The changing landscape of litigation funding in Cayman

Common law rules dating from medieval England outlawing what are known as champerty and maintenance are still in effect in the Cayman Islands. They criminalize and render unenforceable arrangements whereby third parties provide funding for litigation without sufficient justification in the eyes of the law. In their undiluted form, these rules do not allow plaintiffs’ lawyers to act on a “no win no fee” basis, preventing plaintiffs from protecting themselves against losing by agreeing to pay their lawyers only if damages are recovered and only out of what is recovered. They also create uncertainty over the enforceability of agreements between plaintiffs and third parties who agree to advance funding for litigation in return for a reward if the litigation succeeds.

The Cayman Islands court has gradually diluted these rules, such that two types of litigation funding arrangement are now available to fund litigation in the Cayman Islands.

Conditional fee arrangements (CFAs)

Under a CFA, lawyers agree to undertake litigation but only to recover their fees (or a deferred portion in a partial CFA) if successful. The courts have allowed that a success fee “uplift” may be charged on any deferred fees, but this is capped by reference to the prospects of success and capped at 100 percent of normal rates (i.e. if successful the lawyer gets paid the deferred fees and a success fee up to 100 percent of those fees as well). The caps have in practice meant that CFAs have not become more regularly used. In addition it is not clear whether any of the cost of the CFA to the plaintiff can be recovered from a defendant that loses (in the normal case a plaintiff will recover a substantial portion of its legal fees from an unsuccessful defendant). CFAs in their currently permitted form do not appear to be considered commercially attractive and have not become prevalent in the Cayman Islands.

Litigation funding by third parties

This involves a related or third party funder advancing funding to the plaintiff in return for an assignment of the proceeds of the litigation. These arrangements are generally commercially expensive (one to three times funding and a percentage of net returns are fairly standard) but often represent the only option for an impecunious litigant in the Cayman Islands.

So called “contingency fees” are not permitted for litigation in the Cayman Islands. A contingency fee arrangement is where a lawyer agrees that their fee will be a percentage (often 25 to 35 percent) of damages, rather than chargeable on an hourly rate. These are forbidden for litigation in the Cayman Islands.

Under current arrangements, third party litigation funding is probably the least unattractive form of alternative fee arrangement available in the Cayman Islands. It is often perceived as expensive and it is still prima facie unlawful. Litigation funding agreements can only be enforced if the court deems that the terms on which they are offered are acceptable and do not offend against the laws of maintenance and champerty. Funders want certainty that their returns are enforceable before providing substantial funding.

This situation resulted in the artificial procedural construct used in A Company v a Funder: the plaintiff company commenced proceedings against its funder (a third party litigation funder) to obtain a declaration that the funding arrangement was valid. In setting out guidelines for agreements by which pecunious plaintiffs may access litigation funding, the court has taken an important decision about a complex issue of public policy in Cayman, without consultation of the legislative.

A further disadvantage of litigation funding agreements is that the substantial cost of the agreement may prove difficult or impossible for the plaintiff to recover from the defendant.

There is, however, nothing to prevent a Cayman Islands-based plaintiff from making a contingency fee agreement with a foreign attorney to pursue litigation outside of Cayman. A number of commercial disputes involving Cayman Islands entities are capable of being brought either in Cayman or the U.S. and it can be a real advantage to a business to be able to litigate on a contingency fee arrangement. Where they have this choice, Cayman Islands-based commercial litigants have often decided to pursue elsewhere claims that would otherwise be litigated here – particularly in the U.S., in order to take advantage of the contingency fee option. This results in jurisprudence, work and associated revenues being lost to the jurisdiction.

In 2010, the Cayman Islands Court of Appeal called for the legislature to address alternative fee arrangements, a call repeated by the chief justice in 2013. Progress has not been swift: the Law Reform Commission first produced a report on the topic in 2015, with a further interim report in 2018 proposing a draft bill (Bill) and regulations (Regulations, together the Proposal) for the private funding of legal services in Cayman.

The proposal is still a work in progress and subject to a consultation process, but it represents a potentially significant change to litigation funding in the Cayman Islands. The bill proposes the abolishment of the torts and offenses of maintenance and champerty and paves the way for attorneys in the Cayman Islands to enter into contingency fee agreements with commercial clients, expressly recognising that litigation funding by third parties be permitted.

The proposal focuses on contingency agreements, giving detailed guidance on what must be included in such agreements. It proposes permitted fee based on a percentage fee of damages initially capped at 33 percent but capable of being even higher if approved by the court.

Importantly, the proposal provides that parties are not excluded from recovering costs from the opponent simply by virtue of a contingency fee arrangement. The proposal does not descend into the detail of how this would work. However, preservation of an element of the “loser pays” principle in funded cases is to be welcomed as lowering the effective cost of funding for the plaintiff and preserving the incentives against unmeritorious arguments that costs consequences can give rise to.

The proposal recommends legislation that would permit third party litigation funding and regulations that clarify the requirements for funding arrangement terms. Although this must be developed further, the bill appears to propose restricting the sum payable to either:

costs payable to the client in respect of the proceedings (i.e., any awards) together with an amount calculated in accordance with the funder’s anticipated expenditure in funding the provision of the services; or

a percentage of the value of the property recovered in the proceedings.

Without further elaboration on these principles, it is unclear whether the proposal intends to cap the cost of funding, but these costs will face commercial pressure from the availability of contingency fee agreements, particularly if they remain irrecoverable.

Commentary

The proposal is a long awaited step toward progress and offers a real shift in the litigation funding landscape – the prospect for contingency fee agreements in the Cayman Islands offers a truly commercially attractive funding opportunity for lawyers and clients, without the added cost of a third party funder’s profit element on top of the lawyer’s fees.

In practice, we have seen clients select the option of contingency fee arrangements in other jurisdictions against expensive litigation funding in the Cayman Islands. Adding the opportunity to retain those cases in the Cayman Islands will be of benefit to the Cayman Islands both in developing the jurisprudence here, and in preventing the flight to the U.S. of jurisprudence, work and revenues derived from Cayman Islands litigation.

However, it remains to be seen how quickly changes may be implemented and in the meantime access to justice remains satisfied on a case by case basis in reliance upon the developing case law.