Contracts giving rights to third parties must be reviewed


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, according to Solomon Harris, in light of the recently approved Contracts (Rights of Third Parties) Law 2014.

 The Cayman Islands Legislative Assembly has approved the new law although it has yet to be formally gazetted. The legislation, which formally recognises third party contractual rights for the first time in Cayman, has been designed and introduced specifically for the investment funds industry. It also brings Cayman law closer in line to the laws of the home jurisdictions of many of the fund clients that use Cayman as well as making it the first offshore jurisdiction to implement such laws.

Solomon Harris notes that in common law jurisdictions, only the parties to a contract can enforce its terms. 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.

That can be a problem for investment funds especially where a Cayman Exempted Limited Partnership has a term in its Partnership Agreement that grants an indemnity to a corporate general partner and their 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.

Before now, those third parties had a number of ways to address this problem such as entering into separate indemnity agreements directly with the general partner, for example.

The existing remedies have now been made redundant, Solomon Harris notes. 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.

Solomon Harris, Cayman, Contracts (Rights of Third Parties) Law 2014, Legal

Cayman Funds