Cayman Islands approves law for contingency fees and litigation funding
21 January 2021
The Private Funding of Legal Services Act 2020 (the “Act”), was gazetted on 7 January 2021. Once brought into force it will introduce a statutory framework for contingency fee agreements ("CFAs") and litigation funding agreements ("LFAs") in the Cayman Islands.
The Act will make legal services more accessible and will offer a broad range of financing options, a move that is welcomed by plaintiffs and litigation funders. A driving force behind the Act was to provide litigants with access to justice and the ability to pursue claims which they had previously been unable to initiate and sustain due to a lack of resources. It is also seen by many as an important and necessary development to ensure that the Cayman Islands offer the same options to litigants as other leading onshore business and financial centres.
By way of example, LFAs and CFAs can be used by those lacking the personal finances to advance a claim for personal injury or medical negligence, which would otherwise be lost. From a business perspective, they can be essential to successful operations and decision making; a company may wish to trade part of a potential damages award to hedge the risk of litigation; an in-house counsel may not have the budget to advance a claim with limitation approaching; or insolvency practitioners may lack the liquidity to pursue an action.
Is this a big step?
Prior to the Act, the archaic doctrines of maintenance and champerty made it a criminal and civil offence for anyone without a legitimate interest in legal proceedings to support it in return for a share of the proceeds. The legal community has acknowledged that these doctrines are outdated and LFAs within the insolvency context have been permitted, subject to court approval. There has also been a growing sense from the judiciary in recent years, namely through the cases of A Company v. A Funder  and A Trustee v. A Funder , that the treatment of LFAs outside the insolvency arena was gaining acceptance as a legitimate option to finance the pursuit of commercial claims. The passing of the Act is a significant milestone as it will give the legal and litigation finance communities clarity and confidence as to what is permissible with and without court approval.
The Act represents a bigger shift for CFAs from the previous state of the law, which now allows attorneys to take on cases where the payment of their fees is partially or entirely dependent on the outcome of legal proceedings. Until now, the concept of a "no win – no fee" arrangement was generally not legally permissible. The Act will open up opportunities for plaintiffs and attorneys to consider broader options in relation to financing, fees and the management of risk associated with pursuing or defending legal proceedings. These developments are also likely to cause a notable rise in the number of After the Event Insurance (ATE) policies that are marketed and purchased in the jurisdiction by parties.
How do CFAs and LFAs operate?
A CFA will provide that all or some of the fees payable to the attorney by the client is contingent on the success of the case. What constitutes "success" will need to be clearly defined in the CFA. The Act provides for two types of fee structures within a CFA:
- A success fee - if the claim is unsuccessful the attorney will not typically be entitled to a fee from the client, although the agreement could provide for a reduced fee in an unsuccessful outcome. If the claim is successful, the attorney is entitled to a success fee on top of their standard rate, often referred to as the uplift. The success fee cannot amount to more than 100% of the attorney's normal rate and must also not exceed the "prescribed percentage" of the total amount awarded or obtained by the client, excluding costs. The regulations supporting the Act are yet to be passed, but the draft regulations proposed by the Cayman Islands Law Reform Commission ("CLRC") contain a prescribed percentage of 33.3%, which is likely to be adopted. The attorney and client can apply to the Grand Court (the "Court") to exempt the CFA from these prescribed limits, if merited, based on the facts of the case, but the Court's discretion is capped at 40% of the total amount awarded or obtained.
- A percentage fee - as with a success fee, the attorney will not generally be entitled to a fee from the client if the claim is unsuccessful, but this is negotiable. If the claim is successful, the attorney is entitled to be paid a percentage of the amount the client is awarded or recovers. The percentage is usually assessed having regard to the complexity and risk factors associated with the action. The percentage must not exceed the "prescribed percentage" referenced above, likely to be 33.3%; however, the client and attorney have the option to apply to the Court for approval to increase the percentage up to 40%, if the circumstances are considered appropriate.
The existence of a CFA does not affect the usual rights and remedies of the parties in respect of costs, with the successful party entitled to recover "reasonable costs" from the opposing party, unless ordered otherwise by the Court. The Court will not reduce the amount of costs recoverable by the party because their attorney is being compensated under a CFA, although a party cannot recover an amount more than is payable to their attorney under the terms of a CFA.
In LFAs, a plaintiff will contract with a third-party funder to provide all or a portion of the necessary financing to pursue legal proceedings. The Act has not sought to implement a strict framework around LFAs and the CLRC has not proposed further regulation. A LFA will usually include funding for the attorney's fees as well as all related disbursements (court fees, expert fees, general disbursements, other professional service fees etc.), which is not usually the case in CFAs. In return, the plaintiff will agree to pay the funder an agreed sum in prescribed circumstances.
Can these agreements be used in all proceedings?
No. These agreements will not be available for criminal cases or matrimonial cases involving the care of a child. They will, however, be available for matrimonial financial disputes that do not involve the care of a child, subject to Court approval. They can also be used in arbitration proceedings or those before bodies with powers similar to those of the Court, such as tribunals or bodies, which have the power to issue, grant or recommend the issue of a licence or permit.
What are the restrictions?
As well as a limit on the amount of any contingency fee payable by a client, a CFA is also subject to the following restrictions and conditions:
- An attorney cannot claim legal costs from the client in addition to those agreed in the CFA;
- The CFA cannot include a clause to prevent a claim for negligence or other liability for which an attorney could be liable – any agreement which seeks to do so will be void;
- An attorney cannot buy all or any part of a client’s interest in any litigation;
- Where the client is in a fiduciary position such as a guardian, power of attorney or trustee, the Clerk of the Court will approve the CFA before payment is made under it;
- An attorney’s bill under the CFA is not liable to taxation by the client, except in specified circumstances.
What if there is a dispute about the CFA?
Parties cannot start an action to recover money under a CFA, but either party can apply to the Court to determine the validity or effect of the CFA and to set aside or enforce it. Once the client has paid the fees they can apply to the Court to re-open the CFA, provided the Court considers that there are special circumstances which require the agreement to be re-opened.
In other jurisdictions with sophisticated legal systems, CFAs and LFAs have progressed from being a criminal offence to an almost necessity as a means for ensuring assess to justice for all and providing the business community with the tools to effectively manage operations. The Act will bring the Cayman Islands in line with other leading legal centres and in doing so, make it more attractive as a jurisdiction to pursue claims that require the assistance of CFAs and LFAs. Once the purpose and possibilities of CFAs and LFAs are fully understood in the marketplace, they will become an important consideration for clients, attorneys and funders.
Bedell Cristin’s Dispute Resolution team has many years’ experience in dealing with the issues that should be assessed when considering CFAs and LFAs and can advise you on whether one is appropriate in your circumstances. If you require more information on LFAs or CFAs, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.