British Virgin Islands: Financing The Cost Of The Asset Recovery Process – Part 2

Article by Martin Kenney & Elizabeth O'Brien

Third Party Finance of Claims.

The assignment of a partial interest in a claim to an owner of capital is a risk-sharing device, where part of the potential award from a lawsuit is exchanged for money or services. It is thus not dissimilar from a typical contingent fee type arrangement, whereby the fee is calculated by a professional service provider by way of a percentage of the economic benefits of the successful outcome of the case. The ability to assign all or part of the fruits of a cause of action provides an effective method of finance of litigation, assuming the availability of access to capital. That access, however, must be fostered, not fettered. For many victims of economic crime, access to venture capital represents the only viable method of financing multi-jurisdictional, complex and expensive litigation. While conditional fee type arrangements theoretically provide a method of financing a portion of the litigation aspect of such an action, 'extra-litigation' costs are largely ignored. In large-scale fraud cases, the 'extra-litigation' aspect can be of greater fundamental importance (or more expensive) than the litigation element. Moreover, such 'non-lawyer financiable' costs come into play at the beginning of the process – to find and freeze concealed assets. This is where the most risk lies. There can be no meaningful recovery for victims if the necessary groundwork in terms of asset-location, forensic analysis and intelligence work is not carried out competently. Millions of pounds of security may have to be posted. The finance of these aspects of multi-jurisdictional proceedings does not come within the ambit of conditional fee arrangements with professionals, nor does it come within the ambit of the typical plan of litigation costs insurance. This is where access to capital markets is of most crucial importance.

At present the market for claims worldwide is at best inefficient. In many countries, outmoded laws derived from the doctrines of champerty and maintenance prohibit the free trade in claims either outright or make such trade subject to stringent conditions. A development which could make the funding of large asset recovery actions considerably easier would be a practice which would permit regulated access to the capital markets for claims in which venture capitalists would be free to invest and compete, with the concomitant availability of capital for meritorious claims, and at competitive rates. A valid view is that there is no rational reason to permit ancient laws to uncritically quash an otherwise viable market — a market that would help victims, defendants, the courts, and society at large.

Champerty and Maintenance.

In England, the torts of maintenance and champerty were abolished in the 1960s upon the recommendation of the Law Reform Commission which concluded that an action for damages sounded in maintenance and champerty no longer served any useful purpose. Maintenance and champerty were also abolished as criminal offences in England in the 1960s. However, the common law doctrine rendering champertous contracts unenforceable continues to exist.

A number of different approaches have developed in the United States to deal with maintenance and champerty. Some states such as Pennsylvania have maintained the common law prohibitions against champertous agreements, while the courts of other states like California have held that champertous agreements may be contrary to public policy. Yet other states such as New York have adopted statutes declaring champertous agreements void.

Civil law jurisdictions including Puerto Rico and Louisiana have adopted an approach whereby if a plaintiff sells all or a portion of a lawsuit to a third party, the defendant may settle the litigation with the plaintiff by reimbursing the third party for the amount paid by him or her with interest and costs.

There are three routes by which one person may seek to dispose of, and another person may seek to acquire, the prospect of benefiting from current or future litigation against a third party. "The first is the transfer of property carrying with it the right to prosecute any cause of action closely related to that property, such as the assignment of a debt." Such a transfer and any action brought by the transferee to enforce that right are not champertous. ⁹ The second is the assignment of a bare cause of action or bare right to litigate. Such assignments offend public policy. ¹⁰ The third is the assignment of the damages or other monetary compensation that may be awarded in an action in which judgment has not yet been given. Such an assignment, being an agreement to assign future property (damages if and when awarded), operates in equity. If it is supported by consideration, it will be valid and no question of unlawful maintenance or champerty will arise (so long as the assignee has no right to influence the course of the proceedings). ¹¹

From earliest times, the English legal system prohibited maintenance (the funding or other support of someone else's litigation), and champerty (the taking of a share of the spoils of litigation). Both maintenance and champerty gave rise to criminal and tortious liability. In 1993, Lord Mustill giving judgment in the House of Lords in Giles v Thompson said:

The doctrine was historically intended to remedy the practice whereby rich and powerful men sought to acquire additional wealth and power by aiding those with claims of others, stirring up suits and "oppressing the possessors" in exchange for a portion of that property. ¹³

This was a time when officious interference in litigation was a widespread evil practiced by powerful royal officials and nobles to subvert justice and oppress vulnerable litigants. ¹⁴

The doctrine evolved throughout the centuries, and by the early 1840's at least, one of England's leading jurists seemed impatient with the rule that prevented attorneys from assisting those without the means to advance attorney costs and fees in order to seek justice. Lord Abinger, author of the "Assumption of Risk and Fellow Servant Rules," offered this dicta in 1843:

The public policy concerns stimulated by champerty and maintenance have evolved considerably since the mid-19th century. However, the policy underlying the prohibition of champertous agreements, to prevent wanton and officious intermeddling in the disputes of others without justification or excuse, remains valid.¹⁶

Halsbury's Laws of England, 4^th Edition, gives the following definitions of maintenance and champerty:

Maintenance can be described as a doctrine of public policy which is "directed against wanton officious intermeddling with the disputes of others in which the [maintainor] has no interest whatever, and where the assistance he renders to the one or the other party is without justification or excuse," per Fletcher Moulton L.J. in British Cash and Parcel Conveyers Limited v. Lamson Store Service Company Limited. ¹⁷ This statement was cited with approval by Lord Mustill in Giles v. Thompson, supra.

The evolution of the law of maintenance and champerty is perhaps best described by Lord Mustill in Giles v. Thompson where he states at page 152:

While the laws differ from jurisdiction to jurisdiction, some common or basic guidelines may be extracted from case law. In considering whether an arrangement is champertous, the case law suggests that courts will consider a number of factors, including the following:

• Merits of the plaintiff's lawsuit—the less meritorious the plaintiff's suit, the more likely the third party's financial assistance will be seen as intermeddling.

• Fairness and reasonableness of the arrangement as between the plaintiff and the third-party investor—if the parties can be viewed as relative equals with respect to their ability to bargain, the greater the likelihood a court will find the third party's assistance as proper. Additionally, courts will examine the terms of the bargain struck to ensure that they are not unreasonable, and that they are reflective of equality of information and bargaining power between the parties.

• Whether the facts in the particular circumstances actually lead to the evils which the doctrines against champerty and maintenance are designed to avoid.

• The relative economic strengths of the plaintiff and the defendant to the lawsuit. Courts will consider the financial and other inequalities between the plaintiff and the defendant in favour of validating the arrangement between the plaintiff and the third party.

• The third party's ostensible motive in providing financial assistance. Courts are more willing to uphold agreements where a third party claims a motive of providing assistance to help the disadvantaged, despite recognition by the courts that the third party's primary motive is to profit from the financing.

• Who brought the action to have the agreement declared champertous? If the litigant after succeeding wishes to have the court declare the agreement invalid, the fact that the litigant is not going to court with clean hands, will have an impact upon the court's exercise of its equitable jurisdiction.

One of the recognised exceptions to the doctrines of maintenance and champerty is where the alleged champertor or maintainor has a legitimate commercial interest or a pre-existing interest in the subject matter of the litigation. In reality these are terms which courts can mould to suit the realities of the situation. A bona fide business arrangement will be upheld provided there are no other complicating factors present. Canadian jurisprudence provides some interesting examples of circumvention of the doctrines and likewise their application in circumstances which at first glance appeared to fall within the exceptions category.

In Buday v. Locator of Missing Heirs Inc.,¹⁸ the Ontario Court of Appeal relied on the 'bona fide' business arrangement exception to justify an agreement whereby Locator of Missing Heirs ("Locator") agreed to assist the Ollmann family in establishing their rights in a mining claim in exchange for 30 per cent of their interest if successful. Locator was successful in establishing the Ollmanns' claim. However, the Ollmanns refused to assign 30 per cent of their interest to Locator as agreed, and sought a declaration that the agreement was champertous. The court held that the agreement was not champertous because Locator had not stirred up litigation. Rather, it had simply entered into a bona fide business arrangement to assist the Ollmann family in establishing what they believed was a valid mining claim.

In determining whether a legitimate business arrangement existed between the parties, the court examined the exchange of promises. It noted that the Ollmanns contacted Locator, that the principal of Locator had over thirty years' experience in the industry, that the parties formalized their relationship in a written contract which they labelled a "joint venture" agreement, and that the Ollmann family obtained independent legal advice before signing the agreement. In reaching his decision, Griffiths J.A. also placed reliance upon the affidavit testimony of the president of Locator, Howes, which set out his motivations for assisting the Ollmanns. Griffiths J.A. noted that Locator was particularly interested in assisting the Ollmanns because, as he stated in his affidavit, "the Ollmann saga had a lot of real 'human interest' appeal to me, as my favourite cases are ones in which I can help economically disadvantaged people to obtain their rightful inheritances from large corporations."

The fact that the Ollmann family had voluntarily and knowledgeably entered into the agreement, and had received what they had bargained for, was significant in the court's determination that the agreement was not champertous. The fact that the Ollmanns did not come to court with clean hands assisted in tilting the equities in favour of Locator and also likely had an impact upon the court's determination. Thus, it appears that the court examined the totality of the circumstances surrounding the transaction in deciding that the agreement was not champertous.

The inference that Canadian courts support the notion of third party finance of litigation is supported by decisions of the Bristish Columbia Supreme Court. In the case of Wiegand v. Huberman, ¹⁹ Berger J. of the British Columbia Supreme Court held that the borrowing of money to finance a lawsuit where the parties agreed that the loan would be repaid by a share in the proceeds of the litigation did not constitute champerty. The Hubermans required financial assistance to allow them to bring an oppression action against majority shareholders in companies in which they held shares. They sought the assistance of Wiegand, who provided them with $31,500 in exchange for repayment of the loan and 10 per cent of the proceeds of the litigation. The Hubermans did not proceed with the litigation, and Wiegand sought the court's assistance to recover his loan. The court rejected the Hubermans' defence of maintenance and champerty by holding that there was no element of officiousness in Wiegand's actions. Berger J. stated:

Berger J. also denounced the traditional policy justifications for champerty and maintenance discussed earlier, favouring instead a policy of access to the courts, and stated:

The decision of Nantais v. Telectronics Proprietary (Canada) Ltd. ²⁰ involved a class action lawsuit against the manufacturer of a defective pacemaker. A proposed investor financing scheme to finance some of the plaintiff class' costs was reviewed by the trial judge. A number of parties loaned, on limited recourse terms, a total of Cdn$350,000 to assist in the financing of the lawsuit. The arrangement was such that if the litigation succeeded, the investors were to be repaid the initial investment as well as 20% interest per annum thereupon, with priority over all other parties, including the plaintiffs. If the lawsuit failed, the investors would have lost their entire investment. The case settled for Cdn$23.5 million three years after commencement of the suit, and the investors were compensated according to the agreement. The investor financing scheme was given judicial approval.

Sale of Shares in Litigation.

A number of savings and loan institutions have sold shares in litigation that is being pursued against the Government of the United States in relation to its alleged breaches of contract resulting from the 1980's savings and loan crisis. These securities are listed on the NASDAQ and are known by various names including litigation tracking warrants, contingent payment rights, and contingent litigation recovery participation interests. In addition, recent years have seen the development of businesses that invest in litigation and of several investment firms that finance patent litigation.²¹

An investment in a lawsuit is capable of falling within the broad concept of "investment contract" under Securities laws of the United States, ²² thus requiring, in the instance of a private offering, a private placement to sophisticated investors made by way of the issuance of a detailed information memorandum, and otherwise requiring that the securities laws be adhered to. An application of the common enterprise test set out in Howey ²³ would result in investor financed litigation being considered an investment contract. The first prong is met in that there will be an investment of money by the third-party investor. Under normal circumstances, services can be provided in lieu of cash as consideration for an investment. However, in the context of investor financed lawsuits, the plaintiff's most significant service requirement will be legal services. The second prong of common enterprise (more particularly, vertical commonality) is satisfied because the third-party investor's "fortunes ... are interwoven with and dependent upon the efforts and success of those seeking the investment." The third prong of the test will be satisfied because the investors will have an expectation of profit. The fourth prong would also likely be satisfied in that the expectation of profit depends largely on the efforts of others, in particular, the lawyers retained by the plaintiff.

Most importantly, the fourth prong of the test will be satisfied in that the third-party investor will not under most circumstances exercise control over the litigation, such as for example developing legal theories and strategy, determining which witnesses to call, and making or accepting settlement offers. At the very least, these elements of substantial control should not be at the investors' discretion.

It is worth pointing out that a contingency fee arrangement between a solicitor and a client is not a security because the efforts of the lawyers are instrumental in determining the success of the lawyer's investment in the case. Also, the policy underlying securities legislation would suggest that the lawyer as investor (as opposed to a member of the 'public' as investor) does not need to be protected in the circumstances.

Bearing in mind the need to register a full prospectus where securities are offered to the public,²⁴ it is important to consider what type of information would necessarily be included. Factors that may be considered relevant to a third-party investor in determining the risks of a particular lawsuit and that would be required to allow for full, true and plain disclosure might include the following:

• A description of the litigation, including a legal opinion on the strength of the causes of action and potential defenses;

• An analysis of the collection risk if the litigation is successful. Obviously, until a fraud investigation results in assets being located and frozen provisionally, the profile of this risk will be high. Moreover, it would not be appropriate to raise capital by means of the sale of securities to the public to pursue an identified fraud case – as the ensuing breach of security of information would preclude this idea;

• A description of the legal teams for the plaintiff and defendant, including their backgrounds, reputations and experience on similar cases;

• A detailed break-down of the amount claimed;

• A detailed break-down of the expected costs of the lawsuit, including legal fees and significant disbursements;

• Details of how the investment funds will be used in the litigation and an estimate of the proceeds of the securities issue;

• A description of the nature of the investment (equity or debt, rate of return, priority, and control features such as voting rights);

• The length of time expected until final resolution; and

• Underwriters' and promoters' fees.

Disclosure of this type of information however could be detrimental to the plaintiff's case should an opponent gain access to it. However, other parties engaged in the raising of public funds are also subject to disclosure requirements which may expose sensitive information to competitors. There is no reason to distinguish investor financed lawsuits from these ventures, given the investor protection mandate underlying securities regulation. Without public disclosure, the theory is that some information would not be produced and it would be difficult for a market to accurately and efficiently price lawsuits. Thus it is apparent that if such a method of financing litigation is proposed, important considerations will necessarily come into play. It may well be that the risk of exposure of certain information to the opponent outweighs the benefit of achieving funding in this manner. This is particularly true of concealed asset recovery cases – until the obligor's assets have been located and frozen pending trial. One viable alternative to deal with the problem of public disclosure is to simply offer the securities to sophisticated investors under an SEC Reg. D private placement, and to market the securities to a very small circle of discreet investors.

While the above passage outlines the concerns a third party investor in litigation should bear in mind when considering such an investment, the concerns of justice also merit consideration and have hitherto driven the outcry against such methods of financing litigation. There are two principal concerns that are commonly expressed which cast doubt on the probity of permitting third-party investors to have unambiguous access to the finance of litigation. The first concern is the potential for the taking of unfair advantage over a vulnerable victim or plaintiff. The second relates to the issue of 'control' to be exercised by the third party over the conduct of the underlying judicial proceedings. The first concern relates to the protection of the weak and the vulnerable by unscrupulous men of money. The second is directed towards the internal workings of the court and of the judicial process. It is acknowledged that the taking of unfair advantage by persons who have greater wealth and knowledge can and does occur in a free market.²⁵

The acid test for the 'unfairness' of a bargain involving the third-party finance of litigation is the 'price,' and how it is arrived at.²⁶ In what is arguably the most efficiently priced market for legal services (or for access to capital to finance their provision) — the United States of America; this issue has been thoroughly considered by courts and scholars alike within the context of lawyers' contingency fees. To restate, in his 1989 article, 'Contingent Fees Without Contingencies: 'Hamlet Without the Prince of Denmark?' 37 U.C.L.A. L. Rev. 29, Professor Lester Brickman of Cardozo first posited his "corollary proportionality proposition". Professor Brickman's thesis is that the quantum of a contingency fee must be in proportion to the degree of risk and the anticipated measure of work to be undertaken by a fiduciary on behalf of his principal. A substantial contingency fee should not be charged by a fiduciary for work performed on a matter that is devoid of meaningful risk.

Although it is difficult to predict where a more open market for the finance of valid claims would develop in relation to the price to be charged for capital in complex, trans-national litigation, the experience of the authors is of some assistance. In a matter involving the pursuit of the restitutionary claims of approximately 800,000 largely elderly American victims of a telemarketing crime that took in an estimated US$240 million of illicit proceeds, the court-sanctioned price of 50% of the proceeds of recovery in return for the advance of in excess of US$4 million of cash and US$3.5 million of security to support a number of preemptive asset freezing orders, may act as a helpful guide to assessing where the market price for complex asset recovery capital might travel. ²⁷

In addressing the vulnerability of a party to being taken unfair advantage of by a financier in connection with the finance of litigation, the analysis must be fact-driven. Obviously, Citibank as a victim of crime is in a different bargaining position than a group of 800,000 unrelated, under-capitalized elderly victims. The latter case would, in the authors' view, require some form of court-sanctioned agreement for approval of the quantum of the fee to be paid to those who seek to advance the risk capital in the proceedings.

Agreements with third parties to finance litigation would be more warmly embraced by all who are involved in the administration of justice, if they were subjected to:

• full and fair disclosure to the court in advance as to the nature of the proposed financial arrangement;
  
  
• the scrutiny and prior approval of the court (to the extent that the relative bargaining positions of the parties require it);
  
  
• the consensual and open exposure on the part of the financier, to the extent of an agreed limit, to risk of loss for cross-undertakings in damages and adverse costs orders; and
  
  
• meaningful access to independent legal advice for the victim counter-party to the proposed agreement of finance.
  
  

Having the court involved in the approval of such arrangements, where appropriate or necessary, would:

1. create greater access to capital and lower the price thereof, as it would increase certainty in the lawfulness of the arrangements thus struck; and
   
   
2. permit the court to be satisfied that it remains in control of its own process.
   
   

The remaining concern to be dealt with is the issue of 'control' over the strategic or tactical decisions that must be made during the prosecution of a plaintiff's cause. This concern, as expressed, is that a third-party financier may be more inclined to wreak havoc on the judicial process through the inappropriate seizing of control through the aegis of a private bargain, in an attempt to improve the likelihood of success — at all costs. There are two responses to this concern. Firstly, the English law of champerty and maintenance is now such that the mere presence of a fear of the potential of an abuse of process by reason of the involvement of a third-party funder in litigation, does not represent an adequate basis for staying proceedings. A factual record must exist establishing a real likelihood of abuse to properly found an order to stay. Secondly, recognized principles of the economic analysis of law hold that a third-party investor of capital, as the party who is truly 'at risk', is more likely to behave rationally in the judicial process – than would a victim, driven by, in part, an emotional desire for retribution against the malefactor. This notion inverts the centuries-old assumption that third parties are more inclined to be miscreant litigants than plaintiffs or victims. The authors are at a loss to discover a rational explanation in support of this age-old presumption. Like most of the law of champerty and maintenance, there exists a long-standing tradition of a bare, uncritical acceptance of the purported underlying policy justifications of the doctrines.

Whether an investor would have any control over the direction of a lawsuit could be left to negotiation between the plaintiff and the investor. However, as a policy matter, it may be prudent to keep control over key decisions in the plaintiff's hands. Certainly the 'control factor' is important in the context of assignment of proceeds. As noted above, an assignment of damages, being an agreement to assign future property, operates in equity and will be valid for the most part provided the assignee has no right to influence the course of the proceedings. Naturally, the quid pro quo for maintenance of control is that investors will seek compensation for their lack of control over key decisions by demanding a higher rate of return on their investment.

The development of an appropriately regulated market for the third-party finance of litigation would expand the options available to victims by allowing them to adjust the level of risk they wish to bear; the amount and timing of the recovery they seek; and other variables to a far greater degree than they are presently able to do. The introduction of venture capital into the market would lower the cost of capital over a period of time, and ultimately provide victims with a more cost-efficient and comprehensive method of financing litigation than typical, conditional or contingency fee type arrangements. Such a market would foster meritorious litigation while discouraging less worthy claims. As a general rule, the owners of capital do not take irrational or emotive risks with their money. Third party finance will not flow into doubtful or complex matters unless there exists a viable chance of recovery, or unless the use of the portfolio theory of investment is permitted to assist in the spreading of risk over a number of complex claims by a number of investors.

In expressly allowing venture capitalists to enter the market for the finance of bona fide litigation, the door is opened for the regulation and supervision of the same. Thus, while providing meaningful economic access to justice, the court can also guard against any feared abuses of its process.

Security for Costs.

While not at first glance an obvious component of legal costs in any action, anyone attempting to raise funding for litigation related to a multi-jurisdictional concealed asset matter, would be foolish to overlook the possibility that security for costs likely to be incurred by a defendant could be sought at any stage of the proceedings.²⁸ Security for costs may be sought by a defendant where the plaintiff is an impecunious company, or he is situated outside of the forum jurisdiction. ²⁹

One English Court had this to say about security for costs:

It is always a matter to be taken into account that a plaintiff should not be driven from the judgment seat unless the justice of the case makes it imperative. ³³

Where an order for security for costs against a plaintiff company might result in oppression in that the plaintiff might be forced to abandon a claim which has a reasonable prospect of success, the court is entitled to refuse to make that order notwithstanding that the plaintiff company, if unsuccessful, will be unable to pay the defendant's costs.³⁴ A plaintiff company need only establish a probability that it will be unable to pursue the action if an order for security for costs is made against it. ³⁵

Notwithstanding the tendency of courts to lean against the grant of an order for security, the prospect of such an order may have the effect of bringing the proceedings to a halt or forcing a plaintiff to settle an otherwise valid claim at an undervalue. It is thus imperative that provision for such an eventuality be made at the initial funding stages if litigation in the British Commonwealth is contemplated. Indeed this is a factor which should be disclosed in any investment offering document or prospectus as it has a direct bearing on the level of risk involved. While in theory a third party investor having no control over the outcome of the proceedings is not liable to an adverse costs award including a security for costs order, in practice such an order would have the effect as noted above of curtailing the proceedings to some degree. It is also possible that future case law may bring third party investors within the reach of a security for costs order given the facility to order costs against a third party, in the U.K. at least. ³⁶

Conclusion.

There are many ways in which litigation can be funded, all of which are dependant upon the level of risk attached and the price of capital to take account of that risk. The riskier the case, the higher the cost and the lesser the likelihood that funding may be secured. In an efficient market for claims, this would operate as a filter, in effect, which ultimately dissuades litigation which could be classed as highly speculative or lacking in merit to a degree. However, the market is very inefficient – particularly in respect of concealed asset recovery matters. In providing free market access for the funding of litigation, those claims which are based on solid legal and factual foundations and are deserving of adjudication will by definition rise to the top and in most cases secure funding enabling the controversy to be settled. On the other hand, the cost of funding highly dubious claims should have the effect of stifling those claims, leaving the justice system free to deal with more meritorious ones.

Access to justice comes at a price which, in an efficient market, should bear direct relation to the level of risk involved. Theoretically, such a system should ensure that civil justice has the capacity to cope with those claims that make it through. Unfortunately, such a system does not encourage or make provision for those cases which may be arbitrarily deemed speculative – but which nonetheless raise issues of public importance, or that are objectively meritorious.

Concealed asset recovery claims present opportunities to financiers – due to the highly inefficient nature of the market, and the absence of a meaningful body of experienced analysts who can manage and assess the risk properly. A portfolio theory to managing risk in this area should be applied to the extent possible.

Footnotes

^{9. See, for example, Camdex International Ltd v Bank of Zambia [1996] 3 All E.R. 431.}

^{10. See, for example, Trendtex Trading v Credit Suisse [1982] A.C. 679.}

^{11. See, Glegg v Bromley [1912] 3 K.B. 474)" per Gibson LJ in Ward – v – Aitken & Ors., [1996] EWCA Civ 689.}

^{12. See, Black's Law Dictionary (5th ed. 1979).}

^{13. See Slyright v. Page (1589), 74 Eng. Rep. 135 King's Bench.}

^{14. See Winfield, History of Conspiracy (1921) C.H. 6.}

^{15. Findon v. Parker (1843) 152 Eng. Rep. 976.}

^{16. See Giles v. Thompson, Devlin v. Baslington, [1994] 1 A.C. 142 (H.L.).}

^{17. [1908] 1 K.B. 1006 at page 1014.}

^{18. 16 O.R. (3d) 257(1993) (C.A.).}

^{19. 18 B.C.L.R. 102 (B.C.S.C.) (1979).}

^{20. 28 O.R. (3d) 523 (Gen. Div.).}

^{21. One such business, Refac Technologies, invests in disputed patent infringement litigation and is listed on the American Stock Exchange.}

^{22. Other jurisdictions have similar concepts of 'investment contracts', including Canada. Indeed the failure of a Society established to organize and promote class action law suits, to issue a prospectus in respect of the sale of its 'shares in litigation' was arguably one of the factors which influenced a Canadian court in declaring its conduct improper. See, Smith v. Canadian Tire Acceptance Ltd. (1995) 22 O.R. (3d) 433 (Gen. Div.), aff'd (1995) 26 O.R. (3d) 94 (C.A.).}

^{23. 328 U.S. 293 (1946).}

^{24. While there are certain exemptions from disclosure requirements, such as for example for certain institutions, smaller offerings etc., it is not within the ambit of this paper to discuss these exemptions.}

^{25. For instance, a mining company will have an unfair bargaining advantage over a rural land owner of modes means in appreciating the speculative value to be accorded a nascent mineral find embedded in a geological formation deep under the surface of the earth. The formation of a private contract between the mining company and the rural landowner will be influenced by the parties' respect bargaining positions, experience and knowledge. Unless the mining company can be construed as a fiduciary for the landowner; the landowner, in a free market, must be responsible for his own decisions. The landowner can seek to obtain independent legal advice in completing the formation of a private bargain with the mining company, in an attempt to protect his interests. In addition, the law of non est factum (a plea denying the validity of an instrument sued on); unconscionable bargains; contracts of adhesion; the rule of construction of contracts which resolve ambiguities in favour of the party who did not draw the instrument; the law of fraudulent or negligent misrepresentation; and other norms and doctrines exist to afford the party with a lesser bargaining position some protection.}

^{26. 'Price' refers to the cost of finance – the amount of profit that the third-party financier will require in order to advance capital, and take risk in a litigation.}

^{27. It is noted that the matter referred to, In the Matter of the Bankruptcy of James Blair Down et al (Supreme Court of British Columbia Docket Nos. 188266/7/8/VA '98 (Vancouver Registry)), involved complex 'concealed' asset-preservation litigation by a court-appointed interim receiver, Arthur Andersen, Inc., in eight jurisdictions, including Switzerland, Guernsey, Jersey, the British Virgin Islands, Barbados and others; as well as extra-judicial investigations involving at least an additional 20 countries. In this matter, in excess of US$100 million of 'protected' assets were successfully preserved in support of the claims of the victims. The fact that over $4 million of investor cash was made available to support this endeavour on commercially rational terms, as approved by the court, would suggest that it would be available in similar matters, particularly where a reform of the law of champerty and maintenance could be advanced to clarify the lawfulness of such arrangements.}

^{28. Noting however that delay in bringing on such an application may be a relevant factor in considering whether an order for security should be made against a plaintiff.}

^{29. Section 726(1) of the U.K. Companies Act 1985, provides:}

^{30. See Farrer v Lacy, Hartland & Co (1885) 28 Ch D 482 at 485 per Bowen LJ.}

^{31. See Pearson v Naydler [1977] 3 All ER 531 at 537, [1977] 1 WLR899 at 906.}

^{32. Keary Developments Ltd v Tarmac Construction Ltd and another [1995] 3 All ER 534, [1995] 2 BCLC 395, LR 115.}

^{33. Porzelack K.G. – v – Porzelack (U.K.) Ltd. [1987] 1 W.L.R. 420.}

^{34. Aquila Design (GRB) Products Ltd. v. Cornhill Insurance plc [1988] B.C.L.C. 134 C.A.}

^{35. Trident International Freight Services Ltd. v. Manchester Ship Canal Co. [1990] B.C.L.C. 263 C.A.}

^{36. s.51 Supreme Court Act 1981.}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.