Cayman Islands: Campbells Successfully Acts For The Defendants In The Matter Of Steven Goodman v Dawn Cummings And DMS Governance Ltd.

Last Updated: 22 July 2019
Article by Mark Goodman, Liam Faulkner and Harry Shaw

In a Judgment delivered on 2 July 2019, the Grand Court dismissed the Plaintiff's application to amend his pleading and granted summary judgment in favour of DMS, thus dismissing the entire action in favour of the Defendants without a substantive trial. This recent judgment is concerned with the circumstances in which a management company offering directorship services can become vicariously liable for the acts or omissions of an employee, and also provides a helpful reminder about the threshold for proving "wilful neglect or default" and for obtaining summary judgment and strike out.

The Judgment is a vindication of DMS and Ms Cummings and serves as a useful reminder to those that seek to pursue vexatious claims against independent directors and professional fund governance companies in the Cayman Islands.

Background

In December 2016 the Plaintiff, Mr Steven Goodman, issued proceedings against the First Defendant (the "Director") for breach of common law director duties and/or breach of fiduciary duties. The Second Defendant, DMS Governance Limited ("DMS") who provides investment management services and employed the Director, was alleged to be vicariously liable for the acts of the Director. The Plaintiff brought the claim by way of an assignment of certain causes of action from Tangerine Investment Management Limited (in Official Liquidation) ("Tangerine").

The Plaintiff alleged that the Director was a director of Tangerine whose principal business was to act as Investment Manager to funds established by Axiom. It was alleged that the Director caused Tangerine to pay out money to entities controlled by Tangerine's sole owner, to enter into agreements with unsuitable panel law firms, and that her alleged breaches caused the termination of the investment management agreement, resulting in the loss of fees totalling $55 million over four years.

The Defendants vehemently rejected the allegations raised and applied to dismiss the claims against both defendants either by way of summary judgment or strike out ("Strike Out Application").

Preliminary Issues Trial

Following an earlier judgment of Mangatal J dated 13 September 2018, in which it was held that the Director was entitled to rely on an indemnity under Tangerine's Articles of Association (the "Articles"), the proceedings were discontinued against her. Following the decision on the Preliminary Issues, and with DMS left as the only Defendant, the Plaintiff applied for leave to amend the Statement of Claim against DMS ("Application to Amend").

With the Director now out of the picture, the Plaintiff claimed that the acts and omissions of the Director were carried out in the course of her employment or agency with DMS, such that DMS was vicariously liable. The Plaintiff also maintained that DMS breached a contract or duty of care with Tangerine by failing to ensure that Tangerine met its obligations under its investment management agreement and to monitor the Director's performance.

The Judgment

The Judgment was concerned with two fundamental issues, which impact both the Strike Out Application and Application to Amend. These were:

  • whether vicarious liability could be established against DMS in circumstances where the claim against the principal, the Director, was barred; and
  • whether DMS had breached a contract with Tangerine, or breached a duty of care arising from a relationship akin to a contractual one.

Vicarious Liability

The majority of the Judgment focuses on the allegation of vicarious liability against DMS and includes some helpful discussion about the requirements for establishing a successful claim against an employer.

"If the servant is "immune", so is the employer"

This quote from Stavely Iron & Chemical Co. Ltd. v Jones [1956] AC 627 goes to the heart of a claim for vicarious liability. The earlier discontinuance of the claim against the Director, and the scope of the indemnity within Tangerine's Articles of Association, accordingly created a significant roadblock for the Plaintiff succeeding against DMS.

DMS successfully argued that the impact of Tangerine's Articles was not only to indemnify the Director, but that the Articles also obliged Tangerine to "waive any claim or right of action" against her which arose in the performance of her duties for Tangerine, save for any action arising from her "wilful neglect or default".

In response, Counsel for the Plaintiff argued that DMS was not an "indemnified person" under the Articles, and should not therefore benefit from the exculpation provisions. Further, the Plaintiff argued that the Articles did not make the Director "immune" from liability entirely, but only waived liability or barred enforcement against her once liability was established for any action short of wilful neglect or default.

Wilful neglect or default

Mangatal J appears to have had little difficulty in concluding that Tangerine would only have a cause of action against the Director, and thus against DMS vicariously, where wilful neglect or default are pleaded and established against the Director as principal. The judgment records that Tangerine could not have assigned any greater right to the Plaintiff than it itself had against the Director.

The Articles, on a plain reading, went beyond a standard indemnity, and included a waiver of any cause of action, save only where wilful neglect or default are proven. For the purposes of establishing the requirements of wilful neglect or default, Mangatal J held, with reference to Peterson v Weavering Macro Fixed Income Fund Limited (in liquidation) [2015] 1 CILR 45, that the Director must be shown to have known:

"...that she was breaching her duties or, at the least appreciated that her conduct might be a breach of duty and she went on notwithstanding to do or omit to do the act complained of, without regard for the consequences."

In circumstances where the Statement of Claim failed to particularize the essential allegation of wilful neglect or default, Counsel for the Plaintiff submitted that he did not need to establish that the Director's conduct amounted to wilful neglect or default in order to obtain judgment against DMS, and that he need only establish a breach of common law directors' duties or fiduciary duties. Mangatal J rejected this assertion, instead following well settled English law which states that vicarious liability is a form of secondary liability for wrong committed by an employee or agent and if the employee is not liable (whatever the reason), then the employer cannot be vicariously liable.

"In the course of his/her employment"

The claim for vicarious liability was also rejected on the grounds that Tangerine failed to show that the Director, when performing her duties as a director of Tangerine, did so as an employee or agent of DMS. In reliance on the Privy Council decision in Kuwait Asia Bank E.C. v National Mutual Life Nominees Ltd [1991] 1 A.C. 187 and the CICA decision in Paget-Brown & Co. Ltd. v Omni Securities Ltd [1999] CILR 184, Mangatal J held that DMS was not liable vicariously, or directly, to Tangerine (or to the Plaintiff as assignee) for the alleged wrongs of the Director as she was not acting in the course of her employment with DMS (if such an employment relationship even existed) when discharging her duties as a director of Tangerine.

Mangatal J, when summarising the submissions for DMS, helpfully recorded that "all of the features of the wrongful conduct necessary to make the employee liable have to occur in the course of his/her employment". Mangatal J also confirmed, in reliance on Paget-Brown, that the fact DMS was a management company offering services did not affect the principles enunciated in Kuwait Asia.

Breach of Contract and the "Relationship akin to contract" allegations

This issue fundamentally turned on the facts, and the Court held that there was plainly no proper basis upon which to say there were express terms to a contract between DMS and Tangerine. The "relationship akin to a contract" argument was then advanced by the Plaintiff as a fall back, with Counsel asserting that the relationship between DMS and Tangerine gave rise to a duty of care which was then breached.

In contrast, and in reliance on Paget-Brown, DMS submitted that it is settled law in the Cayman Islands that absent fraud or bad faith (which the Plaintiff did not allege), a management company like DMS offering services such as the appointment of one of its employees as a Director of a company owes no duty of care to that company. Mangatal J, following the CICA authority, accordingly struck out this allegation as there was no reasonable cause of action pleaded, and no real prospect of the Plaintiff succeeding on this claim.

Application to Amend

Having rejected the vicarious liability allegation, the Court then held that the Application to Amend amounted to an unsatisfactory pleading or basis for establishing a case of wilful neglect or default. The alleged facts pleaded did not take the claim beyond negligence, and the claim for wilful neglect or default falls to be struck out. Mangatal J also held in the alternative that DMS would be entitled to summary judgment on this issue as the claim for wilful neglect or default had no real prospect of success.

Having recognised that the proposed amendments did not cure the fundamental defects in the Plaintiff's claim, the Application to Amend was dismissed.

Conclusion

This judgment provides a helpful reminder about the requirements for establishing vicarious liability, and should provide some further comfort for companies providing management/director services in the Cayman Islands. The decision clarifies the test for "wilful neglect or default" following from the earlier decision of the Grand Court in Peterson v Weavering.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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