore encompasses both Conditional Fee Agreements and Contingency Fee Agreements (of the types described above).
The Act and accompanying regulations together provide certain limits on the success fee payable and what portion of a successful client's recovery can be paid to the attorney pursuant to a Conditional Fee Agreement and a Contingency Fee Agreement, as follows:
• Conditional Fee Agreements: subject to section 4(2) of the Act, where an attorney is entitled to a success fee under a Conditional Fee Agreement, the success fee shall not exceed the attorney's normal fees by more than 100 per cent. Section 4(2) of the Act provides a further limitation on the total amount that can be paid to attorney under a Conditional Fee Agreement, where the client's claim is for a money judgment. It notes that in such circumstances, the total payable by a client to an attorney shall not exceed the 'prescribed percentage' of the total amount awarded or any amount obtained by the client in consequence of the proceedings, which amount shall not, for the purposes of calculating any excess, include any costs. The draft regulations, which are yet to be Gazetted (but which are appended to the Cayman Islands Law Reform Commission's (LRC) review of litigation funding in the Cayman Islands, dated 30 September 2019, found here), note the 'prescribed percentage' as 33.3 per cent. Therefore, in summary, pursuant to a Conditional Fee Agreement: an attorney may agree an uplift of up to 100 per cent of their normal fees, albeit the total amount payable to the attorney under the agreement cannot exceed one third of the client's money judgment.
• Contingency Fee Agreements: section 4(3) of the Act notes that where a contingency fee agreement involves a percentage of the amount or of the value of the property recovered by the client in an action or proceedings, the amount to be paid to the attorney shall not be more than the 'maximum percentage', if any, prescribed by regulations, of the amount or of the value of the property recovered in the action or proceedings, however the amount or property is recovered. Again, the draft regulations state that the 'maximum percentage' is 33.3 per cent. The limitations noted above as conferred by section 4(2) of the Act also apply to Contingency Fee Agreements in respect of claims for money judgments.
The above said, an attorney may enter into a either a Conditional Fee Agreement or a Contingency Fee Agreement which provides that the amount paid to the attorney will exceed these thresholds if that is approved by the court. Such an application must be brought jointly by the attorney and the client within 90 days of the execution of the agreement. The Act specifies certain considerations the court will have regard to when determining such an application, including the nature and complexity of the value of the proceedings. Notably, in determining such an application, the court cannot approve a contingency fee which exceeds 40 per cent of the total amount awarded, of any amount obtained by the client or of the value of any property recovered in the proceedings.
The Act further stipulates that any award of costs or costs obtained as part of a settlement must be excluded when calculating the fee payable to an attorney under a Conditional Fee Agreement and Contingency Fee Agreement unless prior court approval to the contrary has been obtained.
The Act also includes a number of procedural requirements in relation to Conditional Fee Agreements and Contingency Fee Agreements, including as to their form and content, client cooling-off periods and the impact on costs. Notably, section 12 of the Act requires that a Conditional Fee Agreement or Contingency Fee Agreement must be first approved by the court (before payment to the attorney) where it is made by a client in a fiduciary capacity, including in their capacity of guardian, attorney or trustee under a deed or will.
Litigation funding agreements
The Act makes separate, albeit relatively brief, provision for litigation funding agreements (i.e. Third-Party Funding Agreements).
The only conditions prescribed by the Act regarding the entry of Third Party Funding Agreements are that: the agreement shall be in writing; the agreement shall comply with prescribed requirements, 'if any', and that the sum to be paid by the client to the funder shall consist of either any costs payable to the client in respect of the proceedings to which the agreement relates, together with an amount calculated by reference to the funder’s anticipated expenditure in funding the provision of the services, or a percentage of the amount or the value of the property recovered in the action or proceedings to which the agreement relates. There are as yet no prescribed requirements under the Act, and none have been proposed by the LRC, but the Act makes allowance for such requirements in the future, which may cover matters such as information to be provided by a litigation funder to a client before the agreement is made, and to allow for different requirements for different types of Third Party Funding Agreements.
Certain forms of litigation funding agreements have been available to litigants in the Cayman Islands for over a decade, albeit often subject to the approval of the Judges in the Financial Services Division of the Grand Court of the Cayman Islands. The codification of the guidelines applicable to these types of fee agreements provides greater certainty for litigants wishing to rely on them without having to obtain the prior approval of the court (in most cases). The introduction of the availability of Contingency Fee Agreements (ie an agreement allowing the attorney to retain an agreed percentage of the client's recovery) marks a leap forward for the jurisdiction, and one that brings the Cayman Islands into line with competing common law jurisdictions.
Interestingly, and consistent with the position in England, the LRC has not proposed any specific set of regulations governing third party litigation funding, for now favouring self-regulation over a more prescriptive approach. Consequently, we expect to see the market for these services in the Cayman Islands develop at pace.
1 See, for instance, the judgments in A Company v A Funder (unreported, 23 November 2017) and Re Platinum Partners Value Arbitrage Fund L.P. (In Official Liquidation) (unreported, 31 October 2018), both summarised in our article found here.