Cayman Islands Introduces New Third Party Rights Law
Further to our update issued on 21 February 2014, the new Contracts (Rights of Third Parties) Law was enacted on 21 May 2014 and is now in full force and effect. The purpose of this advisory is to give greater detail of the new law and its practical implications.
At the time of writing, the revised Exempted Limited Partnership Law has not yet been enacted. An update will be issued with respect to that law as soon as it has been passed.
Contracts (Rights of Third Parties) Law
Cayman Islands law observes privity of contract, meaning that only parties to an agreement have the benefit and burden of its terms. Consequently, it is usually not possible for a person who has not signed an agreement to enforce its terms even if the actual signatories have sought to recognise that person under the agreement (often called "third party beneficiary rights").
The Contracts (Rights of Third Parties) Law, 2014 ("CRTPL") will confer on third parties, via an opt-in requirement, a statutory right of enforcement in their own right of contractual benefits afforded to them which are contained in a Cayman Islands law governed agreement even though they are not a party thereto. Only contractual terms that are expressed in writing to be capable of enforcement by the relevant third party will be so enforceable. Having opted in, the parties to the contract may not rescind or vary the contract so as to alter or extinguish a third party's rights without his consent, unless the contract expressly excludes that entitlement.
Scope of Application
Contractual terms capable of being enforced by third parties under the CRTPL include indemnities and exculpations and other limitations of liability. However, certain contracts are specifically excluded from the new law, including company memoranda and articles of association, bills of exchange, promissory notes or other negotiable instruments; claims against employees under an employment contract; contracts for carriage of goods by sea, road or air; and letters of credit.
Effect on Existing Contracts
Terms and contracts entered into prior to enactment of the CRTPL will be capable of enforcement by third parties in their own right if the relevant contract:
(a) already contains appropriate opt-in language, which will now be effective; or
(b) is amended to contain such language.
Notwithstanding the above, however, a third party will only be able to enforce a right which occurs on or after the date on which the CRTPL came into force (i.e. 21 May 2014) or the date the contract is amended, as the case may be.
Enforcement by Third Party
A third party will have no greater rights than a contracting party to enforce the terms benefiting the third party, including with respect to the availability of defences and the submission of disputes to arbitration in accordance with the terms of the agreement. The law also disallows double recovery such that where a contract is enforceable by both a third party and a contracting party, the Cayman Islands court may take account of any previous recoveries made by the contracting party when assessing a recovery under the CRTPL.
Implications for Commercial Agreements
For Cayman Islands law governed commercial contracts, such as management agreements, subscription agreements and limited partnership agreements, the new law is expected to assist most with indemnity and exculpation provisions where the agreement seeks to benefit a wider class of persons than the parties to the agreement itself. Signatories may now expressly opt-in to the new law through the agreement to enable covered persons to enforce such provisions without the use of a deed poll or other solution to the privity of contract rule. Where the agreement does opt-in to the CRTPL, consideration should be given to whether any third party right to consent to a variation of the relevant term should be disapplied through the agreement.
As noted above, the CRTPL expressly provides for the possibility of existing contracts to benefit from the new third party rights regime. If you would like to explore whether the indemnification and exculpation provisions in a current Cayman Islands law governed agreement extend to persons other than signing parties, we will be able to advise on the extent to which any amendments to the agreement might be needed (and whether any such amendments might be implemented without the need to obtain approvals from the signatories).