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The Contracts Rights of Third Parties

The Cayman Islands Government has opened a public consultation on the Third Parties Rights Bill. The Third Parties Rights Bill is likely to find its way onto the statue book in the near future. It will effectively bring the Cayman Islands in line with the UK and the US with regard to the ability of third parties to enforce rights which are conferred on them pursuant to contracts to which they are not parties.

Currently in the Cayman Islands, the principle of “privity of contract” means that only persons who are parties to a contract have the right and ability to enforce its terms. Regardless of whether a contract purports to grant rights to a third party, that third party has no contractual basis on which to enforce those rights. This has been the cause of some frustration for our clients and coadvisers in onshore jurisdictions. It has also led to a practice whereby extra documentation and structures are required in order to give effect the commercial intentions of the parties with regard to conferring benefits on non-signatories to an agreement. For our counterparts in the UK and US, this has often been an unfamiliar hurdle and may well be perceived as an unnecessary one. A frequently encountered example with regard to private equity funds surrounds advice given by Cayman counsel to US or UK counsel regarding the effectiveness (or lack thereof) of indemnity provisions in a limited partnership agreement governed by Cayman Islands law to the extent that such provisions purport to confer protection on non-signatories such as a manager or its affiliates. As things currently stand, the purported extension of those indemnity protections to nonsignatories is ineffective.

The Third Parties Rights Bill is based on the UK model (the Contract (Rights of Third Parties) Act 1999 (the “UK Act”)), with some improvements. It provides that a third party may enforce a term of a contract if the contract specifically provides that he may. It further provides that the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter a third party's entitlement under that right, without the consent of the third party.

Unlike in the UK, the Cayman model ensures that the rights are only conferred on intended third parties. The UK model contains a provision which allows for a third party to enforce a term of the contract where that term “purports to confer a benefit” on a third party. This provision has caused some uncertainty where the UK Act applies and, as such, it has become the default position for the UK Act to be specifically excluded in commercial contracts to avoid the inevitable scenario whereby rights are unwittingly conferred on unintended third parties. In the Cayman Islands, however, the Third Parties Rights Bill will ensure that this type of uncertainty is not a factor. Under the Cayman model a contract will have to be quite clear and specific on which parties can enforce the contract. The provisions of the UK Act which enables a third party to enforce a term of the contract where that term “purports to confer a benefit” on the third party has not been adopted by the Third Parties Rights Bill.

The Third Parties Rights Bill is likely to become law in the Cayman Islands in the near future and it will be a welcome addition to the statute book in particular in the context of advising on private equity investment funds.

 

Contact our experts for further advice

View profile for Chris HumphriesChris Humphries
Managing Director and Head of Funds