Bermuda: Dispute Resolution Review (4th Edition) - Cayman Islands

I. INTRODUCTION TO DISPUTE RESOLUTION FRAMEWORK

The Cayman Islands is a British Overseas Territory, and Cayman law is in general based on English common law and certain English statutes that have been applied to the Islands, and local legislation enacted by the Legislative Assembly ('the LA'). The United Kingdom retains the right to extend provisions of UK legislation to the Cayman Islands by way of an express provision in the Act itself or by Order in Council.

A new Cayman Islands Constitution came into force on 6 November 2009 reflecting and further defining the increased scope of local legislative authority and introducing a Bill of Rights.²

Significant litigation takes place in the Grand Court ('the Court'). Most significant commercial disputes are commenced in the Financial Services Division, which was established in 2009.

The Grand Court judiciary consists of the Chief Justice and five other full-time judges (supplemented from time to time by acting judges brought in from overseas or drawn from the ranks of senior Cayman Islands practitioners) who exercise the same jurisdiction as the English High Court. The Grand Court judges, especially in the Financial Services Division, have considerable experience of disputes involving complex offshore transactions and structures, particularly in the context of hedge fund and commercial trust litigation.

Appeals from the Grand Court to the Cayman Islands Court of Appeal are governed by rules set out in the Court of Appeal Law³ and the Court of Appeal Rules.⁴

The Cayman Islands Court of Appeal is widely regarded as one of the strongest appellate courts in the Caribbean and the offshore world.

In certain circumstances, an appeal from a decision of the Cayman Islands Court of Appeal can be made to Her Majesty's Judicial Committee of the Privy Council. The process is governed by the Cayman Islands (Appeals to Privy Council) Order 1984, a UK statutory instrument that came into operation on 1 September 1984.

Decisions of the Grand Court, the Court of Appeal and the Privy Council on appeals from the Cayman Islands are reported in the Cayman Islands Law Reports, cited as CILR, which are published by Law Reports International.

Since 2006, a right of petition to the European Court of Human Rights following the exhaustion of traditional domestic legal remedies has existed. In 2009, the first case from Cayman using this procedure was heard and ruled admissible by the European Court of Human Rights.

Litigation remains the principal method for resolving disputes, partly because of the accommodating approach shown by the Grand Court to parties requiring confidentiality or flexible timetables (factors that usually attract parties to arbitration). However, awareness and use of alternative dispute resolution ('ADR') mechanisms is growing.

The Law Reform Commission has submitted an Arbitration Bill for enactment by the Legislative Assembly in 2012, following extensive consultation with professional associations such as the Law Society and the Caymanian Bar Association. The Bill will dramatically modernise the arbitration regime in the Cayman Islands, based on the UNCITRAL Model Law with certain variations to suit local conditions. This initiative has strong support from the Cayman judiciary, in particular judges of the Financial Services Division who have substantial arbitration experience, and whose decisions in the course of the last year have demonstrated consistent respect for and enforcement of parties' rights pursuant to arbitration agreements.

II. THE YEAR IN REVIEW

Investment fund disputes

i. Weavering Macro Fixed Income Fund Limited v. Stefan Peterson and Hans Ekstrom⁵

In this case, the Grand Court found a fund's independent directors guilty of wilful default in the discharge of their duties, and ordered them to pay damages to the fund's liquidators in the sum of US$111 million, representing the losses suffered by the fund that were caused by their default.

The facts were extreme: the directors in question were the brother-in-law and stepfather of the investment manager, and had been appointed by him to meet minimum legal requirements. During their tenure they failed to exercise any independent supervisory function and failed to spot fraudulent activity by the investment manager. The Court held that, since investment management, administration and accounting functions are delegated to professional service providers, hedge fund directors must exercise a high-level supervisory role. Because these directors knew that they had a duty to supervise, and had intentionally neglected their duties, the directors were found guilty of wilful default and were therefore not entitled to the benefit of exculpatory provisions contained in the company's articles of association.

The judgment contains the first detailed judicial commentary on the obligations of a fund director during the life cycle of a fund (establishment, ordinary course of business, financial crisis and liquidation). It is, however, subject to appeal, which is scheduled to be heard in April 2012.

ii. Re AJW Master Fund II, Ltd⁶

This was an application by liquidators of an offshore feeder fund to replace the liquidators of the master fund.

The offshore feeder fund had been put into official liquidation on an investor's petition. Days prior to the hearing of the offshore feeder winding-up petition, management had put the master fund into voluntary liquidation. The master liquidators applied for a Court supervision order, which was granted on paper the day before the hearing of the feeder winding-up petition.

The judge who determined the master liquidators' application for Court supervision, Quin J, was told that the hearing of the offshore feeder winding-up petition had 'no bearing' on the supervision application. Henderson J, the judge who heard the offshore feeder winding-up petition, was not aware of the supervision order that had been made at master level the day before. Henderson J held that the practitioners who had been appointed as liquidators at master level were conflicted, and appointed liquidators from a different firm. This had the unfortunate result that different liquidators were appointed at master and feeder level.

The liquidators of the offshore feeder fund then applied for the removal of the master liquidators on the basis that there should be one set of liquidators appointed to both funds, that the master liquidators were conflicted and that investors had expressed concerns about their relationship with former management (which was under investigation by the SEC), as well as the timing of their appointment.

Jones J removed the master liquidators and made the following observations:

1. best practice is for the same liquidators to be appointed at both master fund and feeder fund level where both funds are the subject of insolvency proceedings;
2. best practice is to assign the cases to the same judge;
3. the process by which a voluntary liquidation can be converted to an official liquidation 'on the papers' is analogous to an ex parte application, which means the applicant has an obligation of full and frank disclosure; and
4. in a master-feeder structure, investors in both offshore and onshore feeder funds will be treated as having a direct interest in the master fund, even though they are not directly members of the master fund. These investors will have standing to apply to set aside an improperly obtained supervision order, and also to appear and be heard on the hearing of the petition to wind up the master fund notwithstanding the fact that they are neither creditors nor contributories of the master fund.

Jones J made a costs-capping order that was successfully appealed by the liquidators of the offshore feeder fund.⁷ Jones J's decision was made on the basis that he thought there was a cheaper route to resolving the issue, namely an application to set aside the supervision order rather than applying to remove the master fund liquidators. The Court of Appeal removed the costs cap and approved English authorities that state that a first instance judge seeking to impose punitive or unusual costs orders as a general rule is required to give reasons for such a departure. They also endorsed Jones J's view that investors' interests are generally served by the appointment of the same liquidators at master and feeder fund level.

iii. Re Heriot-African Trade Finance⁸

In this case Jones J followed his earlier decision in Re Belmont Asset Based Lending,⁹ holding that it was just and equitable to make a winding up order on the basis of loss of substratum if the fund was no longer viable, in the sense that it was practically impossible to carry on its business in accordance with the reasonable expectations of its participating shareholders, based upon the representations contained in its offering memorandum.

Jones J was referred to the decision of Banister J in the Eastern Caribbean Supreme Court (British Virgin Islands (BVI)) in Aris Multi-Strategy Lending Fund Ltd v. Quantek Opportunity Ltd.¹⁰ In that case, Banister J specifically declined to follow the approach that Jones J had taken in Belmont and refused to allow a loss of substratum plea where it was contrary to the wishes of the majority investors unless it could be shown that it was impossible, as opposed to impractical, for the business of the company to be carried on. Jones J observed that, if he had understood Banister J's judgment correctly, the law of the BVI is not the same as the Cayman Islands.

It will be interesting to see what happens when this divergence in views between Cayman and the BVI is tested by the appellate courts, especially since both Cayman and the BVI share the same ultimate appellate authority, the Privy Council.

iv. Re Times Property Holdings Ltd¹¹

The petitioners had issued a winding-up petition on grounds of insolvency. The company applied to have the petition dismissed on the grounds that the debt was disputed, and the parties had agreed that disputes should be determined by arbitration in Hong Kong.

Foster J followed two cases from the BVI¹² that had held that, where the company is claiming that it has a genuine and substantial dispute with the creditor in relation to the alleged debt, and the parties have agreed that disputes between them should be tried in a different forum, a winding-up order should not be made. He declined to dismiss the winding-up petition, but stayed it in favour of the arbitration proceedings.

Mareva injunctions and other interlocutory relief

v. Ahmad Hamad Algosaibi and Brothers Company v. Saad Investments Limited, Maan Al Sanea and others¹³

This decision arose from the long-running litigation by the Saudi Arabian Algosaibi family against Mr Maan Al-Sanea and a number of corporate defendants, largely domiciled in Cayman, controlled by him.

Henderson J had made a worldwide Mareva (asset-freezing) order against 42 Cayman Islands companies and Maan Al Sanea, alleged by the plaintiff to be a fraudster and the ultimate beneficial owner of those companies or the person by whom the companies were controlled.

The plaintiff did not assert causes of action against 22 of the 42 corporate defendants (the 'non-cause of action defendants' ('NCADs')), who applied to set aside the Mareva order. Henderson J heard that application and dismissed it. In his judgment,¹⁴ Henderson J affirmed the existence in Cayman Islands law of the Chabra jurisdiction (whereby a Mareva injunction may, in certain circumstances, be granted against an NCAD) and held that the jurisdiction extended to the NCADs as they remained under the substantial control of Mr Al Sanea.

At the return date of the Mareva order,¹⁵ Anderson J (Actg) continued the order against the NCADs on the basis of Henderson J's judgment. He also continued the Mareva against certain defendants (the 'Shell Defendants') against whom the plaintiff had presented no evidence of any assets.

The NCADs and the Shell Defendants appealed.

The Court of Appeal set aside the injunction against several of the defendants and clarified the scope of the Chabra jurisdiction in holding that:

1. before granting such an injunction, the Court must be satisfied that there is good reason to suppose that in the event that judgment is obtained against a cause of action defendant ('CAD'), the CAD can be compelled to use the assets held by the NCAD for the purposes of satisfying a judgment, or that there is some other process of enforcement by a court by which the claimant can obtain recourse to those assets (e.g., through the appointment of a liquidator); and
2. the applicant seeking the continuation of a Mareva order must adduce some evidence from which the Court can properly conclude that, regarding each respondent to the order, there was either reason to suppose that defendant had some assets that (absent such relief) were at risk of dissipation, or that there was a real prospect that assets would be transferred to, or otherwise acquired by, that defendant in the future, which would then become available to satisfy a judgment (whether against that, or some other, defendant) and would (absent Mareva relief) be at risk of dissipation while held by that defendant. The extent to which this had to be established at the initial ex parte application for a Mareva order was left open.

vi. Deloitte & Touche v. Felderhof ¹⁶

The Court of Appeal dismissed an appeal against the decision of Henderson J¹⁷ whereby he had been invited, and declined, to set aside a Mareva injunction on the ground that the Court had no power to grant a free-standing Mareva injunction. The issues in this case were justiciable in Cayman but all parties had agreed that they would be litigated elsewhere and no statement of claim was ever served in the Cayman proceedings. The Court of Appeal confirmed that both Mareva and Chabra relief are available in these circumstances (i.e., where the parties have no intention of litigating the substance of their disputes in Cayman). In relation to the Chabra jurisdiction, the Court of Appeal confirmed the principles set out in the Ahmad Hamad Algosaibi and Brothers litigation (summarised in Section 2, sub-section (v), supra).

vii. Gillies-Smith v. Smith¹⁸

This case was heralded for a short time as the first instance of the Cayman courts granting a free-standing Mareva injunction in support of overseas proceedings. However, this decision subsequently received negative review by Cresswell J in VTB Capital Plc v. Malofeev¹⁹ (see infra).

The Gillies-Smith case involved Canadian divorce proceedings. The plaintiff had obtained an order from the Ontario Court freezing all her husband's assets worldwide, which included a property and two bank accounts in the Cayman Islands. The plaintiff then sought a freezing order in the Cayman Islands in relation to those Cayman assets.

Quin J granted a Mareva injunction on the basis that the Canadian freezing order gave the plaintiff a justiciable cause of action in the Cayman Islands, even though there were no substantive proceedings in the Cayman Islands.

Quin J also granted leave to serve the defendant out of the jurisdiction under the Grand Court Rules Order 11 rule 1(1)(b). Order 11 rule 1(1)(b) provides that a claim for an interlocutory injunction shall not be a sufficient ground for service of a writ out of the jurisdiction. To avoid falling foul of the rule, Quin J held that the freezing order sought was a final, rather than an interlocutory, injunction.

viii. VTB Capital Plc v. Malofeev²⁰

In this case, the Grand Court was asked to grant a free-standing Mareva order against three defendants in support of an English worldwide freezing order. The first defendant was a non-resident, while the second and third defendants were Cayman companies in which, the plaintiff alleged, the first defendant had an interest.

The plaintiff relied on the Gillies-Smith case, arguing that enforcement of the English freezing order constituted a cause of action against the first defendant in the Cayman Islands. The plaintiff sought a Chabra injunction against the second and third defendants on the basis that they had assets that could be used to satisfy a judgment against the first defendant.

The plaintiff also relied on Gillies-Smith in its application for leave to serve out of jurisdiction on the first defendant, as authority that the order sought was a final injunction and not an interlocutory one.

Cresswell J declined to follow Gillies-Smith, and refused to grant the freezing order against the first defendant and leave to serve out of the jurisdiction. He held that the Court was bound by the decision of the majority in Mercedes-Benz AG v. Leiduck.²¹ The judge went on to suggest the legislature give urgent consideration to whether legislation equivalent to section 25 of the English Civil Jurisdiction and Judgments Act 1982 (whereby the English court may grant a freezing order in support of foreign proceedings) should be introduced in Cayman.

With regard to the second and third defendants, the question was whether the Court was able to grant a free-standing Chabra order freezing the Cayman assets of the defendants where no substantive cause of action had been asserted against them. The order was hesitatingly granted by Cresswell J on the basis that the parties could put forward their arguments at an inter partes hearing.

The plaintiff appealed the refusal to grant the order and leave to serve out against the first defendant, and Cresswell J's decision was upheld by the Court of Appeal.²²

ix. TMSF v. Merrill Lynch²³

In this case the Privy Council, overturning decisions of the Court of Appeal and the Grand Court, held that it had jurisdiction to appoint receivers over a judgment debtor's powers of revocation of Cayman governed trusts.

The Privy Council applied Masri v. Consolidated Contractors International Company SAL,²⁴ which confirmed that: the demands of justice are the overriding consideration in considering the scope of the jurisdiction to appoint receivers under Section 37(1) of the Senior Courts Act 1981; the Court has power to grant injunctions and appoint receivers in circumstances where no injunction would have been granted or receiver appointed before the enactment of the Judicature Act 1873; a receiver may be appointed over an asset whether or not it is amenable to execution at law; and the jurisdiction to appoint receivers by way of equitable execution can be developed incrementally to apply old principles to new situations.

The Privy Council also held that the judgment debtor in this case could be regarded as having rights 'tantamount to ownership'. Applying the test in Re Triffit's Settlement,²⁵ the powers were therefore capable of being delegated without the debtor's consent. It was right for the jurisdiction to appoint receivers to be developed incrementally to enable the Court to appoint receivers in respect of such powers.

III. COURT PROCEDURE

i. Overview of court procedure

Proceedings in the Grand Court are governed by the Grand Court Rules (1995 Revision) ('the Rules'). With some limited exceptions, the Rules closely follow the English Rules of the Supreme Court as they stood before the coming into force of the Civil Procedure Rules. The Rules are subject to an overriding objective to deal with every matter in a just, expeditious and economical way. The Court has the power to give directions to achieve this objective, including directions that facilitate ADR, and has shown an increasing willingness to use this power, in particular in cases in the Financial Services Division.

ii. Procedures and time frames

Commercial disputes are usually dealt with in the Financial Services Division of the Grand Court ('the FSD'), which was established in 2009. Each case in the FSD has an assigned judge who is well-versed in commercial matters and has enhanced case management powers aimed at the speedy resolution of complex litigation.

Proceedings relating to the winding up of companies are dealt with in the FSD and governed by the Companies Winding Up Rules.

A writ or other form of originating process (such as an originating summons, notice of motion or petition) is filed and served on the defendant (or its authorised representative or appointed attorneys). Personal service is usually required, which in the case of a corporate defendant means delivery to its registered office.

If the defendant is not in the Cayman Islands, the Court's permission will be required to effect service out of the jurisdiction.

The default stages provided by rules are as follows:

1. Acknowledgment of service and notice of intention to defend – for Cayman defendants, this must be filed within 14 days. For overseas defendants, the order giving permission to serve out will specify the deadline.
2. Statement of claim – to be served within 14 days after service of notice of intention to defend (if not served with the writ).
3. Defence (and any counterclaim) – to be served within 14d ays after the acknowledgment or the statement of claim, whichever is later (but no less than 28 days after service of the writ).
4. Reply (and any defence to counterclaim) – to be served within 14 days after the defence.
5. Lists of disclosable documents – to be exchanged within 28 days after the reply.
6. Summons for directions – to be issued within 14 days after exchanges of the lists, to deal with future conduct of action towards trial and any other interim matters.

In large commercial disputes, these periods are usually extended by agreement between the parties or by order of the Court, and they can be shortened in cases of exceptional urgency. Non-compliance with deadlines can ultimately result in a plaintiff's claim being struck out or judgment being entered against a defendant (as the case may be), but this normally requires non-compliance with at least two successive Court orders.

If the defendant fails to give notice of intention to defend, or fails to defend, it will be open to the plaintiff to apply for judgment in default. This application is processed administratively by the clerk of the Court.

A party can apply to the Grand Court for summary judgment or strike out before a case proceeds to a full trial. The following summary judgment procedures are available:

1. a plaintiff can apply any time after the defendant has acknowledged service, on the basis that the defendant has no real or bona fide defence; and
2. a defendant can apply any time after serving a defence, on the basis that the plaintiff's claim, or part of the claim, has no prospect of success or prospect of recovering more than nominal damages.

The Grand Court can at any stage be asked to strike out a pleading (and order the action to be stayed, dismissed or judgment to be entered accordingly), on the following grounds:

1. it discloses no reasonable cause of action or defence (as the case may be);
2. it is scandalous, frivolous or vexatious;
3. it may prejudice, embarrass or delay the fair trial of the action;
4. it is otherwise an abuse of the process of the Court; or
5. there has been a wilfully disobedient breach of a final court order imposing a deadline for filing or serving a required document (such as a pleading, a list of documents or a witness statement).

Most interim remedies (in particular, injunctions to restrain the disposal of assets) can be obtained ex parte, or without notice to the defendant, in urgent cases or where the relief sought would be frustrated if notice were given to the defendant. Applications made without notice impose extra burdens on the applicant and its attorneys, in particular an obligation to make full and frank disclosure. Where an order is obtained without notice, the defendant is entitled to challenge the order at a later hearing.

In exceptionally urgent cases, the Grand Court can hear an application on the same day as or the day after it is filed, although it is rare that the Court is persuaded that the matter is urgent enough to bypass the normal listing requirements.

A plaintiff can apply to the Court for an order to restrain a defendant from dealing with, disposing of or otherwise dissipating its assets to frustrate any judgment obtained against it. Such type of order (Mareva injunction) can relate to assets within the Court's jurisdiction, or in some cases worldwide. No proprietary claim to the assets is required, but the injunction only takes effect as a personal prohibition, not as a physical attachment. To obtain such an injunction, it is necessary to establish a substantive cause of action, which can be determined by the Grand Court. Third parties, such as banks, who are put on notice of an injunction, must not assist the defendant in removing assets from their control.

In exceptional circumstances, a search-and-seizure order or Anton Piller order is available. This requires a person to allow the applicant access to premises and to effect the physical seizure of assets that need to be preserved as the subject matter of the action, and that may otherwise be concealed or destroyed.

An applicant for an interim injunction will almost always be required to give an undertaking to pay any damages that may be caused to the other parties for which they may be held liable. Applicants can also be required to provide security to support their undertaking.

Other interim remedies include other mandatory or prohibitory injunctions, orders for interim payments (whether in relation to debts, damages or accounts to be taken) and discovery orders, including against third parties.

The principal remedies are damages (for breach of contract or tortious duty), which are compensatory rather than punitive, specific performance of contractual obligations, injunctions (prohibitory or mandatory) and declarations (as to rights or as to a particular state of affairs).

Appeals to the Court of Appeal are usually based on error of law, mistaken conclusion of facts, improper exercise of discretion or procedural impropriety. Appeals must be filed within 14 days. Leave of the Court is required to pursue an appeal from some decisions, including consent orders, orders for costs and most interim orders. Some orders cannot be appealed at all, including an order dismissing a summary judgment application or where legislation provides that the Court's decision is final. Once the notice and grounds of appeal have been filed, the Registrar of the Court of Appeal lays down a timetable for the exchange of written arguments and other materials to be lodged with the Court, and fixes a hearing date in consultation with the parties' counsel.

In 2009, the Court of Appeal (Amendment) Rules introduced summary determination, in appropriate cases, of the question whether an appeal is one for which leave is required. Objections to the hearing of appeals for which leave has not been sought and applications for leave to appeal are, in the ordinary course, placed at first instance before a single judge of the Court of Appeal. A party dissatisfied with the upholding of an objection or the application for leave to appeal by a single judge has the unfettered right to renew the objection or application for leave to appeal to the full Court.

In general, the successful party in proceedings can expect to recover from the losing party its reasonable costs incurred in conducting the proceedings in an economical, expeditious and proper manner, unless the Grand Court orders otherwise.

Detailed guidelines govern the recoverability of fees and disbursements and the taxation process (by which the successful party's costs are assessed). The maximum recoverable hourly rates have been increased in relation to work carried out from 1 June 2011 onwards. Under the old rules, a significant proportion of a party's actual costs – as much as 60 per cent or even 70 per cent in some cases – was often irrecoverable, largely because the allowable rates previously in force fell short of realistic commercial fees. The new rates are largely in line with the rates actually charged. Costs may still be disallowed because specific items are deemed excessive or because it would otherwise be unreasonable for them to be paid by the losing party. Costs incurred in relation to work done by foreign lawyers are only recoverable if the lawyer in question has been temporarily admitted as an attorney in the Cayman Islands for the purposes of the proceedings in question, and the work is done after he or she is admitted.

Where a plaintiff rejects an offer to settle and then succeeds at trial, but is awarded less than a settlement offer made by the defendant, it may be ordered to pay the defendant's costs from the date of the offer.

Interest is payable from the date of service of a costs award, according to prescribed rates that are amended from time to time. The present rate of interest, effective from 1 November 2010, is two and three-eighths per cent (for judgments in US or Cayman Island dollars).

Limitation periods for commencing proceedings run from the date of accrual of the cause of action, and different claims are subject to different general limitation periods, although in each case there are exceptions:

1. contract claims must be brought within six years of the breach of contract;
2. tort claims must be brought within six years of the accrual of the cause of action; in the tort of negligence (the most common tort), this period is six years from the suffering of damages as a result of the conduct in question;
3. claims for recovery of land must be brought within 12 years;
4. some claims for breach of trust and for equitable relief have no statutory limitation period, although in many cases a six-year limitation period will apply and in all cases delaying claims unfairly may result in the Court refusing to allow a claim to succeed; and
5. there are special rules extending the limitation period in certain circumstances where the party did not know immediately that it had suffered damage, or the alleged wrongdoing was deliberately concealed from the proposed plaintiff.

iii. Class actions

The Rules do not provide for group litigation. In practice, however, the Grand Court will allow a representative action to be heard where there are a number of like cases. Company winding-up is the only truly collective action provided for in the Cayman Islands.

iv. Representation in proceedings

Natural persons may carry on proceedings through an attorney or in person. Companies may not commence or defend proceedings other than by an attorney.

In order to appear as an advocate in the Grand Court, visiting counsel must obtain a temporary work permit to allow them to appear in Cayman Court proceedings and be granted a limited admission to the Bar of the Cayman Islands for the purpose of the specific case.

v. Service out of the jurisdiction

The plaintiff will need leave to serve originating process outside Cayman. The Grand Court has discretion to give permission to serve out if the action falls within one of the prescribed categories of case set out in Order 11 of the Rules (which applies to both individuals and companies). Leave is also required for service out of the jurisdiction of any summons, notice or order.

vi. Enforcement of foreign judgments

There is a procedure for registration of foreign judgments, but this has only been extended to judgments from Australia.

A judgment from any other country may be enforced at common law on the basis that it creates a debt between the parties to that action, which is enforceable in the Cayman Islands under the common law principles of the law of obligations. In order to enforce a judgment under common law, a judgment creditor will have to bring a new action in the Cayman Islands in which the cause of action is a debt claim based on the foreign judgment and non-payment thereof. It used to be that this process was only available in the case of a judgment for a specified sum of money. However, following the 2008 case of Bandone v. Sol Properties,²⁶ where an order for rectification of a company's shareholder register was enforced, this is no longer the case.

The Court will not need to re-examine the merits of the underlying case, obviating the delay and expense for the plaintiff of having to re-try the claim. Instead, it will look to see if there is a valid judgment that has not been paid and at factors governing the granting of the judgment.

Notwithstanding that the foreign court may have determined that it had jurisdiction over the defendant, the Cayman court will need to be satisfied that the foreign court had such jurisdiction according to Cayman law. A foreign court will be recognised as having had personal jurisdiction over the defendant in the following cases:

1. if the defendant was ordinarily resident in the foreign country at the time of commencing the foreign proceedings. Residence for a corporation in this context is determined by the place in which it carries on business;
2. if the defendant voluntarily participated in the proceedings before the foreign court, other than simply to contest jurisdiction;
3. if the defendant appeared as a party in the proceedings before the foreign court, whether as a plaintiff or counterclaimant; or
4. if the defendant expressly agreed to submit to the jurisdiction of the foreign court (as opposed to the laws of the foreign country), by contract or subsequent conduct.

The nationality of the defendant is not regarded as a sufficient base for jurisdiction, nor is mere transient presence in the foreign country or the fact that the defendant has property within the foreign country.

The Court will only recognise or enforce a foreign judgment that is final and conclusive, rather than interim or interlocutory in nature. A judgment will be regarded as final and conclusive even if it is under appeal in the foreign court, though if execution has been stayed, the Court will usually also stay enforcement of the judgment that it grants in the Cayman Islands. It is also a well-accepted principle that the Court should not recognise or enforce a foreign judgment where doing so would be contrary to public policy.

vii. Assistance to foreign courts

Letters of request

The UK Evidence (Proceedings in Other Jurisdictions) Act 1975 extends to the Cayman Islands by virtue of the Evidence (Proceedings in Other Jurisdictions) (Cayman Islands) Order 1978.²⁷ Where an application is made to the Grand Court for an order for evidence to be obtained in the Cayman Islands, the Grand Court has the powers conferred on it by the Act as long as: it is satisfied that the application is made in pursuance of a request issued by or on behalf of a court or tribunal exercising jurisdiction in a country or territory outside the Cayman Islands; and the evidence to which the application relates is to be obtained for the purposes of civil proceedings that either have been instituted before the requesting court or whose institution before that court is contemplated.

This provision is almost identical to the provisions of the 1975 Act and it follows that for the Grand Court to give effect to letters of request:

1. there must be a formal application to the Court;
2. the application must be made pursuant to a formal request;
3. the request must be made by or on behalf of a court or tribunal exercising jurisdiction in the relevant country or territory;
4. the request, and consequent application, must be for evidence to be obtained;
5. that evidence must be for proceedings that have been instituted before the requesting court or whose institution is contemplated; and
6. those proceedings must be 'civil proceedings'.

In the interests of comity, the general approach of the Grand Court is to give effect to letters of request where it is proper, practicable and permitted under Cayman law. The Grand Court will generally be accommodating, for example by salvaging the remainder of a problematic letter of request; however, it will not always be entirely deferential to foreign courts.

Information orders

Norwich Pharmacal relief (discussed further in Section V, sub-section (ii), infra) is available in aid of foreign proceedings, and can be granted even where the Evidence (Proceedings in Other Jurisdictions) (Cayman Islands) Order 1978 provides an alternative means of obtaining information.²⁸

Disclosure orders may raise issues of the protection of confidential information (see further Section V, infra). As a result, an application for directions regarding the disclosure under the Confidential Relationships (Preservation) Law ('the CRPL')²⁹ may be required following the issuance of the order.

Voluntary gathering of evidence

Provided evidence is obtained from a person who is willing to give it and who is legally entitled to do so, there are no restrictions on the taking of evidence within the jurisdiction of the Cayman Islands. However, where the information sought and the capacity in which the witness has the information is covered by CRPL(see further Section V, infra), the witness will only be able to divulge the information after obtaining permission from the Court.

Asset freezing orders

Mareva injunctions had until 2011 only been granted where there was a cause of action justiciable in the Cayman Islands. However, the Court had been willing to continue Mareva injunctions following the stay of Cayman proceedings, where the substantive dispute was to be litigated elsewhere, in order to assist the foreign court.³⁰ The decision of Quin J in Gillies-Smith v. Smith³¹ was hailed as Cayman's first free-standing Mareva injunction, but doubt was shed on that decision in VTB Capital v. Malofeev,³² and it should now be treated with caution. Both these cases are discussed in Section II, supra.

Recognition of foreign bankruptcy officials

The Court may make an order under Section 241 of the Companies Law (2011 Revision) recognising the right of a trustee, liquidator or other official appointed in foreign bankruptcy proceedings to act on behalf of the debtor in the Cayman Islands.

viii. Access to court files

The Grand Court is sensitive to the need for the protection of confidentiality of commercial arrangements, and will in appropriate cases make suitable orders to protect parties' commercial interests.

Petition hearings and the trials of writ actions are held in open court and are public. Interlocutory (interim) hearings are held in chambers and are private, although chambers judgments are not confidential to the parties unless the Grand Court orders them to be.

All forms of originating process (such as petitions and writs) are open to public inspection, as are final judgments made or treated as having been made in open court;³³ documents subsequently filed in the proceedings are not. Third parties may apply to inspect other Court files; however, the Court would require exceptional reasons and circumstances to grant access to such documents.

Parties are prohibited from using documents disclosed under compulsion (of rule or order) in the proceedings for purposes outside of the litigation, until they have been read by the Court or referred to in open court.

There are a number of specific measures available to preserve the confidentiality of particular proceedings. Parties can apply for a hearing that would usually be public to take place in private, or the Court file to be sealed from public inspection (or both), or for the publication of information relating to proceedings to be restricted, or details contained in Court judgments to be edited (or both).

ix. Litigation funding

Litigation is usually funded by the parties themselves. It is possible for third parties to fund litigation, subject to compliance with the rules against maintenance and champerty. Maintenance is the giving of assistance to a party in litigation by a person who has no interest or motive recognised by law as justifying his or her interference. Champerty is maintenance of an action in return for a promise of a share of the proceeds of the action. Whether a third party has a legitimate commercial interest in funding the litigation, for example, as shareholder of the party, depends on a number of factors, including whether the maintainer accepts liability for the opposing party's fees and the degree to which the maintainer influences the proceedings.

Insurance may be available, but there is no established market for litigation insurance among local providers.

IV. LEGAL PRACTICE

i. Conflicts of interest and confidentiality

Conflicts of interests and the duty of confidentiality are governed by the common law. The rule is stated in Prince Jefri Bolkiah v. KPMG.³⁴ That case held that the court could impose an injunction to prevent a firm accepting instructions to act adversely to a former client if the firm was in possession of information that was confidential to the former client; and such information was or might be relevant to the matter on which the firm was instructed by the second client. Therefore, there is no conflict of interest where the client is a former client; the only duty that remains after termination of the retainer is the duty of confidentiality of information imparted during its subsistence.

The duty to preserve confidentiality is unqualified. It is a duty not to communicate the information to a third party and not to misuse the confidential information for the benefit of others and without the consent of the client. Although the client is not completely protected from accidental disclosure of the confidential information, he or she is entitled to prevent his or her former attorneys from exposing him or her to any avoidable risk. Lord Millett in the Prince Jefri case said, 'it is of overriding importance for the proper administration of justice that a client should be able to have complete confidence that what he tells his lawyer will remain secret.' Accordingly, the court should intervene unless it is satisfied there is no risk of disclosure. This risk must be real and not merely fanciful, however it need not be substantial. An attorney should not accept instructions if it will increase the risk that information that is confidential to a former client may be disclosed to a party with an adverse interest without the consent of that former client.

Chinese walls and other measures can be taken to eliminate the risk of disclosure, and there must be clear and convincing evidence that all reasonable measures have been taken to prevent disclosure.

The Royal Court of Jersey has taken a more practical approach to conflicts of interest and the duty of confidentiality than has been seen in onshore cases because of the limited number of attorneys capable of dealing with the complex international litigation that arises offshore. This is likely to prove particularly relevant in the similar circumstances prevailing in the Cayman Islands.³⁵

ii. Money laundering, proceeds of crime and funds related to terrorism

The Proceeds of Crime Law 2008 ('POCL')³⁶ came into force on 30 September 2008 in response to recommendations made by the Caribbean Financial Action Task Force. The Law aims to harmonise anti-money laundering ('AML') and anti-terrorist financing legislation in the Cayman Islands and update the AML regime in line with changes to international AML standards since Cayman's AML regime was last substantially overhauled in 2000. POCL replaced the Proceeds of Criminal Conduct Law and some sections of the Misuse of Drugs Law, and is now the primary legislation dealing with AML and terrorist financing in the Cayman Islands, although the Misuse of Drugs Law (2009 Revision) and the Terrorism Law (2009 Revision) are also relevant to AML. In particular, POCL imposes new reporting obligations on regulated financial institutions and gives the courts and the Attorney General broader powers in restraining and recovering the proceeds of criminal conduct on civil grounds.

'Criminal conduct' is defined in POCL as conduct that constitutes an offence in the Cayman Islands or that would constitute an offence if committed in Cayman. 'Criminal property', including terrorist property, constitutes or represents a person's benefit or interest arising, in whole or in part and directly or indirectly, from criminal conduct when the offender knows or suspects that the property constitutes or represents such a benefit. POCL applies to property wherever situated and it is immaterial where the criminal conduct took place. Furthermore, it is immaterial who carried out or benefited from the criminal conduct and whether the conduct occurred before or after POCL's commencement.

The five main offences under POCL are:

1. concealing, disguising, converting, transferring or removing criminal property from the Cayman Islands;³⁷
2. entering into or becoming concerned in an arrangement that the person knows or suspects facilitates the acquisition, retention, use or control of criminal property;³⁸
3. acquiring, using or having possession of criminal property;³⁹
4. an employee or money-laundering reporting officer ('MLRO') failing to disclose to the MLRO or Financial Reporting Authority ('FRA') respectively a knowledge or suspicion of another person's money laundering;⁴⁰ and
5. 'Tipping off' – making a disclosure to a third party that is likely to prejudice any investigation arising from a money laundering disclosure to the FRA.⁴¹

The main defence to the first three offences is the making of a suspicious activity report to the FRA. In relation to the first four offences, professional legal advisers do not commit an offence if the information is received in privileged circumstances. Also in relation to offence four, a similar statutory privilege defence applies to accountants, auditors and tax advisers. Reporting suspicious activity to the FRA will not give rise to any civil liability and does not constitute a breach of the duty of confidentiality under Cayman law.

The penalty for the offences following summary conviction is a fine of up to CI$5,000, imprisonment for up to two years, or both. Following conviction on indictment, offences (a) to (c) attract a penalty of imprisonment for up to 14 years and offences (d) and (e) attract a penalty of imprisonment for up to five years or a fine, or both.

The Money Laundering Regulations ('the Regulations')⁴² supplement and POCL are mandatory. They apply to financial service providers and professional intermediaries, and obligate them to comply with specific administrative requirements in support of AML. The Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands support the Regulations and are also mandatory by virtue of Regulation 5(4)(a). The four key requirements relate to client identification and verification procedures, record keeping procedures, internal reporting procedures and internal control procedures.

V. DOCUMENTS AND THE PROTECTION OF PRIVILEGE

i. Privilege

A party can withhold certain documents from inspection by the other party on the grounds of privilege, although their existence must still be disclosed in general terms in a party's list of documents. Whether or not a particular document or class of documents is privileged can be contentious, but the following categories of documents are generally privileged:

1. correspondence between a party and its lawyers, whether or not connected with the litigation, which is confidential and written for the purpose of giving or obtaining legal advice (this includes correspondence with in-house lawyers, unless it relates to administrative matters and not legal advice);
2. correspondence between a party's lawyers and third persons, where that correspondence is connected with the litigation (other than open correspondence with the other party's lawyers);
3. a party's lawyers' file notes, drafts, instructions and briefs to counsel and counsel's opinions and notes; and
4. experts' reports and witness statements prepared in connection with the litigation (unless and until disclosed to the other party).

The following documents are not privileged:

1. notes relating to the litigation prepared by a party for internal purposes (including board minutes recording discussions of the litigation), unless for the purposes of reporting, when strictly necessary, to others in the party's organisation on advice received from lawyers, or seeking information requested by lawyers;
2. notes to the published accounts concerning the litigation and any provision for the proceedings in the accounts, and related correspondence with accountants; and
3. written communications between a party and outsiders (such as the party's parent company or subsidiary, the police and other authorities, insurers and professional advisers other than the party's own lawyers), or written notes recording these communications, unless these documents came into existence for the dominant purpose of obtaining legal advice in connection with existing or contemplated proceedings.

A document is not privileged just because it is considered (or marked) confidential or because it is produced internally. In particular, current case law in England (likely to be followed in the Cayman Islands) suggests that if litigation is not actually in prospect, documents prepared by employees of a party to be sent to its lawyers may not be privileged if they do not amount to communications between the client and its lawyers for the purpose of taking advice.

The following categories of privilege are recognised by Cayman Islands law.

Legal advice privilege

Traditionally, legal advice privilege has been held to attach to confidential communications between a party and his or her attorney that were written for the purpose of providing legal advice for the client but not otherwise. This includes communications with in-house counsel, provided that those communications relate to legal, as opposed to administrative, issues.

The House of Lords in the English case of Three Rivers District Council and Others v. Governor and Company of the Bank of England (No. 6)⁴³ held that legal advice privilege extends to communications written for the purpose of providing advice as to prudent practical steps to take in the relevant legal context. It remains to be seen how the Cayman courts will interpret legal advice privilege in light of this decision.

Litigation privilege

Unlike legal advice privilege, litigation privilege only attaches to documents created at a time when litigation is contemplated or pending. Documents covered by litigation privilege fall into two categories:

1. communications between a party's attorney and a third party are covered by litigation privilege if they are created at a time when litigation is contemplated and are connected with the litigation; and
2. communications between the party and a third party are covered by litigation privilege if they are created for the dominant purpose of submission to a legal adviser in view of contemplated proceedings.

Privilege against self-incrimination

Aparty is entitled to claim privilege over documents that tend to expose him or her to a criminal penalty.

Public interest immunity

This operates to prevent disclosure of documents production of which would be so injurious to the public interest that it ought to be withheld, even at the cost of justice in the litigation in question.⁴⁴

Without prejudice privilege

This attaches to communications between the parties or their legal advisers that are made in a good faith effort to settle proceedings.⁴⁵

ii. Production of documents

In actions commenced by writ, Order 24 of the Rules provides for discovery to take place automatically 14 days after close of pleadings, unless the Court makes a different order.

There are also other provisions under which a litigant can seek disclosure of documents, for example:

1. In exceptional circumstances, a prospective plaintiff may be able to obtain an order for discovery of documents against a prospective defendant before the commencement of proceedings if the documents sought are necessary to enable the case to be properly formulated.
2. It may be possible to obtain an order for discovery of documents by a third party who has become involved, albeit innocently, in the defendant's (or prospective defendant's) wrongdoing. Such an order is referred to as a Norwich Pharmacal order, following the English case of Norwich Pharmacal Co v. Customs and Excise Commissioners.⁴⁶ This jurisdiction is typically used by victims of fraud to obtain discovery against banks who have received misappropriated funds.
3. A party to litigation can apply under Order 24 Rule 10 of the Rules for disclosure of any document to which the other party has referred in a pleading or affidavit.
4. A party to litigation may apply under Section 8 of the Evidence Law⁴⁷ for an order that he or she be at liberty to inspect and take copies of any matter in a banker's book. The application will have to be supported by affidavit evidence stating why the inspection is necessary and how the entries in question will be admissible at the trial of the proceedings in question.

Discovery under Order 24 takes place in two stages. First each party has to produce a list of discoverable documents, then he or she has to provide each other party with the opportunity to inspect and take copies of those documents (excepting those that are covered by privilege).

'Discoverable' documents are those which are in a party's 'possession, custody or power' relating to matters in question in the proceedings.⁴⁸

A 'document' includes anything in which information is recorded, including computer and other electronic records, photographs, text messages, voicemail and other audio recordings, and includes documents held both in the Cayman Islands and overseas.

As to 'possession, custody or power', 'custody' means mere physical holding and 'possession' is more than mere physical holding – for example, a bailee or agent has possession of documents entrusted to him or her by their owner. Documents in a person's 'power' include documents that that person has a right to call for and would include documents held by that person's servant or agent. The question of whether documents held by a third-party adviser or a subsidiary company are in a party's 'control' will be a question of fact to be determined by reference to the circumstances of the particular situation.

The test of relevance is a broad one. It has been held that documents relate to the matters in issue if it is not unreasonable to suppose that they contain information that may directly or indirectly enable a party either to advance his or her own case or to damage that of his or her adversary.⁴⁹

In general, the Court will not allow applications for discovery where they are held to be mere 'fishing expeditions'. The party making such an application will have to show that there is a real possibility of evidential materiality.⁵⁰

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Footnotes

2 The Bill of Rights will come into force on 6 November 2012.

3 2011 Revision.

4 2004 Revision, amended in 2009.

5 Unreported, judgment dated 26 August 2011, Jones J.

6 Unreported, judgment dated 30 May 2011, Jones J.

7 Unreported, decision of the Court of Appeal dated 5 August 2011.

8 Unreported, decision of 4 January 2011, Jones J.

9 [2010(1)] CILR 83.

10 Unreported, 15December 2010.

11 Unreported, decision of 1 April 2011, Foster J.

12 Sparkasse Bregenz Bank AG: Re Associated Capital Corporation (unreported, decision dated 18 June 2003); Pioneer Freight Futures Company Limited v. World Link Shipping Ltd Samoa (unreported, decision dated 1 July 2009).

13 Unreported, decision of the Court of Appeal dated 15 February 2011.

14 Unreported, decision dated 18 November 2009.

15 Unreported, decision dated 18 December 2009.

16 Unreported, decision of the Court of Appeal, 12 July 2011.

17 Unreported, decision dated 10 February 2010.

18 Unreported, decision of 10 May 2011, Quin J.

19 Unreported, decision dated 18 August 2011.

20 Ibid.

21 [1996] AC 284.

22 Unreported, decision dated 30 November 2011.

23 [2011] UKPC 17 (Cayman Islands).

24 [2009] QB 450.

25 [1958] Ch 852.

26 [2008] CILR 301.

27 The principles applicable to such applications were considered in First American Corporation v. Zayed [2000] CILR 57, in the matter of a request for international judicial assistance from the Sandefjord Court [2001] CILR 322; and In re Parmalat Securities Litigation (Unreported, judgment of Mr Justice Henderson dated 23January 2007).

28 Miller v. Gianne and Condoco Grand Cayman Resort Ltd [2006 CILR N26].

29 2009 Revision.

30 See discussion of Deloitte & Touche v. Felderhof at Section II, sub-section (vi), supra.

31 Unreported, 12 May 2011.

32 Unreported, Cresswell J, 18 August 2011.

33 This does not include proceedings in the Family Division.

34 [1998] All ER (D) 767.

35 RBC Trustees (CI) Limited and Michael David de Figueiredo v. John Bisson and Eleven Others (exercising the profession of advocates and solicitors under the name and style of Appleby) [2007 JLR Note 58].

36 See also the Money Laundering Regulations (2010 Revision) and the Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands.

37 Section 133.

38 Section 134.

39 Section 135.

40 Sections 136-137.

41 Section 139.

42 2010 Revision.

43 [2004] UKHL48.

44 Burmah Oil Co Ltd v. Governor and Company of the Bank of England [1980] AC 1090.

45 Brown v. Rice [2007] EWHC 625(Ch).

46 [1973] 2 All ER 943.

47 2011 Revision.

48 Grand Court Rules Order 24, Rule 1.

49 Compagnie Financière v. Peruvian Guano Co (1882) 11 QBD55.

50 Grupo Torras v. Butterfield Bank 2000 CILR 452.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.