The Privy Council (Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Kitchin and Lord Sales) has handed down its second judgment in a two-part Cayman appeal, unanimously confirming the dismissal of US$2bn claims by a hedge fund against its former professional service providers concerning investments in the multi-billion-dollar Ponzi scheme operated by Bernard Madoff: Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd and another [2023] UKPC 40 (Primeo (No 2)). As well as bringing an end to a decade of litigation, the judgment addresses a multitude of legal issues including points of wider importance in England and other common-law jurisdictions regarding the construction of the deliberate concealment provisions in the limitation statutes and the availability of a defence of contributory negligence to a claim in contract.
The claim was brought by the liquidators of Primeo Fund, a Cayman fund that invested, both directly and indirectly, in Bernard L Madoff Investment Securities LLC (BLMIS), the vehicle through which Bernie Madoff perpetrated his notorious fraud. The claim was brought against two companies that acted as the fund’s administrator and custodian and became part of HSBC Group in 2004, following its acquisition of the Bank of Bermuda.
Primeo argued, among other things, that the administrator should have done more to verify the existence of the fund’s assets, given the heightened operational risk posed by BLMIS’ triple role as broker, investment adviser and de facto custodian to the fund. Primeo sought to fix the custodian with liability in two ways: first, it argued the custodian had breached its duties in appointing BLMIS as sub-custodian; second, it argued the custodian was strictly liable for BLMIS’ default as sub-custodian of the fund’s (fraudulently dissipated) assets.
The claims were dismissed in 2017 following a four-month trial in the Cayman Grand Court. Mr Justice Jones held that Primeo had partially succeeded on breach of duty but was unable to prove causation. He rejected Primeo’s strict liability claim on the basis BLMIS had performed its obligations as sub-custodian by paying cash from time to time when redemptions were requested and by transferring Primeo’s total purported holding to the credit of another Madoff feeder fund, Herald Fund SPC, in May 2007, when Primeo decided to restructure its direct BLMIS investments into indirect investments via Herald. Jones J further held that the majority of the claims were time-barred and all were barred by the rule against reflective loss. He held that the custodian was not entitled to rely on a defence of contributory negligence, since the contractual duty it had breached was not co-extensive with its duty in tort, but he would have reduced any damages award against the administrator by 75% for Primeo’s contributory negligence, since “Primeo was, to a very substantial degree, the author of its own misfortune.”
On appeal, the claims failed again on reflective loss grounds, but the Cayman Islands Court of Appeal (CICA) would otherwise have remitted the claim to the Grand Court to try Primeo’s causation case on a loss of a chance basis not pursued at first instance. On strict liability, the CICA held, reversing the trial judge, that Primeo suffered a loss every time it placed cash for investment with BLMIS, for which the custodian was liable during the period from August 2002 to May 2007. However, this posed a dilemma for Primeo, since its redemptions exceeded its subscriptions in BLMIS over this period, so its strict liability claim prima facie gave rise to no damages claim. Primeo sought to meet this by (a) pursuing a new argument that remittances during 2002-07 could be appropriated to subscriptions before 2002, relying on the so-called rule in Clayton’s Case (1816) 15 ER 161 and (b) advancing a new case that, when it appointed BLMIS its sub-custodian, the custodian had assumed responsibility for the entire value of the investments purportedly held by BLMIS as at August 2002. The CICA would have remitted argument (a) but held it was too late for Primeo to pursue argument (b). Primeo appealed to the Privy Council.
In July 2020, the Supreme Court gave judgment in Marex Financial Ltd v Sevilleja [2021] AC 39 in which it restated and narrowed the reflective loss rule. The same panel that determined Marex convened for Primeo’s Privy Council appeal, hearing reflective loss as a preliminary issue on 20-21 April 2021 and delivering judgment on 9 August 2021: [2021] UKPC 22; [2022] 1 All ER (Comm) 1219 (Primeo (No 1)). Reconsidering the reflective loss issues in light of Marex, the Board reversed the courts below, holding Primeo’s claims were not barred by the reflective loss rule. Among other things, the Board held, declining to follow Nectrus Ltd v UCP Plc [2021] EWCA Civ 57, that whether the reflective loss rule applied was to be assessed when the relevant loss was (first) suffered and not when the claim was brought (Primeo (No 1) [53]-[63]). Significantly, the Board left open the issue of whether the judge and the CICA had been correct to say the reflective loss rule applies where the company’s claim has a realistic prospect of success, as opposed to being likely to succeed on the balance of probabilities ([45(5)], [84]). This unresolved issue will be important for the future development of the law in this area.
The second part of the appeal was heard on 12-15 October 2021 and judgment was delivered on 15 November 2023. The judgment addressed a wide range of issues: see the summary of the Board’s conclusions at Primeo (No 2) [383]-[391]. The following points in particular merit note.
Finality of litigation. The Board’s decisions on a series of procedural issues were dispositive of Primeo’s appeal and confirmed the dismissal of Primeo’s claim without any financial liability on the part of the respondents.
After discussing the nature of the principle of finality in litigation ([146]-[155]), the Board concluded that the CICA had erred in holding that, but for the reflective loss bar, it was appropriate to remit the claim for a further trial of Primeo’s new loss of a chance case on its fault-based liability claims ([176]-[190]). Primeo’s primary causation case at trial was that, had the respondents complied with their duties, Primeo’s directors could and would have withdrawn its investment from BLMIS prior to Madoff’s arrest and invested profitably elsewhere. When this case became untenable after factual cross-examination at trial, Primeo pivoted to a case that had the respondents complied with their duties, a chain of events would have been triggered resulting in Primeo’s auditor, EY, failing to give a clean audit opinion and Primeo being forced to withdraw its assets from BLMIS. Jones J held this ‘auditor causation’ case was too speculative and had not been proven on the balance of probabilities. Among other things, had EY sought to undertake confirmatory audit work at Madoff’s offices, he and his accomplices might well have deceived EY as they in fact deceived on-site fraud investigators from KPMG around the same time. The Board held that the CICA was wrong to allow Primeo to pursue the auditor causation case on a loss of a chance basis at a further trial. A further trial would require substantial new evidence, would cause unfairness to the respondents and was contrary to the principle of finality of litigation.
The Board likewise held Primeo could and should have led evidence at trial in relation to its Clayton’s Case arguments on strict liability and it was too late to do so on appeal ([170]-[175]).
Date of loss. The Board declined to interfere with the CICA’s findings on liability against the administrator and custodian ([54]-[144]), but its reasoning regarding the date of loss contains a notable discussion at [57]-[96] of the difficult case-law regarding the date on which contingent loss is first suffered (Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627 and Law Society v Sephton & Co [2006] 2 AC 543).
Limitation. In a decision of wider importance, the Board held that the provision postponing limitation where there was a “deliberate commission [by the defendant] of a breach of duty in circumstances in which it is unlikely to be discovered for some time” in s.37(2) of the Cayman Limitation Law and s.32(2) of the English Limitation Act 1980 required a deliberate breach of duty and did not extend to a reckless breach, as the English Court of Appeal had accepted in the PPI test case of Canada Square Operations Ltd v Potter [2021] EWCA Civ 339 ([219]-[236]). The Supreme Court delivered its judgment in Canada Square at the same time as Primeo (No 2), reversing the Court of Appeal on the meaning of “deliberate”, but affirming the result that the PPI claims were not time-barred ([2023] UKSC 41). The Board accordingly affirmed the CICA’s decision that Primeo’s fault-based claims against both respondents were time-barred in respect of breaches prior to 20 February 2007 ([236]).
The Board also considered the meaning of “agent” in s.37(1) of the Cayman Limitation Law and s.32(1) of the Limitation Act 1980, confirming that it had its conventional legal meaning and extended to an independent contractor acting within the scope of its authority ([237]-[269]). BLMIS was the custodian’s agent in the relevant sense and the strict liability claim was accordingly not time barred ([270]-[281]).
Contributory negligence. In the Privy Council, Primeo sought to dislodge the finding of contributory negligence on various bases, including an argument, which had attracted some academic interest, to the effect that the English Court of Appeal’s important and oft-cited decision in Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852 was wrong. Primeo argued that Vesta v Butcher, which confirmed the availability of the defence of contributory negligence to a claim in contract where there is a parallel duty in tort, was inconsistent with the intention and language of the UK Law Reform (Contributory Negligence) Act 1945 (the 1945 Act) and should be overruled. The Board considered the legislative background to the 1945 Act in some detail, along with Commonwealth authority, and held, departing from the High Court of Australia’s decision in Astley v Austrust Ltd [1999] LR PN 758, that contributory negligence was available at common law as a defence to concurrent claims in tort and contract prior to 1945 and Vesta v Butcher was accordingly correctly decided and sound in principle ([288]-[353]). On the facts, the Board held the defence was not available to the custodian and (had the point arisen) would have declined to interfere with the percentage of 50% reduction as against the administrator.
The overall result of the Board’s decision on the various appeal and cross-appeal issues is to confirm the dismissal of Primeo’s claims in their entirety.
Richard Gillis KC and Simon Gilson acted for the successful respondents at all levels, together with William Willson and Toby Brown of South Square, instructed by Campbells LLP (Andrew Pullinger, Shaun Tracey and team).
The Privy Council’s judgment can be found on the link below.
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