Litigation Funding in the Cayman Islands: From Common Law Prohibition to Statutory Legitimacy

Introduction

Litigation Funding in the Cayman Islands—specifically third-party funding (TPF)—has become an integral part of commercial litigation across many jurisdictions. It enables claimants to pursue meritorious claims they might otherwise be unable to afford, and it offers investors an opportunity to profit from the proceeds of successful litigation. In the Cayman Islands, a jurisdiction heavily involved in international insolvency, trust, and commercial disputes, the development of litigation funding has been both judicially and legislatively significant. This article provides a detailed overview of the Cayman Islands’ evolving legal stance on litigation funding, culminating in the enactment of the Private Funding of Legal Services Act, 2020 (PFLSA).

1. Historical Prohibition under Common Law

Under traditional English common law—applicable in the Cayman Islands as a British Overseas Territory—third-party funding was prohibited under the doctrines of maintenance, champerty, and barratry. These doctrines prohibited third parties from supporting litigation in which they had no legitimate interest, due to the risk of encouraging speculative litigation and undermining the integrity of the judicial process.

In the Cayman Islands, these doctrines remained a bar to litigation funding well into the 21st century. However, as global practice evolved—especially in commercial centres such as London, New York, and Singapore—the Cayman Islands began to reassess its approach, particularly in the context of complex, cross-border commercial and insolvency disputes.

2. Judicial Softening: Key Case Law

The shift began judicially, with decisions that recognized the practical benefits of litigation funding in certain circumstances:

• In Re ICP Strategic Credit Income Fund Ltd (unreported, FSD 146 of 2010): The Grand Court permitted liquidators to enter into a funding agreement with a third party. While champerty and maintenance were not formally abolished, the Court held that public policy concerns could be outweighed by the legitimate interests of insolvency stakeholders.
• A Company v A Funder (unreported, 2017): This case provided clearer judicial approval of third-party funding in commercial cases, holding that such arrangements could be enforceable provided they were not contrary to public policy. Importantly, the Court noted that the Cayman Islands’ legal framework must reflect the practical realities of modern commercial litigation.

These decisions signalled that the Court would permit funding arrangements on a case-by-case basis, particularly where the funder’s involvement did not interfere with the conduct of the proceedings.

3. Legislative Reform: Private Funding of Legal Services Act, 2020

The judicial trend culminated in legislative reform with the enactment of the Private Funding of Legal Services Act, 2020 (PFLSA), which came into force on 1 May 2021. This legislation represents a comprehensive shift toward formal acceptance and regulation of litigation funding in the Cayman Islands.

Key Provisions of the PFLSA:

• Section 3 – Permitted Funding Arrangements: Legal practitioners and clients may enter into three types of funding agreements:
  • Conditional Fee Agreements (CFAs): Where legal fees are payable only in the event of success.
  • Damages-Based Agreements (DBAs): Where fees are calculated as a percentage of recovered damages.
  • Third-Party Funding Agreements (TPFAs): Where a funder finances the costs of proceedings in exchange for a return from the damages awarded or settlement.
• Section 4 – Written Requirement: All permitted funding agreements must be in writing and meet prescribed formalities.
• Section 5 – Judicial Discretion: The Court may examine a funding agreement’s terms to ensure they are not contrary to public policy or access to justice.
• Section 6 – Costs and Recoverability: The PFLSA does not specifically provide for the recoverability of a funder’s fee as part of legal costs, leaving this issue to future judicial development.
• Regulatory Oversight: The Chief Justice is empowered to make rules regulating funding agreements, although these have not yet been extensively codified.

The PFLSA abolishes the application of maintenance and champerty as crimes and torts in relation to permitted funding arrangements, thereby removing the legal uncertainty that had previously surrounded such contracts.

4. Practical Impact and Sector-Specific Implications

(a) Insolvency and Restructuring

The PFLSA is especially relevant in insolvency litigation, where liquidators and receivers frequently face cost constraints in pursuing claims. The statutory endorsement of TPF enables officeholders to access capital to investigate and litigate claims—often against former directors, auditors, or related parties—with potential for substantial recoveries to creditors.

Moreover, third-party funding aligns with the Cayman courts’ longstanding recognition of the public interest in enabling insolvency professionals to pursue claims in the interest of the estate.

(b) Trust and Fiduciary Disputes

Litigation funding is increasingly used in high-value trust disputes, especially those involving contentious claims against trustees or protectors. Given the often significant legal fees and complex procedural steps in trust litigation, TPF allows beneficiaries or fiduciaries to bring proceedings without immediate financial burden.

(c) International Arbitration

The PFLSA expressly applies to arbitration proceedings seated in the Cayman Islands. This enhances the jurisdiction’s competitiveness as a neutral arbitration forum, particularly for commercial disputes involving private equity, joint ventures, and finance-related claims.

5. Key Challenges and Considerations

(a) Disclosure Requirements

The PFLSA does not mandate automatic disclosure of funding agreements to the court or opposing parties. However, courts may order disclosure where the funder’s involvement is relevant to case management or cost considerations. The extent of disclosure remains a live issue, especially in arbitration where confidentiality is a core principle.

(b) Recoverability of Funders’ Fees

It is still unclear whether a successful litigant can recover the funder’s fee or uplift as part of an adverse costs award. While courts have discretion under the Grand Court Rules, there is no settled authority on whether such costs fall within the definition of “costs of the proceedings.”

(c) Funders’ Influence and Ethical Oversight

Concerns persist regarding the extent of funders’ control over litigation strategy, settlement decisions, or counsel selection. Agreements must include clear provisions preserving the client’s autonomy and legal privilege, in line with the rules of professional conduct.

6. Comparative Perspective

By adopting the PFLSA, the Cayman Islands has aligned itself with other advanced legal systems that regulate but do not prohibit litigation funding, such as the UK (via the Courts and Legal Services Act 1990), Hong Kong, and Singapore. Unlike jurisdictions that rely solely on judicial discretion, the Cayman approach provides certainty through legislative clarity while preserving oversight.

Conclusion

The Cayman Islands has moved decisively from a common law regime of prohibition to a modern statutory framework for litigation funding. The PFLSA legitimizes third-party funding in a broad range of disputes and provides a foundation for responsible, transparent, and efficient funding practices. As the market matures, further judicial and regulatory developments—particularly around disclosure, cost recovery, and ethical safeguards—will be essential to ensure that the system operates with integrity and supports the jurisdiction’s status as a premier forum for complex commercial litigation and arbitration.