Investors and their lawyers have learned to refine and clarify hedge fund documentation as the result of the financial crisis and several decisions emanating from the Cayman Islands courts.

Contract is king, declared Jeremy Walton, a partner at Appleby in the Cayman Islands. Walton specialises in litigation. “The fundamental messages coming out the Cayman courts, and throughout the offshore world, is one emphasising the clarity of documentation. Contract is king is the fundamental message,” Walton noted.

He pointed to a recent Privy Council decision in the Strategic Turnaround case as the clearest indication that investors cannot enforce redemption rights through a winding-up petition. Hedge funds, through provisions in constitutional documents which make up the contract between the fund and investor, allow redemptions and the payout of the proceeds of that redemption to be suspended, confirmed Walton.

Another case, known as Camulos, also tried to force payments through a winding-up petition. “The investors were trying to use the winding-up remedy which was something of a nuclear remedy in legal terms in order to try to achieve their objectives,” explained Walton. “The Court of Appeal in the Camulos case set out a very firm message to the investor community and its lawyers that this was not the appropriate way to proceed with that kind of complaint.”

Looking to the future Walton said he expects to see less litigation focused on the construction of documents and the interpreting of investment contracts. “I think lessons from that period of litigation have been learnt largely. The litigation now is moving more towards compensatory types,” he said. “That is, more conventional litigation against large service providers like auditors, administrators, prime brokers and so on. We’ll see a lot more of that kind of litigation.”

Walton confirmed that Cayman Islands court decisions have established that documentation is “well drafted” and has been “respected and upheld”. He added that documentation is not “much better as a whole and the courts are routinely and regulatory upholding those documents”.