A Company v A Funder

• Jurisdiction: Cayman Islands
• Judge: (Segal, J.)
• Judgment Date: 23 November 2017
• Court: Grand Court (Cayman Islands)
• Date: 23 November 2017

Grand Court, Financial Services Division

(Segal, J.)

A COMPANY

and

A FUNDER

M. Kish for the plaintiff.

Cases cited:

(1) AJW Master Fund Ltd., In re, Grand Ct., December 28th, 2011, Cause No. FSD 200 of 2011, unreported, referred to.

(2) Arkin v. Borchard Lines Ltd., [2005] EWCA Civ 655; [2005] 1 W.L.R. 3055; [2005] 3 All E.R. 613; [2005] 2 Lloyd’s Rep. 187; [2005] C.P. Rep. 39; [2005] 4 Costs L.R. 643, referred to.

(3) Att. Gen. v. Barrett, 2012 (1) CILR 127, considered.

(4) Barclays Wealth Trustees (Jersey) Ltd. v. Equity Trust (Jersey) Ltd., 2013 (2) JLR 22, referred to.

(5) Campbells Cash & Carry Pty. Ltd. v. Fostif Pty. Ltd., [2006] HCA 41; (2006), 229 ALR 58; 80 ALJR 1441, referred to.

(6) DD Growth Premium 2X Fund, In re, 2013 (2) CILR 361, referred to.

(7) Dyxnet Holdings Ltd. v. Current Ventures II Ltd., 2015 (1) CILR 174, referred to.

(8) Elliott v. Cayman Islands Health Servs. Auth., 2007 CILR 163, referred to.

(9) Excalibur Ventures LLC v. Texas Keystone Inc., [2016] EWCA Civ 1144; [2017] 1 W.L.R. 2221; [2016] 6 Costs L.O. 999; [2017] C.P. Rep. 13, referred to.

(10) Factortame Ltd. v. Environment, Transport & Regions Secy. (No. 2), [2002] EWCA Civ 932; [2002] 4 All E.R. 97, followed.

(11) Giles v. Thompson, [1994] 1 A.C. 142; [1993] 2 W.L.R. 908; [1993] 3 All E.R. 321; [1993] R.T.R. 289, considered.

(12) Gong v. CDH China Mgmt. Co. Ltd., 2011 (1) CILR 57, referred to.

(13) ICP Strategic Credit Income Fund Ltd., In re, 2014 (1) CILR 314, followed.

(14) London & Regional (St. George’s Court) Ltd. v. Defence Min., [2008] EWHC 526 (TCC); (2008), 121 Con. L.R. 26; [2008] All E.R. (D.) 249, followed.

(15) Mansell v. Robinson, [2007] EWHC 101 (QB), referred to.

(16) Merchantbridge & Co. Ltd. v. Safron General Partner 1 Ltd., [2011] EWHC 1524 (Comm); [2012] 2 BCLC 291, referred to.

(17) Morris v. Southwark L.B.C., [2011] EWCA Civ 25; [2011] 1 W.L.R. 2111; [2011] 2 All E.R. 240; [2011] C.P. Rep. 21, considered.

(18) Quayum v. Hexagon Trust Co. (C.I.) Ltd., 2002 CILR 161, followed.

(19) SPhinX Group, In re, Grand Ct., January 14th, 2007, Cause No. FSD 258 of 2006, unreported, referred to.

(20) Stiftung Salle Modulable v. Butterfield Trust (Bermuda) Ltd., [2014] BMSC 13; [2014] SC (Bda) 14 Com, considered.

(21) Valetta Trust, In re, 2012 (1) JLR 1, referred to.

Contract — illegal contracts — agreements contrary to public policy — maintenance and champerty — agreement for third party to fund plaintiff’s litigation in Cayman for share of proceeds not unlawful if no tendency to corrupt public justice, undermine integrity of litigation or create risk of abuse — funder not to have right to terminate agreement at will — agreement with professional funder to satisfy Code of Conduct for Litigation Funders

The plaintiff sought a declaration that a litigation funding agreement was not unlawful.

The plaintiff was a large company incorporated in Korea. It intended to bring proceedings in the Cayman Islands for the recognition and enforcement of a New York arbitration award which had been recognized and entered as two judgments in New York. It had identified assets within the jurisdiction in the name of certain of the award debtors. The intended proceedings were to be funded by the defendant, a third-party commercial funder. The plaintiff and the defendant had entered into a litigation funding agreement which was governed by English law. The agreement provided inter alia that the funder agreed to invest certain amounts in pursuing the proceedings including the expenses incurred by the plaintiff in stage 1 and stage 2 as defined in an agreement between the funder and a related party that provided asset tracing and enforcement services to the plaintiff (“the consultancy agreement”). Under the consultancy agreement, the related party agreed to act for the plaintiff to locate and assist in the recovery of assets of the award debtors. The related party had the right to terminate the consultancy agreement on 21 days’ notice, which right it agreed to exercise reasonably and in good faith. Under the funding agreement, the funder had no obligation to pay the stage 2 expenses if the related party decided not to proceed with that stage. The funder was not responsible for any adverse costs that might be awarded against the plaintiff. The plaintiff was to have sole conduct of the proceedings. If the plaintiff were successful and made recoveries in the proceedings, it was required to pay the funder a resolution amount comprising its investment in stage 1 plus a premium of 4 times that amount; its investment in stage 2 plus a premium of 2½ times that amount; plus an amount, after deducting the plaintiff’s unbudgeted legal costs of up to US$1m., of 40% of the remaining recoveries (provided that the total amount did not exceed the sum permitted under the applicable law or the total amount recovered by the plaintiff). Under cl. 15 of the agreement, the funder had the right to terminate the agreement if the plaintiff was in material breach of its duties relating to the conduct of the proceedings or of warranties it had given, if the related party terminated the consultancy agreement or if the funder considered that the prospects of success or economic viability were such that it did not wish to continue.

In an ex parte application, the plaintiff sought a declaration that the funding agreement was not unlawful on the grounds of maintenance and champerty and that commencing the intended proceedings with funding made available pursuant to the agreement would not be unlawful.

Held, ruling as follows:

(1) When considering whether a funding agreement was unlawful on the grounds of maintenance or champerty, Cayman law followed the approach of English law. The critical issue was whether a particular funding agreement had a tendency to corrupt public justice, which required the closest attention to the nature and surrounding circumstances of a particular agreement; undermined the integrity of the litigation process; or gave rise to a risk of abuse. The following features were likely to be of particular significance. (a) The extent to which the funder controlled the litigation. Complete control by a non-party funder who only had a financial interest in the proceedings raised the risk of abuse by manipulation of the proceedings. The risk of abuse would be reduced if the funder could be made subject to a costs order. (b) The ability of the funder to terminate the funding agreement at will or without reasonable cause. If a funder could terminate its obligation to fund at will or without reasonable cause, there would be a risk that it might seek to use this as a threat to put pressure on the funded party. Unfettered termination rights might give rise to an impermissible level of indirect control. (c) The level of communication between the funded party and the lawyer. The funder should not be able to control the litigation by being in control of communications with and able to give instructions to the attorneys on the record who were conducting the proceedings. (d) The prejudice likely to be suffered by the defendant if the claim failed. A funding agreement under which the funder would not be liable to meet any adverse costs order raised a risk of abuse. A funder who had a commercial stake in the outcome of litigation but no exposure to costs if the claim failed had an incentive to put pressure on the funded party to adopt an unduly aggressive litigation strategy. (e) The extent to which the funded party was provided with information about, and was able to make informed decisions concerning, the litigation. (f) The amount of profit the funder stood to make. If the profit element or premium payable to the funder above the amount advanced by the funder to cover litigation costs was high and disproportionate to the risk involved, the residual interest of the funded party might be so small as to make it immaterial. Where the funded party was no longer in a position to benefit from a successful outcome, it was more likely that the funding agreement would be treated as champertous. (g) Whether or not the funder was a professional funder and/or was regulated. A voluntary Code of Conduct for Litigation Funders had been introduced in England and Wales. The risk of abuse was likely to be more carefully scrutinized in a case in which the funder had not participated in the self-regulatory regime and agreed to follow a code of industry best practice. There was no reason why this jurisdiction should impose additional constraints on commercial funding of litigation. Provided that these principles were respected and these important policy goals achieved, properly regulated commercial funding of litigation, which could promote access to justice, should not be objectionable or subject to enhanced requirements or constraints (paras. 42–46).

(2) The terms of the funding agreement in the present case, with one exception, did not give rise to a tendency to corrupt public justice, undermine the integrity of the litigation process or give rise to a risk of abuse. The exception was the right of termination contained in cl. 15, which was effectively a right on behalf of the funder to terminate at will. There was a serious risk of the funder having an unacceptable level of indirect control. Such a right, furthermore, was inconsistent with the requirements of the Code of Conduct for Litigation Funders. Accordingly, the court required cl. 15 of the agreement to be amended to conform with cl. 11.2 of the Code—which provided that a funder could terminate the agreement if it or its subsidiary or related entity reasonably ceased to be satisfied about the merits of the dispute, reasonably believed that the dispute was no longer commercially viable or reasonably believed that there had been a breach of the agreement by the funded party. At least in the context of an ex parte application such as the present and in light of the underdeveloped state of the applicable...