The Supreme Court has again urged the legislature to consider whether the outright prohibition on professional litigation funding and the assignment of bare causes of action continues to be warranted as the ever-increasing cost of litigation is putting access to the courts beyond the reach of many.
While the Court accepted that this is an area in need of careful and considered legislative reform, it warned that unless a real effort is made by the legislature to improve access to justice, it will have "no option" but to step in, "undesirable and all as unregulated change might be."
The call for reform was made by Chief Justice Frank Clarke and Judge William McKechnie in their judgments in SPV Osus Ltd v HSBC Institutional Trust Services (Ireland) Ltd & Ors, in which the Court found that the assignee of a claim arising from Bernard Madoff's ponzi scheme fraud could not bring proceedings before the Irish courts as the assignment was contrary to Irish public policy.
THE MADOFF FALLOUT
In 2008, US company Bernard L Madoff Investments LLC (BLMIS) collapsed due to the large-scale fraud perpetrated by Mr Madoff, causing substantial loss to Optimal Strategic, an investment company that had invested almost all of its assets in BLMIS.
The trustee in bankruptcy of BLMIS admitted certain losses as "allowed customer claims", which carried an entitlement to be paid in priority in the liquidation. Optimal Strategic's allowed customer claim was valued at US$1.5 billion. It also had other claims against third parties arising from Madoff's fraud.
By 2010, a secondary market in trading in allowed customer claims in the BLMIS liquidation had emerged. In order to realise funds, Optimal Strategic set up a scheme to allow its shareholders sell their interest in the claim against BLMIS on the secondary market. As part of the scheme, Optimal Strategic assigned its allowed customer claim, together with its claims against third parties, to a vehicle called SPV Osus Ltd. Shareholders in Optimal Strategic exchanged their shares for shares in the SPV, and sold those shares to investors.
The end result was that 93% of the shares in the SPV were held by distressed debt investors.
The SPV then instituted proceedings before the Irish High Court against two HSBC entities which had acted as Optimal Strategic's custodian and administrator.
However, the Irish High Court and, on appeal, the Court of Appeal and Supreme Court found that the SPV was not entitled to maintain these proceedings as the assignment of Optimal Strategic's third party claims was void and unenforceable under Irish law.
MAINTENANCE & CHAMPERTY
Maintenance is the funding of litigation (normally by paying the costs) by someone with no legitimate interest in the litigation. Champerty is where someone with no legitimate interest in the litigation funds the litigation in return for a share of the spoils.
Since the 1600s, maintenance and champerty have been criminal offences and torts (civil wrongs) in Ireland.
The rationale for the prohibition on maintenance and champerty is to uphold the integrity of the litigation system, to prevent trafficking in litigation for profit, and to prevent people with an improper motive influencing litigation.
However, many argue that the prohibition restricts access to justice.
ASSIGNMENT OF A BARE CAUSE OF ACTION
The assignment of a 'bare' cause of action involves the outright sale of a cause of action which is then pursued by the assignee (who has no interest or connection to the action other than that created by the assignment itself) to the exclusion of the original wronged party. Assignments of a bare cause of action – to use the archaic language of this area of law – 'savour' of maintenance and champerty and are void under Irish law.
PROFESSIONAL LITIGATION FUNDING
In its 2017 decision in Persona Digital Telephony Ltd v Minister for Public Enterprise, the Supreme Court confirmed that professional third party litigation funding is not allowed in Ireland as it offends public policy. Professional third party litigation funding is where a commercial organisation, unconnected to the litigation in question, funds the litigation with a view to making a profit. (Read a previous article here)
In SPV Osus, the Supreme Court stated that the same principle must apply where a third party purchases a claim outright, removes the wronged party from his/her proceedings and converts their claim into a conduit for financial recovery by the assignee.
ACCESS TO JUSTICE
In his decision in Persona, the Chief Justice expressed serious concern about the negative impact the prohibition on litigation funding might have on an individual's constitutional right of access to justice. The Chief Justice called on the legislature to take action, cautioning that if it failed to do so and an individual's constitutional right of access to justice was breached as a result, the courts might have to step in to alter the parameters of the law of champerty.
One year on and the Chief Justice has stated that he remains "very concerned" that there are cases where persons or entities have suffered from wrongdoing but are unable to vindicate their rights because of the cost of going to court.
He emphasised that the best way of attempting to provide a solution is by means of legislation providing for a carefully regulated scheme. But he again warned that if the legislature makes no real effort to address this issue, a point might be reached where the courts may have to step in.
Judge McKechnie echoed his concerns, noting that the "position remains as dire" as it was when the Court first highlighted this issue in 2017.
Watch this space!
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.