Re DD Growth Premium Fund

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 23 October 2013
• Court: Grand Court (Cayman Islands)
• Date: 23 October 2013

Grand Court, Financial Services Division

(Smellie, C.J.)

IN THE MATTER OF DD GROWTH PREMIUM 2X FUND

J. Walton and J.Snead for the applicants.

Cases cited:

(1) AJW Master Fund Ltd., In re, Grand Ct., December 18th, 2012, unreported, referred to.

(2) Att.Gen v. Barrett, 2012 (1) CILR 127, followed.

(3) Bennett v. Att.Gen., 2010 (1) CILR 478, referred to.

(4) Callery v. Gray, [2002] 1 W.L.R. 2000; [2002] 3 All E.R. 417; [2002] 2 Costs L.R. 205; [2002] UKHL 28, followed.

(5) Drake v. Fripp, [2012] 2 Costs L.R. 264; [2011] EWCA Civ 1282, considered.

(6) Edennote Ltd.(No. 2), Re, [1997] 2 BCLC 89, referred to.

(7) Greenhaven Motors Ltd., Re, [1999] BCC 463; [1999] 1 BCLC 635, referred to.

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

(9) SPhinX Group, In re, Grand Ct., January 14th, 2007, unreported, referred to.

(10) Spiralstem Ltd. v. Marks & Spencer PLC, [2007] EWHC 90084 (Costs), referred to.

(11) Universal & Surety Co.Ltd., In re, 1992–93 CILR 149, referred to.

Practice Direction cited:

Practice Direction No. 1/2001, Guidelines Relating to the Taxation of Costs, para. 7.

Attorneys-at-Law-remuneration-conditional fee agreement-CFAs not prohibited under Practice Direction No. 1/2001 if success fee paid by client and agreement appropriate, governed by principles of fairness and reasonableness and made in writing-appropriateness considered in all circumstances of client and case, and reliability and reputation of attorneys-court entitled to require client obtains independent legal advice, require taxation and may disallow uplift in whole or in part

Attorneys-at-Law-remuneration-conditional fee agreement-success fee reasonable if percentage of usual fee determined by uplift fee minus postponement element-uplift fee reasonable if calculated as chance of loss divided by chance of success, multiplied by 100-postponement element reasonable if calculated as length of litigation in years multiplied by attorneys” usual interest rate

A company”s liquidators applied for approval of a conditional fee agreement into which they wished to enter with their attorneys.

The liquidators wished to bring legal proceedings against its former investment manager and redeemed shareholders but, as the company had no available assets, they were required to find funding to support the litigation. As they were unable to borrow sufficient funding, they wished to enter into a conditional fee agreement with their attorneys. The proposed agreement stated that, in addition to their normal fees, the attorneys would be able to charge an extra success fee, although this extra fee would not be recoverable in a costs order. The success fee would be a percentage of their normal fees, with the exact percentage determined by the amount recovered in the legal proceedings (e.g., if the amount recovered were $3m. or higher, but below $6m., the uplift would be 20% of the attorney”s usual fees; and if the amount recovered were $6m. or higher, but below $11m., the uplift would be 40% of the usual fees). The liquidators applied for approval of the agreement.

The liquidators submitted that, notwithstanding the limits in the Guidelines Relating to the Taxation of Costs, paras. 7.1–7.4, the court was entitled to approve the agreement. Although the Guidelines stated, at para. 7.1, that attorneys” fees must be payable on an hourly rate, the proposed success fee qualified as such as it was calculated as a percentage of the

standard hourly rate. Further, as the company would be responsible for paying the uplift fee, the Guidelines” prohibition of conditional fee agreements in para. 7.2 did not apply, provided that, under para. 7.4, the agreement was reasonable. In the current circumstances, the agreement was reasonable as no law firm would take on a conditional fee agreement without an uplift clause and, without such an agreement, the liquidators would be unable to bring the litigation and so would be unable to recover any of the company”s assets.

Held, approving the agreement:

(1) The limits in the Guidelines Relating to the Taxation of Costs, paras. 7.1–7.4 did not prevent the court from sanctioning a conditional fee agreement which included a success fee, provided that the uplift was calculated on an hourly rate, or scale of rates, and was not unreasonable. Although para. 7.2 of the Guidelines prohibited conditional fee agreements, this only applied when the success fee was to be paid by the opposing party. It did not, therefore, extend to a situation in which the uplift was to be paid by the client, provided that the agreement was appropriate and governed by the principles of what was fair and reasonable. The court would consider the appropriateness of the agreement in the context of all the circumstances of the client, the case and the reliability and reputation of the attorneys; would be entitled to require taxation to ensure that the fees claimed were reasonable; and might disallow the uplift, either in whole or in part, if appropriate. Further, the agreement had to be in writing, with a mechanism by which the attorneys could be discharged, and the court would be entitled, depending on the size and value of the liquidation, to require that the client obtained independent legal advice before accepting the offer. As the attorneys were well-known practitioners, the liquidators had sought separate legal advice and the approval of the creditors” committee, and the agreement was in writing with an option to terminate, the conditional fee agreement was valid, subject to the reasonableness of the uplift provision (paras. 25–29).

(2) The uplift provision was reasonable and the conditional fee agreement would therefore be approved. There were two elements to a success fee: the risk element, reflected in the initial uplift, and the postponement element, reflected in a reduction to the uplift. The risk element reflected the fact that the attorneys would be required to charge more in a successful case in order to cover the costs which they would not be able to recover in an unsuccessful case (e.g., if there were a 75% chance of winning each case, the attorneys would be unable to recover costs in one out of every four cases. They would therefore need to charge an extra one-third of their usual fees for each of the successful cases in order to cover their costs in the unsuccessful case). The reasonable uplift fee would therefore be calculated by dividing the chance of failure by the chance of success, and multiplying the result by 100 (e.g., when there was a 75% chance of winning the case, the uplift would be calculated in the following way: (25/75)×100=33.33% uplift). The proposed success fee in the conditional

fee agreement varied depending on how much was recovered in the main litigation, with an average of 59%. This equated to a 63% chance of winning. The graduated scale was justified as there were a number of claims to be litigated and it was possible that the attorneys might be successful in some of those claims and not in others. As these claims varied in difficulty and it was considerably more difficult to win all five claims than to win just one, they would be entitled to a higher success fee if they were able to obtain a higher payment by winning more of the claims (paras. 32–39).

(3) The postponement element reflected the fact that, although the attorneys were required to provide their own funding until the end of the case-and were therefore entitled to include the amount of interest which would be owed when calculating the cost of the litigation-the total costs would not all be incurred from the time the case began. The success fee would therefore be reduced according to the length of the litigation (in years) multiplied by the interest rate which the attorneys would usually charge on their fees (e.g., if the litigation lasted for nine months, being three-quarters of a year, at an interest rate of 6%, the reduction would be calculated in the following way: 0.75×6=4.5% reduction). The attorneys” standard interest rates were 5.75%. Assuming that the litigation would last 18 months-and as the standard assessment for a postponement element in a case in which 6% interest was charged over 1½ years was 9%-the postponement element in this case would probably be 8%. Each level of uplift would therefore only be reasonable if it were reduced accordingly (e.g., if the amount recovered was $3m. or higher, but was below $6m., the uplift would be 12% of the attorney”s usual fees; and if the amount recovered was $6m. or higher, but was below $11m., the uplift would be 32% of the usual fees) (paras. 41–43).

(4) The success fee was equitable even though it could not be recovered from the defendants. The court had previously approved the engagement of foreign lawyers in overseas litigation which included contingency fees that were not recoverable from the other side and it was common practice in England to allow a conditional fee agreement, notwithstanding that elements of the agreement could not be recovered from the other side. Moreover, it was unlikely that any attorneys would accept a conditional fee agreement without an uplift term and it was commercially sound and reasonable for the liquidators and the creditors” committee to find that the benefit of engaging lawyers outweighed the disadvantages of having to pay the uplift costs (paras. 45–46).

(5) The court was entitled to sanction the liquidators” powers. When exercising its discretion to sanction a power falling within the Companies Law, Schedule 3, Part 1, the court would consider all the relevant evidence, including whether the proposed transaction was in the best commercial interests of the company, but, if the liquidators were attempting to enter into a compromise, the court”s choice would be between the proposed deal and no deal at all unless it was satisfied that there would be

better terms or a different offer. The liquidator was...