Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd and HSBC Securities Services (Luxembourg) Sa

JurisdictionCayman Islands
Judge(Field, Birt and Beatson, JJ.A.)
Judgment Date13 June 2019
Date13 June 2019
CourtCourt of Appeal (Cayman Islands)
PRIMEO FUND (in official liquidation)

(Field, Birt and Beatson, JJ.A.)

Court of Appeal (Cayman Islands)

Financial Services — fund service providers — administrator — grossly negligent to prepare NAV on basis of single source of information — hedge fund administrator normally reconciles information regarding existence of client’s assets with information from independent service provider — no implied term in administration agreement for administrator to independently verify information, though implied term to exercise reasonable care and skill

Financial Services — fund service providers — custodian — reasonably competent global custodian would require sub-custodian who also acts as investment manager and broker-dealer (BLMIS) to operate separate client accounts and provide monthly statements or notifications — failure to require such measures negligent breach of duty

Held, dismissing the appeal:

(1) For the reasons set out in the section on reflective loss, Primeo’s appeal against the dismissal of its claim for damages would be dismissed. In respect of other key points, the court upheld the judge’s decision that BLMIS was the second respondent’s sub-custodian from the date of the 2002 sub-custody agreement but not before. The court upheld the judge’s decision as to the interpretation of cl. 16(B) of the 1996 custodian agreement and the fact that it was binding on the second respondent. As to the strict liability claim, the court upheld the judge’s decision that the second respondent was strictly liable for the breach of duty by BLMIS but overruled his conclusion that Primeo suffered no relevant loss as a result. Primeo suffered a loss every time money intended for investment was misapplied by BLMIS and the Herald transfer did not extinguish such loss. As to the second respondent’s breach of the custodian agreement, the court upheld the judge’s finding that the second respondent was in breach of cl. 16(B) in failing to recommend the available safeguards. As to the administration agreement, the court upheld the judge’s conclusion that the first respondent was not grossly negligent before April 2005 but was grossly negligent (and therefore liable) thereafter. The strict liability claim was not time-barred. The court upheld the judge’s decision that the claims against the second respondent for its own breach of the custodian agreement and against the first respondent for breach of the administration agreement were time-barred in relation to any breaches that occurred before February 20th, 2007. In respect of contributory negligence, the court upheld the judge’s conclusion that contributory negligence was applicable to the claim against the first respondent for breach of the administration agreement; overruled the judge’s decision in relation to the second respondent’s own breach of the custodian agreement and held that contributory negligence was applicable thereto; and overruled the judge’s assessment of the degree of contributory negligence, assessing 50% as the appropriate figure (paras. 509–518).

The custody claim

(2) The judge had been well entitled to reach the conclusion that before the 2002 sub-custody agreement BLMIS had been the second respondent’s co-custodian and not a sub-custodian. BLMIS could only have been appointed as the second respondent’s sub-custodian pursuant to cl. 16(B) of the custodian agreements if BLMIS had unequivocally accepted that it held the assets in the managed account to the second respondent’s order rather than to the order of its investor/customer, Primeo. The evidence fellwell short of compelling a finding that there had been such an appointment. In contrast to the position as between the second respondent and BLMIS, there were express written agreements constituting the 1994 and 1996 brokerage agreements between BLMIS and Primeo. The following findings made by the judge were unassailable: (i) The managed accounts had been opened in favour of Primeo, BLMIS’s counterparty to the brokerage agreements, not the second respondent; (ii) although all cash subscriptions were delivered to the second respondent, cash was then transferred to BLMIS pursuant to proper instructions given under the relevant custodian agreement to be managed on a discretionary basis with the securities being held in the custody of BLMIS; (iii) cash was never transferred under the custodian agreements to settle purchases of securities which would then be settled into the second respondent’s custody; (iv) BLMIS owed an implied custodial duty to Primeo in respect of assets held in the managed accounts; (v) it was the intention of the parties in respect of the 1996 brokerage agreements that BLMIS would continue to perform its triple functions, including that of custodian of securities purchased for the managed account, with the consequence that, pursuant to the custodian agreements, assets credited to the managed accounts fell outside the custodial responsibility of the second respondent and were the custodial responsibility of BLMIS down to the 2002 sub-custody agreement; (vi) it was to be inferred from the parties’ conduct that BLMIS acted on withdrawal instructions received from the second respondent acting as agent on behalf of Primeo as the account holder and not on its (the second respondent’s) own behalf; (vii) Primeo had given the second respondent proper instructions under the 1996 custodian agreement to appoint BLMIS as a custodian for Primeo; and (viii) the conclusion that the 1996 brokerage agreements were intended to constitute BLMIS as custodian of the assets of Primeo, rather than sub-custodian for the second respondent, was supported by the continuation after the execution of the 1996 brokerage agreements of the prior practice whereby assets credited to Primeo’s account were not recorded by the second respondent in the custody records maintained by its global custody department and the issuance of holdings reports to BA Worldwide which reflected that these assets were not held in the second respondent’s custody. The court therefore rejected Primeo’s challenge to the judge’s finding that BLMIS was a custodian vis-à-vis Primeo and not a sub-custodian of the second respondent from the 1994 brokerage agreements to the 2002 sub-custody agreement (paras. 144–147).

(3) The judge had been entitled on the evidence to find that, after 2002, BLMIS had been appointed as the second respondent’s sub-custodian according to the common intention of Primeo, the second respondent and BLMIS and that BLMIS would owe its safekeeping duty to the second respondent. The judge had not acted unfairly in so finding. The court accepted Primeo’s submission that the judge’s findings were a permissible “variation, modification or development” of Primeo’s pleaded case and not something new, separate or distinct from that which had been pleaded.The Primeo board were not in a position to dispute that Primeo had consented to the 2002 sub-custody agreement given that the board became directly aware of the agreement and did not disavow it or question its validity (para. 154; paras. 161–163).

(4) The court was not persuaded by any of the submissions advanced by the second respondent in challenging the judge’s finding that it was estopped from denying that it owed duties under cl. 16(B) of the 1996 custodian agreement in respect of the assets held on the BLMIS managed account with effect from August 2002. The judge’s articulation of the law in respect of estoppel by convention and by representation was beyond challenge and there was ample evidence to support his finding that the shared understanding of Primeo, the second respondent and BLMIS was that, following the execution of the 2002 sub-custody agreement, the second respondent rather than BLMIS was to be custodian of the assets held in the BLMIS managed accounts and that BLMIS was to be the second respondent’s sub-custodian. There was also ample evidence to support the judge’s conclusion that explicit representations had been made to Primeo on multiple occasions both orally and in writing that the second respondent considered itself to be custodian and to have appointed BLMIS as sub-custodian. The court accepted Primeo’s submission that whatever might be the position in respect of estoppel by representation, a conventional estoppel would be enforced if it would be unjust or unconscionable to allow one party to go back on the shared understanding on which they had carried on their dealings. The court also accepted the submission that, the parties having entered into the 2002 arrangements and regulated their subsequent dealings on the basis of the shared assumption that the second respondent was the custodian and BLMIS its sub-custodian in respect of the BLMIS assets, it would be detrimental to Primeo, or unjust, if the second respondent was now permitted to resile from that assumption because Primeo would have lost the opportunity of the protection of having had a custodian and sub-custodian in place in respect of the BLMIS assets. It was fully open to the judge to find for the purposes of estoppel by representation that Primeo had relied on the custody confirmations to its detriment because in their absence E&Y would not have issued audit opinions without performing other audit procedures with satisfactory results. There was also very considerable force in the submission that Primeo had an unanswerable case that it relied to its detriment when accepting after the 2002 sub-custody agreement that the second respondent replaced BLMIS as the custodian of BLMIS’s assets because Primeo thereby lost the opportunity of protecting its interest by appointing another custodian. The second respondent freely entered into the 1996 custodian agreement with Primeo, the 2002 sub-custody agreement with BLMIS and represented to Primeo that it had appointed BLMIS as its sub-custodian and was custodian of the...

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