Depositary Liability Clauses in Luxembourg Fund Agreements: Legal Boundaries and Drafting Pitfalls

Under Article 19(10) of the Luxembourg Law of 12 July 2013 on AIFMs, the depositary is strictly liable for the loss of financial instruments held in custody. This liability regime is non-negotiable. Contractual clauses that attempt to exclude or limit this responsibility are considered invalid, particularly where they conflict with the core investor protection principles of the AIFMD.

One recurring issue is the insertion of force majeure exclusions or broad carve-outs for third-party sub-custodians. According to Article 101 of Commission Delegated Regulation (EU) No 231/2013, liability can only be discharged where the loss results from an external event beyond reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts. Anything broader is a legal risk.

In practice, legal counsel must ensure that the fund documentation, depositary agreements and liability wording reflect this balance without undermining the protective function assigned by law. The standard is strict, and any misalignment creates exposure: investor claims, regulatory non-compliance, or board liability.

This topic is central to fund governance in Luxembourg. It calls for clarity in drafting and rigour in reviewing third-party templates that may include unlawful disclaimers. Anyone advising on fund structuring should treat this point as non-negotiable.

Reference:

• Article 19(10), Law of 12 July 2013 on AIFMs (consolidated version: CSSF Website, Official journal: Legilux)
• Article 101 of Commission Delegated Regulation (EU) No 231/2013.