Jersey: Landmark Decision Reached On The Validity Of Litigation Funding In Jersey

Access to Justice

Commercial litigation has a reputation for being expensive and uncertain and is something which some clients may make a conscious decision to avoid. As with most things, it need not be that way. Litigation funding, in the right case, may provide an answer to an impecunious plaintiff, or at least provide a valuable option worth considering as an alternative to funding a case through to trial from resources at one's own disposal.

Third Party Funding Agreements

Third party funding involves an agreement, (which may take a variety of forms) between a litigant and a professional funder rather than between a litigant and a lawyer. In broad terms, the litigant will pass to the funder some or all of the responsibility for the ongoing legal cost of taking a case to trial. The litigant may also purchase ATE ("after the event") insurance to cover any adverse costs order if the case fails. The funder will take an active interest in the case but will not meddle in the litigation by getting involved in decision making. In return, the litigant will agree to share a percentage of the proceeds with the funder.

The funder will not be incentivised to strike too hard a bargain with the litigant for at least two reasons. Firstly, the funder wants the litigant to retain a sufficiently keen interest in the outcome of the case to get the best result at trial or settlement for the benefit of both parties. Secondly, too greedy a deal on the part of the funder may lay the whole arrangement open to being set aside as abusive and contrary to underlying and longstanding rules against intermeddling in litigation.

Funding is not an option for every potential litigant. However, it may well be an option worth considering for significant claims (of approximately £2 million or more) where the prospects of success and recovery look good.

Litigation Funding in the United Kingdom and elsewhere

In the United Kingdom and elsewhere, litigation funding is mainstream and has developed significantly over the past 10 years or so. Whether such agreements are valid and enforceable, as opposed to an abuse of process, is dependant on the circumstances in each case. However, as a concept and if properly structured, they are now officially regarded as beneficial in the interests of justice and to be encouraged.

Litigation Funding in Jersey

Whilst is has long been recognised by third party litigation funders based in the United Kingdom that the Channel Islands have a well established litigation market, there has been no established domestic market for funding and it was not known whether litigation funding agreements were enforceable in Jersey. This is because until the recent decision of the Royal Court in Jersey "In the Matter of the Valetta Trust", the legality and enforceability of funding agreements in Jersey remained untested, unlike in the United Kingdom and elsewhere.

The Valetta Trust

On 25 November 2011, a landmark judgment was handed down by the Royal Court of Jersey in the Matter of the Valetta Trust. As a result of the arguments presented by Advocate Lisa Springate of Bedell Cristin, the Royal Court concluded that public policy strongly pointed towards the third party funding agreement in question being regarded as valid and enforceable.

The case involves litigation commenced in 2011 by beneficiaries of a Jersey discretionary trust and its replacement trustee, against the former Jersey trustee, together with two individuals. The only material asset of the Trust was a minority shareholding in an underlying company which in turn owned certain rights to a product. The former trustee sold the Trust's shares in the company to itself as trustee of another trust which also held shares in the company.

The plaintiffs contend that the sale of the shares was done at a gross undervalue which was known to the former trustee. The plaintiffs therefore wished to institute proceedings against the former trustee for breach of trust as well as against certain other persons who are said to have been knowingly involved in the sale at an undervalue. The former trustee and other defendants strongly deny the allegations.

When considering their litigation options, the prospective plaintiffs turned to litigation funding. They entered into a funding agreement with a leading third party funder, Harbour Litigation Investment Fund LP ("Harbour"), which is based in England. The Royal Court requested detailed submissions on whether such an agreement is permissible and enforceable under Jersey law, particularly since the Court was being asked to authorise the replacement trustee to enter into the agreement and since this was the first time the enforceability of funding agreements had been considered in Jersey litigation.

In reaching its decision that public policy considerations strongly pointed towards the agreement in question being held as valid and enforceable, the Royal Court stated that there is no material difference between the law of Jersey and the law of England in this area. English law has firmly moved away from the historical position that such agreements would fall foul of rules on champerty and maintenance. The desirability of promoting access to justice dictates that it is better, in principle, for a party to have access to funding and to forfeit a percentage of their damages than forego the chance of litigation altogether.

However, the Royal Court made it clear, also following English law, that the question of whether a particular agreement is valid and enforceable, as opposed to an abuse of process and contrary to public policy will be dependent upon the circumstances of each case and the terms of each agreement.

In the Valetta case, the effect of the funding agreement can be summarised as follows. Harbour agrees to provide the legal costs of the plaintiffs. It also agrees to meet any adverse costs orders made against the plaintiffs by virtue of an ATE ("after the event") insurance policy. In return, any damages recovered either by negotiation or by award from the Court are to be applied first, in reimbursing Harbour for all the costs which were incurred. Thereafter, the proceeds are spilt between the plaintiffs and Harbour with the proportion going to Harbour commencing with the greater of 25% of the proceeds or twice the legal costs of the plaintiffs, and increasing according to the length of time that the proceedings have taken, reaching maximum of 50% or three times the legal costs of the plaintiffs, whichever is the greater. Under the agreement, control of the litigation rests with the plaintiffs although they must keep Harbour informed and they agree to conduct the litigation in accordance with the reasonable advice of their lawyers. Harbour has the right to terminate the agreement if satisfied that there has been a material adverse decline in the prospects of success. Harbour would in those circumstances remain liable for all costs incurred during the existence of the agreement and for adverse costs to the date of termination.

The Court had regard to the fact that, whilst the funding agreement provides Harbour with a share of the proceeds, it is drafted to ensure compliance with certain principles governing the validity of such agreements in England and other jurisdictions which, at their core, are all about preserving the purity of justice. It is an important feature of the funding agreement in question that control of the proceedings remains with the plaintiffs, who will still retain a substantial proportion of the damages if successful. The defendants, for their part, are protected in respect of their costs, if the claim fails. For these reasons, the Court approved the funding agreement and authorised the trustee to become party to it.

In concluding its judgement, the Royal Court emphasised that it is only applicable to third party funding agreements and that conditional fee arrangements remain outside the Jersey statute book and are prohibited in Jersey.

The importance of this decision to third party litigation funders and those contemplating litigation in Jersey is that it is now officially recognised that a funding agreement is in the interests of justice and is to be encouraged, provided that it is properly structured. This decision may well have a profound effect on the Jersey litigation market in that litigation funding may facilitate access to justice by plaintiffs who would not otherwise be able to afford to bring the litigation in question, as well as for those who wish to share the costs of litigation with a funder.

Finally, it remains to be seen whether there are a sufficient number of funded cases in Jersey for the Code of Conduct for funders which applies in England and Wales to be extended to disputes which are litigated in Jersey.

The authors act on behalf of the plaintiffs in the Valetta Trust.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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