It is a fundamental rule of common law legal systems that, absent statutory intervention, a person who is not a party to a contract, even if the contract is made for that party’s benefit, cannot rely on or enforce the terms of that contract; this is the so-called “privity of contract” rule. Its origins lie in the common law’s centuries old regard for the notion of bargain, whereby only a party who himself contributes value to an agreement can enforce it, in preference to regard for the intentions of the parties that a third party should benefit. Many jurisdictions provide a statutory entitlement for a third party to a contract made for its benefit to enforce the benefit of that contract, subject to conditions. The Cayman Islands have, as yet, no such legislation. The current position, accordingly, gives rise to issues of the enforceability of side letters between a Cayman Islands fund and an underlying investor who invests through a nominee shareholder, and recent cases reveal a sharp divergence of judicial view – should the court hold the investor to the legal structure it has set up for its own benefit and reasons, and refuse to allow its nominee to enforce a side letter to which it is not a party, or should the court have regard to the perceived commercial reality that the underlying investor and its nominee are effectively one entity, and are to be treated as such, with the consequence that the nominee can enforce the side letter even though not a party to it? Judicial clashes between observance of legal correctness, and perceived commercial reality, are not uncommon and the common law has over the centuries endeavoured, by various devices, to circumvent the privity of contract rule, in particular by the devices of collateral contracts, trusts of a promise and agency. These devices are sometimes described as exceptions to the privity rule, but in reality they are not true exceptions, but the application of different legal principles. Such a judicial clash appears to currently be taking place in the Grand Court of the Cayman Islands as can be seen in the judgments in three recent cases
. In a guest article, Christopher Russell and Sebastian Said, partner and senior associate, respectively, in the Litigation & Insolvency Practice Group of Appleby (Cayman) Ltd, discuss the background and ruling in each of these cases and outline important lessons and recommendations for hedge fund managers arising out of the decisions.