Beware the cost consequences of ignoring Cayman Islands arbitration and jurisdiction clauses
From Solomon Harris
Where the terms of a contract set out the method and jurisdiction for resolving disputes arising under it, a party which elects to ignore those restrictions may find themselves paying a severe cost penalty. This was the finding of the Cayman Islands (‘Cayman’) Grand Court (‘Court’), which has ordered a fund (‘Argyle’) to pay the costs, assessed on the indemnity basis (see below) of an anti-suit injunction in Cayman brought to prevent Argyle continuing with proceedings in New York against BDO Cayman (‘BDO’) (and others). The Court also ordered that Argyll has to pay damages to BDO of BDO’s costs and expenses of the New York proceedings, also assessed on the indemnity basis. The case is a reminder that the Cayman Court will support parties seeking to enforce jurisdiction and arbitration clauses in contracts.
What had the parties agreed?
BDO was the audit firm for Argyle. The terms of engagement agreed between BDO and Argyle contained express terms which provided that Cayman law governed the contract; that the Cayman courts had exclusive jurisdiction; and that resolution of any dispute, controversy or claim would be non-binding mediation and, failing resolution by mediation, then binding arbitration.
What was Argyle’s New York claim?
Argyle claims it was the subject of two frauds with an alleged loss of US$71m. So far no monies have been recovered despite at least one criminal conviction. Argyle brought claims against BDO in New York for US$86m in damages arising from its failure to detect/report the frauds.
How did BDO respond?
When notified of the New York proceedings BDO pointed out the contract terms, adding that they would seek to recover their costs of preventing such proceedings from continuing, assessed on the indemnity basis (see below). The New York proceedings were not discontinued and BDO incurred the costs of New York attorneys to defend the action and of Cayman proceedings for an anti-suit injunction. Having won the Cayman anti-suit proceedings BDO applied for their costs of the ant-suit injunction and damages representing the costs of defending the New York proceedings (including a payment of 70% in advance of the costs being assessed).
How do costs awards work in Cayman?
In Cayman proceedings the Court has a discretion to make an order that one party to the dispute before it pays the costs of bringing or defending the action. These are usually awarded to the party which is considered to have won the dispute. This is not a blank cheque award of all costs but is subject to agreement or assessment by the Court either on a ‘standard’ or ‘indemnity’ basis.
What is the ‘Standard’ basis
Under normal circumstances costs are awarded on a ‘standard’ basis where the onus is on the party which claims the expense to demonstrate that it was reasonably incurred and the costs of non-Cayman lawyers cannot be recovered. On the standard basis there is usually a significant shortfall between the actual costs incurred and what the unsuccessful party has to pay towards the successful party’s costs.
What is the ‘Indemnity’ basis?
Where the court is satisfied that the paying party has conducted the proceedings improperly, unreasonably or negligently it may make an order for costs to be taxed on the ‘indemnity basis’, where the onus is on the party paying the costs to prove they are unreasonable. Foreign lawyers costs may be recovered. Under indemnity basis costs awards a party generally recovers their costs almost in full.
How did that apply here?
The Court did not have any Cayman precedents on which it could rely to assess if Argyle should pay costs to BDO and if it had conducted the proceedings improperly, unreasonably or negligently and so it considered the principles applied in decisions made in the English and Australian courts in similar situations. Although these were not binding upon the Court, the judge found that, in the absence of Cayman authority, they were persuasive in their reasoning and made for good policy.
What principles were applied?
The principles applied were that where one party ignores contractual provisions that disputes under their contract are to be heard in one jurisdiction (A) and starts proceedings in another jurisdiction (B) then the party forced to bring anti-suit proceedings in jurisdiction A to stop the proceedings in jurisdiction B should be compensated on the same basis as for any other breach of contract. This would mean that the Defendant to the proceedings in jurisdiction B could recover damages to put them in the position that they would have been had the breach of contract not been committed. So in making the decision as to on what basis Argyle should pay BDO the costs of the anti-suit proceedings the Court found:
“… the correct approach where there has been a breach of a jurisdiction clause by a party in initiating proceedings in a non-chosen jurisdiction is that the costs should be awarded on an indemnity basis. The reason for that is plain. If a party has breached his agreement, then the damages which flow from the breach of that agreement are all the costs incurred by the [other] party …” [Kyrgyz Mobil Tel Ltd v Fellowes International [2005]]
What about the costs of the New York proceedings?
The Court found that it had jurisdiction to award the costs of and occasioned by foreign proceedings as damages for breach of contract where they represented a party’s losses occasioned by a breach of contract which the Court found had been proven to have occurred. Absent any Cayman precedent, the Court followed the “logical and straightforward analysis” taken in English decisions and held that BDO’s costs of defending the New York proceedings were incurred as a result of Argyle’s breach of contract, and therefore BDO was allowed to recover for any damages that flow from that breach of contract. Moreover those costs should be assessed on the indemnity basis together with interest from the date of commencement of the New York proceedings until payment. Also BDO should be given an indemnity as to any future costs and expenses of dealing with the New York proceedings.
Did Argyle have to pay money on account?
Although the Court accepted it had a discretion to order litigants to make a payment on account of costs, in this case the judge decided not to exercise his discretion to make the order, taking everything into account and balancing the interests between the parties. This means Argyle will not have to pay any money for costs to BDO until either the amount is agreed or assessed by the Court.
Does this affect commercial funding of litigation?
The case is an important reminder to commercial third party funders to keep a close eye on how the litigation they are funding is being conducted. As Tomlinson J explained in the UK Court of Appeal decision in Excalibur Ventures v Texas Keystone and others [2016]:
‘By funding, the funder takes a risk, a risk as to the nature of which he has the opportunity to inform himself both before offering funding and during the course of the litigation which he funds,’
That decision, which would be persuasive authority in Cayman proceedings, upheld an award of indemnity costs against third party funders in litigation described by the trial judge in his award of costs as ‘speculative and opportunistic’. Were the Court to find, as here, that the party they are supporting has conducted the proceedings improperly, unreasonably or negligently then commercial funders could find themselves liable to meet an award of indemnity costs.
Solomon Harris
Solomon Harris has many years of experience in all forms of disputes arising from fund liquidations and receiverships. If you are would like further information on how we can help, contact Kai McGriele
Disclaimer
The information contained in this article is necessarily brief and general in nature and does not constitute legal advice. Appropriate legal or other professional advice should be sought for any specific matter.
