By Simon Raftopoulos and Liesl Richter From Appleby

Currently under Cayman Islands law, a person who is not a party to a contractual agreement cannot enforce its terms directly, irrespective of whether the agreement expressly purports to grant to such third party any rights. In other words, strict ‘privity of contract’ principles apply.

The Contracts (Rights of Third Parties) Law 2014 (Law) has been passed by the Legislative Assembly and will come into force upon approval by the Governor. The Law gives third parties the ability to enforce rights expressly conferred upon them in a contractual agreement. The parties to an agreement can now agree that specified third parties will have a statutory right of direct enforcement of contractual obligations, notwithstanding that such third parties are not a party to the agreement itself.

The Law also provides that the parties to the contract may only rescind or amend the agreement in such a way as to extinguish or vary the third party’s rights with that third party’s consent (unless the agreement contains an express provision permitting such extinguishment or variation without such consent).

For third parties to be given these rights, the parties to the agreement will have to opt-in to the application of the Law. Only those provisions which are expressly stated to be capable of enforcement by a particular third party will be enforceable by the third party.

The Law provides that a third party may in such third party’s own right enforce a term of a contract if:

the third party is expressly identified in the contract by name, as a member of a class or as answering a particular description, which may include a person who is not in existence when the contract is entered into; and

the contract expressly provides in writing that the third party may enforce the relevant term of the contract.

Any term of the contract which excludes or limits liability in relation to any matter will also apply to the relevant third party.

The Law will only apply to third party rights created on or after date on which the Law came into force. Furthermore, the Law will not apply to certain instruments, including promissory notes, other negotiable instruments or Memorandum and Articles of Association.

The Law is a welcome addition to Cayman Islands legislation which will be of particular interest to the financial services industry. In particular, the Law will enable indemnities and exculpation provisions in favour of third parties in fund documents and partnership agreements to be enforceable, avoiding the need for a separate agreement or other option to solve the privity of contract rule.

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.

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