Litigation funding-conditional and contingency fee agreements

The Law Reform Commission submits for public comment a discussion paper entitled “A review of litigation funding in the Cayman Islands- Conditional and Contingency fee agreements”. The review is being carried out pursuant to a referral from the Attorney General and a call by the Court of Appeal for an examination of the law governing such agreements in the Cayman Islands.

A general definition of a conditional fee agreement is an agreement where the lawyer accepts the client’s normal fee only if the action was successful and he accepts the client’s normal fee with an agreed uplift amount in the event of success so as to be compensated for the risks of not being paid in the event of failure. A contingency fee agreement is one in which the lawyer is paid nothing if the action is unsuccessful but he retains an agreed percentage of the client’s recovery if the action is successful, also to compensate for the risks of not being paid in the event of failure.

Both types of agreements have been viewed by proponents over the years as fundamental routes to access justice by lower income persons. The agreements are used in civil cases and can be of particular value where a person does not qualify to obtain legal aid but also cannot afford to pay a retainer. However, opponents to the use of such agreements view them as incentive to excessive litigation and argue that they promote a “compensation culture”.

The discussion paper examines the current law in the Cayman Islands as well as the history, advantages, disadvantages and the social impact of such types of agreements in jurisdictions such as the UK, Australia, Canada and the USA.

A Private Funding of Legal Services Bill attached as the Appendix to the paper is also submitted for comment. The Bill provides not only for both two types of agreements but also for litigation funding agreements under which third parties can fund litigation in return for a share of the proceeds.

The Discussion Paper and Bill will be published on www.gov.ky as well as on www.lawreformcommission.gov.ky (or www.lrc.gov.ky). Submissions should be made no later than 31st March, 2016 and should be posted to the Director, Law Reform Commission, P.O. Box 1999 KY1-1104, delivered by hand to the offices of the Commission which are located in the Legal Department, Fourth Floor, Government Administration Building or sent by e-mail to [email protected] .

The following is from the above referred Discussion Paper published Tuesday December 29 2015 “A review of litigation funding in the Cayman Islands – Conditional and contingency fee agreements”:

THE WAY FORWARD IN THE CAYMAN ISLANDS

91. There are other aspects of litigation funding which have not been highlighted in this paper as the Commission requires feedback as to whether they exist here at this time and, if not, whether they could or should form a part of the justice reform in this area. In the UK, for example, such other types of funding include legal expenses insurance comprising before the event insurance and after the event insurance.

(a) Before the event insurance-

A before the event legal expenses policy allows the insured to recover the costs of litigation. The policy will generally provide that the insured must have a reasonable prospect of success in the proceedings and some policies require the case to be assessed by counsel to determine the likelihood of a successful outcome. Before the event policies are regulated by the Insurance Companies (Legal Expenses Insurance) Regulations 1990, the purpose of regulation being to ensure that there is no conflict of interest where the same insurer is both the legal expenses insurer of a claimant to proceedings and the liability insurer of the defendant in the same proceedings, as there may be a temptation for the insurer to refuse to support the claimant’s action even though it has a strong prospect of success.

A before-the-event policy is mainly sold together with other insurance for example, car insurance to cover car-related disputes, or house insurance. It cannot generally be bought once a problem exists. In effect, if a person has this kind of insurance to cover legal costs, a conditional-fee agreement is not required. The
insurance will usually pay for solicitor’s fees and expenses; costs for expert witnesses; court fees; and opponent’s legal costs.

(b) After the event insurance-

After the event insurance (“ATE insurance”) has developed since the abolition of legal aid for most civil actions, and provides a mechanism for the claimant to bring an action in the knowledge that, if the action is unsuccessful or if costs are otherwise not recoverable, the costs awarded against the insured will be paid by the after the event insurers. In practice the claimant will, when instructing solicitors in respect of his claim, be advised by them whether it is appropriate to take out after the event cover and the arrangements will be made by them. It is likely that after the event insurance will be available only where the insured has a
better than 50 per cent chance of succeeding with his claim.

An after the event insurance policy covers the opponent’s costs as well as the insured ‘s disbursements including the ATE Insurance premium. The policy can also in certain circumstances extend to cover the insured ‘s solicitor’s own legal costs where the Solicitor is not acting under a conditional fee agreement or a similar agreement. The standard cover is for costs incurred after the inception date of the policy up to conclusion of the legal action, however (subject to negotiation) the policy may also cover costs already incurred prior to the policy being taken out.

92. In its approach to this review the Commission realises that the courts in the Cayman Islands have in several cases given sanction to the use of both conditional fee and contingency fee agreements. In our research we found that most jurisdictions only permitted contingency fee agreements after enactment of legislation although Professor Zander noted the practice in the UK before legislation of “speccing” i.e.
solicitors took on cases on the basis that they would only seek to recover costs from the other side if the case was won and not charge the client if the case was lost. But, according to Professor Zander, “it was prohibited and such understandings could not be openly expressed.”

93. The Commission found mention of “common law contingency fee agreements” which were contingency fee agreements used in South Africa prior to and after the enactment of legislation. In a South African case, the South African Association of Personal Injury Lawyers challenged the constitutionality of the Contingency Fee Act. The Association contended, inter alia, that the Act did not override the common law. Its primary argument was that the legislature could never have intended the Act to be exhaustive and that the common law right of practitioners to conclude contingency fee agreements is untrammelled. It therefore argued that legal practitioners can conclude enforceable contingency fee agreements with their clients without complying with the requirements of the Act, provided they observe their ethical duties.

94. The High Court rejected such arguments and rejected the notion of “common law contingency fee agreements”. The court noted that-

“So-called common law contingency agreements are thus unlawful for two reasons. First, they are unlawful under the Act. The Act covers the field and applies to all contingency fee agreements. It requires all contingency fee agreements to comply with the limitations and requirements laid down by sections 2(2) to 5 of the Act. Therefore, as held by this Court in De La Guerre any contingency fee agreement not in compliance with the Act is invalid. Second, a contingency fee agreement which does not comply with the Act also falls outside the scope of the exception in s 2(1) of the Act. Hence, any contingency fee agreement which is not permitted by s 2(1) of the Act, will fall to be dealt with under the common law, which expressly prohibits such agreements and renders them invalid.”.

95 . The Association contended alternatively that the Act is unconstitutional on the grounds that it discriminates against lawyers and their clients in breach of section 9 of the Constitution. This was rejected by the court as being without merit.

96. Justice Chadwick in the Latoya Barrett case questioned the judicial recognition of such agreements when he noted the judgement of the Chief Justice in Quayam and others-

“.. .while recognising that there is much force in the view that the Chief Justice should have resisted the temptation to treat the question which was before him as one which could and should be answered by judicial development of the common law in this jurisdiction (see paragraph 41 of his judgment) rather than by legislative intervention, I am not persuaded that it is appropriate to decide whether or not he was entitled to take the course that he did. I prefer to leave open both the question whether he was entitled to take that course and the question whether (if so) the conclusion that he reached on the substantive issue (whether or not public policy requires that conditional fee agreements be struck down) should be upheld.”.

97. The arguments for and against such agreements have been set out in this and many other papers but the reality in the Cayman Islands is that the agreements have been in use here for some time. The Commission agrees with Lord Justice Jackson’s view that there is no compelling reason why the clock should be ttu11ed back in this area of the law. Provided that there are sufficient legislative safeguards, including a mechanism for review of such agreements, should there be any objection to legislative regulation?

98. In providing legislative intervention as requested by the courts the matters which the Commission believes should therefore be considered at this time should include the following-

(a) in introducing legislation, what are the measures which should be provided to protect the interests of clients?
(b) should the Cayman Islands follow the path of the UK and Canada and introduce the US type contingency fee agreements?
(c) should third party funding form part of this reform?
(d) should the court be given oversight of these agreements or could there be a system of review by legal associations similar to South Africa?
(e) how should success fees in conditional fee agreements be regulated?
(f) what are the types of action or proceedings to which such agreements should be applicable?
(g) should there be cooling-off periods provided during which a client can
cancel the contract?

99. For the purposes of this review a draft Private Funding of Legal Services Bill was drafted and is set out in the Appendix to this paper. The main precedents used in the preparation of the Bill were the Ontario Solicitors Act, the UK Court and Legal Services Act and the Contingency Fee Act of South Africa.

100. The Bill provides for contingency fee agreements which comprise the US style agreement as well as the conditional fee style agreement with the success fee. Also provided for is third party funding. It is proposed under the Bill that the Grand Court will be able to review such agreements upon application by the attorney and the client.

101. The Bill provides in clause 5 for the form and content of an agreement. In accordance with that clause, all such agreements must be in writing, be signed by the client or his representative, such as a guardian or trustee where that is applicable and by the relevant attorney-at-law and must state the following-

(a) the proceedings to which the agreement relates;
(b) that before the agreement was entered into, the client-
(i) was advised of any other ways of financing the litigation and of their respective implications;
(ii) was informed of the normal rule that in the event of the client
being unsuccessful in the proceedings, the client may be liable to pay the taxed party and party costs of the client’s opponent in the proceedings; and
(iii) understood the meaning and purport of the agreement;
(c) what will be regarded by the patties to the agreement as constituting success or partial success;
(d) the circumstances in which the fees and disbursements of the attorney­at-law relating to the matter are payable;
(e) the amount which will be due, and the consequences which will follow, in the event of the partial success in the proceedings, and in the event of the premature termination for any reason of the agreement;
(f) either the amounts payable or the method to be used in calculating the
amounts payable;
(g) the manner in which disbursements made or incurred by the attorney-at-law on behalf of the client shall be dealt with;
(h) subject to subsection (5), that the client will have a period of fourteen days, calculated from the date of the agreement, dm1ng which the client will have the right to withdraw from the agreement by giving notice to the attorney-at-law in writing; and
(i) the manner in which any amendment or other agreements ancillary to that agreement will be dealt with.

102. The Bill would also abolish the torts and offences of maintenance and champerty using the approach taken in several jurisdictions. While the offences and torts would be abolished the Bill provides that the abolition of criminal and civil liability
under this legislation for maintenance and champetty shall not affect any mle of that law as to the cases in which a contract is to be treated as contrary to public policy or otherwise illegal

103. The Commission invites comments on the issues highlighted in this paper, on the provisions of the Bill and on any other matter relating to the funding of litigation which may be able to improve access to justice in the Cayman Islands.