Cayman Islands Procedural Law Does Not Apply to Derivative Claims of Cayman Entity in New York Lawsuit

On November 20, 2017, the Court of Appeals issued a decision in Davis v. Scottish Re Group Ltd., 2017 NY Slip Op. 08157, holding that foreign procedural law did not apply to derivative claims relating to a foreign entity in a New York lawsuit, explaining:

The parties agree that Cayman Islands substantive law governs the merits of this action, and were we to address the merits of plaintiff's claims, we would employ the Cayman Islands Companies Law or other law relied upon by the parties. However, under New York common-law principles, procedural rules are governed by the law of the forum. The parties disagree as to whether Rule 12A is a part of the Cayman Islands substantive law concerning derivative actions, or is a procedural rule that then does not apply to actions litigated in New York. Where there is disagreement as to the nature of a law, the law of the forum normally determines for itself whether a given question is one of substance or procedure. We recognize, however, that the foreign jurisdiction's designation of the rule as procedural or substantive, while "instructive, is not dispositive.

. . .

We first look at the plain language of Rule 12A. Rule 12A states that it pertains to all derivative actions commenced by writ, and that the trigger for applying to the Grand Court occurs when the defendant has given notice of intention to defend. Both procedures are specific to Cayman Islands litigation. The term writ is clearly inapplicable to jurisdictions, such as New York, in which such actions are not commenced by writ. Additionally, under the Grand Court Rules, the defendant acknowledges service of the writ by completing a specified form which includes a box to be checked off indicating the intent to defend. Under this analysis, Rule 12A is a procedural rule that does not apply in New York Courts.

Rule 12A also states that it applies to "every shareholder action commenced by writ." By its terms, it does not specifically apply to actions involving Cayman-incorporated companies. The plain meaning of these words is that any derivative action commenced in the Cayman Islands, brought by writ on behalf of any corporation, no matter where incorporated, is subject to Rule 12A. Thus, it serves a gatekeeping function, but only as to derivative actions brought in the Cayman Islands, not for derivative actions, wherever brought, concerning Cayman companies specifically.

In addition, Rule 12A has no provision that would suggest that it applies, as urged by defendants, in derivative actions brought on behalf of Cayman Island companies commenced outside the Cayman Islands. Had the Rules Committee, the body appointed by the Cayman Islands Grand Court to make rules relative to practice and procedure in the Grand Court, intended that Rule 12A apply to derivative actions involving Cayman Islands companies anywhere in the world, it could have expressly provided as such. The British Virgin Islands' Business Companies Act (2004, § 184C), for instance, requires that any shareholder intending to commence a derivative action on behalf of a BVI-incorporated company, first obtain leave from a BVI court. Likewise, the Canada Business Corporations Act, requires any shareholder seeking to commence a derivative action on behalf of a Canadian corporation to obtain leave from a Canadian court, and upon being granted leave, the action must be commenced solely in certain enumerated Canadian courts. Rule 12A does not have a similar provision and lacks any extra-jurisdictional authority.

. . .

Holding that Rule 12A is procedural does not impose a burden on our courts, or the courts of the Cayman Islands. However, were Rule 12A held to be substantive, it is unclear what procedural path a party seeking to bring a derivative action in New York on behalf of a Cayman company would follow to comply with Rule 12A. Must the party first proceed by writ in the Grand Court and then discontinue the Cayman action to return to, or commence its action here in New York? Would the ruling by the Grand Court that there was a sufficient showing of merit be binding on a New York court on a motion to dismiss or for summary judgment? Rule 12A provides no answers.

Therefore, a Tanges analysis also leads to the conclusion that Rule 12A is procedural in nature. Because the procedural law of the forum typically applies under our conflict of law rules, plaintiff's failure to first comply with Rule 12A's leave application procedure does not bar his derivative claims.

(Internal quotations and citations omitted) (emphasis added).

We routinely represent foreign litigants in US courts, particularly in the Commercial Division of the New York state courts. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are, or represent, a foreign litigant with questions about commercial litigation in New York.