Cayman Islands: Cayman Islands Court Of Appeal Overturns Antisuit Injunction In Favour Of Argyle Funds SPC Inc

The Cayman Islands Court of Appeal has unanimously allowed every ground of an appeal by the liquidators of Argyle Funds SPC Inc. ("Argyle"), holding that its former auditors, BDO Cayman Ltd ("BDO Cayman"), had no sustainable basis for restraining Argyle from continuing claims of fraud and gross negligence against three of BDO Cayman's affiliate entities in the New York courts. This decision will therefore be of particular interest to Cayman Islands professional service providers who delegate some or all of their work to be undertaken outside of the jurisdiction.

The Court of Appeal's decision in Argyle Funds SPC Inc. (In Official Liquidation) v BDO Cayman Ltd1, delivered on 8 October 2018, overturns an anti-suit injunction ordered by Mr Justice Raj Parker in the Grand Court of the Cayman Islands (the "Grand Court") earlier this year preventing Argyle from bringing proceedings against BDO Trinity Limited, BDO USA LLP and Schwartz & Co LLP (together, the "Affiliates") in New York for their alleged failure to alert Argyle in the course of four audits between 2010 and 2013 to two catastrophic frauds which resulted in Argyle's collapse (the "New York proceedings"). Argyle claims compensatory damages of over US$86 million and punitive damages of not less than US$260 million.

The most important points arising from the Court of Appeal's judgment are:

  1. The decision clarifies and reaffirms the correct principles of contractual construction to be applied when an anti-suit injunction is sought in the Cayman Islands, and particularly the circumstances in which third parties can benefit from sole recourse and exclusive jurisdiction clauses which seek to bar claims against them. In particular, where third parties to a contract seek to rely on an exclusive jurisdiction clause, the Grand Court is to adopt the seven steps set out in Team Y & R Holdings Hong Kong Limited v Ghossoub2.
  2. Contractual promises as to who and where a party may be sued need very careful drafting and the language used must be extremely clear when such important rights are sought to be restricted, particularly with respect to clauses conferring benefits on third parties.
  3. Summary findings of fact on affidavit evidence alone without cross examination of those witnesses and without the benefit of discovery where important material might be discovered is almost never appropriate and was not so in this case (in line with Elektrim SA v Vivendi Holdings 1 Corporation et al3). This point is particularly pertinent where the relief sought would effectively amount to a strike out of proceedings in a foreign jurisdiction. 
  4. An entity or person to be restrained by an anti-suit injunction should be made a party to the injunction proceedings.

Background

Facts

Argyle was a Cayman Islands Mutual Fund with BDO Cayman as its statutory auditor for the audit years ending 31 December 2006 – 2014, as a result of which audits of the investments held by certain of Argyle's classes should have been scrutinised with appropriate care. Argyle and BDO Cayman entered into four audit engagement letters between 2010 and 2013 (the "Engagement Letters"), however the Affiliates were not parties to the Engagement Letters.

In 2016, Argyle discovered that large sums under the control of one of the credit advisors in which it had invested (and which had purportedly been audited) had been misappropriated through the fraudulent actions of that credit advisor. On 31 May 2016 Argyle went into official liquidation.

On 21 June 2017 Argyle commenced the New York proceedings against BDO Cayman and the Affiliates.

First instance proceedings in the Grand Court

On 8 August 2017, BDO Cayman filed an ex parte Originating Summons on notice to Argyle in the Grand Court of the Cayman Islands seeking an anti-suit injunction against Argyle to restrain it from continuing the New York proceedings against BDO Cayman and the Affiliates.   

BDO Cayman claimed that the following five key clauses constituted a contractual scheme under which Argyle was obliged to have any dispute arising out of an audit governed by the Engagement Letters determined by arbitration in the Cayman Islands and solely against BDO Cayman:

(i) Applicable Law;

(ii) Exclusive Jurisdiction

(iii) Dispute Resolution

(iv) Assignment; and

(v) Sole Recourse4.

BDO Cayman further argued that Argyle could only claim against the Affiliates with respect to allegations of fraud, wilful default and non-excludable liability if an exception contained in the Sole Recourse clause applied and that, even if an exception applied, such a claim had to be brought in the Cayman Islands under the Exclusive Jurisdiction clause.

In relation to the 2010 audit (governed by the 2010 Engagement Letter which did not contain the Sole Recourse Clause), BDO Cayman's case relied on the Dispute Resolution and Assignment clauses, together with the contention that if those clauses did not prohibit Court proceedings against the Affiliates, those proceedings must be brought in the Cayman Islands under the Exclusive Jurisdiction Clause.

Argyle argued that, on a proper construction of the five key clauses, there was no bar to the claims against the Affiliates. In respect of the 2010 audit, Argyle argued that the Assignment Clause was not engaged because BDO Cayman had not filed any evidence of an assignment or established that the Affiliates were "permitted assignees". Further, a covenant not to sue the Affiliates could not be spelled out of the Assignment Clause. Finally, in respect of the 2011, 2012 and 2013 audits, the claims in the New York proceedings against the Affiliates fell squarely within the exception in the Sole Recourse clause. 

In granting the anti-suit injunction, Justice Parker ruled that: (i) the New York proceedings breached the Arbitration, Exclusive Jurisdiction and Sole Recourse clauses, and the forum in which Argyle was required to pursue any claims arising under or in relation to the Engagement Letters was by arbitration against BDO Cayman alone, even where a third party assisted with the audits; and (ii) BDO Cayman remained solely liable for its own performance and that of its assignees, and Argyle agreed not to bring claims or proceedings against any assignee. Justice Parker rejected Argyle's submission that the clauses had no application because Argyle's claims in the New York proceedings fell within the exception to the Sole Recourse clause and were founded on an allegation of fraud, wilful misconduct or other liability which cannot be excluded under New York law. Justice Parker held that, for the exclusion to apply, the pleaded claims in the foreign proceedings should comply with Cayman Islands pleading standards and made various findings of fact relying upon and preferring the untested affidavit evidence of BDO Cayman.

The Appeal

The five key clauses were also considered by the Court of Appeal as they applied to each of the Engagement Letters.

The 2010 audit

The Court of Appeal agreed with Argyle that Justice Parker had erred in his finding that the claims against the Affiliates in respect of the 2010 audit were in breach of the 2010 Engagement Letter (which did not contain the Sole Recourse Clause).

The Court of Appeal held that it was for BDO Cayman to establish that, under the Assignment Clause, Argyle was contractually obliged to litigate any claim against the Affiliates pursuant to the Dispute Resolution clause or that otherwise Argyle had entered into an enforceable covenant not to sue the Affiliates. However, BDO Cayman had produced no evidence at all that the Affiliates were a 'permissible assignee' of that they had agreed to be bound by the "applicable terms and conditions of the [Engagement Letter]", which was required on the true construction of that clause. 

Further, the claims in respect of the 2010 audit were found not to be governed by the Exclusive Jurisdiction clause. The Court of Appeal held that, if claims against third parties were to fall within the clause, clear wording to that effect would be necessary and there would also be an imbalance caused by the absence of any machinery ensuring that the third party was subject to the jurisdiction of the Cayman Islands' Courts.

The 2011, 2012 and 2013 audits

The Court of Appeal concluded that there were two central issues:

  1. are the New York proceedings against the Affiliates a "claim or proceeding founded on an allegation of fraud or wilful misconduct or other liability that cannot be excluded under the applicable laws?" such that they fall within the exception in the Sole Recourse Clause; and if so
  2. are the New York proceedings brought in breach of the Exclusive Jurisdiction clause? 

In answer the first issue, the Court held that the claims in wilful misconduct and fraud against the Affiliates fell within the exception. It was not a function of the Grand Court to decide whether the allegations in New York complied with the pleading requirements in England or Cayman (which, it appeared to the Court of Appeal, is what Justice Parker had concluded). Argyle's evidence from New York legal counsel showed that the claims complied with New York law and there was no admissible evidence to the contrary.

In answer to the second issue, the Court of Appeal held that to answer the question, the Grand Court is to adopt the seven steps articulated in Team Y & R Holdings (see below).  In so doing the Court of Appeal found that the Exclusive Jurisdiction clause did not extend to claims brought by Argyle against third parties pursuant to the exception in the Sole Recourse clause. The intended effect of the exception was that Argyle should be free to bring all claims that fell within the exception in judicial rather than arbitral proceedings.  Argyle was not bound to arbitrate its claims against the Affiliates as the Court of Appeal confirmed that the Dispute Resolution clause only applied to parties to the Engagement Letters. If the parties had intended that the Exclusive Jurisdiction clause apply to such claims, express words within that clause were needed.  The Court of Appeal rejected BDO Cayman's argument that in agreeing to the Exclusive Jurisdiction clause, Argyle took the risk that a third party sued under the exception would not be subject to the jurisdiction of the Cayman Islands.

Procedural point

Although it was not necessary for the Court of Appeal to rule on this point, the judgment clarifies the position in the Cayman Islands in relation to the Court's jurisdiction to issue injunctions.  

At first instance Argyle argued that the Grand Court lacked jurisdiction to grant an injunction against Argyle because it had not been made a party to the Originating Summons proceedings. Justice Parker rejected Argyle's argument, finding that the Grand Court had jurisdiction to grant the anti-suit injunction order in personam. His Lordship concluded that there had been no material non-compliance with the Grand Court Rules or prejudice to Argyle resulting from the procedure adopted despite the fact that Argyle was prevented from obtaining disclosure of the documents referred to in BDO Cayman's pleadings and evidence. Were it necessary to do so, Justice Parker said that he would have allowed the defect to be cured under GCR Order 2 Rule 1, applying the Overriding Objective. 

The Court of Appeal disagreed with BDO Cayman's argument that it was necessary to make Argyle a party and found that Argyle should have been made a party to the proceedings prior to the hearing at first instance. However, the Court of Appeal decided not to make BDO Cayman a party as it was now unnecessary to do so given its decision to allow Argyle's appeal.

Conclusion

The judgment is significant as a clear statement of the rights of those receiving professional services to pursue the parties that actually perform those services in the appropriate forum unless there is express and unambiguous language preventing such claims.

The key takeaway for the professional services industry in the Cayman Islands is that where work is delegated to be carried out by related entities outside of the Cayman Islands, any attempt to contractually limit clients' rights to bring claims against those entities must be expressly articulated within the contract. Failure to do so or to do so with ambiguity risks rendering nugatory the very limitations originally sought.

Footnote

1 The Sole Recourse Clause was only contained in the 2011, 2012 and 2013 Engagement Letters.

2 [2017] EWHC 2401

3 [2009] 1 Lloyd's Law Rep 59

4 CICA 8 of 2018

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Travers Thorp Alberga
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Travers Thorp Alberga
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions