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Expanding Access to Funding for Asset Recovery Offshore

Late last month, a lively group of fraud, insolvency, and enforcement practitioners gathered virtually at the Asset Recovery Americas Conference, an annual meeting focused on developments in enforcement law in the U.S. and Latin America. At the forefront of everyone’s mind was what to expect in terms of legal claims in the wake of the pandemic and how clients can best protect and pursue their rights. With insolvencies on the rise and the potential for abuse in connection with pandemic stimulus offerings, many see an influx of fraud claims on the horizon with victims lacking the resources to pursue their rights or recover assets moved or hidden offshore.

Conference speakers thus focused on access to justice and changes in the legal landscape for litigation funding, particularly in jurisdictions that have recently sanctioned and clarified the use of funding. These jurisdictions now provide a clearer framework for access to justice, which practitioners hope will be adopted by other jurisdictions as the need for funding grows in the region.

Cayman Islands

In Cayman, the Private Funding of Legal Services Act, passed in January 2021, became effective May 1. The Act codifies and modernizes rules relating to funding that were previously left to Cayman courts. Many consider this a significant development as it brings the Cayman funding market in line with onshore jurisdictions that have more established regulatory frameworks and more robust funding markets.

New rules established by the Act include:

  • Champerty and Maintenance. The Act repeals the common law offenses of champerty and maintenance, and abolishes both civil and criminal liability. Previously, the doctrines prohibited funding arrangements except in the context of insolvency, absent court approval. This presented uncertainty, leaving practitioners and funders skittish about entering into such arrangements only to have them later overturned in court. With the doctrines abolished, clients now have a clear path to pursue funding arrangements.
  • Contingency Fee Agreements. Contingency fee agreements, previously disallowed in Cayman, are now expressly permitted if in writing and signed by the client. However, any success fees earned by attorneys must be capped at 100%. If the parties choose to increase the success fee, they may do so by seeking court permission. The Act also provides for a 14-day period during which a client can choose to withdraw from the agreement.
  • Litigation Funding. Significantly, the Act permits the use of litigation funding agreements, subject to several requirements, including that the agreement be in writing and comply with requirements that may be later prescribed, such as the funder providing the client information about itself prior to entering into the agreement. The Act also provides that a funder’s return may be calculated as either (1) the costs of the litigation plus an amount calculated by reference to the funder’s anticipated expenditure; or (2) a percentage of the amount or the value of the property recovered in the proceedings.

British Virgin Islands

Although the British Virgin Islands do not have similar legislation, recent written decisions have formally sanctioned litigation finance as being “essential to ensure access to justice”.

In late 2020, Justice Adrian Jack of the British Virgin Islands Eastern Caribbean Supreme Court issued a written opinion formally sanctioning litigation finance in litigation related to a vast global Ponzi scheme run by Exential Investments. The fraudulent scheme had cost investors hundreds of millions in losses and left them without resources to pursue their rights in court absent funding. Investors turned to the funding market to cover costs and expenses to bring claims in several jurisdictions and sought approval in court. In sanctioning the funding arrangement, Justice Jack noted that the BVI legislature abolished criminal liability for champerty and maintenance in 1997 and approved the arrangement as lawful and consistent with public policy.

Although BVI courts have previously supported funding in general terms and funding has existed in the region, Justice Jack’s opinion is the first written judgment approving third party funding as a matter of BVI law. As such, it can be relied on in other cases and provides more certainty and clarity for practitioners going forward. The landmark ruling is expected to encourage and open the funding market in the jurisdiction and beyond.

Brazil

With no legislation or caselaw regarding funding in place, the legal framework for funding in Brazil remains in flux. Although funding is used in Brazil, it is not yet mainstream. However, the country is considered fertile ground for funding arrangements, with significant ongoing litigation in the region and elsewhere involving Brazilian parties. In 2019, for example, the ICC reported that Brazil ranked third in the number of parties involved in ICC arbitrations by country (behind only the U.S. and India). There is also substantial commercial litigation pending in Brazilian courts. At present, funding is primarily employed in the arbitration space and practioners remain reluctant to use it more broadly (unlike contingency agreements which have been sanctioned by the Brazilian Superior Court of Justice). Nonetheless, focus remains on the region as a potential place for growth for litigation funding and a more established legal framework in the future.

Argentina

Like Brazil, Argentina does not have legislation or regulations addressing the use of litigation finance in the country, and thus no restrictions regarding the practice. However, in the wake of the Lavo Jato and Notebook Scandals, it is seen as a region in which a need exists for funding to provide claimants access to the courts. As such, expectations remain for use and growth of funding in the region in years to come.

With companies hurting in the wake of the pandemic and claimants often lacking the resources to pursue claims and recover assets lost due to fraud, litigation finance remains an important tool for access to justice. As the law continues to evolve and more jurisdictions codify and modernize the practice, claimants should not only seek to use funding, but should seek out relationships with funders that are experienced, trustworthy, and client-minded.