The rise of litigation funds in Jersey
by Stephen Baker, senior partner and Eleanor Davies, associate at Baker & Partners
Litigation funding is certainly a hot topic, as can be seen from the controversy surrounding the involvement of litigation funders in the now infamous divorce proceedings between Tatiana Akhmedova and her now ex-husband, oligarch Temur Akhmedov. Jersey is no different, with litigation funders becoming increasingly involved in all manner of disputes.
Given the high costs of litigating, this is unsurprising. There are a number of advantages to obtaining litigation funding, whether you are an individual with a good case but limited means, or a large company with a book of debts to collect. However, such arrangements were traditionally considered in England and Jersey alike to fall foul of the prohibition against “maintenance and champerty”, which was targeted at third parties with no legitimate interest in a claim funding it, sometimes in exchange for a share of the proceeds. The roots of the prohibition lie in the medieval courts, where a noble with the ear of the King might be persuaded to advance your cause, however hopeless, if he or she could take a cut. The idea is that justice is not “sullied” by corrupting third parties.
Times have moved on, the prohibition against maintenance and champerty has progressively weakened, and modern litigation funding, with its codes of practice and careful assessments of the merits of a claim, has become part of the litigation landscape.
Unlike England, Jersey did not legislate to prevent third party funding, although it has its own prohibition against maintenance and champerty in the Code of 1771. The Code of 1771 built on a 17th century English ordinance and contains a provision which states: “personne ne pourra contractor pour choses ou matières en litige” (“no person may contract for things or matter in litigation”). Also, unlike England, there had been no cases on maintenance and champerty until relatively recently. It has been accepted for over a decade (since the Valetta case in 2011) that in principle such arrangements are acceptable to the Jersey courts because they improve access to justice, and because the historic reasons for the prohibition against maintenance and champerty are not engaged by the modern form of litigation funding.
In the Valetta case, the court confirmed that as a matter of customary law, an agreement which provides for a share of the proceeds of litigation may be held to be unenforceable on the ground of champerty if it is contrary to public policy. However, any arrangement that complies with the code of the Association of Litigation Funders in England is likely to be acceptable, as that code provides that control of the litigation rests with the litigant, not the funder. The court was also reassured that the arrangement in that case did not provide for the funder to take more than fifty percent of the winnings once its costs were covered, though there is no hard and fast rule as to what proportion of the winnings to be taken by the funder would be contrary to public policy.
Untested in Jersey
The position on assignment of claims – also thought to have been prohibited by the Code of 1771 – has not been tested in Jersey. However, it seems that similar considerations would apply and the court would apply a similar test as for other litigation funding arrangements: does the arrangement offend against public policy and affect the purity of justice, bearing in mind the desirability of improving access to justice? It is likely that a Jersey court would follow the English position, given the similar historical context, and look at what interest the assignee has in the case. Are they pursuing it for a genuinely commercial interest (including for profit), or are they pursuing it for some abusive motive (e.g. to put a competitor out of business)? On a small scale, it has been common for many years for lower value debt claims to be assigned to third party agencies who then pursue them through the courts, and there is no reason in principle why this would not be permissible for larger or more complicated claims.
Because the position has not been tested in the Jersey courts, in that no litigation funding arrangement has been rejected by them, it is not entirely clear what forms of third party funding arrangements might fall foul of the vestigial prohibition against maintenance and champerty and be struck down as unlawful, unenforceable, or as an abuse of process. What is clear is that the Jersey courts accept the need for litigation funding in modern times.
Litigation funding in asset recovery
What sort of claims, then, are most amenable to litigation funding? This article will focus on the role litigation funding can play in asset recovery. We have seen this operate effectively where assets have been placed into Jersey structures to avoid judgment creditors, particularly judgment creditors in other jurisdictions.
Often litigants seeking to recover assets by litigation in Jersey need to deal with the existence of trusts, typically as part of structures involving numerous underlying companies holding trust assets. These can pose difficulties for asset recovery because of the nature of Jersey trusts, which tend to be discretionary. This means that beneficiaries have no rights of ownership over trust assets: they cannot insist on assets being distributed to them. Instead, the trustee owns them for beneficiaries who may or may not ever receive any of the assets.
Asset recovery efforts can easily run up against a brick wall in this way, and unwinding transfers into trusts (or trusts themselves) can be expensive. However, this is where litigation funders can step in: if a funder knows there is a good chance of recovering valuable assets, then there is a commercial reward for them. It is also in the interests of a litigant who might not be otherwise able to unlock the assets and get what is due to them.
So how can a litigation funder assess whether a claim is likely to unlock assets? One route is to follow a staged approach, first seeking disclosure orders against Jersey service providers who may hold information about what assets a person has, and where they are located (Jersey trusts often hold underlying companies and/or properties located in other jurisdictions). Where there is a risk of dissipation, disclosure orders can be paired with gagging orders, temporarily preventing the service providers from telling the target or targets that disclosure of assets is being sought.
Once disclosure has been provided, the litigation funder (and the party seeking the assets) will have a better idea of whether the claim is worth the candle. Any assets that are at risk of dissipation can be frozen by applying for a freezing order, whether limited to Jersey or worldwide, allowing time to consider what substantive claims can be brought and making sure that when the gagging order is lifted, the assets stay where they have been found.
Trust busting options
Once the nature of the assets and how they got into the trust structure have been established, there are a number of “trust busting” options depending on the particular circumstances of the case. These include:
- Applying to have a trust set aside as a sham, for example if it is clear that the trustee and settlor intended when the trust was established to deceive third parties as to the way the assets are truly held.
- A Pauline action, seeking to set aside transfers into trusts made with the purpose of defeating creditors. This requires the debtor to be insolvent at the time of the transfer, or to become insolvent as a result, but is particularly useful when dealing with enforcement of judgment debts where the debtor has deprived himself or herself of assets by putting them into trust.
- A proprietary claim to a trust asset, asserting that the asset does not belong to the trust because it is subject to a prior constructive trust, arising from unconscionable conduct, such as fraud.
Litigation funding: invaluable role
Which of the above is most suitable will of course depend on the circumstances, but all are substantive claims where litigation funding could play an invaluable role. In our experience, it is well worth the initial expenditure to uncover assets that can be unlocked, with disclosure orders often revealing assets around the world that were not previously known to the litigant or the funder.
As for the concerns apparently raised following settlement in the Akhmedov litigation, where Mrs Akhmedova accepted a settlement of less than the value of the financial award, with a substantial chunk going to her litigation funder, these should not trouble a litigant or a litigation funder. We do not know what led to the settlement in that case, but there are plenty of cases in which litigants settle for less than a previous court order has awarded them, for a variety of reasons, and the Jersey court has recognised that a litigation funder’s share can properly mean taking a substantial amount. What matters is whether justice is served by litigation funding being in place in the particular circumstances of a case.
Stephen Baker is a Jersey Advocate and Senior Partner at Baker & Partners. He specialises in complex international financial litigation including trust and commercial disputes as well as civil fraud.
Eleanor Davies is an English Solicitor and Jersey Advocate. She has a range of experience in Jersey litigation matters and specialises in company and trusts disputes.