The Contracts (Rights of Third Parties) Law 2014

From Solomon Harris

The Cayman Islands Legislative Assembly has approved the anticipated Contracts (Rights of Third Parties) Law, 2014 (the ‘Law’), although it has yet to be formally Gazetted. Here we look at how the Law will affect existing and future contracts governed by Cayman Islands (‘Cayman’) law, and the benefits it should bring to most funds contracts. This legislation, which formally recognizes third party contractual rights for the first time in Cayman, has been designed and introduced specifically for the investment funds industry. It brings Cayman law closer in line to the laws of the home jurisdictions of many of the fund clients who use Cayman as well as making it the first offshore jurisdiction to implement such laws.

Privity of Contract

In common law jurisdictions, only the parties to a contract can enforce its terms (‘Privity’). If the contracting parties agree to benefit a third party (someone who is not a party to the contract) that benefit can only be enforced by the parties, it cannot be enforced by the third party.

Why is that a problem for investment funds?

By way of example, consider that a Cayman Exempted Limited Partnership (‘ELP’) has a term in its Partnership Agreement (‘PA’) which grants an indemnity to a corporate General Partner (‘GP’) and also to the GP’s officers, directors, shareholders, employees and agents. Of these, the GP is the only one to sign the PA and so the only one to be able to enforce its indemnity.

How did the third parties protect themselves?

As the other indemnified parties were third parties, they were not able to enforce the indemnity purportedly granted in their favour. Before now, those third parties had a number of ways to address this problem; entering into separate indemnity agreements directly with the GP (often impractical where there are a large number of third parties); establishing a trust arrangement, where the GP would hold the benefit of the indemnity on trust for the third parties; putting in place a separate indemnity agreement governed by a non-Cayman law which recognizes third party rights, for example that of New York or Delaware, (not ideal given the possible differences in the benefits conferred by using two different laws); or using the rather ancient device of a deed poll in order to confer third party rights.

How will that change?

All those remedies have been made redundant. Under the new Law, provided that the third party is expressly identified in the contract, and that the contract sets out in writing that the third party has the right to enforce a contractual term, then the third party can enforce its rights and has the same remedies for breach of contract (damages, injunctions, specific performance) that it would have had if it had been a party to the contract. The rights and the remedies are subject to and in accordance with any other relevant terms of the contract, such as arbitration clauses and exclusions or limitations on liability. The mechanism by which these rights can be enforced involves new relationships and terms such as ‘promisor’ and ‘promisee’, and there are exceptions and further provisions as to identification of the third party.

How do you identify a third party?

The third party must be expressly identified in the contract. This can be by name, as a member of a class or as answering a particular description. It includes a person nominated or otherwise identified under the terms of the contract, even where the third party is not yet in existence when the parties enter into the contract.

What contracts does it cover?

The Law applies to all existing and future contracts, provided they meet certain criteria such as those set out above. In practice, most fund industry contracts which set out third party rights are likely to meet the criteria. Where the Law applies to an existing contract a third party may only enforce rights which have accrued on or after the Law came into effect. This means that existing contracts can benefit from the Law without being amended.

What contracts are excluded?

The Law does not apply to certain contracts, and confers no rights on a third party in the case of: a contract on a bill of exchange, promissory note or other negotiable instrument; any contract binding on a company and its members under its Memorandum and Articles of Association; any term of a contract of employment against an employee; a contract for the carriage of: goods by sea or road; cargo by air; or letters of credit. There are further exclusions relating to the Limitation Act, double recovery, and restrictions on a third party being considered a party to the contract for the purposes of any other law or instrument.

What happens when the contract ends?

The new Law provides circumstances where the parties to a contract will not be able to rescind it, or vary it to alter or extinguish a third party’s entitlement without that third party’s consent. This is subject to the contrary intention being expressly provided in the contract. A party will be able to apply to the Court to dispense with any required third party consent.

What do I do now?

Existing Cayman contracts which confer rights or benefits on third parties should be reviewed to check to what extent they can or need to be amended. We at Solomon Harris have extensive experience in drafting, negotiating and re-structuring all types of agreements for Cayman funds and will be happy to conduct a review.

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