New rules mean third-party litigation funding has become acceptable in the Cayman Islands and Hong Kong in certain instances, opening up new investment opportunities for the growing number of hedge fund operating in the space.
The legal amendments relating to third-party litigation funding in both jurisdictions have fund managers investing in the space excited by the new options that could be presented.
"We've been following recent developments in funding activity with great interest and I expect that with the continued whittling away of traditional laws of maintenance and champerty in common law jurisdictions, we will see more funding activity going forward," predicts Tania Sulan, chief investment officer, Canada at IMF Bentham.
IMF Bentham has been at the forefront of a move by hedge funds into litigation financing in recent years. Fortress Investment Group partnered with Bentham last year to launch a dedicated US fund with up to $200m in starting assets while the firm established Bentham Ventures with affiliates of Paul Singer's Elliott Management in 2014, with Elliott understood to have purchased IMF Bentham's stake in the entity two years later.
Other firms operating in the space include New York-based Tenor Capital, while BlueCrest founder Michael Platt has backed a new start-up, Curiam Capital, which was launched last week by former Grais & Ellsworth lawyers Owen Cyrulnik and Ross Wallin.
William Farrell, co-founder at commercial litigation funder Longford Capital agrees legal developments in Cayman and Hong Kong open the jurisdictions up to greater litigation funding activity. "While the allowances are not as clear-cut as the use of funding in the US or in the UK, the common law jurisdictions are quickly moving toward a more liberal use of litigation funding for companies to access justice. That is very encouraging."
Of the Cayman decision, Christy Searl, a director of the litigation finance firm Burford Capital, which provided the funding in the Cayman case, says: "It removes the previous ambiguity about funding outside of insolvency. The court has said funding agreements will be accepted so long as the funders involved meet the laid out requirements, so I think with this guidance you will see more litigation funding agreements."
Before the recent amendments in Cayman and Hong Kong, the main prohibition on third-party funding was the common law rules against maintenance and champerty.
Peter McMaster, a partner at law firm Appleby, explains that champerty is where a litigant party pays a third party a cut of its damages in return for the third-party funding litigation. Maintenance is where a third party provides funding to allow legal proceedings to be brought. "Not every circumstance where third-party funding is done is illegal; there are certain types of acceptable maintenance of legal proceedings and it's a question of whether what is being proposed is contrary to the public policy outlawing maintenance," McMaster explains.
In Cayman, the Grand Court has confirmed that litigation funding is not contrary to public policy on maintenance and champerty. In a recent landmark case, A Company vs A Funder, the court set a list of considerations when presented with a funding agreement and offered some circumstances under which the court may permit them.
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Originally published in HFMweek in February 2018
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