Exculpation and Indemnity Clauses in the Hedge Fund Context: A Cayman Islands Perspective (Part One of Two)

In an increasingly litigious world, and a world of increasing commercial failures, those sustaining losses look for others to sue.  In the hedge fund context, this will typically take the form of funds, their liquidators or their shareholders derivatively suing service providers such as the investment manager, the investment adviser and the auditors, or the fund’s former directors.  Frequently, there will be clauses in the Articles of Association or other constituent documents of the fund, or in contracts with directors or service providers, for exculpation or indemnity, or both, of which potential defendants will seek to avail themselves.  If effective, these clauses will halt a claim in its tracks against those entitled to the benefit of them, but the ambit of such clauses, and the meaning of terms contained in them, are not always clear; and even if they are clear, they are not always clearly understood.  In a guest article, the first of a two-part series, Christopher Russell and Rachael Reynolds, Partner and Senior Associate, respectively, at Ogier, Cayman Islands, provide an overview of exculpation and indemnity clauses in Cayman Islands hedge fund documents, then offer a detailed discussion of the relevant global caselaw with respect to carve-out terms including actual fraud, personal dishonesty, fraud, wilful fraud or dishonesty, wilful default, wilful neglect, wilful misconduct and gross negligence.

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