The Cayman Islands confirms its commitment to disputes funding
The Cayman Islands has welcomed codification of the third-party disputes funding regime with the introduction of the Private Funding of Legal Services Act 2021 (gazetted by the Cayman Parliament on 7 January 2021, but not yet come into force). In light of the uncertain economic outlook triggered by COVID-19, the Act provides new funding opportunities in one of the largest financial centres in the world.
In this article, we reflect on the implications of the new Act in conjunction with Cayman Islands law firm Harneys.
Third-party funding in the Cayman Islands – then and now
Prior to 2017, the obsolete common law offences of champerty and maintenance prohibited third-party funding arrangements outside of the insolvency context. In 2017, Cayman Islands law firm Harneys secured the court’s approval of such an arrangement on behalf of a well-resourced client in a significant step towards bringing the jurisdiction into line with the United States and United Kingdom.
However, litigants and funders were slow to embrace such arrangements. This reluctance resulted from the requirement for court approval, adding an additional layer of cost. In circumstances where the developing case law did not set clear parameters for acceptable funding arrangements, there was the risk that the funder might invest significant resources getting a case off the ground only to have the arrangement rejected by the court.
The new Act should reduce the transaction costs and uncertainties of implementing third-party funding arrangements and make them much more attractive to litigants and funders going forward. Nick Hoffman, managing partner and head of litigation of Harneys in the Cayman Islands, reflects on the Act:
The new Act takes a sensible, light touch and modern approach to third-party funding arrangements, recognising that such arrangements will invariably be made between sophisticated parties who should be left to make their own arrangements having regard to their assessment of the risks involved.
Going forward, court approval is not required as the champerty and maintenance offences are expressly repealed by the Act, and there is no cap on how much the funder can recover. The new Act requires only that the funding arrangement be in writing, and that the amount payable to the funder should consist of either (1) the costs of the litigation plus an amount calculated by reference to the funder’s anticipated expenditure or (2) a percentage of the amount or the value of the property recovered in the proceedings. Cabinet may make regulations in relation to litigation funding agreements. The Act also applies to arbitration proceedings.
Why the Cayman Islands?
The Cayman Islands is a leading global financial centre, serving as a hub for investment funds (a little over 11,000 mutual funds and 12,000 private funds), trusts, insurance and reinsurance vehicles (around 600), and capital markets transactions. Cayman Islands companies account for around half of the 2,000 or so companies listed on the Hong Kong Stock Exchange, and for just under half of the Exchange’s market capitalisation. There are hundreds of other Cayman Islands companies listed on other major stock exchanges around the world.
High value commercial disputes inevitably follow financial activity of this scale, and the courts of the Cayman Islands regularly host litigation that captures international attention because of the sums of money at stake. Recently, the Cayman Islands appellate court heard an appeal in Ahmad Hamad Algosaibi & Brothers Company v Al-Sanea & Ors, a multi-billion-dollar claim heard over one year at first instance and involving allegations of fraud arising from one of the largest corporate collapses of the 2008 global financial crisis.
The financial ramifications of the COVID-19 pandemic mean that distressed debt, formal insolvencies, turn around and restructures are on the immediate horizon, and the timely introduction of the new Act provides debtors and creditors with new opportunities to leverage litigation funding for the benefit of stakeholders. Tim DeSieno, Omni Bridgeway’s Global Director of Distressed Debt, considers that:
Given the Cayman Islands’ central place in global finance, there will surely be opportunities over the coming years, regardless of the impact of COVID-19. Omni Bridgeway welcomes the Cayman Islands’ new statutory framework, and we stand ready to help stakeholders unlock value in connection with disputes and restructurings.
To learn more about how disputes funding can help your company or law firm, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos.
Or contact the authors of this post, Nick Hoffman, William Peake, and Lachlan Greig of Harneys or Omni Bridgeway’s Oliver Gayner, Tim DeSieno, and Ken Epstein or for a consultation to learn more about the ways we can help you pursue meritorious claims.