Cayman Court Approves Litigation Funding Agreement

In A Company v A Funder,1 the Grand Court of the Cayman Islands has approved third party funding of commercial litigation in a case that falls outside of the typical insolvency context. The Plaintiff was a prospective litigant seeking Cayman Islands recognition and enforcement of a New York arbitration award and judgments, together with a freezing injunction in support. The Plaintiff was concerned that its funding agreement would contravene the law of champerty and therefore be illegal and unenforceable. To assuage this concern, it sought declaratory relief from the Court in artificial proceedings against the Funder constructed and issued for this specific purpose.

In a detailed judgment by Mr Justice Segal, the Court, not without some hesitation as to the exercise upon which it was embarking, declared that the funding agreement was not unenforceable in Cayman as a matter of public policy. This decision represents an incremental expansion of the availability of third party litigation funding in the Cayman Islands. Although the judgment does not constitute a binding precedent (including because it was in substance an ex parte application for declaratory relief), we anticipate that further similar proceedings will be brought in the future.

The Court's Reasoning

The Court's starting point was that champerty, which Segal J described as "an aggravated form of maintenance, whose distinguishing feature is the support of litigation by a stranger in return for a share of the proceeds," remains a crime in the Cayman Islands. While a previous decision of the Chief Justice2 had indicated that the Court would develop the common law so as to permit exceptions to the general prohibition, where that was necessary in the interests of justice, the Cayman Islands Court of Appeal had cast doubt upon that approach by suggesting that any development of the law ought to be via statutory reform.3

Segal J considered the Cayman Islands' authorities, along with English and commonwealth decisions, and reached the view that in the absence of any contrary decision of (or clear guidance from) the Court of Appeal, it was right for him to follow the Chief Justice's approach toward developing the common law.

When assessing the permissibility of the funding agreement, Segal J underscored that the key issue is whether a particular funding agreement has the tendency to corrupt public justice, undermine the integrity of the litigation process and give rise to the risk of abuse...