Primeo Fund v Bank of Bermuda (Cayman) Ltd

JurisdictionCayman Islands
JudgeSir Richard Field, JA
Judgment Date13 June 2019
CourtCourt of Appeal (Cayman Islands)
Docket NumberCICA (CIVIL) APPEAL No. 21 of 2017 (FORMERLY CAUSE NO FSD 30 of 2013 — AJJ)
Primeo Fund (In Official Liquidation)
(1) Bank of Bermuda (Cayman) Limited
(2) HSBC Securities Services (Luxembourg) SA

The Hon Sir Richard Field, JA;

The Hon Sir Michael Birt, JA; and

The Rt. Hon Sir Jack Beatson, JA.

CICA (CIVIL) APPEAL No. 21 of 2017 (FORMERLY CAUSE NO FSD 30 of 2013 — AJJ)




In Open Court

Mr Tom Smith QC, Mr Richard Fisher and Mr Robert Amey instructed by Mr Peter Hayden, Mr Jonathon Milne and Mr Jonathan Moffatt of Mourant on behalf of the Appellant.

Mr Richard Gillis QC, Mr William Willson, Mr Toby Brown and Mr Simon Gilson instructed by Mr Andrew Pullinger, Mr Shaun Tracey and Mr Hamid Khanbhai of Campbells on behalf of the Respondents.


I. Introduction


II. The contractual framework


III. The factual background


IV Outline of the claims, the Judge's findings and the scope of the appeal


V The Judge's findings on Primeo's strict liability and gross negligence claims *


VI The role of an appellate court in relation to findings of fact


VII The challenge to the finding that before the 2002 Sub-Custody agreement BLMIS was R2's co-custodian and not a sub-custodian


Vlll. R2's appeal against the finding that it became custodian under an implied tripartite agreement under which BLMIS owed its safeguarding duty to R2 and not to Primeo


IX R2's appeal against the finding that it was estopped from denying that it owed duties under clause 16(B) of the 1996 Custodian Agreement


X The Strict Liability Claim


XI Primeo's claim that R2 was itself in breach of clause 16(B) of the 1996 Custodian Agreement


XII The Administration Claim against Rl


XIII Causation


XIV Reflective Loss


XV Limitation


XVI Contributory Negligence


XVII Summary of Conclusions


Sir Richard Field, JA

This is the judgment in the appeal of the Primeo Fund (“Primeo”) from the decision of Justice Andrew Jones QC (“the judge”) sitting in the Grand Court. The judge dismissed Primeo's claims for damages against both Respondents as the administrator and custodian of investments in a managed account with Bernard L Madoff Investment Securities LLC (“BLMIS”), owned and controlled by Mr Bernard Madoff, whose trading business turned out to have been wholly fictitious and which became insolvent. The Respondents have raised a number of matters by way of cross-appeal and Respondents' Notice. The judgment that follows is the judgment of the Court to which all three members have contributed.


Primeo is an investment fund. It was incorporated in the Cayman Islands on 18 November 1993 and registered as an exempted company under the Companies Law. It is now in official liquidation. It was promoted, marketed and managed by Bank Austria AG (“Bank Austria”).


Primeo's claims for breach of contract, and negligence are briefly summarised at [65] below and the judge's findings at [66] – [67] below. In narrating the factual background below and the judge's findings more fully we have drawn liberally from the judge's comprehensive judgment to which we are indebted.

(a) The 1994 Brokerage Agreements

In January 1994, Primeo signed a package of agreements (“the 1994 Brokerage Agreements”) with BLMIS consisting of a Customer Agreement, an Option Agreement and a Trading Authorisation. The management account BLMIS opened for Primeo was numbered 1FN060. There was no separate investment management agreement. Under the 1994 Brokerage Agreements, BLMIS had complete discretion to buy and sell investments for Primeo without reference to either Primeo or Primeo's Investment Adviser. From 2001 down to 9 May 2007 virtually the whole of Primeo's invested assets were held directly in the managed account operated by BLMIS.

(b) The 1996 Brokerage Agreements

In March 1996 replacement brokerage agreements (“the 1996 Brokerage Agreements”) were concluded between Primeo and BLMIS consequent on the restructuring of Primeo into two sub-funds, Primeo Global and Primeo Select. For all practical purposes, the terms and effect of the 1996 Brokerage Agreements were the same as under the 1994 Brokerage Agreements, although BLMIS established a new account for Primeo numbered 1FN092. Primeo Global did not invest with BLMIS and was closed in 2001.

(c) The Herald Transfer

On 1 May 2007, Primeo ceased to invest directly through BLMIS but instead did so indirectly through Herald Fund SPC (“Herald”) to whom it assigned its rights under its managed account with BLMIS valued at US$465,824,061 in consideration for the issue of shares by Herald having an equivalent subscription price based on Herald's NAV for 30 April 2007 (this assignment and related issue of shares are hereinafter referred to as “the Herald Transfer”). The funds invested with BLMIS by Herald were invested through managed account arrangements on the same terms as Primeo's 1996 Brokerage Agreements.

(d) The 1993 Custodian and Administration Agreements

On 20 December 1993, Primeo concluded an administration agreement (“the 1993 Administration Agreement”) and a separate custody agreement (“the 1993 Custodian Agreement”) with the Second Respondent, then called Bank of Bermuda Luxembourg SA (“BoB Lux”). As a result of the acquisition of the Bank of Bermuda Group (“BoB Group”) by HSBC Holdings plc on 18 February 2004, the Second Respondent changed its name to HSBC Securities Services (Luxembourg) (“HSSL”). We therefore refer to the Second Respondent as “R2”.


Clause 16(B) of the 1993 Custodian Agreement permitted R2 as the Custodian to appoint:

“such agents, sub-custodians and delegates as it might think fit to perform in whole or in part any of its duties and discretionsprovided …the Custodian will at all times remain responsible to the Company for any acts or omissions of any such person or persons… as if such acts or omissions were those of the Custodian, but will not be liable for any loss occasioned by reason only of the liquidation, bankruptcy or insolvency of such person.”

(e) The 1996 Custodian Agreement

On 19 December 1996, Primeo concluded new agreements (respectively “the 1996 Administration Agreement” and “the 1996 Custodian Agreement”). The custodian appointed under the 1996 Custodian Agreement remained BoB Lux, but the Administrator appointed under the 1996 Administration Agreement was the First Respondent, the Bank of Bermuda (Cayman) Ltd. (hereafter “Rl”). This was because it was a requirement under the new listing rules of the Irish Stock Exchange that the administrator and custodian of an investment fund be separate entities. However, simultaneously with signing the 1996 Administration Agreement, Rl concluded a delegation agreement with BoB Lux, with the result that R2 was both Sub-Administrator and the Custodian of Primeo.


The 1996 Custodian Agreement is governed by the law of the Cayman Islands and included a new Clause 16(B). This conferred on the Custodian the power to:

“appoint such agents, sub-custodians and delegates as it might think fit.”

and provided that:

“the Custodian will use due care and diligence in the appointment of suitable sub-custodians and must be satisfied for the duration of the sub-custody agreements as to the ongoins suitability of the sub-custodians to provide custodial services to the Company [Primeo] …[and] will require the sub-custodian to implement the most effective safeguards available under the laws and commercial practices of the sub-custodian's jurisdictions in order to ensure the most effective protection of the Company's assets. Subject thereto the Company has agreed to indemnify the Custodian from all liabilities of whatsoever nature which may be [in]curred by it in performing its obligations under the Custody agreement other than those liabilities resulting from fraud, negligence or wilful breach of duty on the part of the Custodian or any agent appointed by it …”


The duties imposed by the underlined words are referred to in the judgment as “the appointment and ongoing supervision duties”.


To the extent relevant, Clause 16(E) of the 1996 Custodian Agreement provides:

“The Custodian shall not, in the absence of negligence or wilful breach of duty on the part of the Custodian or any agent, delegate or sub-custodian, be liable to the Company … for any act or omission in the course of or in connection with the services rendered by it hereunder or for any loss or damage which the Company may sustain or suffer as a result or in the discharge by the Custodian of its duties hereunder or pursuant hereto…. The Company agrees to indemnify the Custodian from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (other than those resulting from the negligence or wilful breach of duty on the part of the Custodian or any agent appointed by it) which may be imposed on, incurred by or asserted against the Custodian in performing its obligations or duties hereunder.”


Clause 6 (A) imposed on the Custodian a duty, subject to sub-paragraphs (B) and (C) to “… record and hold in a separate account in its books all Securities received by it from time to time and shall arrange for all Securities to be deposited in the Custodian's vault or otherwise be held by or to the order of the Custodian as it may think proper for the purpose of providing for the safekeeping thereof.”


Clause 6 (B) deals with the opening of broker accounts. It allows the Custodian:

“upon receipt of Proper Instructions [to] open accounts with brokers or other intermediaries[and to] make …...

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