The Contracts (Rights of Third Parties) Law 2014 (the Law) came into force on 21 May 2014. Subject to certain exemptions, the Law allows for the direct enforcement of contractual rights by third parties in contracts to which they are not a party. Prior to the Law, contracts governed by Cayman Islands law could only be enforced by parties to the contract, following the common law doctrine of privity of contract.
Rights of a Third Party
The Law is similar to the UK’s Contracts (Rights of Third Parties) Act 1999 (the UK Act) and to legislation enacted in several other common law jurisdictions. The main difference with the UK Act is that the Law contains an “opt-in” requirement. The Law only confers rights on persons specifically intended to benefit from it, unlike the UK Act which allows a third party to enforce contractual terms which purport to confer a benefit on them (and has an “opt-out” requirement). Pursuant to the Law, a third party may enforce a contractual term in its own right if:
1. the third party is expressly identified in the contract by name, as a member of a class or as answering a particular description (and a third party may include a person not in existence when the contract is entered into); and
2. the contract expressly provides in writing that the relevant third party may enforce the relevant term.
The Law further restricts the contract parties’ ability to rescind or vary the third party’s right so as to extinguish or vary a third party’s entitlement under that right, without the third party’s consent unless the contract itself expressly provides that the contract may be rescinded or varied without the third party’s consent.
Application and Exceptions
The Law applies to contractual benefits capable of being enforced by third parties, including indemnification and exculpation provisions. It is anticipated that the Law will provide a helpful mechanism for agreements where indemnity provisions are currently ineffective, for example, in limited partnership agreements which are extended to cover third parties (such as an investment manager) but without having the make such parties a party to the limited partnership agreement. The Law does not confer rights on certain contracts and instruments and specifically excludes the following: bills of exchange, promissory notes and other negotiable instruments, rights under memorandum and articles of association, contracts of employment, contracts for carriage of goods by sea, road or air and letters of credit.
Impact on existing contracts
The Law applies to contracts containing the relevant terms which are made on or after the Law came into force. Contracts entered into prior to the Law coming into force are capable of directly being enforced by third parties if:
the contract is amended after the Law has come into effect to include the relevant terms; or
the contract already contains the relevant terms “opt in” language for effect when the Law came into force.
The Law will permit parties to structure contractual arrangements to confer rights of enforcement on third parties where appropriate. In doing so, the Law ensures third parties to Cayman Island law governed contracts the same protections and benefits afforded to them in other key offshore jurisdictions, such as the UK and the US.