Is it time to check if your sole recourse and exclusive jurisdiction clauses cover non-parties?
19 October 2018
The Cayman Islands Court of Appeal (‘CICA’) has allowed a Cayman Islands (‘Cayman’) mutual fund to bring claims in the New York courts for gross negligence and fraud against three entities (‘the Affiliates’) affiliated with Argyle’s Cayman auditors (‘BDO’). This was despite express contractual terms of engagement of BDO restricting dispute resolution to mediation or arbitration and a clause giving Cayman courts exclusive jurisdiction.
What was CICA thinking?
CICA decided that for the Affiliates to be able to rely on the sole recourse and exclusive jurisdiction clauses there would have had to be clear and express terms to that effect in Argyle’s contract with BDO.
What were the claims in New York?
Argyle claimed it had been the subject of fraud and brought proceedings for US$86m in compensatory damages in New York against BDO and the Affiliates, who were members of BDO International or, in one case, a BDO ‘alliance firm’ for their alleged failure to detect/report the frauds. It also seeks punitive damages.
Should the claims have been in Cayman?
The Grand Court in Cayman thought they should and granted an anti-suit injunction to stop the New York proceedings. Argyle did not have a contract with the Affiliates but its contract with BDO (contained in various letters of engagement) included express terms which provided that:
- Applicable law - Cayman law governed the contract;
- Jurisdiction - Cayman courts had exclusive jurisdiction;
- Dispute Resolution
- resolution of any dispute, controversy or claim would be non-binding mediation and, failing resolution by mediation, then binding arbitration;
- if any Affiliate carried out work under the contract Argyle would bring no claims or proceedings of any nature whatsoever (whether in contract, tort, breach of statutory duty or otherwise) against them;
- Sole Recourse
- [‘the Carve-out’] the restrictions did not apply to any liability, claim or proceeding founded on an allegation of fraud or wilful misconduct or other liability that cannot be excluded under applicable laws; and
- Argyle agreed that any BDO affiliates who BDO might involve shall each have the right to rely on and enforce the limitation of liability provisions as if they were parties to this Agreement.
Why did CICA disagree?
CICA overturned that decision in respect of the Affiliates (there was no application to do so against BDO Cayman). Its reasons were that whilst claims between the parties fell within the dispute resolution clause restrictions, whether those restrictions applied to non-parties needed to be considered in the context of the contract as a whole, not just the language used in the exclusive jurisdiction clause.
What clauses were relevant?
In this case the contract claims against the Affiliates for fraud and wilful misconduct fell within the Carve-out in the Sole Resource clause. The intended effect of that clause was that Argyle should be free to bring claims that fell within the Carve-out in judicial rather than arbitration proceedings. If it had been the parties' intention to limit such judicial claims to being brought in the Cayman courts then CICA’s view was that the parties would have expressly provided for this in the Carve-out or the Jurisdiction clause, but they did not do so. Instead the Carve-out clause refers to ‘applicable laws’, which was an indication that the parties contemplated claims would be brought in jurisdictions other than Cayman.
What should financial services advisors do now?
Where those in the financial services industry based in Cayman intend:
- that some of their functions in a contract in Cayman will be done by personnel based in other jurisdictions in entities which are within their group or affiliated with their organisation; and
- that the parties they contract with will be limited to bringing claims in Cayman and/or to non-judicial resolution methods,
then they will need to make sure the contract includes a clause which expressly deals with the issue and that it is clearly drafted. Existing contracts should be reviewed to see if Exclusive Jurisdiction and Sole Recourse clauses are sufficiently clear and all new contracts will need to include a carefully drafted clause.
What about those in Argyle’s position?
If you consider you that had a valid claim against professional advisors, but that contractual terms in Exclusive Jurisdiction and Sole Recourse clauses have either prevented you from bringing judicial proceedings or limited you to proceedings in a particular jurisdiction, then it is now worth revisiting those contracts to see whether this decision provides the basis for a review of any decision not to bring a claim.
Location: Cayman Islands
Related Service: Litigation & Dispute Resolution
Partner | Cayman Islands
Partner | Cayman Islands