The Dispute Resolution Review, 9th Edition: Cayman Islands

I INTRODUCTION TO THE 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 seven highly experienced commercial judges. Hearings by telephone or video link 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 2016, the Cayman Islands courts dealt with a number of significant commercial disputes and insolvency cases. Summarised below are decisions that will be of interest to practitioners and those in the financial services industry.

i In the matter of SPhinX Group (CICA, 2 February 2016)

The SPhinX Group insolvency has produced another significant judicial decision, this time in the context of the interplay between arbitration and the Court's winding-up jurisdiction.2 The CICA followed recent English authority confirming the primacy of arbitration agreements, leaving some scope to argue that certain issues remain non-arbitrable.

In 2007, the liquidators of the SPhinX Group engaged US attorneys on a contingency fee basis to pursue litigation against 60 defendants in New York. The engagement agreement contained a New York arbitration clause. The liquidators subsequently proposed a scheme of arrangement and the US attorneys threatened to bring a claim against the SPhinX Group in relation to their fees, on the basis that the scheme would undermine the US litigation. Ultimately US$50 million was added to the reserves of the scheme, although not specifically designated for a claim by the US attorneys.

In 2014, certain stakeholders in the liquidation sought orders from the Grand Court that the liquidators be directed not to retain any reserves for the purpose of satisfying a claim by the US attorneys. The US attorneys sought a stay of that application on the basis of the arbitration clause in the engagement agreement.

The stakeholders argued that the issues raised by their application involved the exercise of a power vested in the liquidators as officers of the Court, and was therefore not arbitrable.

That argument was rejected by the Grand Court at first instance. The Court considered that the setting of the reserve was entirely dependent on whether or not the US attorneys were entitled to remuneration under the engagement agreement, and that the question was subject to the arbitration clause in the agreement. While recognising that matters falling within the exclusive jurisdiction of the Court cannot be referred to arbitration, the Court held that that the stakeholders could not bypass the agreed dispute resolution process in the present circumstances. The stakeholders appealed.

The CICA dismissed the appeal. It agreed with the Grand Court's analysis and added that even though the enforcement of an arbitration agreement in a liquidation context could delay the liquidation and add to the expense of administering the estate, those cannot be reasons for failing to protect a contractual right to arbitration.

ii Ennismore Fund Management Limited v. Fenris Consulting Limited (Privy Council, 19 April 2016)

This case concerned the construction of an agreement between an investment manager and one of its consultants. The Privy Council confirmed that the relevant principles of contractual interpretation applicable in the Cayman Islands are the same as those recently set out by the UK Supreme Court in Arnold v. Britton [2015] UKSC 36. Most relevantly in this case, the Privy Council reiterated that oral evidence of the subjective intentions or understanding of contracting parties is not admissible when construing contractual agreements. Accordingly, it remains the case as a matter of Cayman Islands law that parties to a commercial agreement will be held to the language of a written contact where that language is clear and the Court will not impute an alternative meaning that contradicts the language of the contract.

iii Pearson (Herald Fund) v. Primeo Fund (CICA, 19 June 2016)

The CICA has confirmed that where shares in a Cayman Islands company have been redeemed in accordance with the company's articles of association but the redemption proceeds are unpaid by the date the company enters liquidation, the unpaid redeemers are creditors of the company whose claims rank behind those of ordinary unsecured creditors but ahead of unredeemed investors, and that Section 37(7)(a) of the Companies Law did not operate to unwind the effect of the redemptions.

Herald Fund SPC (Herald) had invested substantially all of its assets in Bernard L Madoff Investment Securities LLC, the vehicle through which Mr Madoff operated his well-known Ponzi scheme. Primeo Fund (Primeo) had, in turn, invested in Herald and was therefore an indirect victim of the Madoff fraud.

Various investors, including Primeo, had submitted redemption requests to Herald with a redemption date of 1 December 2008 (the December Redeemers). Pursuant to the terms of Herald's articles, those redemption requests had crystallised and the investors had been redeemed on 1 December 2008. However, following the discovery of the Madoff fraud on 11 December 2008, Herald suspended the payment of redemption proceeds on 24 December 2008 and so the December Redeemers had not been paid their redemption proceeds when Herald went into liquidation in 2013.

The issue before the Court was whether the December Redeemers' position differed from Herald's shareholders who had not redeemed their shares prior to the Madoff fraud being exposed and Herald suspending the right to redeem its shares. The answer centred on the interpretation of Section 37(7)(a) of the Companies Law and the extent to which that provision had the effect of unwinding redemptions effected prior to the commencement of the liquidation.

The CICA held that Section 37(7)(a) does not apply where, at the commencement of the liquidation, the shares in question have in fact been redeemed in accordance with the articles of association. Accordingly, Section 37(7)(a) did not apply to the December Redeemers.

The Court held that the December Redeemers were creditors with a provable claim in the liquidation for the amount of their redemption proceeds. The decision provides welcome guidance on the interpretation of Section 37(7)(a) of the Companies Law, and emphasises the need for, and importance of, commercial certainty for investment funds and their redeeming investors.

iv Skandinaviska Enskilda Banken AB v. Conway and Walker (CICA, 18 November 2016)

This case is a rare example of a successful Cayman Islands clawback claim. The CICA held that certain redemption payments made shortly before the collapse of Weavering Macro Fixed Income Fund (the Macro Fund) constituted voidable preferences that had to...