The Cayman Islands government announced on 21 February 2014 its intention to comprehensively revise the law applicable to Exempted Limited Partnerships ("ELPs") in the Cayman Islands. This will be effected by a repeal of the existing Exempted Limited Partnership Law and its replacement with a new law. The intention behind the changes is not to make fundamental alterations to the nature, formation or operation of ELPs, but does have the following principal objectives:
(a) To promote freedom of contract between partners.
(b) To the extent consistent with Cayman Islands law, to help synchronise the drafting of a Cayman Islands partnership agreement with its onshore counterpart where a structure comprises both onshore and offshore partnerships.
(c) To deal with certain issues which the market has signalled it would like to have addressed in order to make ELPs even more straight forward and cost effective to set up and manage.
The Cayman Islands government also announced the introduction of a brand new law, the Contracts (Rights of Third Parties) Law ("CRTPL"), which will recognise third party beneficiary rights and make them directly enforceable.
The new laws are not yet enacted. It is expected they will be passed in or around the second half of March 2014, and a further advisory will be published at that time with greater detail of the new laws and their practical implications for clients.
The purpose of this advisory is to highlight the principal proposals under the new laws.
Revised Exempted Limited Partnership Law
(a) Preservation of the requirement of the general partner to act at all times in good faith whilst enabling the partnership agreement to manage competing interests, for example, in the context of conflicts of interests.
(b) Confirmation that, subject to the partnership agreement, a limited partner does not owe fiduciary duties.
(c) Enabling registration of foreign limited partnerships to allow such partnerships to qualify as a general partner of an ELP.
(d) Introduction of new provisions regulating advisory boards specifically to:
(i) make the terms of the partnership agreement relating to advisory boards applicable to members notwithstanding that they may not be parties to the partnership agreement; and
(ii) confirm that, subject to the partnership agreement, an advisory board member does not owe fiduciary duties.
(e) Express ability for third parties to execute the partnership agreement in order to take the benefit of particular provisions without being deemed partners.
(f) Expansion of express limited liability "safe harbours" with respect to membership and operation of boards and committees of an ELP.
(g) Streamlining and simplifying the technical requirements for the admission of partners and transfer of partnership interests.
(h) New provisions expressly confirming that an ELP may create a floating charge and that the property of the ELP includes any right to make capital calls and receive the proceeds thereof.
(i) New provisions expressly confirming that default sanctions will not be unenforceable solely because they are penal in nature.
(j) New provision expressly preserving limited liability of limited partners if the last remaining qualifying general partner is lost or removed.
(k) New provisions relating to the maintenance of the register of partnership interests and recording of contributions and distributions in order to simplify the requirements of the statutory register.
(l) Clarifying clawback provisions to affirm that repayment of capital contributions will only be required if the ELP is insolvent at the time the original distribution was made.
(m) Clarifying and streamlining the procedures for dissolution of an ELP.
(n) Introduction of a short-form strike off mechanism for ELPs (equivalent to the procedure which already exists for Cayman Islands companies).
(o) Introduction of the ability to transfer an ELP out of the jurisdiction (equivalent to the procedure which already exists for Cayman Islands companies).
Contracts (Rights of Third Parties) Law
Cayman Islands law observes privity of contract, meaning that only parties to an agreement have the benefit and burden of its terms. This means that it is usually not possible for a person who has not signed an agreement to enforce its terms directly even if the actual signatories have sought to recognise that person under the agreement (often called third party beneficiary rights).
The CRTPL will confer on third parties, via an opt-in requirement, a statutory right of direct enforcement of contractual obligations contained in an agreement even though they are not a party. Only terms which are expressed in writing to be capable of enforcement by the relevant third party will be so enforceable.
In the context of ELPs, the new law is expected to assist most with indemnity and exculpation provisions of the partnership agreement which commonly seek to benefit a wider class of persons than the parties to the agreement itself. Once passed, CRTPL will allow the partners to opt-in to the new law via the partnership agreement to enable covered persons to enforce such provisions directly without the use of a deed poll or other solution to the privity rule.
As noted above, a detailed advisory will be issued on introduction of the new laws.