Cayman Islands: Recent Developments in Arbitration Law
Cayman arbitration law is undergoing something of a renaissance. The number of arbitrations taking place in the Cayman Islands has increased over the past few years, particularly in the property insurance field as a direct consequence of the impact of Hurricane Ivan, which passed close to Grand Cayman in September 2004 and caused extensive damage. This trend is set to continue as the fallout from the credit crunch in the US gives rise to disputes concerning Cayman domiciled funds and other structured investment vehicles. At the same time, Cayman arbitration law is currently the subject of a review aimed at reforming the law and implementing the terms of the UNCITRAL Model Law.
Sources of domestic Cayman arbitration law
By way of a brief introduction, the primary sources of Cayman arbitration law are statutory: the Arbitration Law (2001 Revision) governs domestic arbitration proceedings and the enforcement of domestic arbitration awards. The Cayman Islands is also a party to the New York Convention. The Foreign Arbitral Awards Enforcement Law (1997 Revision) gives effect to the provisions of the New York Convention, and governs the recognition of foreign arbitral proceedings and the enforcement of foreign arbitral awards.
Foreign arbitral awards to which the New York Convention is not applicable may also be enforced in the Cayman Islands pursuant to applicable conflict of laws principles as applied by the Grand Court.
Arbitration case law is developed through judicial decisions of the Grand Court of the Cayman Islands, and through appeals therefrom to the Cayman Islands Court of Appeal and thereafter to the Privy Council in London. The Arbitration Law is based on the English Arbitration Act 1950, and as a consequence the Cayman Courts will apply common law principles established through relevant English case law in interpreting its provisions.
The Cayman courts have a supervisory jurisdiction over Cayman arbitrations aimed at ensuring both quality and fairness. The courts also exercise a supportive function, including the ability to provide interim relief in support of the arbitral process, particularly in cases of urgency. In general, however, the courts will seek to exercise this jurisdiction sparingly so as to avoid encroaching unnecessarily upon the powers invoked on the arbitrators by the parties to the relevant dispute.
A major factor in the increasing number of arbitrations that have taken place in the Cayman Islands over the last couple of years was Hurricane Ivan, which passed close to Grand Cayman on 11 and 12 September 2004. The storm caused extensive damage to property and infrastructure and resulted in widespread business interruption, particularly on Grand Cayman, the largest of the three islands that comprise the Cayman Islands and the location of the vast majority of its population. Approximately 83 per cent of the total housing stock on Grand Cayman was estimated to have suffered some degree of damage during the storm at a cost in the region of CI$1.44 billion.1 Major damage was also sustained to infrastructure and commercial premises such as hotels and resorts, which formed a key part of Cayman's tourism industry. In total, the economic impact of the storm on the Cayman Islands was estimated at US$3.43 billion.2
The insured loss associated with Hurricane Ivan was estimated at about US$1.5 billion.3 In the weeks and months that followed the storm, numerous insurance claims were made under property and business interruption policies issued by local and overseas insurers. Although the vast majority of these claims were settled without recourse to legal proceedings, inevitably a small proportion were disputed and resulted in litigation or arbitration proceedings. A large proportion of the Cayman arbitrations to have taken place between 2005 and 2008 have been linked in some way to damage sustained during Hurricane Ivan. This said, very few of these arbitrations have resulted in the production of ancillary judgments of the Grand Court, the Cayman Islands Court of Appeal or the Privy Council on matters associated with the proceedings, a factor which suggests that these arbitrations were concluded to the parties' satisfaction.
Case study: a Hurricane Ivan arbitration
A good example of an arbitration connected with a Hurricane Ivan insurance claim is the proceedings brought by the operator of a major timeshare resort on Grand Cayman against the underwriters of its material property damage and business interruption insurance.4 The resort property sustained major damage during the storm and the owner made a claim under its policy, which was governed by Cayman law and contained an arbitration clause in respect of any disputes that may arise. The resort operator and its underwriters were unable to agree on the quantification of the damage sustained and therefore the extent of the operator's claim under the policy, and as a consequence arbitration proceedings were brought against underwriters. The proceedings were commenced in early 2006 and were determined at an arbitration hearing which took place in Grand Cayman in December 2007.
Although the details of the arbitration proceedings and the award subsequently issued by the arbitrators are confidential to the parties, we are able to comment in general terms on the following procedural aspects of the proceedings.
- This was an ad hoc arbitration conducted under rules of the parties' own devising. There are no arbitral institutions established to provide services in connection with arbitrations in the Cayman Islands. Arbitrations are conducted in Cayman using the rules of international institutions (such as the American Arbitration Association, the International Chamber of Commerce, the London Court of International Arbitration and the Chartered Institute of Arbitrators). However, more often ad hoc arbitrations are conducted here pursuant to rules of the parties' own devising, usually with very successful results. Underlying Cayman arbitration law is a strong presumption in favour of allowing the parties to resolve their disputes in accordance with a private system of rules agreed between them rather than one imposed externally. In this case, the parties were able to agree a tailored set of rules and procedures as were necessary to manage the particular type of dispute and the issues arising therein.
- Given the subject matter of the dispute concerning the quantification of hurricane damage sustained to property, the parties nominated arbitrators in different disciplines appropriate to the determination of a specialist dispute of this nature. The arbitrators were located in Grand Cayman and in London. The parties' experts were also located in Grand Cayman and in a number of overseas jurisdictions, and the parties used specialist Queen's Counsel from the UK at the final arbitration hearing. This geographical diversity presented some logistical challenges, although these were overcome by using video link for all hearings with the exception of the final arbitration hearing and a meeting of the parties' experts. This allowed both of the arbitrators (and in the lead up to trial the parties' Queen's Counsel and the UK-based umpire) to participate in the proceedings without the need for the persons located overseas traveling to Cayman on a regular basis during the interlocutory stage of the arbitration. As a consequence, the parties were able to limit the costs associated with the proceedings while selecting arbitrators and experts with appropriate experience and expertise for a dispute of this scale and nature.
- The Cayman Islands does not have any specialist facilities available for the conduct of arbitration proceedings, although again this does not pose any impediment to the efficient and effective conduct of arbitrations in Cayman. The parties in this arbitration were able to use the facilities at the offices of the parties' local counsel and the Cayman-based arbitrator in conducting the interlocutory hearings using video-link facilities as stated above. The arbitration hearing took place at the Ritz Carlton Grand Cayman, one of several hotels able to provide excellent facilities for the conduct of an arbitration hearing of this nature. The opening of the Ritz Carlton in December 2005 has led to increase in both the range and quality of facilities available on Grand Cayman for arbitration hearings.
Overall, these arbitration proceedings illustrate the ease with which specialist disputes are being successfully arbitrated in the Cayman Islands using legal and other resources located in both Grand Cayman and overseas. More generally, the case also provides an excellent example of the advantages that the arbitration process has to offer in comparison with court-based litigation, particularly for more specialist types of dispute of this nature. The parties in this case were able to tailor both the tribunal and the conduct of the proceedings to reflect the particular issues arising in the dispute in a manner which would not have been possible if the claim was conducted through the courts. The parties were also able to conclude the dispute within two years of the issue of the proceedings, notwithstanding that a number of interlocutory hearings were required due to the complexity of the claim. Accordingly, the arbitration process allowed for a reasonably swift conclusion to the dispute.
K Coast Development Ltd v Proprietors of Strata Plan #55
One recently reported decision of the Grand Court in the field of arbitration law is K Coast Development Ltd v Proprietors of Strata Plan #55,5 which illustrates the influence of English case law on Cayman jurisprudence. The case concerned a dispute over the payment of fees by the defendant to the plaintiff for work undertaken in restoration of the defendant's property following Hurricane Ivan.
The plaintiff had retained subcontractors to undertake restoration work on the defendant's property, which had been certified under the construction contract by an independent quantity surveyor. On receipt of the certification, the defendant paid to the plaintiff the contractually agreed sum by cheque in respect of the work undertaken. In reliance on the deposit of the cheque into its bank account, the plaintiff paid this sum to the subcontractors.
However, the quantity surveyor then purportedly changed his mind about the work certified and as a consequence the defendant stopped the cheque. The plaintiff sued the defendant on the cheque and sought summary judgment in respect of its claim.
The defendant asserted that there had been a total failure of consideration for the payment given the change in the quantity surveyor's mind about the work, and sought a stay of the proceedings and an order that the plaintiff's claim be referred to arbitration pursuant to the terms of the construction contract. However, the Grand Court held that the claim could not be submitted to arbitration given that the defendant's claim was in effect a claim for unliquidated damages based on an alleged overpayment, which could not be raised as a defence, set-off or counterclaim to the plaintiff's action on the cheque. There was, therefore, no 'dispute' between the parties that could be referred to arbitration.
In so finding, the Grand Court applied the decision of the English House of Lords in Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH,6 and approved the following quote taken from the headnote:
Even if the claim on the [cheque] were liable to be submitted to arbitration, there was not any dispute between the parties with regard to the claim within [section 6 of the Arbitration Law], since a claim for unliquidated damages [ie the claim for total failure of consideration based on an overpayment
pending quantification through an arbitral award] could not be raised by way of defence, set-off or counterclaim to an action on a [cheque] and therefore could not be used to create a "dispute" on the [cheque] within the meaning of [section 6]. It followed that no admissible defence to the appellants' claim on the [cheque] had been put forward by the respondents.
The Grand Court therefore followed the stated principle of English law established in the context of the English Arbitration Act 1975, and refused to grant a stay of the proceedings pending arbitration in these circumstances. However, the Grand Court left it open for the defendant to pursue separate arbitration proceedings based on the allegation that the work for which payment had been given had not been done and had been erroneously certified.
The case is a good example of the wide variety of disputes which have arisen from damage sustained to property during Hurricane Ivan. It also illustrates the manner in which the Cayman courts will follow and apply relevant common law principles established by the English courts in the arbitration field, in this case in respect of the circumstances in which the court will stay proceedings brought before it in favour of arbitration.
Reform of Cayman arbitration law
Arbitration law in the Cayman Islands is currently the subject of a wide-ranging review with the aim of reforming the law. In particular, the review is considering the introduction into Cayman law of the principles enshrined in the UNCITRAL Model Law on International Commercial Arbitration.7 The Model Law sets out desired international standards aimed at achieving the harmonisation and improvement of domestic law as it pertains to international commercial arbitration practice, and covers all aspects of the arbitral process from the arbitration agreement to the recognition and enforcement of the arbitral award.
The Law Society of the Cayman Islands has appointed a committee to produce recommendations and draft new legislation modelled on the Model Law for the consideration of the Cayman government.8 The main purpose of the review is to reform Cayman arbitration law with a view to stimulating Cayman's growth as an international arbitration centre. Although increasing numbers of domestic Cayman arbitrations have taken place over recent years as discussed above, the Cayman Islands have historically been infrequently used as a seat for international arbitrations. This is perhaps in part due to the perception that Cayman arbitration law is outdated and in need of modernisation. As stated, the Cayman Arbitration Law is based on the English Arbitration Act 1950, which in England has since been replaced with the Arbitration Act 1996. The implementation of new legislation in the near future based upon the provisions of the Model Law will serve to correct that perception and bring Cayman arbitration law into the modern era.
The proposed reform of Cayman arbitration law will closely follow the provisions of the Model Law save to the extent that changes are proposed to reflect the experiences of other offshore jurisdictions, such as Bermuda, Singapore and Hong Kong, which have adopted the Model Law. In addition, revisions will be proposed to reflect the nature of the offshore financial business conducted in Cayman, and in particular the types of business where participants may require access to sophisticated dispute resolution mechanisms. For example, in recognition of the multitude of parties often involved in hedge fund disputes, specific provisions will be proposed dealing with multi-party arbitrations and related issues concerning the consolidation of arbitral proceedings. Another example recognises the fact that Cayman is a major centre for offshore banking: to the extent that ancillary asset-preservation relief may be required in support of arbitration proceedings, the proposed reforms will seek to augment the asset-preservation powers of arbitral tribunals.
Given the nature of the jurisdiction, much of the business conducted in the Cayman Islands originates onshore and is of an international nature: companies and funds are formed in Cayman with the primary object of conducting their business overseas. Accordingly, the implementation of the harmonised rules and principles for the conduct of international commercial arbitration as set out in the UNCITRAL Model Law will have direct relevance and applicability to much of the business transacted through the Cayman Islands when disputes arise.
It is hoped that the current projected time frame for the conclusion of the review process will allow the implementation of the proposed reforms to take place during 2009.
Arbitration and the Cayman funds industry
The timing of the reforms is certainly apposite given the growing number of disputes concerning Cayman registered funds and other structured investment vehicles. Cayman currently boasts over 10,000 registered funds with a total net asset value in excess of US$1.3 trillion.9 Cayman has a greater number of domiciled hedge funds than any other offshore jurisdiction.
The recent turmoil in the US subprime mortgage market resulting from the credit crunch has led to a loss of confidence on the part of investors. As a consequence, funds have been struggling to meet redemption requests submitted by investors and at the same time are struggling to meet margin calls on their leveraged investments. In addition, deterioration in financial performance has led investors and creditors to take a harder look at and harder line with the funds' service providers. Declining financial performance has a tendency to give rise to heightened suspicions of malfeasance by investment managers and other service providers, while some managers are making increasingly risky plays to cover below-par returns and short positions.
All of this has led to an increasing number of disputes concerning Cayman domiciled funds, including claims brought by disgruntled investors, creditors and also liquidators in cases where a fund has had a winding up order made against it. Claims of this nature have been brought in the courts of various jurisdictions, including in particular Cayman, New York and Delaware. However, given the specialised nature of disputes concerning funds, many of these claims are likely to be amenable to resolution through arbitration rather than court-based litigation. For example:
- The flexibility offered by the arbitration process allows the parties to tailor any arbitration, including the tribunal and the procedure to be followed, to the particular matters in dispute. This makes arbitration particularly useful and well-suited to the complex and technical commercial disputes that can arise in connection with hedge funds, for example disputes concerning the valuation of a fund's assets: the parties to such a dispute would be able to nominate specialist arbitrators with expertise in the funds industry. While the judges in the Cayman courts have an increasingly wide range of experience in dealing with fund disputes, the ability to nominate a particular arbitrator with specific expertise in the funds industry is a significant factor that can make arbitration extremely attractive for disputes of this nature in comparison to court-based proceedings.
- Arbitration is usually much quicker than litigation, not least given that the arbitrators' decision is final and binding and only subject to appeal on limited grounds. In addition, arbitration proceedings are not subject to the challenges of court schedules which can arise in a small jurisdiction, and parties can avoid the conventional pre-trial timetables usually imposed by the court on litigants. Accordingly, arbitration usually results in the final determination of disputes in a much shorter time frame than court-based litigation. As with many commercial disputes, this factor may be of critical importance in the funds arena. With the asset values of many troubled funds declining at alarming rates, and with the distinct possibility that there may be nothing left to argue about by the time parties get to trial as a consequence, the speed of dispute resolution afforded by the arbitration process is likely to be particularly advantageous in fund disputes. This factor can also result in considerable costs savings in determining such claims.
- Arbitration is private and results in the production of an award which is confidential to the parties. Accordingly, the process does not result in the production of a public judgment and avoids any disclosure of confidential information into the public domain. Again, this can represent a considerable advantage in fund disputes, for example where there are issues concerning the identity of investors, investment strategies adopted, portfolio make-up and other commercial secrets relating to a fund's operations.
It is anticipated that the forthcoming reform of Cayman arbitration law will, once implemented, see the Cayman Islands well placed as a modern and sophisticated jurisdiction in which to conduct international arbitrations, including disputes concerning Cayman-domiciled funds.
1. See the World Bank Report, The Impact of Hurricane Ivan in the Cayman Islands (ECLAC, 2005).
3. Source: the Cayman Islands Monetary Authority.
4. The co-authors acted on behalf of the underwriters in the proceedings.
5. 2007 CILR N 17.
6. 1977 2 All ER 464.
7. As adopted by the United Nations Commission on International Trade Law on 21 June 1985, and as amended on 7 July 2006.
8. One of the co-authors, Jeremy Walton, is the chairman of that committee.
9. Source: the Cayman Islands Monetary Authority. Cayman is reputed to have a similar number of unregistered funds.