Cayman Islands: New Law To Boost Cayman's Arbitration Industry

Last Updated: 4 September 2012
Article by Appleby  

Introduction

The development of international arbitration was originally driven by litigants' dissatisfaction with the time, cost and publicity involved in court proceedings. Arbitration procedures evolved to offer a flexible, efficient and private alternative means to resolve commercial disputes before expert tribunals.

Offshore financial centres like the Cayman Islands have not encountered the same level of demand for alternative dispute resolution mechanisms. Its Grand Court (''the Court'') is well-equipped to handle commercial disputes for sophisticated international parties in a cost effective and expeditious manner; it has a Financial Services Division which is dedicated to handling disputes arising out of the particular transactions and legal structures involving Cayman investment vehicles and other corporate entities.

At the same time, comparable jurisdictions such as Bermuda and Singapore have done a great deal to develop successful arbitration industries, demonstrating that there is a place for such dispute resolution mechanisms to coexist with and complement an efficient court system. In the offshore market, and especially in the current economic conditions, it has become apparent that purchasers of financial services and products have increasing regard to the quality of dispute resolution mechanisms in choosing between competing jurisdictions.

Above all, increasingly widespread adoption around the world of the UNCITRAL Model Law on International Commercial Arbitration (''the Model Law'') has led international commercial enterprises to demand and expect access to the same kind of arbitration mechanisms in every country where they do business. Now the Cayman Islands has joined that group of countries with a variant of the Model Law with some additional provisions to suit local conditions and other refinements which have proved successful in other jurisdictions.

The Arbitration Law, 2012 ( 'the Law')

The Law came into force on 2 July 2012. The Law is expressly founded on 3 fundamental principles which are a hallmark of modern arbitration systems: (1) a fair resolution of disputes by an impartial tribunal without undue delay or expense; (2)maximum party autonomy, subject only to safeguards in the public interest; and (3) limited judicial intervention. The provisions of the Law will be construed in accordance with these principles, as will the rules of Court governing arbitration-related applications by virtue of an 'overriding objective' provision. Those rules will also allow parties to take advantage of the benefits offered by the Financial Services Division where all arbitration applications will be filed. The Law is structured with all the key aspects that are required to ensure effective arbitration proceedings, as follows:

(a) The formation of an effective and enforceable arbitration agreement;

(b) Jurisdiction for the Court to stay legal proceedings brought in breach of an arbitration agreement;

(c) The composition of an arbitral tribunal, together with Court powers for appointing, removing and replacing arbitrators as may be required in certain circumstances;

(d) The conduct of arbitral proceedings, including powers of the tribunal and processes to be followed in default of any agreement between the parties;

(e) The jurisdiction and process for granting interim measures and preliminary orders, including limited Court powers to support an arbitration by granting similar relief where necessary;

(f) The making of an award, including the remedies available, fees and costs;

(g) Restricted rights to appeal or otherwise challenge an award in the Court;

(h) Court powers to enforce an award.

Some of the significant provisions of the Law which make up this overall structure are mentioned below.

The Arbitration Agreement

The Law encourages parties to adopt or adapt a model arbitration clause provided in a Schedule to the Law if they are unable to independently formulate an appropriate arbitration clause for the purposes of arbitral proceedings. The clause focuses attention on the fundamental elements to provide an effective, workable agreement and offers certain default provisions (in parentheses below) such as:

(a) a period for the parties to seek to resolve their differences before initiating arbitral proceedings (10 days to respond in writing to a particularised complaint with remedy sought);

(b) the seat of the arbitration (Cayman Islands);

(c) the language of the arbitration (English);

(d) the number of arbitrators (one);

(e) the designation of an appointing authority in order to appoint an arbitrator (which may be designated by the Court in default of agreement).

Stay of Legal Proceedings

It is critical that any domestic court be given the power to stay legal proceedings which are brought in breach of an agreement to submit disputes to arbitration. Some jurisdictions provide their courts with a discretionary power, which exposes both parties to considerable uncertainty. However the Law, in line with other Model Law jurisdictions, provides that the Court must stay such proceedings ''unless it is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed''. This language is clear and familiar to practitioners, predictable in its application, and in practice makes it very difficult for a party to avoid resolving a dispute other than in accordance with its agreement to arbitrate.

The Composition Of An Arbitral Tribunal

The parties to an arbitration agreement may choose any number of arbitrators. Absent such agreement, the Law provides that an arbitral tribunal shall be composed of a single arbitrator - which is consistent with the model arbitration provision in the Schedule to the Law. There has been a tendency in some jurisdictions and among some arbitration institutions to encourage panels of 3 arbitrators, which has caused time delays in fixing arbitration hearings and has added fee costs to the entire process. The Law's encouragement of the appointment of a single arbitrator is to be commended. There is no requirement that an arbitrator be from or resident in the Cayman Islands. Indeed, the Law contains no protectionism of any sort for those involved in the arbitration industry.

The Conduct Of Arbitral Proceedings

Unless otherwise agreed, a party may be represented by a legal practitioner (whether from the Cayman Islands or elsewhere) or by any other person chosen by him. This allows the party flexibility to use an arbitration expert (who may not be legally qualified) or employ the services of overseas counsel, so as to suit commercial needs and the particular issues in dispute: the former would obviously not be possible in court proceedings, while the latter would be subject to limitations and restrictions in obtaining rights of audience to appear in court proceedings.

The parties may agree on powers to be exercised by the tribunal for the purpose of arbitral proceedings and any orders made pursuant to those powers may be enforced with the leave of the Court. The Law also provides a default list of powers that may be exercised by the tribunal in the event that the parties do not agree them - such as the power to award security for costs, discovery of documents and interrogatories, the giving of evidence by affidavit and the preservation and interim custody of any evidence for the purposes of the proceedings. This allows the parties flexibility to determine what an arbitrator can and cannot do, as well as ensuring that he has all necessary powers to conduct an arbitration properly even if the parties do not address their minds to this issue.

The Jurisdiction And Process For Granting Interim Measures And Preliminary Orders

Subject to the parties' agreement, an arbitral tribunal may grant interim measures at any time prior to the issue of an award - including measures to maintain or restore the original position of a party, and to take action that would prevent prejudice to the arbitral process or preserve evidence that may be relevant and material to the resolution of the dispute. Parties considering arbitration will be assured that the tribunal has jurisdiction to act to preserve the status quo pending determination of a dispute. Specific provisions address the regime for obtaining relief on an ex parte basis (i.e. without notice to the other party) and for requiring the provision of appropriate security as part of the price for obtaining an interim measure.

The Court is empowered to exercise any of the arbitrator's powers, and also jurisdiction to grant interim injunctions including asset-freezing orders, but only if the arbitral tribunal is unavailable or incapacitated for any reason. This means that if the tribunal cannot be convened or act for unforeseeable reasons, the parties are not left in limbo and can still seek the relief when they need it. In non-urgent cases, the Court is only permitted to act with the tribunal's permission or the written agreement of all parties; and any order of the Court will cease to have effect if the tribunal subsequently makes an order to which the Court's order relates. These provisions serve to underline the primacy of an arbitrator's powers and the purely supporting role which the Court may play.

The Making Of An Award, Including The Remedies Available, Fees And Costs

The parties may agree the powers exercisable by the arbitral tribunal in terms of remedies. Subject to any such agreement, the tribunal may award any remedy or relief that could have been ordered by the Court if the dispute had been the subject of civil proceedings in that Court.

Unless otherwise agreed, an arbitrator may make interim awards and awards on different issues at different points in the arbitral proceedings; andmay make an award at any time.

The arbitral tribunal has a complete discretion with respect to making awards of costs in relation to an arbitration, unless a contrary intention is expressed in the arbitration agreement.

An arbitral tribunal's fees and expenses may be subjected to assessment by the Court at the request of a party, unless they have been fixed by written agreement or such agreement provides for determination by another person or institution.

Restricted Rights To Appeal Or Otherwise Challenge An Award In The Court

A party to arbitration proceedings may appeal to the Court on a question of law arising out of an award made in the proceedings, but such an appeal first requires leave of the Court - and the parties may agree to exclude this right of appeal in any event.

A party also has an inalienable right to apply to the Court to set aside an award which is tainted by fraud, a breach of natural justice, has some jurisdictional flaw (e.g. the agreement is invalid or does not cover the dispute, the tribunal is not properly constituted), or is contrary to public policy. These are the standard grounds to set aside awards as found in most modern arbitral regimes which follow the Model Law.

Court Powers In Relation To An Award

The Court is given jurisdiction to determine any preliminary point of law, if either all parties agree or the tribunal grants permission. The Court's decision may be the subject of appeal if it raises a legal question of general importance; and unless otherwise agreed by the parties, the tribunal may continue the arbitration in the meantime. This provision gives the parties flexibility to make use of the Court to resolve a complex legal issue which is not best suited to the tribunal (e.g. if the arbitrator does not have legal training) without undermining the entire arbitral process. The parties can also agree to exclude this provision altogether.

Any award made by an arbitral tribunal (where it had jurisdiction) may be enforced with leave of the Court, permitting judgment to be entered in terms of the award; which in turn allows a party to seek post-judgment relief. This provides successful parties with access to the Court's broad array of enforcement processes in order to ensure that arbitral awards have meaningful effect on the losing parties.

The recognition and enforcement of foreign arbitral awards is addressed in a different statute (the Foreign Arbitral Awards Enforcement Law) which gives force to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (''the New York Convention''). However, the Law now provides for the recognition and enforcement of any award, irrespective of the country in which it is made and whether or not that country is a party to the New York Convention, as long as that award satisfies the same criteria as are set out in the Convention.

Other Notable Features

The Law expressly requires a tribunal to conduct arbitral proceedings in private and confidentially; it also allows for related Court proceedings to be held in private on application by a party and to restrict the publication of any confidential information relating to the proceedings in appropriate circumstances. As such, the parties are assured that privacy is maintained in relation to all aspects of an arbitration and that (in appropriate cases) any related court proceedings can also protected in the same way. Such features do not appear in the Model Law, but they are designed to respect parties' interest in preserving confidentiality in respect of arbitral disputes in jurisdictions like the Cayman Islands.

Conclusion

The Cayman Islands can now start to develop an arbitration industry based on a statute which implements modern international arbitration practices. The Law has the promise of support from a judiciary which is committed to giving it all the support which is required by way of arbitration applications, including the fast track procedures offered by the Financial Services Division of the Court.

The next step will be for legal practitioners to encourage commercial parties who use Cayman entities or Cayman law for their transactions to include Cayman arbitration provisions in their agreements. If that initiative succeeds, one can expect the volume of arbitrations to surge in the ensuing 12-24 months, as disputes start to arise in relation to those transactions.

Previously published in MEALEY'S International Arbitration Report, August 2012.

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.

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