In the matters of ICP Strategic Credit Income Fund Ltd. and ICP Strategic Credit Income Master Fund Ltd.
On April 4, 2014, Justice Andrew Jones QC delivered the written reasons for his decision to authorize the Joint Official Liquidators (JOLs) of two Cayman Islands funds to enter into a contingency fee agreement with a firm of New York attorneys. Although the reasons are not ground-breaking, they include a helpful review of the law in the Cayman Islands on litigation funding agreements generally and contingency fee agreements in particular.
The JOLs of ICP Strategic Credit Income Fund Ltd. and ICP Strategic Credit Income Master Fund Ltd. made a sanction application to seek the court’s authority to commence litigation on behalf of the funds in the United States of America against Barclays Bank Plc and DLA Piper LLP on the basis that the prosecution of the litigation would be funded pursuant to the terms of a contingency fee agreement with a firm of New York attorneys. It is not necessary to set out the full factual background to the litigation in this briefing note, but in short it involved the alleged misuse of the funds’ money for the purposes of meeting margin payments which were required to be paid by a company called Triaxx Funding High Grade I, Ltd. to Barclays Bank Plc.
The law on litigation funding in the Cayman Islands
First, it is useful to define some of the commonly used phrases in this area of the law:
- A ‘litigation funding agreement’ is a form of limited recourse loan agreement, by which a lender advances money to a litigant (or to the liquidators of a litigant) for the purposes of funding the prosecution of a cause of action, and which limits the lender’s recourse to a share in the proceeds of the litigation;
- A ‘contingency fee agreement’ is a contract between a litigant and a law firm, by which the law firm agrees conduct proceedings on behalf of the litigant on terms that the law firm’s right to remuneration arises only if the litigation is successful and is limited to a share in the proceeds of the litigation. Contingency fee agreements are unlawful and unenforceable if they relate to litigation which is to be conducted in the Cayman Islands, on the basis that they are contrary to the public policy of this jurisdiction (per Smellie CJ in Quayum v. Hexagon Trust Company  CILR 162); and
- A ‘conditional fee agreement’ is a contract between a litigant and a law firm, by which the amount of the law firm’s remuneration is conditional upon the outcome of the litigation. Under a conditional fee agreement, a law firm will typically be paid on a time spent basis in the usual manner, but the amount payable by the litigant will be subject to an uplift or bonus in the event that the litigation is successful (normally as a percentage uplift of the time charged or as an enhanced scale of hourly rates). Conditional fee agreements are permissible in the Cayman Islands, provided that the proposed agreement has been approved by the court.
In matters where official liquidators commence proceedings on behalf of the companies over which they are appointed, the liquidators often obtain funding for such litigation from creditors of the companies or from unrelated third parties. In those circumstances, the liquidators will be confronted with the question of whether such funding arrangements can be categorized as indulging in the archaic common law doctrines of maintenance or champerty, which have not yet been abolished in the Cayman Islands (notwithstanding the fact that criminal and civil liability for those doctrines was abolished in England and Wales in 1967).
In brief, maintenance is the assistance or encouragement of proceedings by someone who has no interest in the proceedings or any motive recognized by the law as justifying interference, and champerty is an aggravated form of maintenance whereby the assistance is provided in exchange for a share of any fruits of the action. The doctrines of maintenance and champerty have been recognized in the Cayman Islands in Johnson v Cook Bodden  CILR 399 and in Quayum. The public policy behind the outlawing of champerty is to stop a person intermeddling in the disputes of others where he or she has no interest, is not justified in intermeddling, and does so with a view to obtaining some of the spoils (British Cash and Parcel Conveyors Ltd v Lamson Store Service Co Ltd  1 KB 1006).
Should a litigation funding agreement be found to involve maintenance or champerty, it is generally treated as contrary to public policy and unenforceable. Any proceedings arising out of such a contract are also liable to be stayed as an abuse of process on the application of the defendant. In the context of liquidation proceedings, creditors providing a fighting fund for liquidators need not fear falling foul of the doctrines (provided that they do not seek to usurp the liquidators’ control of the action) as they are considered to have a legitimate interest in actions which may have the effect of swelling the size of the liquidation pot for ultimate distribution. The difficulty arises when the proposed litigation financier is an unrelated party.
In the ICP case, the Grand Court recognized growing limitations on the application of the doctrines of maintenance or champerty to reflect modern needs and practices and found that when considering whether an agreement falls foul of the doctrines, the paramount question for the court is whether the agreement would tend to “corrupt public justice” and that the doctrines are “primarily concerned with the integrity of the process in this jurisdiction.” Further, that “the modern authorities demonstrated a flexible approach where courts have generally declined to hold that an agreement under which a party provided assistance with litigation in return for a share of the proceeds was unenforceable” (per Coulson J. in London & Regional (St. George’s Court Ltd) Ltd v Ministry of Defence  EWHC 526 at paragraph 103).
In the context of liquidation proceedings, Jones J. went on to find that:
- an outright sale of a cause of action by an official liquidator, by way of a legal assignment, where the price is a percentage of the proceeds of the action, is a valid exercise of the liquidator’s statutory power to sell the company’s property;
- an assignment of a percentage of the proceeds of a cause of action pursuant to a litigation funding agreement is also a valid exercise of the liquidator’s statutory power to sell the company’s property, provided that the funder is given no right to control or interfere with the conduct of the litigation; and
- a purported assignment of a right of action (or the proceeds thereof) which is vested in the liquidator personally (such as the right to assert preference claims) is not authorized under the statutory power to sell the company’s property and would be an unlawful surrender by the liquidator of his fiduciary power and would be contrary to public policy.
Jones J. then examined the circumstances in which the court could properly allow a liquidator to enter into a contingency fee agreement, and held that he should follow the Quayum decision and conclude that such agreements are contrary to Cayman Islands public policy (despite the change of attitude in England) and are therefore void and unenforceable.
However, the judge found that although the Court’s sanction could not validate a contract that was otherwise void and unenforceable, “the public policy underlying the Cayman Islands common law of champerty relates only to litigation conducted in our domestic courts.” Jones J. accordingly held that a contingency agreement “which is expressed to be governed by Cayman Islands law, will be valid and enforceable provided that its terms require that it will be performed wholly in a foreign country where its performance will be lawful and permissible in accordance with the applicable local law and rules of professional conduct.” It followed that as the proposed contingency fee agreement with the firm of New York attorneys in the ICP matter was permissible under New York law, it was open to the court to sanction that agreement, which it duly did.
As mentioned in the introduction to this briefing, the reasons for the ICP decision are not novel, but they provide a useful review of the law in the Cayman Islands on litigation funding. In the context of liquidation proceedings, when a liquidator wishes to enter into a contingency fee agreement with a foreign firm of attorneys, the liquidator should ensure that: (i) the proposed agreement complies with the requirements of the Cayman Islands’ Companies Winding Up Rules (particularly the requirements of Order 25, which provide that the agreement must be governed by Cayman Islands law and must contain an exclusive jurisdiction clause for the Cayman courts); (ii) the performance of the agreement is permitted by the law and professional conduct rules of the country in which the litigation is to be conducted; and (iii) the liquidator does not fetter his fiduciary power to control the litigation.