Cayman Court Limits Scope Of Arbitration Clauses In Dissolving Limited Partnerships

In the recent case of Cybernaut Growth Fund, L.P.1, limited partners accounting for approximately half of the partnership interest petitioned to wind up the partnership (Partnership) on just and equitable grounds, based upon loss of trust and confidence by the petitioning limited partners (LPs) the in general partner (GP). That petition was met by an application to strike out or stay the petition which asserted that: (i) the LPs had contracted out of their right to petition; and (ii) the petition could not proceed until an arbitration commenced by the GP had been resolved2.

Contracting out

The first of these points (contracting out) was disposed of by construction of the terms of the limited partnership agreement, which the Court found clearly preserved application of the relevant provisions of the Exempted Limited Partnership Law (Law) pertaining to winding up of the partnership. The Court in Cybernaut echoed the findings of the Court of Appeal in TNT N.V. v Logispring GP L.P. [2009] CILR 456, by finding that express language excluding those provisions of the Law would be required, but, like the Court of Appeal in TNT, the Court in Cybernaut stopped short of deciding whether an express provision would have been effective as a matter of public policy. It remains to be seen whether commercial practice will adjust to this uncertain policy position by including non-petition covenants in exempted limited partnership agreements, as has become increasingly common in open-ended hedge funds. Section 95(2) of the Companies Law provides that the Cayman Court must dismiss or stay a winding up petition where the petitioner is contractually bound not to present a winding up petition. That section has been incorporated by reference in section 15(4) of the Exempted Limited Partnership Law. There appears no reason, therefore, why simple non-petition covenants could not be deployed in partnership agreements, so moving the question of effective contracting out away from considerations of public policy and relying, instead, upon an express legislative enactment pursuant to which the Court holds stakeholders to their agreement not to petition to wind up the vehicle through which they have invested.

Arbitration

The second point in Cybernaut (arbitration as a necessary preliminary to hearing of the petition) was resolved against the GP and the petition was allowed to proceed to hearing.

Counsel for the GP argued that because the LPs' assertion of loss of trust...