Litigation funding is generally permissible in the Cayman Islands following the enactment of the Private Funding of Legal Services Act (2020 Revision) (“PFLSA”), which modernised the legal framework and clarified the permissibility of third-party funding arrangements.

Prior to the coming into force of the PFLSA on 1 May 2021, maintenance and champerty were considered both criminal offences and civil wrongs (torts) in the Cayman Islands. Maintenance is the improper support or litigation by a third party who has no legitimate interest in the case. Champerty is an aggravated form of maintenance where the third party provides financial assistance in return for a share of the proceeds if the case is successful. Given the risk of liability for either of these offences, litigation funding arrangements were historically uncommon in the Cayman Islands outside of the context of claims brought by liquidators of insolvent companies (where the courts identified exceptions to the common law position and authorised litigation funding when certain criteria were satisfied).

The PFLSA explicitly abolished the common law prohibitions on maintenance and champerty, save where the cause of action accrued before the PFLSA came into force. The legislation does not impose detailed requirements for or restrictions on the provision of litigation funding, although there is scope for further rules to be introduced by way of regulation. It is understood that this was a deliberate policy decision on the part of the legislature to enable the legal funding industry in the Cayman Islands to develop commercially.

General Position

The PFLSA does not currently impose detailed rules regarding the provision of third-party legal funding to litigants involved in Cayman Islands litigation. In order to constitute a valid funding arrangement under the act:

• the agreement must be in writing (Section 16(2)(a));
• the agreement must comply with prescribed requirements, if any (Section 16(2)(b)); and
• the sum to be paid by a client is required to consist of either:
1. any costs payable to the client in respect of the proceedings to which the agreement relates, together with an amount calculated by reference to the funder’s anticipated expenditure in funding the provision or services (Section 16(2)(c)(i)); or
2. a percentage of the amount or the value of the property recovered in the action or proceedings to which the agreement relates (Section 16(2)(c)(ii)); and
• the arrangement must not be illegal or contrary to public policy (Section 18(2)).

The legislature is yet to introduce any additional statutory requirements as contemplated by Section 16(2)(b); however, as addressed in 3.1 Alternative Fee Structures, additional requirements have been prescribed in the case of contingency fee arrangements under the Private Funding of Legal Services Regulations 2021 (the “Regulations”).

Now that champerty and maintenance have been abolished, it is unclear the extent to which the Cayman Islands courts will scrutinise the content of funding agreements in the general case or the basis upon which a funding arrangement might be challenged on public policy grounds.

Insolvency Litigation

A liquidator seeking to enter into a funding arrangement will still be required to seek the permission of the court notwithstanding the entry into force of the PFLSA. In those circumstances, the court will scrutinise the arrangement for fairness and the impact on creditors. Factors that the court is likely to consider in such an application include:

• the distance between the funder and the control of the litigation;
• the funder’s ability to terminate the funding agreement;
• the level of communication between the funded party and the attorneys acting for the company or liquidator;
• the prejudice likely to be suffered by a defendant if the claim fails (in light of the financial position of the plaintiff);
• the extent to which the funded party is able to make informed decisions regarding the litigation; and
• whether the funder is a professional and regulated funder.

Many litigation funders active in the Cayman Islands follow the Code of Conduct of the Association of Litigation Funders of England and Wales, which has been expressly referred to in Cayman Islands case law. This is a widely recognised, self-regulatory framework that sets out requirements regarding (amongst other things):

• capital adequacy;
• non-interference in legal strategy;
• fair and transparent terms; and
• termination protections.

The Cayman Islands does not have a specific standalone consumer credit regime. However, funders should ensure that their commercial arrangements do not unintentionally trigger licensing or regulatory obligations under the jurisdiction’s financial services laws.

Particularly in the context of cross-border payments, funders should ensure compliance with the Cayman Islands’ anti-money laundering and know your customer (“KYC”) rules under the Proceeds of Crime Act and related regulations.

In the context of insolvency, liquidators seeking third-party funding require court approval under the Companies Act to ensure that the agreement is in the best interests of creditors (see “Insolvency Litigation” in 1.2 Rules and Regulations on Litigation Fundingfor more details).

As explained in General Position” in 1.2 Rules and Regulations on Litigation Funding, there are currently very few statutory requirements for valid funding agreements under the PFLSA. Provided that the agreement is recorded in writing and is not illegal or contrary to public policy, the only statutory restriction on terms concerns the quantum of possible recovery by the funder. Any terms that purport to impose a “fee” greater than allowed under the act will be unenforceable.

In circumstances in which champerty and maintenance have been abolished, and in the absence of detailed rules under the PFLSA or any related regulations, it is unclear the extent to which other specific terms in funding agreements might be deemed unlawful or unenforceable in the general case. It is unclear whether the courts will seek to interfere with commercially agreed terms between the funder and the litigant on similar public policy grounds to those that were applied in the context of champerty/maintenance challenges.

In an insolvency context, the courts retain the right to scrutinise the terms of any agreement and to assess whether the agreement is in the best interests of creditors. It is feasible that the courts will continue to disapprove of terms in agreements that may previously have fallen foul of the doctrines of champerty and/or maintenance and may refuse to approve agreements that:

• purport to allow the funder to veto settlement offers;
• enable the funder to direct the approach taken to legal arguments; or
• grant the funder an unrestricted right to withdraw without reasonable notice or valid grounds.

Terms which purport to restrict a funder’s liability for adverse costs or security for costs will not be enforceable as against respondents to litigation.

There is no general obligation to disclose funding under the PFLSA. However, the court has the jurisdiction to order disclosure of the identity of funders and details of the funding arrangements where appropriate: Arnage Holdings Ltd v Walkers (a Firm) at [24]. Disclosure is likely to be required, to differing extents, in the following contexts:

• Insolvency proceedings. Liquidators are required to apply to court for approval of funding agreements. In this context, the liquidator would need to provide a copy of the funding agreement and an explanation as to why the agreement is in the best interests of creditors. Commercially sensitive elements of the arrangement may be treated as confidential and redaction may be allowed.
• Security for costs. It may be possible for a respondent to a claim to obtain disclosure of information relating to the existence of a funding arrangement where there are concerns about a party’s ability to meet an adverse costs order and an application for security for costs is made. Typically, the information that the court might require to be provided would include confirmation as to the existence of the funding agreement, the identity of the funder and, potentially, information regarding the funder’s financial capacity to meet any potential adverse costs order.

Perhaps unsurprisingly, given the position prior to the entry into force of the PFLSA, there has been no substantial consideration in the Cayman Islands as to the circumstances in which a pure funder will be held liable to pay an adverse costs order. In circumstances where there is limited, or no case law, surrounding an issue, English law is often instructive as to the approach that the Cayman Islands courts would take if faced with a similar legal question. The English position is particularly relevant in the context of costs as the Cayman Islands courts’ power to order a non-party to pay costs derives, ultimately, from Section 51 of the English Senior Courts Act 1981 as incorporated into Cayman Islands law under Section 11 of the Grand Court Act. 

The leading decision in England regarding funder liability for adverse costs is Arkin v Borchard Lines Ltd [2005] EWCA Civ 655. In that case, the English Court of Appeal held that a litigation funder’s liability for adverse costs should be capped at the amount of funding it provided to the claimant (the “Arkin Cap”). Arkin has been referred to with apparent approval in several Cayman Islands cases.

More recent case law suggests that the English courts may depart from the Arkin Cap in certain circumstances. In ChapelGate Credit Opportunity Master Fund Ltd v Money [2020] EWCA Civ 246, the English Court of Appeal clarified that the courts have full discretion to order a funder to pay all adverse costs in appropriate cases. Factors that may be relevant to the exercise of that discretion include: (i) the extent of the funder’s control or influence over litigation strategy, (ii) the extent of the funding, and (iii) the funder’s direct financial interest in the case.

Given the increase in litigation funding that has followed the introduction of the PFLSA, it can be expected that there will be an increased number of applications for funders to be held liable in respect of adverse costs where the funded party is unsuccessful. It will be interesting to see whether the Cayman Islands courts follow the approach taken by the English courts in this context, notwithstanding the abolition of the offences of champerty and maintenance in the jurisdiction and the lack of statutory restriction upon the form that third-party funding agreements may take.

The Cayman Islands courts have the power to require parties to litigation to provide security for costs. The jurisdiction, which is discretionary, derives both from legislation and from the inherent jurisdiction of the court.

Security for costs may be obtained against a Cayman Islands incorporated company under Section 74 of the Companies Act on grounds that there is reason to believe the assets of the company will be insufficient to meet an adverse costs order if the company is unsuccessful in the litigation.

In proceedings to which the Grand Court Rules (“GCR”) apply, the Court may grant security for costs against a plaintiff under GCR Order 23 where the plaintiff is ordinarily resident outside of the jurisdiction and it can be shown that there is a real risk that, were the plaintiff to be unsuccessful, an order that the plaintiff pay the respondent’s costs would be unenforceable. Where a costs order would be enforceable outside of the jurisdiction but the costs of enforcement are anticipated to be significant, security for costs may be ordered to reflect the additional cost of enforcement.

Security for costs are also available under GCR Order 23 where:

• the plaintiff is a nominal plaintiff suing for the benefit of another and there is reason to believe the plaintiff will be unable to pay the costs of the defendant if ordered to do so;
• the plaintiff’s address is deliberately omitted or incorrectly stated on the writ; or
• the plaintiff has purposefully changed address in the course of the litigation to evade litigation consequences.

Security for costs may be available against foreign companies under the Court’s inherent jurisdiction in circumstances other than those contemplated under GCR Order 23: Dyxnet Holdings Ltd v Current Ventures.

There are currently no reported judgments in the Cayman Islands where litigation funders have been ordered to provide security for costs. However, given the court’s inherent jurisdiction to order security for costs in the appropriate case, it is possible that the courts will follow the approach of other common law jurisdictions as the funding market in the Cayman Islands matures.

After the event (“ATE”) insurance is not as widely used in the Cayman Islands as it is in jurisdictions like England and Wales. However, it is gaining traction, particularly in high-value commercial litigation and insolvency cases.

In Caribbean Islands Development Ltd v First Caribbean International Bank [2014 (2) CILR 220], the question of whether ATE insurance was an acceptable form of security for the plaintiff’s adverse costs was considered. The court, dismissing the plaintiff’s submissions that an ATE insurance bond was good security, looked at a number of factors including (i) whether the provider was capable of, and was likely to, honour the bond and (ii) the governing jurisdiction of the bond. The court noted that it was sensible for ATE insurance to be regarded as an acceptable form of security; however, it found that, in this case, although the bond provider was a reputable insurer and did have the financial strength to cover the bond, the bond had been issued in accordance with English law, and the bond provider did not have a presence in the Cayman Islands. The court was therefore not convinced of the certainty of the defendant being able to enforce the bond as security for costs, and dismissed the plaintiff’s submissions that the bond met the security for costs order awarded against the plaintiff.

The PFLSA expressly permits the use of contingency fee agreements other than in criminal proceedings, quasi-criminal proceedings or matters concerning the care of children under the Children Act (2012 Revision). Contingency fee agreements are defined as agreements in which it is agreed that the remuneration paid to the attorney is contingent, in whole or in part, on the successful disposition or completion of the matter in respect of which the legal services are provided.

Further regulation of contingency fee agreements has been introduced in the Private Funding of Legal Services Regulations, 2021 (the “Regulations”).

The following conditions are applicable to contingency fee agreements under the PFLSA and the Regulations.

• The default position is that the attorney’s success fee shall not exceed any of:
1. the normal fees of the attorney by more than 100%;
2. where the claim in question concerns money, 33.3% of any amount awarded to or obtained by the client in the proceedings (excluding in respect of costs); or
3. where the claim concerns the recovery of property, 33.3% of the value of any property recovered.
• It is, however, possible for the attorney and client to bring a joint application pursuant to Section 4 of the PFLSA, within 90 days of the execution of the agreement, for approval by the court of an agreement providing for an amount payable which is greater than the cap prescribed by regulations. However, the court cannot approve a contingency fee of more than 40% of the value in dispute. In determining whether to accede to the application, the court will consider the nature and complexity of the proceedings, the expense or risk involved in the litigation and any other factors the court considers to be relevant.
• The contingency fee agreement must be in writing signed by the parties and must contain prescribed information as set out in Regulations 4 and 5 of the Regulations.
• The agreement may not contain provisions that:
1. require the consent or the attorney before a claim may be abandoned, discontinued or settled at the instructions of the client;
2. prevent the client from terminating the contingency fee agreement with the attorney or changing attorneys; or
3. provide that the attorney will not be liable for negligence or be relieved of any responsibility to which they would otherwise be subject.

There is currently no regulation on fee-sharing arrangements between third-party funders and the lawyers whose cases are being funded.

Incorporated law firms in the Cayman Islands (“Recognised Bodies”) may not have directors or members who are not either attorneys or Recognised Bodies.

No tax is typically charged on legal fees payable by clients to lawyers in the Cayman Islands.

Assuming that the payment originates from the Cayman Islands, and absent any unusual circumstances, there should be no withholding on any portion of returns paid to a third-party funder based in Cayman, Delaware, Guernsey, Ireland, Jersey or Luxembourg.