Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd and another
| Jurisdiction | UK Non-devolved |
| Judge | Lord Reed,Lord Hodge,Lord Lloyd-Jones,Lord Kitchin,Lord Sales |
| Judgment Date | 15 November 2023 |
| Neutral Citation | [2023] UKPC 40 |
| Court | Privy Council |
| Docket Number | Privy Council Appeal No 0089 of 2019 |
[2023] UKPC 40
Lord Reed
Lord Hodge
Lord Lloyd-Jones
Lord Kitchin
Lord Sales
Privy Council Appeal No 0089 of 2019
Privy Council
Michaelmas Term
From the Court of Appeal of the Cayman Islands
Appellant
Tom Smith KC
Richard Fisher KC
Robert Amey
(Instructed by Mourant Ozannes (Cayman) LLP)
Respondents
Richard Gillis KC
William Willson
Toby Brown
Simon Gilson
(Instructed by Campbells LLP)
Heard on 12, 13, 14 and 15 October 2021
| Paragraphs | |
| Introduction | 1–53 |
| Factual background | 3–11 |
| Primeo's claims | 12–15 |
| Herald's claims | 16–20 |
| Alpha's claims | 21–24 |
| Summary of findings in the courts below | 25–46 |
| Issues to be determined by the Board | 47–53 |
| Liability and damages | 54–213 |
| The claims against HSBC | 54–98 |
| The administration claim against the Bank of Bermuda | 99–144 |
| Procedural issues | 145–213 |
| Limitation | 214–260 |
| S37(2) of the Limitation Act | 217–236 |
| S37(1)(b) of the Limitation Act | 237–281 |
| Contributory negligence | 282–371 |
| Contributory negligence as a defence to a claim in contract | 288–353 |
| The claim against HSBC | 354–371 |
| The appropriate reduction as against the Bank of Bermuda | 372–382 |
| Conclusions | 383–392 |
Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Kitchin,
This is the judgment of the Board to which every member of the panel has contributed.
This appeal concerns litigation arising from the multi-billion-dollar Ponzi scheme operated by Bernard (‘Bernie’) Madoff (“Mr Madoff”). The appellant, Primeo Fund (in Official Liquidation) (“Primeo”), has brought claims against its former professional service providers, the respondents, for breach of their duties in connection with Mr Madoff's fraud. This appeal raises a multitude of legal issues, including important questions regarding the law of limitation and the availability of the defence of contributory negligence. The many issues which are addressed in this judgment are set out at paragraphs 50 to 53 below.
Primeo is a company (now in official liquidation) which was incorporated in the Cayman Islands on 18 November 1993. It began operations as an open-ended mutual investment fund on 1 January 1994. Primeo raised money from investors, who subscribed for shares, and then invested that money on their behalf. It was promoted, marketed and managed by Bank Austria AG (“Bank Austria”). Primeo was set up as a fund of funds to provide Bank Austria's customers with access to international investment funds and exposure to the US equity market.
The respondents were professional service providers to Primeo, acting as its administrator and custodian at all relevant times. The respondents were companies within the Bank of Bermuda group, which was acquired by HSBC Bank plc in 2004.
On 21 December 1993, the second respondent, HSBC Securities Services (Luxembourg) SA (“HSBC”), was appointed as Primeo's custodian and initially as its administrator. The custodian and administrator agreements entered into on 21 December 1993 were superseded on 19 December 1996 by new agreements between Primeo and HSBC (the “1996 Custodian Agreement”), and Primeo and the First Respondent, Bank of Bermuda (Cayman) Ltd (the “Bank of Bermuda” and the “1996 Administration Agreement” respectively) by which the Bank of Bermuda became Primeo's administrator. Also on 19 December 1996, the Bank of Bermuda and HSBC entered into a delegation agreement, under which the Bank of Bermuda delegated most of its duties under the 1996 Administration Agreement to HSBC. Accordingly, the custodian and administrator function were both, in practice, carried out by HSBC.
Ernst & Young, Cayman (“EY”) was Primeo's auditor at all relevant times.
Primeo also entered into a subscription agency agreement with Bank Austria. Under an advisory agreement in December 1993, Primeo appointed BA Worldwide Fund Management as its investment adviser, who in turn entered into a sub-advisory agreement with Eurovaleur Inc on 1 January 1994. BA Worldwide Fund Management was replaced as Primeo's investment adviser by Pioneer Alternative Investment Management Limited, a UniCredit group company, on 25 April 2007. From December 1993, the majority of Primeo's directors were nominees of the Bank Austria group; and from April 2007, the majority of Primeo's directors were nominees of the UniCredit group.
In January 1994, and again in February 1996, Primeo entered into agreements with Bernard L Madoff Investment Securities LLC (“BLMIS”) namely Customer Agreements, Trading Authorisations and Options Agreements (together, the “Brokerage Agreements”). Primeo opened two “managed accounts” with BLMIS, which functioned as Primeo's investment manager, broker and custodian/sub-custodian.
At the outset of its operations, Primeo made a variety of investments, including placing a small proportion of its funds for investment directly with BLMIS (the “Direct BLMIS Investments”). BLMIS purported to operate a “split-strike” investment strategy, which purportedly involved investing in listed securities, treasury bills and cash. Over time, Primeo increased the amount and proportion of its investments with BLMIS. From 2003, Primeo began also to invest indirectly with BLMIS by purchasing shares in other feeder funds associated with Mr Madoff, first Alpha Prime Fund Ltd (“Alpha”), a Bermuda-domiciled investment fund, and later Herald Fund SPC (“Herald”), a Cayman-domiciled fund.
On 1 May 2007, Primeo assigned its rights in respect of its Direct BLMIS Investments to Herald in consideration for new shares in Herald at their reported value (the “Herald Transfer”). Accordingly, from 1 May 2007 onwards, Primeo did not have any direct investments with BLMIS; it was simply a shareholder in Herald and Alpha, which in turn invested with BLMIS.
On 11 December 2008, Mr Madoff surrendered to authorities and was charged with fraudulently operating a multi-billion-dollar Ponzi scheme. Primeo's board convened the following day and suspended the calculation of Primeo's Net Asset Value (“NAV”) (a company's NAV is an expression of the total value of its assets less its liabilities). Primeo was placed into voluntary liquidation on 23 January 2009.
In February 2013, Primeo issued proceedings against the respondents for alleged breach of their contractual duties as Primeo's administrator and custodian. In summary, in its revised re-re-amended statement of claim, Primeo alleged breaches of duty including the following:
(1) The Bank of Bermuda, as administrator, breached its obligations under the 1996 Administration Agreement in respect of (a) calculating Primeo's NAV; (b) the keeping of Primeo's accounts and books and records; and (c) various implied duties, including the duty to exercise reasonable care and skill.
(2) HSBC appointed BLMIS as its sub-custodian in 1993 and 1996, which appointment was formalised in August 2002 through a written Sub-Custody Agreement (the “2002 Sub-Custody Agreement”), and HSBC breached various duties under the 1996 Custodian Agreement. In addition, HSBC was alleged to be liable for the negligence or wilful breach of duty of BLMIS as sub-custodian appointed to carry out HSBC's responsibilities as custodian (which is referred to below as the strict liability claim), and to have breached various implied duties.
(3) Primeo claimed these alleged breaches caused it loss on the basis that it would otherwise have withdrawn its investments and/or not placed further investments directly or indirectly with BLMIS.
The allegations were denied by the respondents in the Re-Amended Defence, which in brief summary asserted:
(1) There was no breach of the duties under the 1996 Administration Agreement or 1996 Custodian Agreement. The respondents also relied upon exoneration and indemnity provisions in those agreements, and denied the existence of the implied advisory and reporting duties.
(2) BLMIS was the directly appointed custodian to Primeo pursuant to the Brokerage Agreements.
(3) Any breaches by the respondents were not the cause of Primeo's loss. Further, any damages should be reduced on account of Primeo's contributory negligence.
(4) Primeo's claims were in any event barred by the rule against the recovery of reflective loss. Other grounds were also asserted for why no loss was recoverable from the respondents.
(5) Causes of action that accrued before 20 February 2007 were barred on limitation grounds.
A four-month trial commenced in the Grand Court of the Cayman Islands in early November 2016 and oral closing submissions concluded in late February 2017. The court heard evidence from 10 factual witnesses, including former Primeo directors and senior HSBC executives, and 17 expert witnesses, including investment management consultants and professional administrators and custodians. In the trial judgment dated 23 August 2017 ( 2017 (2) CILR 334), the Honourable Justice Jones QC found that the respondents owed duties to Primeo and breached them. However, he dismissed Primeo's claims against both respondents on the grounds that (i) the claims infringed the rule against the recovery of reflective loss; (ii) Primeo had not suffered relevant loss for the strict liability claim; (iii) causation had not been proven for the breach of duty claims; and (iv) certain claims were statute barred. The trial judge also found that any award of damages made against the Bank of Bermuda would have been reduced by 75% on account of Primeo's contributory negligence.
Both Primeo and the respondents appealed various issues to the Cayman Islands Court of Appeal (the “Court of Appeal”). The 10-day appeal hearing took place in...
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...whose highest court of appeal is the Privy Council. Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd and another [2023] UKPC 40 This appeal concerned proceedings arising from the infamous multi-billion-dollar Ponzi scheme perpetuated by Bernard Madoff. This long-awaited ......