Reproduced with permission from Law Business Research Ltd.

This article was first published in The Dispute Resolution Review, 5th edition (published in February 2013 – editor Richard Clark).

For further information please email [email protected]

Cayman Islands

Aristos Galatopoulos and Caroline Moran1

I         INTRODUCTION TO DISPUTE RESOLUTION FRAMEWORK

The Cayman Islands are a British Overseas Territory and the legal system is an English- style common-law system that comprises statute law and binding case precedents. English case law is highly persuasive in the Cayman Islands in the absence of any Cayman Islands authority. Decisions of other Commonwealth jurisdictions are also persuasive. The Cayman Islands also has a Constitution that includes a Bill of Rights.

The Grand Court of the Cayman Islands (‘the Grand Court’) is the superior court of record of first instance for the Cayman Islands. The caseload of the Grand Court is divided among five divisions: Civil, Family, Admiralty, Financial Services and Criminal.

Commercially significant civil litigation classified as ‘financial services proceedings’ is tried in the financial services division (‘FSD’). Every proceeding in the FSD is assigned to one of the six highly experienced commercial judges of the FSD. Hearings by telephone or videolink are permitted and are used regularly.

Appeals from the Grand Court are to the Cayman Islands Court of Appeal (‘CICA’) (which usually sits three times each year). Subject to certain restrictions, there is an automatic right of appeal to the CICA from any final decision of the Grand Court. In general, leave of the Court is required to appeal an interlocutory decision.

An appeal may lie to the Privy Council from the CICA. A final appeal may then lie to the European Court of Human Rights if it raises appealable human rights issues under the European Convention on Human Rights that applies in the Cayman Islands.

II        THE YEAR IN REVIEW

In 2012, the Grand Court showcased its resources by dealing with lengthy and complex commercial trials involving significant amounts of live evidence.3 Summarised below are a number of decisions of the FSD of general interest to practitioners and of particular relevance to the financial services industry.

In addition, the Grand Court continues to grapple with the question of whether there is jurisdiction to grant free standing injunctions in support of foreign proceedings without a substantive proceeding in the Cayman Islands.4  The current position is that there is no such jurisdiction.5 The Cayman Islands Law Reform Commission is currently giving active consideration to legislative reform in this area and at least one decision of the CICA is pending at the time of writing.

i         Re FIA Leveraged Fund (Grand Court, 18 April 2012)

If permitted by their constitutional documents, investment funds may redeem shareholders ‘in kind’ in satisfaction of the redemption debt.6 This case makes clear that assets distributed in kind must have a real commercial value.

The fund purported to redeem investors in kind by distributing shares in a Delaware SPV to them. The only asset of the SPV was an option to purchase shares in a publicly traded US bank. The bank’s publicly available SEC filings showed that it considered the option to be worthless.

The investors petitioned to wind up the fund on the grounds that it could not pay its debts because the in-kind distribution was worthless and thus was insufficient to satisfy their redemption debt. The fund disputed that any debt was due7  relying on its constitutional documents that permitted the board of directors ‘in its sole discretion’ to determine the value of the assets forming the redemption in kind.

The Grand Court granted the winding up order, finding that the option had no real underlying value, and holding that in exercising their ‘sole discretion’, the directors needed to act bona fide and satisfy themselves that the value of the assets to be distributed would be equivalent to the amount of the debt owed.

ii        Al Sadik v. Investcorp Bank B.S.C. (Grand Court, 18 May 2012)

In this case, the Grand Court considered the principles of contractual interpretation and the scope of fiduciary duties owed by an investment manager to its client.

The parties entered into an investment management agreement (‘IMA’) whereby the defendants would manage the plaintiff’s investment. The plaintiff lost significant amounts on his investment and sued to recover the loss, claiming, among other things, that the defendants leveraged the investment in breach of the terms of the IMA and breached its fiduciary duties by failing to inform the plaintiff of the leverage and trying to conceal it.

The terms of the IMA were ambiguous as to whether there was a broad or limited discretion with regards to leverage. In interpreting the IMA, the Grand Court considered that it must be informed by the investment proposal that had been presented to the plaintiff prior to entering into the IMA because, although not part of the contract, it was part of the factual matrix.8 The Grand Court found that as the proposal did not envisage any limitation on the use of leverage when suggesting how returns could be achieved; a term could not be implied into the IMA that would render performance of any part of the proposal impossible.

The Grand Court also confirmed that where a party has a contractual and a fiduciary duty, the fiduciary relationship must be interpreted in a manner consistent with the contract. Accordingly the defendant’s fiduciary duties to report to the plaintiff were informed by the IMA, which did not include an obligation to disclose the leverage.

An appeal decision is pending.

iii       ABC Company (SPC) v. J & Co Ltd (CICA, 25 May 2012)

This is the first significant judgment of the Cayman Islands courts dealing with the winding up of segregated portfolio companies (‘SPCs’). The decision confirms that insolvency of one portfolio will not affect the other portfolios so as to require a winding- up order to be made over the SPC as a whole – a fundamental assumption in the use of SPCs.

Relying  on  the  Belmont  line  of  authorities,9   the  petitioner  brought  a  just and equitable winding-up petition against ABC on the grounds that it had lost its substratum because one-third of its segregated portfolios had suspended subscriptions and redemptions. The CICA ordered the petition to be struck out, on the grounds that it was bound to fail, because the majority of the segregated portfolios were operating normally and therefore loss of substratum could not be established. The CICA carried out a detailed review of the SPC’s constitutional documents and concluded that it was in the reasonable expectation of shareholders that some, but not all, portfolios could be suspended in this manner. The CICA expressly did not decide the point but indicated that future cases may require a review of the Belmont line of authorities.

iv         Re Medley Opportunity Fund Ltd (Grand Court, 21 June 2012) and Lansdowne v. Matador Investments Limited (in official liquidation) (Grand Court, 23 August 2012).

In both of these cases the Grand Court considered the enforceability of side letters by investors seeking to rely on their terms to redeem from a fund. Although in many respects both these cases turned on their own facts, it appears that certain general principles can be distilled from the decisions. The Grand Court will not treat a nominee and the holder of the beneficial interest in the shares as one and the same for the purpose of enforcing a side letter. As such, care should be taken that the signatories to the side letter include the shareholder of record or alternatively make clear that nominees or custodians appointed by the signatory to the side letter, have the benefit of the same rights.10  For side letters to be enforceable, there must be sufficient flexibility built into the Articles and other definitive constitutional documents of the fund to permit side letters to be entered into and this should be disclosed in the offering document.

The Grand Court has not expressly confirmed that confidential side letters can operate to vary redemption rights. In Medley, the Grand Court appeared to assume that this was the case. In Matador, in a highly unusual factual situation, the Grand Court refused to uphold a confidential side letter that it considered to be a ‘secret agreement’. This was in circumstances where the constitutional documents of the fund did not appear to permit side letters. We can expect the debate about the use of confidential side letters to continue into 2013.

v         Renova v. Gilbertson (Grand Court, 15 August 2012)

This case reinforces the principle that directors cannot allow their personal interests to trump their duties of good faith.

The plaintiff brought a derivative action against the defendant on the grounds that he had breached his fiduciary duty, as a director of a Cayman Islands-based private equity fund (‘the fund’), by diverting an investment opportunity for the fund in the Fabergé brand to himself and certain business associates.

The defendant argued that shareholders could agree to modify a director’s fiduciary duties to the company, such that he would be entitled to act in his own interests rather than the interests of the company. He claimed that the plaintiff had done so and therefore there was no breach of fiduciary duty.

The Grand Court disagreed and held that while directors’ fiduciary duties might be capable of a degree of modification in certain circumstances, to be effective such modifications must be made clearly and openly with the fully informed and express consent of the company. This had not been obtained in the circumstances of this case.

An appeal is pending.

III      COURT PROCEDURE

i         Overview of court procedure

General litigation in the Grand Court is governed by the Grand Court Rules (‘GCR’). The FSD has also issued an FSD User’s Guide, which sets out timing and procedures to be followed in the FSD.

Winding-up proceedings are governed by the Companies Winding Up Rules

(2008 Revision) (as amended) (‘CWR’).

ii        Procedures and time frames

Proceedings under the GCR

In general, litigation is commenced by way of a writ that is endorsed with a statement of claim setting out the nature of the plaintiff’s claim and the reliefs or remedies requested. Once issued, the writ must be personally served on the defendant.11 For service of defendants outside the jurisdiction, leave of the court to serve the proceedings must first be obtained (see Section III, v, infra). If a defendant intends to defend the action, it must acknowledge service, file a notice of intention to defend and then file a defence. The plaintiff can then file a reply to the defence. Counterclaims may also be filed within the same proceeding. The GCR set out default provisions that apply to the timing of proceedings giving parties 14 days to respond at each new stage of the proceeding. Lists of discoverable documents must be exchanged 14 days after pleadings close (see section V(ii) infra).

These default provisions are usually modified by consent of the parties or the direction of the Grand Court. In the FSD, it is typical for case management conferences (‘CMCs’) to be held early on in the proceedings12 to set out an agreed timetable. CMCs are usually held periodically throughout the litigation to revise and update the timetable as necessary.

Much of the commercial litigation before the Grand Court is complex, cross- border and involves heavy interlocutory applications. Despite proactive case management, these cases take approximately two years to come to trial.

Proceedings under the CWR

The CWR sets out a default timetable for winding-up proceedings. Winding-up proceedings are commenced by way of a petition supported by affidavit evidence. In the normal course winding-up proceedings are decided on affidavit evidence without discovery. Typically a creditor’s winding-up petition will be heard within six to eight weeks of filing.

Interlocutory hearings

Interlocutory hearings are made by way of summons and typically proceed on affidavit evidence only. The summons must be served on the other party not less than three clear business days before the hearing date. Normally a summons will be listed for hearing within two to six weeks depending on the length of the application and court availability.

Urgent interim applications

Injunctive relief may be available to a plaintiff pending trial depending on the circumstances. Urgent applications for injunctive relief are normally heard ex parte in the first instance and can be heard on extremely short notice by the court. At the ex parte hearing, the court can grant an interlocutory injunction pending the inter partes hearing, which will normally be heard shortly afterwards. At the inter partes hearing, the court can grant an interim injunction pending trial. In almost all circumstances, the court will require the applicant to provide a cross undertaking as to damages to protect the defendant in the event that at trial it is established the injunction should not have been granted and loss has been caused to the defendant as a result. In some circumstances, the court will require fortification of the undertaking by a sum of money into court.

The following types of injunctions are available in the Cayman Islands:

a         an injunction to prevent a party from carrying out a certain action before trial;

b          a freezing (Mareva) injunction to restrain a party from disposing of or dealing with certain assets pending the trial;

c          an Anton Piller order to require the defendant to permit persons to enter his premises, search for documents or other moveable property and take them away and retain them; and

d        a mandatory injunction requiring that a positive act should be done.

Where the assets of a company are in jeopardy, for example, as a result of misconduct of the directors, the Grand Court also has jurisdiction to appoint provisional liquidators on an urgent basis to take control of the company pending the hearing of a winding-up petition.

iii       Class actions

Where numerous persons have the same interest in any proceedings, the Grand Court may grant permission for the proceedings to be continued as representative action. Any judgment obtained in such proceedings is binding on all of the persons who are represented, however, the judgment cannot be enforced against them

iv        Representation in proceedings

The legal profession in the Cayman Islands is fused such that litigation attorneys liaise directly with the client on a day-to-day basis and also appear as advocates in court. Barristers from overseas may be engaged to appear as advocates but must first be admitted by the Grand Court to practise in the Cayman Islands on a limited basis for the duration of the application.15

Natural persons may represent themselves or be represented through an attorney, however, a legal entity must engage an attorney.

v         Service out of the jurisdiction

Leave of the court is required before service out of any originating process. GCR Order 11 sets out a prescribed list of proceedings that may be served out of the jurisdiction with leave. Before the court will order that a party has leave to serve a writ out of the jurisdiction, it must be satisfied that:

a          the applicant has demonstrated a good arguable case that the claim has an appropriate nexus to the Cayman Islands under one or more of the heads set out at GCR O.11 r1;

b        there is a serious case to be tried on the merits; and

c         it is proper in the exercise of its discretion to grant leave and particularly that the Cayman Islands are the forum conveniens.

 

vi        Enforcement of foreign judgments

Foreign money judgments may be enforced by action at common law. Certain Australian money judgments are an exception and can be enforced by way of a statutory registration procedure pursuant to the Foreign Judgments Reciprocal Enforcement Law (1996 Revision). There is no procedure for the enforcement of non-money judgments in the Cayman Islands.

A common-law enforcement action is commenced by the issue of a writ endorsed with a statement of claim setting out the facts of the original cause of action; the foreign court’s jurisdiction over the debtor; particulars of the judgment; and confirmation that money is owed on the judgment.

At the hearing of the application, the applicant must demonstrate that the foreign judgment:

a         was made by a court of competent jurisdiction;

b        is for a definite sum of money;

c         is not a sum payable in respect of foreign taxes or fines;

d        is final and conclusive;

e         is not impeachable on the grounds of fraud;

f         does not offend natural justice; and

g         is not contrary to public policy.

If the plaintiff can establish these factors, the Grand Court will enforce the award. There is no requirement of reciprocity with the foreign court.

vii      Assistance to foreign courts

Evidence

Pursuant to the Evidence (Proceedings in Other Jurisdictions) (Cayman Islands) Order 1978, if requested by a foreign court or tribunal (‘the requesting court’), the Grand Court may make an order to allow evidence to be obtained in the Cayman Islands in support of foreign proceedings.19 The Grand Court has the power to make any appropriate order to obtain the evidence, including the examination of witnesses orally or in writing and the production of documents.

There is no prescribed form that the letter of request must take, however, it must be a formal request that comes directly from the requesting court. The Grand Court can grant such assistance where the Grand Court is satisfied the requesting court is exercising jurisdiction in a country outside the Cayman Islands and the evidence is to be obtained for the purposes of civil proceedings before that court.

Orders to produce information – ‘Norwich Pharmacal’ orders

Under the Norwich Pharmacal 20 jurisdiction, the court may order a person, whether or not he or she is a party to the substantive proceedings (actual or intended), to disclose information about wrongdoers and the location of his or her assets.21 Such an order can be granted in support of foreign proceedings with the application being made by one of the parties to the proceedings and without the need for any letters of request. The applicant must show that:

a          a wrong has been done to the applicant by a wrongdoer and the applicant intends to assert his or her legal rights;

b          an order is necessary to assist the applicant in achieving justice and there is no other practical source of information; and

c          the respondent is a person who was involved in the wrongdoing (even innocently) and is able to provide the information necessary to enable the wrongdoer to be identified and sued.

Foreign insolvency proceedings

Part XVII of the Companies Law provides that where a foreign legal entity is subject to foreign bankruptcy proceedings in its country of incorporation, on the application of the foreign insolvency representative, the Grand Court may make an order:

a          recognising the right of the foreign representative to act in the Cayman Islands on behalf of the debtor;

b        staying legal proceedings against the debtor;

c          requiring a person in possession of information relating to the debtor to be examined by and produce documents to the foreign representative; and

d          requiring any property belonging to the debtor to be turned over to the foreign representative.

viii     Access to court files

The court office maintains hard-copy files of originating processes and final judgments that are open to public inspection upon the payment of a fee but there is not yet an electronic database.

Supporting affidavit evidence and interlocutory applications or orders are not available for public inspection. A third party may make an application to the court for leave to inspect the court file. However, such applications would only be granted in exceptional circumstances.

ix        Litigation funding

Third-party litigation funding agreements governed by Cayman Islands law will not be permitted unless they are structured in a manner that does not offend against the common law rules of maintenance (providing assistance for litigation with no legally recognised motive) and champerty (funding in return for receiving a share of the proceeds), which were designed to prevent vexatious litigation.22

However, in insolvency proceedings the Cayman Islands courts allow liquidators to enter into foreign law governed funding agreements for use in foreign proceedings. If the foreign jurisdiction permits such agreements, then the Cayman Islands courts will not interfere.23

IV      LEGAL PRACTICE

i         Conflicts of interest and Chinese walls

The general principle is that, in the absence of consent, a firm should not act for a client where there is a conflict of interest with another existing or former client and a reasonable person would anticipate a risk that confidential information would be disclosed.24

That said, Chinese walls are permitted and expressly recognised in the Cayman Islands Code of Conduct for Attorneys. Proper information barriers must be put in place to prevent leakage of confidential information, including physical separation of attorneys and hard-copy files, firewalls around electronic files and undertakings by the attorneys. Whether a Chinese wall is an appropriate means by which to manage a conflict will very much depend on the circumstances of the individual case.

ii        Money laundering, proceeds of crime and funds related to terrorism

Cayman Islands anti-money laundering (‘AML’) and proceeds of crime legislation is contained principally in the Proceeds of Crime Law, 2008 (‘the PCL’) and also in the Misuse of Drugs Law (2010 Revision) and the Terrorism Law (2011 Revision). The PCL is supplemented by the Money Laundering Regulations (2010 Revision) (‘Regulations’) and the Guidance Notes on the Prevention and Detection of Money Laundering in the Cayman Islands.

Regulation 5(1) requires that anyone carrying out ‘relevant financial business’ must, except in certain prescribed circumstances, maintain appropriate procedures to forestall money laundering, including client identification and verification procedures and designation of a compliance officer responsible for maintaining AML procedures. Litigation advice, unlike transactional advice, does not usually constitute relevant financial business and falls outside the Regulations.

Pursuant to the PCL and the Terrorism Law, lawyers also have obligations to report knowledge or suspicion of money laundering or terrorist activity that comes to their attention during the course of their business to the Financial Reporting Authority of the Cayman Islands. However, a lawyer does not need to do so where such a report would breach a client’s legal professional privilege (i.e., where the information comes to the lawyer in privileged circumstances) unless it has been given with the view to furthering a criminal purpose.

V        DOCUMENTS AND THE PROTECTION OF PRIVILEGE

i         Privilege

If a document falls within one of the categories of privilege, it need not be produced to the other side in litigation, however, it must still be identified on the party’s list of discoverable documents with an annotation that privilege is being claimed.

The recognised categories of privilege are:

a         legal professional privilege that comprises:

•   legal advice privilege; and

•   litigation privilege. Legal advice deals with written communications for the purpose of obtaining or providing legal advice. Litigation privilege covers

documentation created when litigation is contemplated or pending including communications with third parties for the dominant purpose of the litigation;

b          privilege against self-incrimination that allows a party to claim privilege in respect of documents which may put him at risk of criminal prosecution;

c          privilege on the grounds of public policy to prevent disclosure of documents which may be injurious to the public interests; and

d          without prejudice communications between the parties directly or between their lawyers directly are not required to be disclosed.

Except in certain prescribed circumstances, the Confidential Relationships (Preservation) Law (2009 Revision) (‘CPRL’) makes it a criminal offence for professional persons to disclose ‘confidential information’25  in their possession that arises in or is brought into the Cayman Islands, without the consent of their principal. Where the CPRL applies, a litigant cannot disclose the relevant documents in the discovery process without a court order granting them permission to do so.26

The same rules of privilege apply to in-house counsel and to foreign lawyers involved in Cayman proceedings. Such individuals may also be subject to the terms of the CPRL.

ii        Production of documents

After the close of pleadings, each party must make available to the other party any relevant documents he has or had in his possession, custody or power relating to the matter in issue in the case.

Parties’ discovery obligations are broad, and extend to all documents that are relevant to the dispute, or that may reasonably lead to a train of enquiry. However, the court will not permit requests of documents that amount to a mere ‘fishing expedition’.

The documents must have a real possibility of evidential materiality.

Where a third party is controlled by the litigant or where the litigant has the right to obtain the document from the third party, the documents are considered to be in the litigant’s power of procurement and are discoverable. Whether a litigant controls its subsidiary or not will depend on the circumstances of the case.

Electronic records or anything on which evidence or information is recorded (e.g., tapes, videos) are considered to be documents for the purposes of discovery. Any electronic media, to the extent that it contains information capable of being retrieved and converted to readable form is considered to be a document. It is immaterial that documents, electronic or otherwise, are overseas.

There are no rules governing electronic discovery in the Cayman Islands, however, a party can apply for an order that in-depth electronic discovery of media that are not readily accessible would be oppressive or disproportionate, depending on the circumstances of the case.

VI      ALTERNATIVES TO LITIGATION

The vast majority of disputes are resolved by litigation rather than any alternative dispute resolution (‘ADR’) procedures and there is no requirement for parties to first attempt ADR procedures before they will be permitted to continue with legal proceedings. However, many of the FSD judges have indicated strong support the use of ADR procedures and as a result, it is likely the use of ADR will become more prevalent.

With the exception of arbitration, there are no procedural rules governing mediation or other forms of ADR. Parties using such procedures will need to agree the terms of reference.

In respect of arbitration, the Arbitration Law (2012 Revision) came into force on 2 July 2012 (‘the Law’). It is based on the UNCITRAL Model Law and on the Arbitration Act 1996 that applies in England, Wales and Northern Ireland.

The provisions of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (‘the New York Convention’) have effect pursuant to the Foreign Arbitral Awards Enforcement Law.

There is a Cayman Islands chapter of the North American branch of the Chartered Institute of Arbitrators and a number of local firms have practitioners with ADR qualifications. Arbitration is not used frequently, however, with the new law, it is expected its use will increase.

The Law sets out the procedures that govern arbitrations in the Cayman Islands and the duties of the arbitral tribunal. Many of the duties and procedures can be modified by agreement between the parties. However, any tribunal must act fairly and impartially, allow each party a reasonable opportunity to present his case and conduct the arbitration without unnecessary delay or expense.

A party may, with leave of the Grand Court, appeal an arbitral award to the Grand Court on a point of law.

A party may also apply to the Grand Court to set aside an award in certain prescribed circumstances that broadly fall into three categories: invalidity of the arbitration agreement; procedural irregularities by the tribunal; or irregularities with the award itself (e.g., contrary to public policy or natural justice).

Foreign arbitral awards are enforceable in the Cayman Islands. Non-New York Convention awards are enforceable at common law in the same way as foreign judgments (see Section III, vi, supra).

New York Convention awards will be enforced unless the respondent establishes certain specified defences including invalidity of the arbitration agreement, lack of proper notice of the arbitration proceedings and procedural irregularities in the conduct of the arbitration. Enforcement may also be refused if the award is in respect of a matter that is not capable of settlement by arbitration according to Cayman Islands law or if it is contrary to public policy.

VII     OUTLOOK & CONCLUSIONS

The Cayman Islands courts continue to deal efficiently with the resolution of disputes including a heavy list of complex, high-value, financial services litigation with cross- border elements. It is anticipated that legislation will shortly be introduced to allow the Cayman courts to grant free-standing Mareva relief in foreign proceedings, which will be a useful tool for practitioners in cross-border litigation.

In addition, the Contracts (Rights of Third Parties) Bill 2012 is expected to modify the law relating to privity of contract, allowing third parties to enforce contractual rights granted to them even where they are not a party to the contract.

About the authors

Aristos Galatopoulos

Maples and Calder

Aristos Galatopoulos has been the head of Maples and Calder’s litigation and insolvency practice since 2007 and is an expert in complex international insolvencies, restructurings and security enforcements. Aristos’ practice focuses on the Cayman Islands financial services sector, dealing with banks, insurers, investment funds and financing structures that have collapsed or are in default, and representing his clients in any resulting litigation. Aristos has particular experience of distressed investment funds, acting for funds, their directors, service providers and counterparties in a variety of major cross-border disputes and crisis events.

Caroline Moran

Maples and Calder

Caroline Moran is an associate in Maples and Calder’s Cayman Islands office. Caroline has extensive commercial litigation experience in distressed funds, shareholder and financial services disputes. Caroline specialises in insolvency and corporate recovery and has a cross-jurisdictional practice advising on all aspects of domestic and cross-border insolvency and restructuring issues, in particular, contentious liquidations and non- consensual restructurings.

Maples And Calder

P.O. Box 309

Ugland House

South Church Street

Grand Cayman KY1 1104

Cayman Islands

Tel: +1 345 949 8066

Fax: +1 345 949 8080 [email protected] [email protected] www.maplesandcalder.com