20 March 2018

Contentious Trusts case summaries - March 2018

A Company v A Funder (unreported, 23 November 2017, Segal J)

Although unreported, this is an important case which has potentially changed the face of third party litigation funding in the Cayman Islands.

By way of background, the legal concepts of 'maintenance' (the procurement of financial assistance from a third party to commence, continue or defend legal proceedings without lawful justification) and 'champerty' (an aggravated form of maintenance whereby the third party financially supports proceedings in exchange for a share of the proceeds of the litigation) are both technically still crimes and torts in the Cayman Islands. However the Cayman courts have in recent times indicated that they are prepared to approve third party funding agreements in certain circumstances such as in those cases which are dealing with insolvent estates and liquidations.

This case however related to a quite different factual situation. It involved a large Korean company which sought approval from the Grand Court to its proposed third party funding agreement in connection with proceedings which it intended to bring in the Cayman Islands to enforce a New York Arbitration award and related judgments.

In considering the application, the Grand Court provided very helpful guidance to third party funders setting out the factors it will consider when assessing the merits and legitimacy of any third party funding agreement. This guidance included the following considerations:

  • The extent to which the third party funder controls the litigation. The court felt that the more control the funder has the less likely it is that the agreement will be approved;
  • The level of information provided to the funded party and the amount of informed decisions taken in relation to the proceedings by the funded party;
  • The ease by which a third party funder may terminate a funding agreement. The Grand Court felt that if a funder could terminate an agreement at will this would give a funder inappropriate leverage in relation to the litigation strategy and key decisions;
  • The level of communication between the funder and the lawyers conducting the litigation. Again it was felt that a funder should not be in a position where it could give instructions to the lawyers conducting the proceedings;
  • Whether under the terms of the agreement, the funder is liable to meet any adverse costs orders. The Court considered that if the funder has no such obligations this would cause unfair prejudice to the defendant to any failed claim. The Grand Court did however acknowledge that this risk could be mitigated by the funded party taking out after the event insurance;
  • The amount of profit the third party funder is likely to make from the agreement and the amount of benefit which the funded party will gain from a successful outcome;
  • Whether the third party funder is a professional organisation and/or whether it is a regulated organisation.

In applying these factors to the case before it the Grand Court approved the proposed third party funding agreement in question. The judge, Mr Justice Segal, acknowledged that there are benefits which may flow from allowing claimants with genuine claims the opportunity to pursue those claims in a manner which manages the costs and risk associated with litigation.

The judgment in this case is significant and brings the Cayman Islands in line with a number of international financial centres where third party funding agreements are a common sight in the courts and we expect to see a sharp increase in third party funding arrangements in the Cayman Islands.

Re K Trust (2017) JRC 177

In this recent Jersey case, the Royal Court considered the issue of mistake and the circumstances in which a transfer of property could be set aside by virtue of a mistake.

By way of background, in November 2009, the representor in this case, who was neither domiciled nor resident in the UK, established a discretionary trust in Jersey (the "K Trust"). The representor had made transfers from his personal bank account into the trust and the trustee had made some distributions to him. The representor had been given some UK inheritance tax advice prior to the transfers. In November 2016 the representor became aware that the transfers into the K Trust might be subject to UK tax. It was found that the bank accounts from which the representor was making payments from and receiving payments into were UK situs for the purposes of UK inheritance tax. Consequently, the transfers had given rise to a substantial inheritance tax liability, running into the millions of pounds.

The representor consequently made an application to the Royal Court to set aside the original transfers from his personal account into the trust. The representor argued that he would not have used these accounts had he known the tax consequences because he had other non-UK bank accounts from which he could have sourced the funds. The application was made pursuant to section 47E(3) of the Trusts (Jersey) Law 1984 which states that the court may set aside a transfer of property into a trust by a settlor if the settlor when exercising this power: '(a) made a mistake in relation to the transfer or other disposition of property to trust; and (b) would not have made that transfer or other disposition but for that mistake, and the mistake is so serious a character as to render it just for the court to make a declaration under this Article'.

The position under English law following Pitt v Holt, is that the courts of England and Wales will only deem mistakes caused by incorrect unconscious belief or incorrect tacit assumptions sufficient to cause the court to set aside a transfer of property.

On the facts the Royal Court accepted that the representor had held an 'incorrect conscious belief' because he had acted owing to an ignorance of some fact or facts and permitted the relevant transactions to be set aside. However, contrary to the position decided by the UK Supreme Court, the Royal Court also did not rule out that mistake caused by 'mere causative ignorance' could be sufficient to cause the court to set aside a transfer of property. The Royal Court stated that it envisaged arguments that would support the setting aside of transfers following a decision of the settlor made in a state of ignorance. This would constitute a much lower barrier for the setting aside of transfers and it will be interesting to see whether the Royal Court do develop this softer approach going forward.

Ashley Dawson-Damer v Grampian Trust Company Limited

In a recent hearing in front of Judge Winder in the Bahamas, the Bahamian Court provided clarification on the application and scope of section 83(8) of the Trustee Act 1998.

This provision of the Bahamian trust law essentially allows trustees to withhold disclosure of certain documents from beneficiaries.

The Judge held that a strictly literal reading of section 83(8) was not appropriate because it would act as a complete barrier to the jurisdiction of the Court to order disclosure. Judge Winder indicated that the Court is not precluded from ordering disclosure to a beneficiary where it could be shown that the trustee was guilty of wrongdoing. Consequently in order to defeat section 83(8) a beneficiary must show some fraud or mala fides on the part of the trustee; a prima facie case of breach of duty would not be sufficient to defeat the protection of section 83(8).

Read more articles in Contentious Trusts Newsletter - March 2018

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