The Dispute Resolution Review - Cayman Islands

Article by Aristos Galatopoulos and Luke Stockdale1

I INTRODUCTION TO DISPUTE RESOLUTION FRAMEWORK

The Cayman Islands is a British Overseas Territory with an English-style common-law legal 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 Grand Court of the Cayman Islands (the Grand Court) is the superior court of record of first instance. The caseload of the Grand Court is divided among five divisions.

Commercially significant litigation in the financial services sector is handled by the financial services division (FSD). Every proceeding in the FSD is assigned to one of six highly experienced commercial judges. 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 Grand Court or the CICA is required to appeal an interlocutory decision to the CICA. A further appeal may then lie from the CICA to the Privy Council in London.

II THE YEAR IN REVIEW

In 2013, the Cayman Islands courts dealt with a number of significant commercial cases and clarified several important legal issues. Summarised below are decisions that will be of interest to practitioners and those in the financial services industry.

i Re FIA Leveraged Fund (CICA, 18 February 2013)

If permitted by their constitutional documents, investment funds may redeem shareholders 'in kind'. This decision makes clear that assets distributed in kind must have a real commercial value determined in good faith using a transparent methodology.

The fund purported to redeem investors in kind by distributing shares in a Delaware special purpose vehicle (SPV) to them. The only asset of the SPV was an option to purchase shares in a publicly traded US bank, the public filings of which showed that it considered the option to be worthless.

Redeeming investors petitioned to wind up the fund on the grounds of insolvency, arguing that the in-kind distribution was worthless and, therefore, insufficient to satisfy their redemption debt. The fund disputed that any debt was due,2 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 CICA upheld the Grand Court's decision to wind up the fund. The CICA held, by reference to the fund's constitutional documents, that a distribution in kind had to be made from assets in the fund's portfolio on the date the redemption proceeds were due to be paid. As the SPV shares were not assets of the fund on that date (given that the SPV was only incorporated later), the purported distribution of the SPV shares was not permissible.

The court also held that, although the directors undoubtedly had discretion under the fund's constitutional documents to determine the value of assets used in the in-kind distribution, there needed to be a proper basis for adopting a particular valuation. There was no evidence of such a basis for the valuation of the SPV shares in this case.

ii VTB v. Universal Telecom Investment Strategies Fund SPC (CICA, 5 June 2013)

In this case, the CICA confirmed for the first time that 'free-standing' freezing injunctions in support of foreign proceedings are available in the Cayman Islands.

The Cayman Islands proceedings were related to proceedings in England between VTB and a Russian businessman, Mr Malofeev, in which VTB alleged, among other things, fraud. VTB sought a freezing injunction against a Cayman Islands fund, UTISF, the shares of which were beneficially held by Mr Malofeev. VTB did not allege any wrongdoing against UTISF but sought a freezing injunction against it on the basis of the Grand Court's 'Chabra' jurisdiction.3 That jurisdiction permits the court to make a freezing order against a third party where assets held by it could be used to satisfy a judgment against an alleged wrongdoer, and there is a risk of the assets being dissipated.

In a landmark judgment, the CICA confirmed the availability of free-standing freezing injunctions in the Cayman Islands in support of foreign proceedings, holding that - contrary to what had commonly been understood to be the position - there need not be a defendant involved in the Cayman Islands proceedings against whom substantive relief is sought. Such injunctive relief is available provided that the party against whom the injunction is sought is subject to the court's jurisdiction and that the substantive claim against the alleged wrongdoer, wherever brought, is founded on a cause of action recognised by the Cayman Islands court.

iii Crawford Adjusters v. Sagicor General Insurance (Cayman) Ltd [2013] 4 All ER 8

This decision of the Privy Council on appeal from the CICA effectively extended the tort of malicious prosecution to all civil proceedings.

One of the appellants, Mr Paterson, was a chartered surveyor who had been engaged by Sagicor, an insurance company, to calculate the value of certain insurance claims. Sagicor then obtained a report from a different chartered surveyor that contained a lower figure for Sagicor's liability. Sagicor brought proceedings against the appellants alleging fraudulent misrepresentation, deceit and conspiracy, but discontinued its claims before trial. The appellants continued a counterclaim that they had brought against Sagicor for unpaid fees and added a claim for malicious prosecution.

The Grand Court and CICA held that all four elements of the tort of malicious prospection were made out, namely that the prior proceedings had been determined in the appellants' favour; the allegations of fraud and conspiracy by Sagicor had been made without reasonable cause; the allegations had been made maliciously; and as a result, the appellants had suffered substantial damage. Nevertheless, both courts considered that they were constrained by previous authority to hold that the tort of malicious prosecution could not be extended to civil proceedings. By a majority of three to two, the Privy Council found that the appellants could succeed in their claim for malicious prosecution and that the public policy underpinning the earlier decisions was no longer applicable.

iv In re Cybernaut Growth Fund, LP (Grand Court, 23 July 2013)

This case involved consideration by the Grand Court of the circumstances in which it would stay winding-up proceedings alleged to be brought in breach of an arbitration agreement.

An investment fund, structured as a Cayman Islands exempted limited partnership (ELP), was sought to be wound up on just and equitable grounds by certain of its investors.4 The general partner and the other limited partner applied to the court to have the petition stayed on the grounds that it fell within the arbitration clause in the partnership agreement.5

The court considered the decision of the English Court of Appeal in Fulham Football Club (1986) Ltd v. Richards.6 That decision confirmed, as a matter of English law, that an arbitral tribunal is unable to make winding-up orders, but gave rise to the question of whether the tribunal could decide matters that may form the basis for a winding-up order without going so far as to actually make a winding-up order.

The Grand Court held that the petition before it was not arbitrable. It examined the Fulham decision and concluded that a stay of winding-up proceedings in favour of arbitration could only be granted where the petition includes discreet inter partes claims falling within the arbitration agreement, or...