Supreme Court: Oireachtas needs to address lack of regulation for complex commercial litigation

About this case:

• Citation:
  [2018] IESC 44
• Judgment:
  External link
• Court:
  Supreme Court
• Judge:
  Mr Justice Frank Clarke

Emphasising the need for a properly regulated scheme or structure, and concurring with the leading judgment of Justice Donal O’Donnell, Chief Justice Frank Clarke said that a point might be reached where the courts had no option but to go down the route of imposing significant change in the law if it became clear that no real effort was being made on the part of the legislature to address the issues identified.

Background

The background to the case was that funds of clients of Banco Santander SA were invested through New York, with HSBC Institutional Trust Services (Ireland) Limited (HITS), appointed as custodian and HSBC Security Services (Ireland) Limited (HSSI)as administrator. ‘Optimal Multi Advisors’ had offered clients an opportunity to access investments in funds including the Strategic Series fund. ‘Optimal Strategic US Equity Ltd’ was the vehicle used for the Strategic Series of shares and to represent the interest of individual investors. By 2008, almost all its assets were invested in Bernard L Madoff Investments LLC (BLMIS), which had been appointed sub-custodian by HITS.

BLMIS collapsed due to a “long-running and very large-scale Ponzi fraud”, and Optimal Strategic’s assets (which had a net paper value of $2.9 billion and a net equity value off $1.5 billion in 2008) became whatever value could be extracted from that collapse.

A structure was devised to allow Optimal Strategic investors participate in the opportunity presented by possible assignment of claims recognised by the Madoff bankruptcy, and distressed debt investors ultimately held 93 per cent of the shares in SPV Optimal Osus.

A ‘key step in that transaction’ was assignment by Optimal Strategic to SPV Osus in the May 2011, which extended to all claims the investors might have.

In 2014, SPV Osus Limited initiated proceedings against HITS, HSSI, Optimal Investment Services SA, and Banco Santander SA.

Dismissing the appeal, the five-judge Supreme Court upheld High Court’s finding that SPV Osus could not proceed with its case in Ireland because the assignment “very clearly involved trading in claims” and was thus void under Irish law.

Call for urgent consideration by the Oireachtas

Repeating the call for the Oireachtas to address the issue of third-party funded litigation in Persona Digital Telephony, Mr Justice Clarke said that ‘there is a significant and, arguably, increasing problem with access to justice which arises in the context of the increasingly complex world in which we live, which in turn has increased the complexity of much litigation not least in the commercial field’.

Permitting entirely unregulated third party funding, as was at issue in Persona, or the unregulated assignment of causes of action, as is at issue in this case, as a means of solving the problem of access to justice runs the real risk of creating more problems than it solves. Justice Clarke said that the best way of attempting to provide solutions by means of legislation.

Mr Justice Clarke said that there were ‘compelling reasons for considering that any significant change of the law in either of these areas should take place in the context of an attempt to establish a properly regulated scheme or structure which would ensure that the potential benefits of liberalisation are not outweighed by any disadvantages which might flow from an entirely unregulated commoditisation of litigation’. 

Stating that he was ‘very concerned that there are cases where persons or entities have suffered from wrongdoing but where those persons or entities are unable effectively to vindicate their rights because of the cost of going to court’, Justice Clarke called for the legislature to give the issue urgent consideration.

Stating that a significant change in the law being imposed by court decision would give rise to a potentially unregulated market in litigation, Justice Clarke said that an unregulated change in this area has the potential to do more harm than good, but as undesirable as unregulated change might be, Justice Clarke reiterated “the point made in Persona that a point might be reached where the courts had no option but to go down such a route if it became clear that no real effort was being made on the part of the legislature to address issues such as those which came into focus on this appeal”.

• by Seosamh Gráinséir for Irish Legal News