On the 1st of May 2021, The Private Funding of Legal Service Act 2020 (“The Act”) officially legalised litigation funding in the Cayman Islands and codified the rules for its use. Previously, the use of private litigation funding had been decided by courts on a case-by-case basis and had included consideration of the long-outdated principles of champerty and maintenance. The Act has now brought the Cayman Islands in line with other jurisdictions such as the US and UK which have long accepted litigation funding as a means of access to justice and have developed active competitive litigation funding markets. The Act is most welcome by those in the Cayman Islands seeking to manage the costs of litigations, and opens the door to three different funding arrangements:
- Third-party funding – where a third party (usually a professional third-party fund) agrees to fund all or some of the client’s legal cost and/or other costs in exchange for payment based on contracted terms (usually on an unsecured, non-recourse basis).
- Conditional fee agreement (“CFA”) – where the client pays an agreed percentage uplift on the law firm’s standard fees if the claim succeeds, but nothing if the case is lost. Sometimes referred to as ‘no win, no fee’.
- Contingency fee agreement (Also known as Damages Based Agreement (DBAs) – in which a law firm or attorney receive a percentage of the damages or sums recovered by the client if the claim succeeds, but nothing if the case is lost.
How did we get here?
Like many jurisdictions, historically, the Cayman Islands recognised the archaic English doctrines of champerty and maintenance, however, unlike most jurisdictions, champerty and maintenance officially remained crimes and torts in the Caymans until they were repealed with the introduction of the Act on 1st May 2021.
In recent years, the courts in the Caymans have warmed to litigation funding and had begun to take a pragmatic approach, establishing guidelines for litigants seeking to use funding agreements, so that it could be used in some cases. The courts were sympathetic to the use of Conditional Fee Agreements in insolvency claims that could not otherwise have gone ahead due to lack of funding for legal costs. However, these guidelines still required the legality of litigation funding to be considered fully on the merits in each case. The Act now specifies in which circumstances litigation funding can be used with no court approval needed.
What does the act cover?
The Act is the result of about five years of review and consultation by the Cayman Islands Law Reform Commission (“LRC”). It covers the following:
Maintenance and Champerty abolished going forward
Section 17 of the Act repeals the common law offences of maintenance and champerty and abolishes both civil and criminal liability unless the cause of action accrued before the Act came into force (in which case the principles of maintenance and champerty would still need to be considered).
Third-Party Litigation Funding Agreements permitted subject to a few requirements
Section 16 of the Act permits the use of Litigation Funding Agreements, subject to the following:
- The agreement must be in writing.
- The agreement must comply with any prescribed requirements.*
- The success fee the client pays should consist of any costs, together with an amount calculated by reference to the funder’s anticipated funding expenditure in funding the legal fees or a percentage of the amount or the value of the property recovered in the action or proceedings to which the agreement relates.
It appears that for now, Litigation Funding Agreements are intended to be largely self-regulated in the Caymans (much as they are in the UK), as the act has just one section on how Litigation Funding Agreements are to be governed compared to its 13 sections on CFAs.
*There are as yet no prescribed requirements for Litigation Funding Agreements under the Act, and none have been proposed by the LRC, but the Act makes allowance for such requirements in the future, which could cover things such as information to be provided by a litigation funder to a client before the agreement is made, or different requirements for different types of Third Party Funding Agreements.
Contingency Fee Agreements permitted (up to 33.3% of recovery or 40% by application)
- Section 3 of the Act permits the use of Contingency Fee Agreements, subject to a percentage cap of a monetary award or value of assets. As was expected based on the draft Regulations, the prescribed percentage has been set by section 8 of the Regulations as being 33.3%. However, the attorney and client can apply to the Grand Court of the Cayman Islands to exempt the CFA from these prescribed 33.3% cap under section 4(4) of the Act, if merited based on the facts of the case, but the Court’s discretion is capped at 40% of the total amount awarded or obtained (section 4(6) of the Act).
Conditional Fee Agreements permitted up to 100% uplift or 33.3% of recovery
- Conditional Fee Agreements are permitted, however, Section 4 of the Act provides that the success fee payable under a Conditional Fee Agreement cannot exceed an attorney’s normal fees by more than 100% (unless a joint application made by the attorney and client is approved by the Court as above). Furthermore, the total amount payable to the attorney under the agreement cannot exceed a percentage cap of the client’s recovery prescribed by regulations at 33.3%.
Other Considerations
Cost Awards excluded from recovery % when calculating success fees
The Act also requires that any award of costs must be excluded when calculating the fee payable to a law firm under a Conditional Fee Agreement or Contingency Fee Agreement unless prior court approval has been obtained.
Procedural requirements, approval of court required for fiduciaries
The Act also includes a few procedural requirements concerning Conditional Fee and Contingency Fee Agreements, including specifics on form and content, (agreements must be in writing and signed by the clients), client cooling-off periods and impact on costs. Notably, section 12 of the Act requires that before an attorney or law firm is paid under a Conditional Fee Agreement or a Contingency Fee Agreements, the agreement must first be approved by the court where it is made by a client in a fiduciary capacity.
Comment
Over time, the Cayman Islands legislature and judiciary have recognised the need to offer litigants in their courts third party funding, and it appears that the outdated doctrines of champerty and maintenance that have long vexed clients, attorneys, and litigation funds will soon be a thing of the past.
The Act has been many years in the making and follows on from case law endorsing regulated litigation funding in the jurisdiction. It will give litigants greater access to justice and a range of funding options likely to lead to a more competitive legal market in the jurisdiction and officially opening the Caymans for business to a competitive market of professional third-party funders.
Erso Capital to finance Cayman Island litigations and arbitrations.
Our team at Erso can consider meritorious commercial disputes in the Cayman Islands. We can provide capital commitments from as low as USD $500,000 through to opportunities that require in excess of US $50m+ of capital.
If you have a matter that you would like to discuss with us please contact our team:
Europe:
James Delaney Matthew Amey
Director & co-founder Director & co-founder
jmd@ersocap.com mla@ersocap.com
Americas:
James Blick Caroline Parker-Beaudrias
Director & co-founder Investment Counsel