Cayman’s Parliament is expected to enact a new Law that will give third parties who are conferred benefits under a contract, but who are not a party to it, the right to enforce the contract’s terms for their own purposes.
At present, under common law privity of contract rules, a contract can only be enforced by one of its parties. This is set to change once the Contracts (Rights of Third Parties) Bill 20145 comes into force. The Law will give a third party that is expressly indentified in a contract the ability to enforce any rights it derives in connection with it, provided the contract expressly says it is entitled to do so.
The changes are expected to be welcomed by the Island’s investment funds sector (and its insurers), particularly as they will give effect to indemnity and exculpation provisions which are often contained in limited partnership and shareholder agreements, which routinely purport to confer benefits on individuals (such as investment managers) who are not ordinarily parties to them.
The law will not be retroactive.
Where a third party seeks to enforce a contract that contains an arbitration clause, the third party will be treated for purposes of the Cayman Arbitration Law 2012 as being a party to the arbitration agreement.
The Cayman Law is similar (but not identical) to the UK’s Contract (Rights of Third Parties) Act 1999. In practice, the UK Act has been of limited effect, as most commercial contracts now include standard clauses which proscribe the benefits it was intended to offer.
It will be interesting to see whether other offshore jurisdictions will follow suit and introduce similar legislation.