During the past few years, parties to complex investment structures, particularly highly leveraged structures, have been the subject of legal skirmishes, both in England and in the leading offshore jurisdictions. Many of these disputes have taken place in private, or have settled before getting to court. However, moves towards full litigation are becoming apparent.

One of the reasons for this is a growing perception that those in de facto control over these structures are pushing their 'black-letter' legal rights too far.

An example of this is the use of increasingly esoteric 'synthetic side-pockets' in hedge funds. Some fund investors wishing to redeem are now being told that they must accept shares in special purpose vehicles (SPVs) holding toxic assets that are less liquid than the residual assets of the fund. This is very different from the usual form of redemption in specie. It has resulted in a wave of case law in Bermuda, the British Virgin Islands (BVI and the Cayman Islands.

Another example can be found in collaterised debt obligations (CDOs). Clashes between the rights of different tiers of CDO structures are bringing to light instances of questionable behaviour. When such CDOs are in a state of distress, or even in receivership, the junior classes of investor are often at the mercy of senior classes. That such senior classes have preferential rights is not the problem: it is the manner in which and purposes for which these rights are being asserted that is the increasing focus of investor complaint.

One view is that, if investors have contracted for minimal rights, they must be held to their bargain. There is force in this view. Investment structures in the years preceding the collapse of the asset-price bubble reflected a market in which the appetite to invest was almost insatiable. It was a seller's market and this was reflected in the contractual documentation, trust deeds and articles of association that were drafted. The 'standard terms' of many SIVs and CDOs of the time may now seem one-sided, but this was the result of economic forces operating in a market in which the investors were relatively sophisticated. On this view, it should not be the function of the courts to rewrite the parties' bargains because those bargains did not turn out to be as successful as hoped.

The industry consensus is that, through the operation of market forces, the next generation of structures will reflect a shift in the balance of power between investors and promoters/senior investors and managers. But this does not help existing investors facing what they perceive to be examples of contractual abuse.

Is there a need for equity to intervene and, if there is, is there room for it to do so? Our view is that there is, albeit within proper limits. Equity should never be employed to defeat the intentions of the parties. The protection of genuine commercial expectations is of great importance. However, when those who control investment structures are employing increasing contractual creativity to achieve their objectives in unforeseen ways, they have a weaker claim to commercial certainty.

Common law contract principles can provide important restrictions on abuse, usually via the mechanism of an implied term. For example, where a party has a contractual power which affects the interests of other parties, the court will often imply a term that the power should be exercised reasonably or at least not capriciously. However, these forms of intervention are not always available and, when they are, they are often unwieldy and can offer only limited remedies.

In the situations we are considering, there has been a division between the ownership of and control over valuable assets. This is precisely the sort of situation in which the English courts and by extension, the courts of the leading offshore jurisdictions, have traditionally invoked chancery principles in order to give relief from abuse or oppression. Over the centuries, these principles have adapted themselves to cater for new situations. Modern investment structures represent a fertile ground for their application.

Equity is well suited to meet the situation where contractual rights are being abused to further questionable purposes. At the risk of oversimplification, the common law tends to undertake an external assessment of the reasonableness of a party's contractual conduct. Equity, on the other hand, looks to the party's internal motives and purposes when determining whether to intervene.

The most powerful weapon in equity's armoury is the fiduciary duty. Where fiduciary relationships are established, the court has broad powers to remedy steps taken for improper purposes. Moreover, it will not allow the core fiduciary duties of honesty and good faith to be avoided through elaborate exculpation clauses. But even beyond the traditional remedies for breach of fiduciary duty, there are numerous other equitable principles which may assist the apparently powerless investor: e.g, the rule in Hastings-Bass, the fraud on a power doctrine, the fraud on the minority doctrine and the equitable doctrines which govern the enforcement of security over property.

We do not have the space to list examples where equity can suitably be invoked to supplement the law in this context. Moreover, many important relationships – such as swap and repo arrangements – raise questions which are too large to be considered in this article. The important point is that, provided they are applied with appropriate sensitivity, equitable principles offer a means by which effect can be given to the legitimate expectations of investors. Parties on both sides of the growing wave of litigation need to be aware of them, as do those who are advising on the exercise of contractual rights.