Privity Of Contract In The Caymans, Part II

Two recent decisions by the Grand Court of the Caymans concern the scope and enforceability of side letters. Although one has to be careful about sweeping conclusions (each decision was limited to its specific facts), the hedge fund management won both lawsuits, in each case at least in part on privity-of-contract grounds.

The takeaway is that if you are invested in a Caymans domiciled fund, and you want to negotiate an enforceable side letter, you ought to be very careful about drafting it – and careful, too, that the Articles allow for the agreement you have in mind. Your work may otherwise be construed with a jaundiced eye. I detailed the first of these decisions, the Medley Opportunity Fund case, in an earlier entry, and this is a follow up.

The Facts

The second of this summer’s big decisions on point was Lansdowne Limited & Silex Trust Company v. Matador Investments (in Liquidation), handed down by The Hon. Mr. Justice Charles Quin on August 23.

Lansdowne is incorporated in Nevis; Silex in Switzerland; Matador in the Caymans.

In May 2009, investors in Matador petitioned the Grand Court for a winding up of Matador’s affairs under the Companies Law. Three months later, the court granted that petition.

In February 2010 the appellants offered their proof of debts, which the official liquidator later partially rejected, finding there was no agreement between Matador and either Lansdowne or Silex that invalidated Matador’s power to gate or suspend redemptions: that the gates were thus in place. Investors were accordingly shareholders and not creditors with respect to the gated money.

The August 2012 decision arose on appeal from that rejection.

Oral Side Letter

In this case, there was no literal side “letter” in the sense of an agreement reduced to writing. The dispute arose because of discussions alleged to have taken place between Eva Guerrand-Hermès (G-H) on the one hand and Priscilla Waters (W) on the other. G-H was a representative of the management of the Matador fund. W was a woman beneficially entitled to an interest in that fund through both of the two named appellant entities. The court referred to the agreement between EG-H and PW as an “oral side letter.”

Specifically, Waters claimed exemption from the gating and suspension that the Articles of Association allowed the managers of Matador. This claim she based on, for example, a conversation in April 2005 when G-H allegedly said to W that she “should not concern [herself] with these draft documents as the terms of [her] investment into Matador would not be governed by the strict terms of the documents … and these draft documents were the standard Form documents intended for future investors.”

The claims of the two legal entities here, Lansdowne and Silex, both derive from W’s own claim of exemption.

Quin reasoned first that there must be Privity. A side agreement has to be made between Matador and Lansdowne. This was also an issue, as we saw, in the Medley matter. Of course, only human beings have oral conversations. More abstract legal entities, in the nature of things, only ‘converse’ through properly executed documents. But it isn’t the informality that was fatal here; it is still, as it was in Medley – where the side letter was an actual letter – that the ‘wrong’ party or parties created it.

Articles of Association

Quin also stressed that for any side agreement to be valid and enforceable, the underlying agreement, the Articles of Association, must allow it. Here he went beyond the Medley decision. Even if the side agreement had been between the pertinent parties, a side agreement inconsistent with the underlying Articles cannot change the redemption and suspension process.

This decision applies a rule of law announced by the Privy Council in a 2010 decision, Culross Global SPC v. Strategic Turnaround Master Partnership. Lord Mance in that context wrote, “In order to protect the shareholders whose shares are not to be redeemed, the terms and manner of the redemption must be set out in the Company’s Articles.”

Mr. Justice Quin, then, agreed with the respondents, with the fund management and the liquidator in the management’s shoes, that “the Agreement referred to by the Appellants plainly falls foul of these entrenched rights and for these reasons … does not bind Matador or the Liquidator.”