Litigation finance for trustees

Nick Rowles-Davies of Burford Capital talks facilitating recovery while mitigating risk

Litigation is an ever-present issue to trustees, whether bringing claims or defending cases. Now more than ever there is a need for trustees to be aware of the options available for funding this litigation.

There has been a significant increase in certain types of litigation in the last few years, for example, fraud cases such as the Stanford and Madoff matters, media litigation caused by events at News Corp and the largest area of litigation in recent times – banking and finance litigation.

The credit crunch has also led indirectly to a lot of structured finance litigation. Many of these structures are being litigated now as a result of proposed restructuring and disputes between noteholders or between noteholders and sellers, with servicers, trustees and issuers often finding themselves in the middle.

This significant increase in litigation means that trustees must carefully consider how all this affects them. If there are potential claims to be made, then trustees have a fiduciary duty to consider the merits and benefits of those claims – that is, they have a duty to maximise assets or recover funds belonging to the trust.

The litigation landscape is evolving, but one important change is the growth in use of third-party litigation funding or litigation finance. The use of litigation finance coupled with after-the-event (ATE) legal expenses insurance allows a party to substantially ‘de-risk’ the litigation process.

‘Litigation finance coupled with ATE insurance allows a party to substantially “de-risk” the process’

Nick Rowles-Davies, Burford Capital

Litigation funders (such as Burford Capital who can provide litigation finance together with ATE insurance) will pay the legal costs and disbursements associated with the claim to an agreed level in return for a share of the proceeds of the case. ATE insurance is a policy of insurance that covers adverse legal costs in the event that a case is unsuccessful – namely it pays the opponent’s legal fees if the case loses.

There is a premium to pay for the insurance, but this can often be paid on a deferred and contingent basis – therefore it is payable only if the case wins.

Consequently, the combined use of litigation finance and ATE insurance can provide a trustee with the means to bring a claim without the concerns of paying out legal fees to their own lawyers, allowing recovery with no risk. At the very least, the consideration of funding and ATE may displace the positive duty to consider pursuing a piece of litigation and ensure protection against claims from beneficiaries or others.

The use of litigation finance is growing rapidly. It is now regularly considered by most litigators in England and Wales, primarily due to the professional obligations placed upon solicitors to consider alternative methods of financing (SRA Code of Conduct Version 9, 1 April 2014 – IB 1.16) and has now been considered and accepted in most offshore jurisdictions.

Caribbean

In the various jurisdictions across the Caribbean, the general tenor of the response to litigation funding has been cautious but positive. In the Bahamas, while there is no reported case directly on funding, in the decision in Massai Aviation Services & anor v The Attorney General & Anor (The Bahamas) [2007] the court noted the diminishing relevance of the rules of champerty and maintenance.

The Bermudan legal system has had the benefit of considering a litigation funding agreement and its validity. The case of Stiftung Salle Modulable and Rutli Stiftung v Butterfield Trust (Bermuda) Ltd [2012] decided that a litigation funding agreement was permitted.

In the British Virgin Islands (BVI), another Crown dependency, the legal system bears significant resemblance to the English system. The case of Hugh Brown & Associates (Pty) Ltd v Kermas Ltd [2011] came before Mr Justice Bannister. He demonstrated a willingness to accept litigation funding and, while he noted that he was not addressed on the lawfulness of the arrangement, he was willing and prepared to accept that it was correct that there was nothing wrong with the arrangement.

The Cayman Islands, with a system almost identical to that of the BVI, has indicated its belief that the doctrines of champerty and maintenance do not serve any current social purpose.

Channel Islands

In Jersey, the litigation funding market was given a boost when the Jersey courts expressly approved the use of funding in the Valetta Trust case (Re The Valetta Trust [2011]). In Barclays Wealth Trustees (Jersey) Ltd v Equity Trust (Jersey) Ltd and Equity Trust Services Ltd [2013], the defendant sought unsuccessfully to strike out the proceedings for abuse of process as the case had the benefit of litigation funding.

Guernsey does not yet have any decided case on the point, but it is widely understood that the Guernsey courts will take the same approach as the Jersey courts.

Litigation finance is certainly on the rise in the offshore jurisdictions and around the globe generally. Combined with ATE insurance, litigation finance can greatly assist trustees in pursuing claims and mitigating against the risks and unpredictability of litigation.