How Can Service Providers to Cayman Islands Hedge Funds Enforce Rights to Contracts to Which They Are Not Parties?

In the hedge fund world, as in all commercial spheres, exclusion and limitation of liability of, and the right of indemnity for, service providers, is a key element in the structure.  See “Indemnification Provisions in Agreements between Hedge Fund Managers and Placement Agents: Reciprocal, But Not Necessarily Symmetrical,” Hedge Fund Law Report, Vol. 3, No. 41 (Oct. 22, 2010).  This structure creates a tension between two competing commercial factors: the need to attract service providers of sufficient quality, and who expect such terms, and commercial acceptability, in particular to prospective investors.  A particular problem has been the enforcement of such terms by service providers or their associates, who are intended to be covered by the protection afforded by such terms, but who are not themselves parties to the contract that creates those terms.  The new Cayman Islands statute, The Contracts (Rights of Third Parties) Law 2014 (the 2014 Law), which came into force on May 21, 2014, directly impacts, and assists, in this area.  In a guest article, Christopher Russell and Jonathan Bernstein, partner and senior associate, respectively, at Appleby, Cayman Islands, provide a thorough analysis of the 2014 Law and its consequences for the allocation of risk among hedge fund service providers, managers and investors.  On hedge fund service providers generally, see “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 15 (Apr. 18, 2014) (section entitled “Due Diligence on Service Providers”).

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