16 July 2012 | By Joanne Harris
25 February 2013
5 November 2012
20 February 2012
23 January 2013
25 February 2013
Offshore litigation is thriving as the fallout from the financial crisis and court innovations whip up a perfect storm
This week’s special report focuses on the growth in litigation offshore, examining the driving factors and the effect of innovations such as the launch of the Cayman Islands’ Financial Services Division or the British Virgin Islands’ Commercial Court. How much longer will the flood of cases last?
For law firms around the world litigation has been the department flourishing most in the past few years, and the offshore sector is no different. Courts are crammed with multimillion-dollar cases as investors and creditors seek redress for losses sustained in the financial crisis.
The scale of this, say offshore lawyers, is unprecedented.
“What’s happening offshore is something we’ve not seen before,” says Ogier global litigation head Matthew Thompson.
He says the cases going through the offshore court system now are “complex, novel and challenging” and are leading to judgments that will have a significant impact in the onshore world too.
Offshore work - and litigation is no exception - has always been centred around financial institutions and investment vehicles. Therefore, the impact of the recession on the sector has been significant and will be, predict lawyers, long-lasting.
“We probably have been busier in the last little while and I think things are going to continue to be busy,” says Chris Young, head of the Cayman Islands litigation team at Forbes Hare.
Estimates of how long the financial crisis work will last range from two years to five. Cayman-based Walkers litigation partner Colette Wilkins predicts that cases will take another five years to work their way through the system, and is pretty sure of her estimate.
“I have no doubt it’s going to take that length of time,” Wilkins asserts.
Appleby’s global litigation head Andrew Bolton gives a longer, rather than shorter, estimate.
“We’re acting for a number of clients against whom proceedings arising from the financial crisis have merely been threatened at this stage,” Bolton reports. “Given the length of time some of these substantial cases take to work themselves out, I don’t think we’re going to see a tailing off of work arising from the financial crisis for a good few years.
Scandal in the wind
Offshore firms have had involvement in litigation relating to most of the big scandals of the crisis, including the collapse of Lehman Brothers and the Bernard Madoff Ponzi scheme fraud. Cases involving creditors of Madoff have kept many firms busy, with claims by the liquidators of Madoff feeder fund Fairfield Sentry in particular occupying vast amount of lawyers’ and courts’ time.
The Fairfield claims have been concentrated in the British Virgin Islands (BVI), with firms involved including Forbes Hare for the liquidators and Harneys, Maples and Calder, Ogier and O’Neal Webster for various defendants. The litigation has been ongoing for several years, and has also involved a few hearings in Cayman.
The main issues identified by offshore litigators that lead to financial crisis-related claims are attempts by investors and creditors to recoup lost funds, negligence claims against directors or service providers, illiquidity, valuation and deleveraging issues, and, increasingly, trust disputes as the second generations of trusts start to seek control of their assets. Freezing injunctions are also becoming more common.
Some courts are seeing new types of claims, such as the anti-anti-suit injunction filed in Guernsey by the liquidators of the Carlyle Capital Corporation in their fight against the company’s former directors to recoup more than $1bn (£650m) in losses sustained when Carlyle went into liquidation.
As well as the claims obviously arising from the crisis, offshore courts continue to see the usual flow of interlocutory hearings, applications for injunctive relief or applications for Norwich Pharmacal orders to obtain information from third parties.
“It’s not entirely true to say that the workload here is driven by the state of the global economy,” observes Maples and Calder global litigation and insolvency head Aristos Galatopoulos. “We’ve been consistently busy regardless of whether there’s been a perceived recession or boom.”
All this activity makes the role of offshore courts more important than ever. Much of the litigation has come to Cayman where, in November 2009, a new court division was launched. The Financial Services Division (FSD) is part of the Grand Court, but has its own panel of three part-time judges - former English High Court judge Sir Peter Cresswell, Angus Foster QC, previously a partner at Walkers, and ex-Maples and Calder partner Andrew Jones QC.
If more judges are needed, Chief Justice Anthony Smellie and Grand Court Justices Alexander Henderson and Charles Quin are available to support the FSD panel.
The BVI has a similar initiative, having launched its Commercial Court under the control of Mr Justice Edward Bannister QC in April 2009. Like his Cayman counterparts, Bannister is praised for the work he has done in the court, which has included presiding over the Fairfield claims.
The FSD’s launch was timely and though it is only in its third full year of operation, it has proved a popular initiative.
“Cayman was developed as a jurisdiction for trusts and financial structures some 40 years ago,” explains Ogier’s recently recruited Cayman litigation head Richard de Lacy QC. “In 2007 the crash made it essential that there was a court to provide services for the work-out.
Lawyers believe the FSD’s launch, and the selection of three reputable judges to lead the division’s work, has propelled Cayman into the top tier of offshore litigation jurisdictions.
“It helps in the perception of the jurisdiction, in terms of having a separate regime for dealing with these matters and having appropriately qualified and experienced judges who know their way around funds disputes and commercial disputes,” says Harneys Cayman litigation head David Herbert.
“It has improved the resource available through the court system for the conduct of litigation in Cayman, there’s no doubt about that,” agrees Appleby’s Bolton. “It’s enabled commercial matters of the kind we’re primarily dealing with to progress in a much more efficient manner.”
Some think the FSD has led to a trend towards longer trials. In 2012 so far there have been three trials lasting well over a month. Al Sadik v Investcorp Bank BSC & Ors was heard at the start of the year with judgment handed down in May. Dubai businessman Al Sadik claimed breach of fiduciary duty against Investcorp, which managed a hedge fund Al Sadik had invested in. Jones J dismissed Al Sadik’s claims, but the judgment is being appealed.
The other long cases have not yet had judgment handed down. A claim brought by Russian billionaire Victor Vekselberg over the rights to the Fabergé name ended earlier this year, while at the time of writing a dispute over the trust company of the Ojjeh family from Saudi Arabia is in its eighth week in court.
“It’s interesting that 2012 has seen three such substantial pieces of litigation and trials rather than interlocutories,” observes Herbert. “Offshore courts haven’t traditionally been trial centres. They weren’t set up for that.”
Young agrees, saying that in pre-FSD days Cayman had fewer long trials.
“It’s not often that you get cases of that length fighting out,” adds Wilkins. “It’s indicative of the kind of claims disgruntled investors are bringing.”
“This demonstrates that clients have confidence in the court and the FSD in particular, and also that the Cayman Islands has the infrastructure to hold complex trials with large numbers of clients, witnesses and onshore lawyers on site for several weeks,” says Galatopoulos.
However, not everyone feels long trials are a result of the launch of the FSD.
“There have been big trials in the past,” Conyers Dill & Pearman litigation head Nigel Meeson QC says.
“I don’t think the FSD is the cause of longer trials - we’ve always had big matters in Cayman,” adds Bolton. “There are some very big deals going on through Cayman and some major pieces of litigation spinning out of them.”
Whether the FSD has led to an increase in substantial hearings in Cayman or not, the success of the division means the focus is on how it can be further improved. The choice of the three judges is widely praised, but the consensus is that more judges, or alternatively full-time judges instead of part-time ones, would be welcome, according to Meeson.
“The court would probably benefit from being able to have a full-time judge or possibly two full-time judges available to it - if you have full-time judges they can be more in control administratively,” notes Forbes Hare Young.
“One problem at the moment is that it’s taking quite a long time to get cases heard and it’s taking a long time to get court dates,” says Harneys’ Herbert. “If there were to be one or two full-time FSD judges it would alleviate the problem.”
Bolton believes the system is working reasonably well, with the three judges demonstrating flexibility in their scheduling to ensure they are available for the long trials.
“It’s only really when something comes up unexpectedly where you need to get into court quickly and are assigned a judge who happens to be off the island at the time that you have problem,” he says.
Some lawyers support the concept of a separate registry for the FSD, providing more administrative support for what is an increasingly busy part of the Cayman Grand Court, while Meeson suggests that a more streamlined listing process would assist. Such improvements will be necessary as the court consolidates its position.
The growth in litigation has prompted several firms to strengthen their litigation teams in recent months. Herbert was recruited by Harneys from XXIV Old Buildings in October 2011 to head up the firm’s Cayman litigation team, part of a string of hires from onshore law firms and barristers’ chambers in the past 12 months.
In January, Appleby picked up Serle Court Chambers’ Peter McMaster QC for its Cayman litigation team, and followed that hire in March with the appointment of Ogier’s local litigation head Chris Russell.
Looking for a replacement for Russell, Ogier also turned to the bar, hiring 3 Stone Buildings silk Richard de Lacy.
Former barristers now make up a considerable proportion of the litigation partnerships of offshore firms, although Appleby, Conyers and Ogier are the only firms to have brought silks into their partnerships - Meeson joined Conyers in 2007 from Quadrant Chambers.
“I suspect people have seen it’s been good for us,” says Meeson.
The attractions for the individual barristers of joining an offshore firm are many, say those who have made the move. Apart from being able to exchange a London commute for a Caribbean lifestyle, they say the quality of work is equal or even better than at the English or other bars.
“There’s some pretty major litigation going on here,” says Meeson. “The sums involved are typically hundreds of millions of dollars - it’s big-ticket stuff.”
Bolton points out that in Cayman and the BVI the profession is fused, making it easy for a barrister to be admitted to the local bar and appear in court.
“You retain the involvement in advocacy while working in an environment where you’re part of a team,” he says. “You have greater client involvement and the quality of the work is good. It’s that combination of teamwork plus the advocacy element that attracts a QC to join an offshore law firm.”
“Whether it’s Guernsey, Jersey, Cayman or BVI, you want people who can be both client- and court-facing,” adds Thompson.
De Lacy says he was attracted to join Ogier by the chance to have more client contact and develop a “new dimension” to his professional life.
Those firms that have not yet hired their own silks express doubt about the concept of having an in-house QC.
“The problem that these firms are going to face is that they’ll be under increasing pressure to use the QCs they’ve got on their books,” says Herbert. “They’re going to find it more difficult to get London silks admitted here because the answer can be that they’ve already got a QC in the office able to represent their client.
“It’s always a question of horses for courses - you have to have the right fit between the barrister and client, the right fit between the barrister and the subject-matter and the right fit between the barrister and the judge.”
Wilkins, herself a former barrister, says hiring a QC is not on Walkers’ agenda, adding that the firm’s relationship with the bar is “extremely healthy”.
“It’s a fantastic resource for us to have - one person’s skillset isn’t going to cover all the types of cases we do,” she says, echoing Herbert’s opinion.
But the firms with QCs insist they are not about to stop instructing leading London counsel.
“The flexibility we have by being able to instruct counsel from London is helpful,” says Bolton. “It may be that when a very large case is running up to trial you can add to your manpower by bringing in counsel to do a lot of the quality work. In cases where Peter [McMaster QC] is the partner running the matter, that’s a bit less likely because we can offer the client the person who’s been involved with the case right the way through to continue and do the advocacy.”
This becomes less likely in the longest-running cases, when taking a partner off day-to-day duties to do the advocacy for weeks on end is not an option.
There is an argument, however, that having a senior barrister or QC employed by a firm is a good cost-saving measure - to appear in a Cayman court, for example, a London barrister must apply for temporary admission to Cayman, which costs a fairly hefty fee. It is also impossible at present to recover costs incurred by an advocate from outside Cayman.
The trend towards hiring barristers is likely to be mainly confined to the Caribbean for the present because, fees notwithstanding, it is easier to requalify as a Cayman or BVI advocate than to requalify as an advocate in Guernsey or Jersey. The Guernsey requirements, for example, include a three-month course at the University of Caen in France as well as passing the local bar exams and completing a training period as an advocate.
Practising litigation offshore is no longer confined to the traditional jurisdictions. As the amount of work being sourced from emerging markets grows, more firms are considering whether they need a litigator on the ground in their Asia offices.
Firms to have put litigators in Hong Kong recently include Appleby and Harneys. Harneys made up Hong Kong-based insolvency and litigation lawyer Ian Mann last year, while Appleby relocated partner Eliot Simpson and senior associate Joanne Collett to the region in March 2012.
Driven by the same factors, US litigation firm Kobre & Kim is hoping to take advantage of its Hong Kong office and Asian client base by opening a BVI office, headed by partner - and another former barrister - James Corbett QC.
“It’s not just Hong Kong,” says Bolton. “Hong Kong, it’s fair to say, dominates, but we’re talking about companies with substantial business in mainland China and throughout Asia.
“This isn’t anything radically new - it’s the continuation of a trend that’s been going on for several years now. As the Asian market grows and as they continue to use Cayman and other offshore structures for their business, an increase in the number of matters arising out of that business will follow.”
At Walkers, which has had insolvency partner Fraser Hern in Hong Kong for three years, Wilkins says the office has always been a source of work for the firm’s contentious teams, but acknowledges the importance of the region.
Maples was the first firm to bring a litigator in on the ground in Asia, hiring Herbert Smith lawyer John Trehey in 2007 and making him up to partner in 2009. Galatopoulos says Trehey was originally more focused on restructuring work, for example on advising on schemes of arrangement, but this emphasis has shifted recently.
“In the past couple of years it’s noticeable that there’s a lot more commercial litigation and pure insolvency work coming out of Asia,” he says. “For us, the key is to build on our strong relationships with the onshore firms in the region and make sure we are able to deliver an excellent product to them as quickly as possible. Responsiveness is crucial in that respect. The timezone can help us - while our Asia team sleeps, our people in BVI and Cayman are working away.”
Bolton thinks a cultural shift in Asia is one reason why it is now a focus for offshore firms’ litigation teams as well as their corporate and funds practices.
“There’s been a bit of a cultural change in the Asian region about getting involved in litigation,” he observes. “It used to be that it wasn’t the done thing to get involved in any sort of dispute.
“We’re seeing a diminishing reluctance to get involved in litigation.
It’s still a cost-sensitive region and the work coming out of that area is very demanding but there’s an increase in it.”
Firms that do not have a litigator on the ground in Hong Kong say they are watching the market closely. At Ogier, Thompson says it is “inevitably something we’ll look at,” while Meeson says “we’re keeping an eye on it”.
Many lawyers believe that BVI law is the key capability in Asia, as Asian clients have generally preferred BVI structures over Cayman, although Cayman remains popular.
Firms also mention Russia as a source of disputes - the Fabergé case in the FSD is one of the more recent examples, but Meeson reveals he has two Russia-related cases ongoing.
The establishment of the FSD and the BVI Commercial Court mean the major offshore centres now have a court system most see as being equal in quality to that of the onshore jurisdictions to which litigants may traditionally have turned. Lawyers are confident that the jurisdictions would have coped, had the new courts now been set up, but believe the system would have been “creakier” and “slower” than what is currently offered.
Litigation is now very much a key part of the offshore offering. With developments such as the growing influence of Asia set to continue, it will be an area offshore firms will keep focusing on for some time to come.
Financial Services Division judges
Sir Peter Cresswell
Sir Peter Cresswell retired from the High Court in England in January 2008 after 17 years as a judge. He headed the Commercial Court between 1993 and 1994 and throughout the 1990s managed the ‘Lloyd’s names litigation’, a series of multimillion-pound claims brought by investors in Lloyd’s of London who suffered huge losses in the early part of the decade.
Cresswell was called to the bar in 1966 and appointed silk in 1983. He was named to the Financial Services Division judicial panel in November 2009.
Angus Foster QC
Angus Foster was formerly a partner at Walkers in the Cayman Islands. He joined the firm in 1981 and became a partner in 1986. He served as head of litigation and was a member of the firm’s management committee for some years before his retirement from Walkers in June 2007.
On his retirement Foster became an acting Grand Court judge, and was appointed silk by Cayman Governor Stuart Jack in 2009.
Andrew Jones QC
Andrew Jones was the first litigator hired by Maples and Calder, back in 1984. He was made up to partner in 1986 and remained at the firm until his retirement in 2006. Jones was appointed silk in 2002. He also sat on the Grand Court Rules Committee for many years.