Offshore Part 3 – Jewels in the crown

One case has put litigation funding on the map in Jersey, while the Crown Dependencies are each bringing in vital new legislation, meaning fresh streams of work for their legal markets. LB reviews the latest developments

Third-party litigation funders have operated in the UK for some time, but not in the Channel Islands, as the legality and enforceability of funding agreements in Jersey remained untested. This is set to change following a court judgment that could allow islanders access to external funding if they cannot afford to pursue a legal claim.

In Re the Valetta Trust [2011] (Valetta), the Royal Court supported the idea of allowing professional third-party funders to back litigants in legal actions in return for a percentage of any awards made. ‘This is a landmark judgment,’ says Lisa Springate, a partner at Bedell Group and who represents the plaintiffs. ‘The importance of Valetta to third-party litigation funders and those contemplating litigation in Jersey is that it is now officially recognised that a funding agreement is in the interests of justice and is to be encouraged, provided that it is properly structured.’

Appleby’s Jersey-based litigation partner Fraser Robertson tells LB that although third-party litigation funding is not yet a material part of the litigation landscape in Jersey, he believes that the issue has benefited from Valetta in terms of much needed and welcome guidance.

Funding has not in itself altered how Sinels Advocates operates, but partner Philip Sinel also believes that the Valetta case is useful in drawing attention to the industry. His firm already has a number of cases that are either funded or are in the process of being funded. Over the past two years Sinels Advocates has routinely notified its clients about litigation funding and they have considered the issue with interest. ‘In my view it will become as significant here as it is in England,’ says Sinel.

No cure for all

When assessing all their commercial options, for some litigants funding will mean the difference between taking a case forward or not. But funding is not the answer in all cases. A defendant without a counterclaim cannot gain any money and will only be able to recover a portion of their costs if successful. ‘We have yet to see funding used on behalf of an innocent and much put-upon defendant,’ says Sinel.

‘Litigation funding makes perfect sense in the context of trust litigation, where you often have David taking on Goliath’

In the conventional situation where litigation funding is available, namely where the plaintiff has a significant damages claim, it enables a plaintiff who wants to limit some or all of the costs of the litigation. The advantages of entering an agreement where, if it goes wrong, the litigation funder will pay the other side’s costs are obvious.

The difficulty from the plaintiff’s point of view is that they end up parting with a very significant chunk of the damages and/or a multiple of the costs incurred. ‘Depending on the level of risk associated with the dispute, litigation funders can take as much as 50% or more of the damages awarded if it is a high-risk case,’ says Jersey-based Nuno Santos-Costa, head of dispute resolution at pan-Channel Islands firm Collas Crill.

Litigation funding may also fail to appeal with regard to low-level disputes for individuals, especially when Jersey’s legal aid system is fairly flexible and the thresholds quite low. Plus, funding the premium still requires someone to make a payment up front, which may not be recovered. ‘This funding is therefore likely to be available for cases with strong prospects of success,’ says Ogier’s Jersey-based partner Matthew Thompson, ‘but not those where the merits are much more open to argument.’

And with justice in Jersey moving more slowly than in England, according to Sinel, there may have to be some alterations for local conditions. Funding could lead to issues between the funder and a plaintiff about the merits of settling or not. The plaintiff may be under fiduciary duties but the funder will want a return on its investment. ‘The question remains as to which will prevail,’ says Thompson.

Work streams

Certainly the size of claims in Jersey should mean that there is a market for funded cases, which clearly require a minimum value to make them worthwhile.

Carey Olsen’s Jersey-based litigation partner William Grace believes that the Valetta decision opens up new opportunities specific to the Jersey litigation market, but the overall effect of which will depend on whether the litigant is a company or a private individual. ‘Of the private clients litigating in Jersey, many are not in need of external funds to fight their cases,’ he says. However, funded cases introduce an element of hedging – reducing the upside and downside – which may attract some clients who can fund matters themselves.

Funding is expected to be of particular interest within trust disputes – which like any litigation, can be expensive, complex and uncertain – where trustees do not wish to take on all the risk or to expose all of the trust’s assets. Furthermore, such assets may be difficult to realise, particularly in the current market.

‘Of the private clients litigating in Jersey, many are not in need of external funds to fight their cases’

Not going the whole way

Although the Royal Court in Valetta effectively accepted that Jersey should follow the UK on the issue of funding, it also emphasised that its judgment only applies to third-party funding arrangements. There has been a minor relaxation in England on conditional fee agreements, but this isn’t the case in Jersey.

Therefore, an additional issue for Jersey litigators to factor into the funding discussion is the absence of conditional fee arrangements. Paul Nicholls, a Jersey-based partner at Walkers, believes that litigation funding has made little, if any, impact in Jersey, principally because the island does not have a framework for conditional fee work.

Others consider that the lack of conditional fee arrangements may mean that funded cases are a more attractive option. ‘We can see funded cases being used in group litigation,’ says Carey Olsen’s Grace. ‘Where the overall costs are high, an individual’s loss is relatively modest and there is a need for some type of funding agreement for multiple clients.’

As for neighbouring Guernsey, it has not seen a case like Valetta come before the courts as yet. But given the similarity between Guernsey and Jersey law in this area, it would come as no surprise were Guernsey to follow the precedent set by Jersey.

Taking security

New legislation in the pipeline also looks set to further enhance the Channel Islands’ reputation. In particular, Jersey’s States Assembly approved the new Security Interests (Jersey) Law 2011 in July 2011, which was sent to the Privy Council for approval. It is a long-awaited revision of the current law and is likely to come into force in the first quarter of 2012.

With Jersey vehicles used by corporations and individuals worldwide for a variety of purposes, the creation of security over Jersey vehicles and their assets is required to support the financing of these structures. As such, it is critical that all parties have confidence in the effectiveness of such security, and the robustness of the legislation under which it is created.

‘The legislation is both more balanced,
and creditor-friendly’

Many believe that Jersey needs the legislation to bring the island in line with other finance centres. ‘At present,’ says Kate Anderson, an associate in Voisin’s commercial team, ‘we have a law and system based upon a customary law that does not allow floating charges.’ This causes problems when trying to structure lending with Jersey entities by having to identify each and every asset situated in Jersey and take security over every one.

Consequently, the Jersey Law Society Financial and Commercial Law Sub-Committee encouraged a working party to come together to work on updating the law. Leading banking partners, including Bedell’s Mark Dunlop, Carey Olsen’s Nicholas Crocker and Ogier’s Raulin Amy, met with Professor Sir Roy Goode QC – who was engaged to advise on the policy and drafting of the new law – and government advisers to provide feedback on the various drafts of the legislation.

Fix it

Aiming to fix the structural limitations of the 1983 legislation, the new law draws heavily on the personal property securities’ laws of New Zealand, Australia and Canada. ‘The legislation is both more balanced, in addressing a wide range of issues, and creditor-friendly in the secured party options and contracting out that it allows,’ says Carey Olsen’s Crocker.

‘Many will see the new law as complicated – which it is’

Particular innovations include the concept of security without title transfer or possession, similar to an English law charge; the ability to take security over a custody or securities account; clarity over the right of use by the grantor of the security interest; greater flexibility on enforcement and the timing of the exercise of enforcement rights, and an online registration system.

Because the new law will introduce a wide range of possible enforcement actions, this will better reflect lenders’ commercial needs. They will now be able to appropriate collateral and be able to purchase the collateral themselves on enforcement, subject to safeguards. ‘This may impact positively on the advice we currently give on restructuring and enforcement,’ says Appleby’s Benjamin.

Previously, the practice was to have a separate security interest agreement for each type of security property. The new law will introduce a ‘whole undertaking’ type of security interest agreement, covering all present and future intangible movable property. This, like the ability to directly take a security interest in securities held by an intermediary, will be very welcome to the banking community.

Introducing a register of security interests for the first time is also significant. Registration will not be compulsory, but Benjamin expects most lenders to take advantage of the process. Lenders and their advisers will need to adapt their practices to deal with registration requirements and searches, but this is anticipated to be straightforward as the register will be online.

Imperfections

No new legislation is perfect. Although the new law contains transitional provisions under which existing security agreements will be grandfathered so as to retain their validity and priority, subsequent amendment of existing security can trigger additional requirements, failing which validity and priority may be lost in certain circumstances. Therefore, lenders need to be very familiar with the transitional provisions.

The proposed legislation is also longer and more complicated. Appleby has, along with other leading law firms, been collaborating with the Jersey Bankers Association on a standard security interest agreement. However, Benjamin suspects that it will be some time before it fully beds down and market standard practices settle.

‘It is a dense, difficult piece of work, but it deals with several issues on which the existing legislation is silent’

Nonetheless, a number of Jersey advisers would not be surprised if the new legislation was subject to some minor amendments in a few years, to make it more workable on a practical level.

Reputation

As Jersey lawyers will be able to provide more robust legal opinions on international secured financing transactions, the new law is expected to enhance the reputation of the island as a jurisdiction of choice in which to structure international financing deals.

‘This legislation goes to the heart of what Jersey now represents,’ says Carey Olsen’s Crocker, ‘in terms of it being a sophisticated, offshore jurisdiction, at least as good as any other.’ It also shows how willing the island is to invest in serious, modern legislation.

Clients requiring total mobility may still favour trusts.

Solid foundations

Jersey’s neighbour has been having its own revolution, having decided to introduce Guernsey foundation legislation in 2012, offering the Guernsey Foundation as an alternative to a trust. With elections coming up in April, the legislation is expected to be introduced towards the end of the second quarter of 2012.

Gavin Ferguson, Appleby’s Guernsey managing partner, tells LB that the Guernsey law will be more akin to civil law foundations legislation such as the Liechtenstein version. At the same time, Guernsey has developed an entirely bespoke law, rather than simply replicating the foundation laws of other international financial centres.

Differences with Jersey include the Guernsey law requiring – similar to civil law jurisdictions – an initial endowment. It also only requires a guardian where the beneficiaries are not entitled to information about the foundation – unlike Jersey law which requires there always to be a guardian. The Guernsey legislation additionally imposes a fiduciary duty on the council to the foundation itself and a fiduciary obligation on the guardian (if appointed) to the founder and beneficiaries to enforce the constitution. Jersey law negates any form of fiduciary duty within a foundation structure.

Neither trust nor company

The distinction between foundations and trusts and companies is an important one, believes Carey Olsen’s Guernsey-based partner Russell Clark, particularly when promoting foundations to the Far East, Middle East, South America and Europe. It is anticipated that the Guernsey Foundation will appeal to those unfamiliar or uneasy with the pure trust concept and who perceive a trust’s absence of separate legal identity to be an issue. It will also be attractive to those wishing to explore alternative, perhaps more innovative, structures for holding and managing their private wealth.

Foundations will likewise appeal to people who do not want a company because they do not require shareholders and who may benefit from a trust-style tax regime. ‘Foundations are more black and white, and are easier to understand,’ says Mourant Ozannes Guernsey partner St John Robilliard.

Foundations may also make constructive use of Guernsey’s corporate ‘zero/ten’ tax regime, but the island’s tax laws will require amending first. Such follow-on legislation was introduced in Jersey, and Guernsey will need to do the same, believes Robilliard. Although it is a niche area and mature market, many trusts lawyers also expect foundations to be used with non-purpose charitable trusts.

‘It’s part of Guernsey’s style to study what has already happened in Jersey’

Where in the world?

In terms of which geographical regions are likely to generate instructions, Appleby’s Ferguson expects interest from all over, including those from common law jurisdictions wishing to diversify. However, primarily interest should come from the civil law jurisdictions, including the Middle East, Far East and parts of Latin America, including Columbia and Venezuela.

Because of its civil law systems, Collas Crill’s Guernsey-based fiduciary head Marcus Hinkley believes that Asia is the obvious first port of call for marketing the new Guernsey Foundations law. Furthermore, the firm’s new Singapore office (see ‘Riding High’, LB218, page 66) has greatly helped it market the new legislation.

William Simpson, a partner in Ogier’s Guernsey office, says that instructions are likely to come from China, Russia and other places where they are less used to trusts and where for one reason or another the usual corporate structure is not appropriate. To date, the office has had a few enquiries from clients, but not an avalanche. ‘This is not too surprising really as the law is not yet in force,’ he says.

‘Look at Jersey,’ says Mourant’s Robilliard. ‘It has thousands of trusts and only around 150 registered foundations. It’ll be a similar quality-rather-than-quantity story here, with foundations being tailored for a specialised market of high-end clients with particularly large holdings.’

‘There is a healthy rivalry between the two islands’

Setting an example

‘It’s part of Guernsey’s style to study what has already happened in Jersey,’ says Robilliard. Jersey’s own foundations law has been in place since 2009 (see ‘Shine a light’, LB198, page 70).

Most Jersey lawyers are not at all surprised at the developments next door. ‘There is a longstanding and healthy rivalry between the islands,’ says Walkers partner Nigel Weston, ‘and when one island introduces an innovative and successful product, it is not long before the other follows suit.’

Bearing in mind that Jersey has been an international financial centre offering trust services for over 60 years, foundations have had some success, with reports of them being used for a variety of purposes, including charitable activities, private wealth planning and structured transactions. Of the 150 foundations registered, Collas Crill has worked on approximately 20% of them. Walkers has also advised on a number of foundations.

As clients become more familiar with the concept, foundations will increase in popularity. ‘At this stage people, by which I mean advisers and users and service providers, have had more experience with trusts and are comfortable with their use,’ says Weston. However, in many scenarios trusts and foundations are equally flexible, and either could be used. Awareness is changing, and already in Jersey, the lawyers are finding people more open to the idea of using foundations.

‘The enactment of the new legislation will lead to increased numbers of instructions for the law firms on both islands that are seen as experts in the area,’ says Guy Adams, a director at international legal recruitment company Laurence Simons. ‘Those firms whose lawyers have invested time in understanding the changes, and market that knowledge successfully, are likely to do very well in securing new work.’

Near replica

The Isle of Man (IOM) passed its own Foundations Act in 2011, which was given Royal Assent in November and is expected to come into effect towards the early part of 2012. But while the Guernsey legislation is based more upon the old Liechtenstein version, the IOM law is based on the Jersey model.

Yet there are a few key differences. ‘We explicitly state the responsibilities of the council members, declaring them to be fiduciary,’ explains John Rimmer, a partner in Appleby’s IOM office.

Furthermore, the IOM does not require a guardian to enforce the obligations of the foundation, it does not require a Manx-resident council member, and it has deliberately retained a more conservative model, which can be modified in the future, if necessary. This makes a Manx Foundation more certain in its make-up and predictable in how it is treated, believes Rimmer.

The IOM foundation is also a useful vehicle because it can have a separate personality and therefore own assets in its own name. Additionally, IOM foundations are potentially available for use as orphan vehicles and therefore not under any external control, save for court supervision. With no shareholders or owners to direct or own them, they offer greater certainty in their application than non-charitable purpose trusts, says Rimmer.

Appleby’s own IOM office has clients and opportunities in places where trusts are unacceptable, either because the individuals concerned find the idea of a trust a difficult one to swallow or because trusts are unfairly seen in some jurisdictions as vehicles of secrecy and even fraud.

While the UK Crown Dependencies are catching up with the mainland in areas such as the development of litigation funding, Jersey, Guernsey and the IOM have shown their ability to introduce legislation that can serve as a model to both offshore and onshore jurisdictions. LB