In the Weavering case, the judge agreed that the fund’s directors were entitled to rely on the exculpatory provision in the articles of association. He noted that the purpose of this type of provision is to protect directors who do their “incompetent best”. That is, those who attempt to perform their duty, but fail as a result of their carelessness, no matter how gross, are relieved from liability.
Conversely, those who have an appreciation of their duty, but make no attempt, or at least no serious attempt, to perform the duty are not relieved from liability. This observation has led stakeholders query whether Cayman should introduce a concept of gross negligence to its legal framework. Afterall, this appears to be a normal industry standard outside Cayman.
According to the hedge fund service contracts that I have seen, “gross negligence” can be defined as “a standard of conduct beyond negligence whereby a person acts with reckless disregard for the consequences of his or her action or inaction”. This seems appropriate as a director should not be indemnified or exculpated for recklessness.
In my opinion, this line of thinking is consistent with the Cayman court’s judgment that independent directors must appreciate their high supervisory role (in addition, in my view, the role is seemingly changing from a “non-executive” director position to an “executive” status). With a gross negligence definition, if one has a high supervisory role and is to discharge his legal and fiduciary duties in the manner described in the Weavering case, then that person would not have the benefit of the exculpation provision should he be guilty of gross negligence. In contrast, under current laws, where an exculpatory provision is set out in the articles of association and the gross negligence definition is absent, it must, no doubt, encourage the idea that directors may get away with doing their incompetent best. Whether stakeholders will actually try to get this concept into the statute, however, is another question.
What do you think about this proposition i.e. should “gross negligence” be introduced to Cayman law as a new standard above “negligence”?
About the author:
Alric Lindsay is an independent fund director and provides independent directorship services to Cayman Islands based investment funds. His bio can be found on www.lindsay.ky. He can be contacted at alric@lindsay.