The Legislative Assembly of the Cayman Islands has recently passed the Contracts (Rights of Third Parties) Law, 2014 (the "Law") which is expected to enter in to force shortly. The Law confers on third parties a statutory right of direct enforcement of contractual obligations contained in contracts to which they are not a party. Prior to the Law, contracts governed by Cayman Islands law could only be directly enforced by the parties to the contract.
The Law is particularly relevant to commercial situations where there is an express intention to make contractual obligations directly enforceable by third parties, but no desire for the third party to be a party to the contract. The Law will remove the need for parties to seek alternative solutions to enable the enforcement of contractual terms by a third party. Similarly, it means that a third party will no longer necessarily need to be a party to the contract to initiate legal proceedings in order to enforce third party rights under it. This ensures that third parties benefit from the same protection and benefits afforded to them in other key onshore jurisdictions, such as the United Kingdom.
The Law is based in large part upon the UK Contracts (Rights of Third Parties) Act 1999 with many of its provisions being identical or similar to those in the UK legislation (subject to one important exception set out below). This was done deliberately to enable the Cayman Islands courts to benefit from the UK courts interpretation of the legislation and to provide a regime which is likely to be familiar to contracting parties and their advisors in many different jurisdictions.
The key provisions of the Law are as follows:
The Law contains an opt-in requirement. Only contractual terms that are expressed in writing to be capable of enforcement by the relevant third party or parties will be so enforceable. Having opted in, the parties to the contract may not rescind or vary the contract so as to qualify or extinguish a third partys rights without their consent. This is one way in which the Law differs from the UK legislation (which has an opt-out requirement).
The Law applies to contractual benefits capable of being enforced by third parties, including indemnities and exculpation and other limitation of liability provisions. Certain contracts and instruments are specifically excluded, including bills of exchange, promissory notes or other negotiable instruments; claims against employees under employment contracts; contracts for carriage of goods by sea, road or air; and letters of credit.
Effect on existing contracts
Terms in contracts entered into prior to the Law coming into force will be capable of direct enforcement by third parties as follows:
(a) where the contract already contains appropriate opt-in language - upon the Law coming into force; or
(b) where the contract is amended to insert such language - upon the amendment becoming effective after the Law has come into force.
However it is important to note that causes of action which accrued prior to the Law coming into force will not be capable of being enforced under the Law.
Identification of third party
The third party must be identifiable from the contract as a member of a class or as answering a particular description.
A third party will have no greater rights than a contracting party, including with respect to:
(a) the availability of contractual defences; and
(b) the submission of disputes to arbitration in accordance with the terms of the contract.
No double recovery
Where a term of the contract is enforceable by both a third party and a party to the contract, the court will take account of any previous recoveries made by the contracting party when assessing any recovery under the Law, so as to prevent the possibility of double recovery.
In summary, the Law will permit parties to structure agreements to confer rights of enforcement on third parties where it is considered appropriate to do so. It is to be welcomed as an enhancement of the principles of freedom of contract in the Cayman Islands.
The Law is likely to be beneficial in a number of different scenarios, including for example, in relation to Cayman Islands exempted limited partnerships where the partners wish to agree to enable a wider class of persons to benefit from the indemnity and exculpation provisions in the partnership agreement than only the partners, but without making all of the members of the class parties to the partnership agreement.