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Private Funding of Legal Services Act, 2020 – A New Age of Litigation Funding in the Cayman Islands

The passing of the Private Funding of Legal Services Act, 2020 (the “Act”) sounded the death knell of the torts of maintenance and champerty in the Cayman Islands, and paves the way for a new age of litigation funding and contingency fee arrangements in the jurisdiction. The Act was gazetted on 7 January 2021 and is expected to come into force shortly. Once in force, the Act will bring the Cayman Islands more into line with other common law jurisdictions such as England and Australia in which litigation funding is commonplace.

The Act has the potential to significantly alter the litigation landscape in the Cayman Islands. In addition to facilitating justice by assisting parties that could not otherwise afford to bring good claims, the Act will permit sophisticated parties to pursue valuable claims without deploying their own capital, allowing them to better manage their cash flow to support their operations and growth.

Background

English legal systems historically prohibited arrangements through which a stranger to proceedings either funded or “maintained” litigation in which he or she had no interest (known as “maintenance”) or in which the stranger would receive part of the proceeds of any successful claim (an aggravated form of maintenance known as “champerty”).

While restrictions in most common law jurisdictions have relaxed over time in favour of regulated litigation funding, the scope for contingency fee and funding arrangements in the Cayman Islands had been uncertain, and limited primarily to funding of claims in the insolvency context. In 2017 Mr Justice Segal approved a third party funding agreement in A Company v A Funder [2017 (2) CILR 710] [1], however, it is anticipated that the Act will have a greater impact on litigation funding and contingency fee arrangements, and provides greater certainty to those involved in funded litigation in the jurisdiction.

The Act

The Act has its origins in a 2015 Bill of the same name, which was revised and re-introduced in 2020. The stated objective of the Act is to regulate contingency fee arrangements (“CFAs”) and litigation funding agreements (“LFAs”) in order to provide an alternate means of funding legal services. The Act defines the  “proceedings” to which it applies broadly as including those before any court or comparable tribunal or functionary, and expressly includes arbitration proceedings. Part 4 of the Act expressly repeals any offence under the common law for maintenance, including champerty.

CFAs

A CFA is an agreement providing for attorneys’ fees to be payable at the conclusion of the case only if the relevant litigation is successful; such agreements typically provide for a “success fee” payable to the attorneys (which is typically a multiple of the attorneys’ usual fees).

Part 2 of the Act confirms that an attorney may enter into a CFA with a client under which the attorney’s remuneration is contingent (in whole or in part) on the successful disposition or completion of the matter. Criminal proceedings under the Penal Code (2019 Revision) and proceedings concerning the welfare of a child under the Children Act (2012 Revision) are expressly excluded, and section 14 of the Act prohibits a CFA through which an attorney purchases all or a part of a client’s interest in the proceeding. A CFA must be in writing, signed by the relevant parties, and must include a 14 day cooling off provision entitling the client to withdraw (see section 5).

Section 4 records that a CFA cannot provide for a success fee of more than 100% of the attorney’s normal fees, and restrictions are imposed by regulations on the percentage of any recoveries or property in which an attorney may participate. However, under section 4(4) an attorney and client may jointly apply for Court sanction to approve a CFA which contravenes these restrictions. The Court has a wide discretion in this regard, but cannot approve a CFA under which the attorney would receive more than 40% of the total award or proceeds recovered.

In exercising its discretion, the Grand Court may consider any relevant factors, but must have regard to the nature and complexity of the proceeding, and the expense and risk involved in the proceeding.

Subsection 4(7) provides that absent approval of the Court (again to be sought via a joint application by the attorney and client), a CFA cannot include in the amount due to the attorney any additional amount arising as a result of any award of costs recovered. The Court must be satisfied that exceptional circumstances apply before it can approve such an arrangement. Section 6 of the Act further clarifies that a CFA will not affect party-party costs.

Applications under subsections 4(4) and (7) must be brought within 90 days of the CFA being executed, and the CFA will not be enforceable until it is approved. In cases of fast moving litigation, and to provide certainty around an attorney’s engagement, it may be necessary for CFAs to be drafted on conditional terms, whereby the remuneration will vary depending on Court approval.

Section 8 of the Act states that any provision in a CFA that an attorney is not liable for negligence (or is relieved of liability to which the attorney would otherwise be subject) is void, however this does not restrict an attorney being indemnified by their employer for liabilities incurred during their employment as a consequence of professional negligence.

Sections 9, 10 and 11 of the Act respectively address how disputes under a CFA are to be determined, enforcement of the CFA, and reopening the CFA.

LFAs

A LFA is defined in subsection 16(1) of the Act as an agreement under which a funder agrees to fund in whole or in part the provision of legal services to a client by an attorney under which the client agrees to pay a sum to the funder in specified circumstances. Part 3 of the Act governing LFAs is lighter on detail than the sections of the Act concerning CFAs.

Subsections 16(2) and (3) require that (i) a LFA be in writing, (ii) a LFA comply with the prescribed requirements (which are limited for the time being to the funder providing prescribed information to the client prior to entering the LFA, which may differ depending on the type of LFA), and (iii) the sum to be paid by a client shall include either (a) any costs payable to the client in relation to the relevant proceedings, and an amount calculated by reference to the funder’s anticipated expenditure, or (b) a percentage of the recoveries or property.

Conclusion

The Act creates useful funding options for claimants, funders and attorneys involved in Cayman Islands litigation. While it remains to be seen how these new funding arrangements will be adopted by the market and regulated, the Act provides additional certainty for stakeholders. It is anticipated that the Act will enable the development of litigation funding in the Cayman Islands along similar lines to that permitted in jurisdictions in which such funding is now well established, and will facilitate both access to justice and improved litigation cost management.

If you have any questions regarding litigation funding in the Cayman Islands, or wish to discuss confidentially the prospective funding of a claim in the jurisdiction, please contact the authors below.

Andrew Pullinger - Partner, Campbells Grand Cayman - Commercial Litigation

Andrew Pullinger

Partner
+1 345 914 5865
Harry Shaw - Associate, Campbells Grand Cayman - Dispute Resolution

Harry Shaw

Associate
+1 345 914 5869