Michael Makridakis, Christian Luthi, Mark Forte and Alex Potts QC of Conyers consider the differing approaches to third-party funding and contingency fee arrangements in Hong Kong, Singapore, the Cayman Islands, British Virgin Islands and Bermuda.
Businesses in Hong Kong, Singapore and around the world commonly organise their corporate structure to include entities incorporated in their home jurisdiction, as well as those in offshore jurisdictions such as the Cayman Islands, the British Virgin Islands and Bermuda.
When disputes arise within a group of companies or with external parties, claimants are often required to make important, preliminary choices. For example, in which jurisdiction should the claim be filed? Should the claim proceed by way of commercial litigation or arbitration? And vitally, how much will the proceedings cost and what, if any, external funding options are available, over and above the claimant's own resources?
The purpose of this article is to identify and compare the third-party funding options available for claims brought in Hong Kong or Singapore, with those available in the offshore jurisdictions of the Cayman Islands, the British Virgin Islands and Bermuda (the subject jurisdictions).
TYPES OF 'FUNDING' AND 'PROCEEDINGS'
In addition to conventional funding arrangements that might be provided by a company's shareholders or creditors, funding for legal costs and disbursements may be available directly from a specialist litigation funding provider or indirectly from the lawyers conducting the case, or both.
In third-party funding, a third-party funds all or part of the costs of the litigation in exchange for an agreed upon financial return, usually calculated as a multiple of the funding amount contributed or a percentage of the damages recovered. The costs funded may include the lawyers' fees, disbursements and sometimes a provision for potential adverse costs orders, security for costs or after-the-event insurance. A key element of such agreements is that they are usually 'non-recourse': if the claim is unsuccessful, the borrower will have no obligation to repay even the principal amount advanced by the funder.
With lawyers' contingency fees, the obligation to pay fees to the lawyer is contingent, in whole or in part, upon a successful outcome in the litigation. Commonly, the lawyers' fees will comprise a percentage of the damages recovered. Where a law firm discounts its normal hourly rates but is entitled to an 'uplift' above its normal hourly rates in the event of success, this is a subtype of contingency fee known as a 'conditional fee'. As with third-party litigation funding, the borrower will commonly pay either no fees or reduced fees if the case is unsuccessful.
THE GENERAL RULE AND THE EXCEPTIONS
Traditionally, the common law prohibited 'maintenance' and 'champerty' such that claimants could not obtain third-party litigation funding or enter into contingency fee agreements with their lawyers. Maintenance occurs where an unconnected third-party assists with maintaining litigation, usually by providing financial assistance. Champerty is an aggravated form of maintenance in which the third-party assists the claimant in exchange for a share of the proceeds of the litigation. At common law, maintenance and champerty are torts and constitute criminal offences.
To varying degrees in the subject jurisdictions, exceptions to the general prohibition on maintenance and champerty have developed at common law and/or legislation has been enacted watering-down or abolishing the prohibition altogether. The result is a patchwork of regulation and common law exceptions across the subject jurisdictions.
The three principal common law exceptions are:
Common interest: Certain relationships are judicially recognised as involving persons with a legitimate common interest in the outcome of litigation. Examples include government legal aid for citizens, landlord and tenant and master and servant relationships.
Access to Justice: This promotes the policy idea of enabling an impecunious claimant to pursue a meritorious claim against another where they otherwise would not be able to without the requisite funding. In jurisdictions where the legislature has not abolished maintenance and champerty, some courts have considerably expanded the scope of this exception.
Liquidation: Companies in liquidation are generally insolvent. In order to raise funds, the liquidator enjoys a statutory power of sale to assign causes of action and the proceeds thereof to third-parties. The courts in nearly all common law jurisdictions have recognised that liquidators should be exempt from the general prohibition on maintenance and champerty.
Even in jurisdictions where the court has expanded the scope of the 'access to justice' exception, approval should still be conceptualised as a two-step process. First, there is the 'gateway issue' of whether the claim falls within a recognised common law exception. Second, there is the question of whether the terms of the funding agreement itself are consistent with the public policy of the jurisdiction and with any regulations governing litigation funding. In some jurisdictions in which maintenance and champerty have been abolished, claimants need only concern themselves with the second consideration. In these jurisdictions third-party litigation funding agreements may be conceptualised as prima facie valid, subject to their terms complying with applicable public policy.
Whether or not contingency fee agreements are lawful will usually depend upon the rules of the particular jurisdiction regulating lawyers and lawyers' fees.
HONG KONG AND SINGAPORE
In order to provide a reference point for analysis of the offshore jurisdictions it is necessary to outline the position in Hong Kong and Singapore.
In Hong Kong, maintenance and champerty remain torts and criminal offences at common law. Third-party litigation funding of commercial litigation is rare, as claims must fall within one of the common law exceptions to the prohibition on maintenance and champerty. However, liquidators commonly rely on the liquidation exception to enable funding of cases by companies in liquidation. Court sanction of such agreements is not usually required. Third-party funding of arbitral proceedings is authorised and regulated by statute. Lawyers may not receive contingency fees for arbitration or court proceedings.
Since 2017, maintenance and champerty have not been torts or criminal offences at common law in Singapore. Despite this, third-party litigation funding of commercial litigation is rare, as claims must still fall within one of the common law exceptions to the prohibition on maintenance and champerty. Liquidators have relied on the liquidation exception to enable funding of cases by companies in liquidation. The liquidation exception has been codified for certain types of proceedings by liquidators, including what may be referred to as 'claw-back' claims. Litigation funding is authorised in international arbitration proceedings (but not for domestic arbitrations), provided there is compliance with the conditions prescribed by the legislation. Lawyers may not receive contingency fees for arbitration or court proceedings.
THE CAYMAN ISLANDS
Of the subject jurisdictions, the Cayman Islands currently represents the 'high-water mark' of the liberalisation of the laws governing litigation funding and lawyers' contingency fees. However, equivalent draft legislation is currently under review in several other jurisdictions. In May 2021, the Private Funding of Legal Services Act (2020 Revision) (the Cayman Act) came into force. The Cayman Act abolishes the crimes and torts of maintenance and champerty and expressly authorises third-party litigation funding and lawyers' contingency fees. While the former category is unregulated (albeit subject to certain common law principles), the latter is regulated by the Cayman Act and by the Private Funding of Litigation Regulations.
The Cayman Act applies to all Court and arbitral proceedings (subject to limited exceptions, for example, concerning guardians, trustees and minors). For third-party litigation funding agreements, the Cayman Act requires the agreement to be in writing and to comply with any prescribed regulations. In drafting the Cayman Act, the Cayman Islands Law Reform Commission formed the view that the jurisdiction should favour self-regulation and allow the market to dictate the standard terms and conditions of litigation funding agreements. At present, there are no prescribed regulations in play in relation to third party funding.
While the Cayman Act abolishes the torts and crimes of maintenance and champerty, it expressly does not "affect any rule of law as to the cases in which a contract is to be treated as contrary to public policy or otherwise illegal". Subject to one point, the legislative position in the Cayman Island is therefore indistinguishable from that in the United Kingdom, where the Criminal Law Act 1967 includes an identical qualification. The difference is that the UK has introduced a voluntary code governing litigation funders and the content of litigation funding agreements, whereas the Cayman Islands has not yet done so.
Since the introduction of the Cayman Act, we are not aware that the court has handed down a decision detailing the circumstances in which a litigation funding agreement might be contrary to public policy or otherwise illegal as a matter of Cayman Islands law. The commission, cognisant of the increasing use of litigation funding in the United States and the UK, wished not to prescribe any restrictions that may have the effect of placing the Cayman Islands at a disadvantage in the eyes of potential litigants seeking a forum for the resolution of their disputes.
Nevertheless, the court is likely to look to the significant body of UK case law on this issue, together with the principles laid down in first instance decisions handed down before the introduction of the Cayman Act (for example A Company and A Funder (unreported, Segal J, 23 November 2017)). Furthermore, due to the similarities between the two jurisdictions, in the absence of bespoke Cayman Islands guidance, it may be wise for claimants and funders to follow the UK's voluntary code on litigation funding to the extent commercially feasible.
Although a detailed analysis is beyond the scope of this article, the principal public policy issues are likely to include: the claimant's right to independent legal advice; an absence of conflicts of interest; the extent of control of the proceedings by the funder; the level of remuneration payable to the funder; appropriate provision for potential adverse costs orders; and the circumstances in which the claimant and/or funder may terminate or vary the agreement. Standard funding agreements used by experienced litigation funders will invariably address these issues. The Cayman Court retains the ability to control its procedure and prevent any abuse of process. Thus, any contravention of public policy may result in the court declaring the funding agreement unenforceable and/or the court holding the funder personally liable under a non-party costs order.
Lawyers' contingency fees are permissible. However, the Act and the regulations impose maximum limits on recoveries and/or uplifts payable to the lawyers involved.
There is no legislation expressly abolishing the torts of maintenance and champerty, although draft legislation regulating third party litigation funding is currently under consideration. In the case of Stiftung Salle Modulable et al -v- Butterfield Trust , the Bermuda Supreme Court was required to rule upon the validity of a litigation funding agreement entered into by two impecunious charitable/philanthropic foundations and a professional litigation funder. In two first-instance judgments in this case (one in 2012, the other in 2014), the court held that the Bermuda Constitution provides a "constitutionally protected right of access to the court" and went so far as to suggest, "such funding arrangements should be encouraged rather than condemned".
Neither judgment includes any detailed analysis of the legal principles underpinning the court's decision. Reference is made to the parties' respective written arguments, but the arguments are not included in the judgments. The court simply stated that it rejected the defendant's arguments as to the invalidity of the funding agreement "on traditional common law principles prohibiting maintenance and champerty", without further explanation.
Some commentators have suggested the judgments in Stiftung Salle Modulable herald the virtual abolition of the torts and crimes of maintenance and champerty in Bermuda. However, the case appears to fall squarely within the well-established common law 'access to justice' exception. The borrowers were two impecunious foundations who obtained litigation funding in order to pursue the wrongdoer who allegedly caused their impecuniosity.
While the first-instance decisions in Stiftung Salle Modulable can be read as importing the access to justice exception into Bermuda law, (and there have also been a number of other unreported cases in which third party litigation funding has been provided without objection), it is submitted that establishing the validity of a litigation funding agreement nonetheless remains a two-step process. One must: establish that the case falls within a recognised exception to the general prohibition; and ensure that the terms of the funding agreement comply with public policy.
In contrast, lawyers' contingency fee agreements are unlawful except in undefended debt collection cases, or to the extent expressly permitted by the Bermuda Bar Council, or by the court, in the circumstances of any particular case.
BRITISH VIRGIN ISLANDS (BVI)
The BVI legislature abolished criminal liability for maintenance and champerty in 1997. However, it is unclear whether the torts themselves were abolished and thus whether a funded claim must fall within an exception to the general prohibition.
In Tetiana Leremeieva et al v Estera Corporate Services BVIHC the court endorsed the access to justice exception, describing it as, "the entirely laudable practice of encouraging access to justice for those with good claims who would otherwise be shut-out from the court system". The court identified excessive control and excessive returns to a funder as relevant public policy considerations.
In the case In the Matter of Exential Investments Inc BVIHC the liquidator sought court approval for entry into a litigation funding agreement. The court noted that the courts in many common law jurisdictions had adopted the modern English approach permitting third-party litigation funding at common law. The court held that the funding agreement proposed was not contrary to BVI public policy and that without funding, the liquidators would be unable to obtain recoveries for the benefit of the creditors of the company. The court also held that the funding arrangement in question was essential to ensure access to justice.
These cases appear to fall squarely within the recognised exceptions of 'access to justice' and 'insolvency'. Accordingly, it cannot be said with certainty that a third-party litigation funding agreement should be viewed as prima facie valid in BVI, subject only to its terms complying with relevant public policy. Rather, establishing the validity of a litigation funding agreement is likely to involve the two-step process discussed above.
With the coming into force of the Legal Professions Act 2015 and the Code of Ethics governing the conduct of lawyers, the prevailing view is that lawyers' contingency fee agreements are now lawful in contentious matters. However, there remains some debate about whether the provisions in the Legal Professions Act and the Code of Ethics have this effect due to some ambiguity in the language used. Finally, it is worth noting that the BVI legislature is currently considering a draft bill that would authorise and regulate both litigation funding and lawyers' contingency fees.
Judges and legislators are increasingly seeing third-party litigation funding as an important tool for promoting access to justice. Where claimants have a choice about the form and forum for the resolution of a dispute, the availability of third party litigation funding and lawyers' contingency fees may be a significant factor influencing their decision. The author hopes that claimants will find the comparative analysis provided in this article useful in making this important decision.
Originally Published by ICLG
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.