A prime opportunity? The Privy Council examines causation, loss and limitation

  • Market Insight 2023年11月30日 2023年11月30日
  • 英国和欧洲

  • 保险和再保险

In Primeo Fund (in Official Liquidation) (Appellant) v Bank of Bermuda (Cayman) Ltd and another (Respondents) [2023] UKPC 40, the Judicial Committee of the Privy Council (Privy Council) has decided on a number of outstanding issues in this long-running case, which is rooted in losses suffered by the Primeo Fund (Primeo) after investing in Bernie Madoff’s Ponzi scheme.

Whilst decisions of the Privy Council, the court of final appeal for the UK overseas territories and Crown dependencies, are not directly binding on cases before courts in England & Wales, they do have persuasive authority. Accordingly, a decision such as this which discusses a range of issues that are often in dispute in professional liability cases – limitation, contributory negligence and the measurement of loss – is relevant to firms and their insurers. 


Primeo was a Cayman Islands investment company. From Primeo’s inception, it had placed a proportion of its funds directly with Bernard L Madoff Investment Securities LLC (BLMIS) which, it transpired, was operating a Ponzi scheme. When this came to light, Primeo suffered heavy losses and was placed into liquidation. 

Primeo subsequently initiated proceedings in the Cayman Islands against the Respondents - its former administrator, Bank of Bermuda (Cayman) Ltd (the Bank), and its custodian, HSBC Securities Services (Luxembourg) SA (HSBC), for $2bn - alleging:

  • against the Bank that, as administrator, it had breached its duties under the administration agreement in respect of calculating Primeo’s net asset value (NAV) and maintaining Primeo’s books and records and had breached its duty of reasonable care and skill; and
  • against HSBC for breaches of its custodian agreement, primarily for appointing BLMIS as sub-custodian – this was a strict liability claim.

At first instance, the Bank and HSBC were found to have breached duties owed to Primeo, but Primeo’s claims were dismissed for having infringed the reflective loss rule – a principle that states that a shareholder cannot claim a fall in the value of their shares or dividends due to loss suffered by the company, where the company itself has a right to claim against the same wrongdoer. This was due to Primeo having indirect investments as a shareholder in two feeder funds and resulted in the finding that Primeo thus had no separate and distinct loss from that capable of being claimed by the feeder funds. Primeo’s appeal was eventually allowed by the Privy Council, who held that the reflective loss rule had no application in this case. Our article on that decision can be found here.

As a result, the other points which had been decided were reopened and form the basis of this judgment by the Privy Council.

Issues for determination

There were three main issues for determination: 

  1. Liability and damages
  2. Limitation
  3. Contributory negligence

Liability and damages

The Privy Council found that, consistent with the trial judge and the Court of Appeal before it, Primeo suffered an “immediate and real loss” each time it invested cash in BLMIS and BLMIS misappropriated that money. 


A variety of counterfactual “but for” arguments were raised by HSBC to challenge this finding and to assert that no recoverable loss had been suffered. For example, HSBC argued:

  • BLMIS could have safeguarded the funds whilst also operating the Ponzi scheme – this was dismissed outright by the Privy Council as the monies were inseparable from the general assets of BLMIS, having not been held in a separate trust.
  • Even if BLMIS complied with its safeguarding duty, it still would have operated a fraudulent Ponzi scheme using money from other investors, running up losses so that Primeo would only have had an unsecured right to its cash – this too was dismissed by the Privy Council. 

The Privy Council considered that the relevant counterfactual involved asking what would have been the position if BLMIS had not carried on the Ponzi scheme at all. Or alternatively, if it had carried on the scheme, but had given a true account to Primeo of the fraud it was perpetrating so that Primeo did not invest. In both scenarios, no loss would have been suffered. In the present case, causation had been established and the proffered counterfactuals could not be sustained.

Further, given that it was in fact the case that Primeo’s cash had been misappropriated by BLMIS, the Privy Council saw “no sound reason in principle to make a counterfactual assumption in favour of the fraudster.” 

In MBS v Grant Thornton [2021] UKSC 20, the Supreme Court similarly cautioned against the use of counterfactuals, finding that they can cause parties to stray into “abstruse and highly debatable arguments” which could drive the outcome in a case, risking “litigation by way of contest between elaborately constructed worlds advanced by each side, which would become increasingly untethered from reality." The Privy Council’s reluctance to entertain the various counterfactuals is consistent with this: the Supreme Court in MBS held that the use of counterfactuals is simply a tool to cross-check the result given pursuant to an analysis of the purpose of the duty. It is subordinate to that analysis and should not supplant or subsume it.

Measurable loss

An alternative argument to counter the Court of Appeal’s finding that Primeo suffered real and immediate loss each time it made an investment was advanced by HSBC, relying on Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd [1997] 1 WLR 1627 and Law Society v Sephton [2006] 2 AC 543, both being authorities more usually relied on in relation to limitation. In Nykredit, a lender valuation case, it was held that a lender suffers loss and damage only when it is possible to say that it is, on balance, worse off; the lender does not suffer a loss by the simple fact of having entered into the transaction in circumstances where the covenant to repay is sufficient to address any shortfall. In Sephton, claims were made against the Solicitors Compensation Fund, which the Law Society sought to recover from Sephton, an accountancy firm which had failed to detect fraud at an audited law firm. Sephton argued that the claim was time-barred as the losses had occurred when the solicitor committed each theft. The House of Lords disagreed, finding that the Law Society would only suffer loss if a claim was made on the Compensation Fund; it was a contingent liability up until that point. 

Relying on these cases, HSBC argued that the relevant legal question is when the loss becomes measurable and that Primeo only suffered measurable loss for which damages could be recoverable when the scheme collapsed and it became clear that Primeo would not receive full redemption. Before then, there was a possibility that Primeo’s redemptions could have been met in full. As such, it was contended that there was no actual loss at the point of investing, contrary to what the Court of Appeal had held. Further, when the Ponzi scheme was revealed, Primeo no longer held direct investments in BLMIS - it only held indirect investments through other companies to which the reflective loss principle applied – so no damages were recoverable, it was argued.

This alternative argument was rejected by the Privy Council as misconceived and the reliance on Nykredit and Sephton was said to be misplaced. The Privy Council concluded that Primeo did suffer loss at each deposit because it exchanged its cash for worthless assets in the form of promises made by BLMIS (a “hopelessly insolvent” company). Although quantification of the loss would depend on evidence, the loss was measurable in the relevant sense at that point as the difference in value between the cash invested by Primeo and the worthless choses in action as against BLMIS which Primeo received in return (i.e. the right to participate in BLMIS’s insolvency once everything came to light). If Primeo had become aware of the true position when handing over its cash, it could immediately have sued BLMIS for loss calculated in that way. As the Privy Council put it: “The fact that BLMIS was successful in deceiving Primeo does not change this legal reality.” 

The Privy Council considered that Nykredit in fact supported Primeo’s case, as Lord Nicholls in that case looked at when a lender had suffered relevant (i.e. loss that falls within the scope of duty owed) measurable (in the sense that it can be given a monetary value) loss. Primeo suffered a loss with each deposit of cash and it was “measurable” since, in principle, it was clear that actual loss was suffered even though the quantification of that loss on each occasion would depend on the evidence available when the question came to be addressed at trial. Further, Lord Nicholls in Nykredit, when he addressed valuing the borrower’s covenant, was referring to its true value at the relevant time, not such value as might be ascribed to it by the market by reason of a fraudulent concealment of the true state of affairs. The true facts in the present case were that BLMIS was in fact insolvent when Primeo made its investments so its promises to repay were valueless even if they could not be precisely quantified until a later date.

As for HSBC’s reliance on Sephton, this too was misplaced. In Sephton, until the contingency of a claim being made had occurred, the Law Society suffered no relevant damage. By contrast, Primeo suffered real and immediate loss as soon as each investment of cash was made and misappropriated by BLMIS: “The fact that BLMIS made a promise to Primeo to hold underlying instruments of equivalent value and to pay money when Primeo wished to redeem its investments meant that, in a relevant sense, Primeo maintained a claim against BLMIS day in, day out to honour its promise to hold such instruments and to be prepared to make redemption payments on request.”

As a result, loss was recoverable from HSBC further to its breaches as custodian. However, the trial judge had found that a certain period applied to the strict liability claim against HSBC (after 2002, when HSBC had become custodian). During the appeal hearing, HSBC argued there was no net loss during this time as Primeo had in fact received payments back from BLMIS in excess of what it had paid to BLMIS. As Primeo had framed its claim on a net loss basis, it could only succeed against HSBC if it was permitted to introduce at appeal level, in response to HSBC’s net loss argument, a new claim that HSBC had assumed a custodian responsibility for the funds so that Primeo’s loss derived from its lost chance to be able to withdraw the funds and invest them elsewhere. The Privy Council prohibited Primeo from advancing this argument on the principle of finality – i.e. that the full case must be presented at trial and new points may only be raised on appeal in limited circumstances. Other new points that Primeo sought to introduce were similarly rejected on the grounds of finality.

As to claims against the Bank for negligence/gross negligence, the Privy Council agreed with the trial judge and the Court of Appeal that the Bank, as administrator, was grossly negligent in its Net Asset Valuations from April 2005.


As the writ was issued on 20 February 2013, the Respondents argued that they had a limitation defence to any causes of action that accrued more than six years ago, i.e. anything before 20 February 2007. Primeo contended that time was extended under section 37 of the Cayman Limitation Act 1996 (LA 1996). This section, as relevant to this case, states that where there has been a “deliberate commission of a breach of duty” (s.37(2)) or “any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant” (s.37(1)(b)), the period of limitation does not begin to run until the plaintiff has discovered, or could with reasonable diligence have discovered, this fact. 

Section 37 of the LA 1996 is similar to section 32 of the Limitation Act 1980 in England & Wales (which was the subject of a Supreme Court decision, Canada Square v Potter [2023] UKSC 41, handed down the same day as this decision – see our article on that case here).

The courts below held that: 

  • In respect of the fault-based part of Primeo’s claim, Primeo could not rely upon section 37(2), since the reference in that provision to “deliberate commission of a breach of duty” required that the Respondents committed the relevant breaches of duty knowing that they were in breach (which was found not to be the case); recklessness was insufficient. 
  • In respect of the strict liability part of Primeo’s claim, Primeo could rely upon section 37(1)(b) to postpone the commencement of the limitation period, since BLMIS was to be treated as HSBC’s agent, and accordingly its deliberate concealment of relevant facts could be attributed to HSBC.

The Privy Council agreed. 

  • Section 37(2) - As the Supreme Court held in Canada Square, ‘deliberate’ and ‘reckless’ are not synonymous and have distinct meanings: ‘deliberate’ is something “done consciously and intentionally”, and ‘reckless’ means “without thought or care for the consequences of an action”. Therefore, reckless breach of duty is not enough. Similarly, relying on Cave v Robinson Jarvis & Rolf [2002] UKHL 18, the Privy Council held that the breach of duty had to have been committed intentionally. As a consequence, Primeo’s argument failed and any fault-based causes of action which arose prior to 20 February 2007 were time-barred. 
  • Section 37(1)(b) - Primeo’s action was not based on the deliberate concealment of HSBC but on the deliberate concealment of BLMIS. Therefore, for the section 37(1)(b) argument to succeed, Primeo had to establish that HSBC was the agent of BLMIS as section 37(1) states: “References in this subsection to the defendant include references to the defendant’s agent, and to any person through whom the defendant claims, and his agent.” ‘Agent’ is not defined within the statute so the Privy Council stated that this indicated that the legislature intended that it should bear its usual meaning according to the general law. An agent is a person with the capacity to alter their principal’s legal relations with third parties. Following an analysis of the law of agency and the relevant contracts between BLMIS and HSBC, the Privy Council concluded that “it is plain that BLMIS deliberately concealed relevant facts when acting as HSBC’s agent in rendering performance to satisfy HSBC’s obligations under the 1996 Custodian Agreement. The running of time was therefore postponed pursuant to section 37(1) of the Limitation Act. HSBC’s appeal on this point should therefore be dismissed.”

Contributory negligence

The remaining issues to be determined were:

  • whether contributory negligence was available as a defence to Primeo’s contractual damages claim against HSBC.
  • whether the Court of Appeal had erred in substituting its own assessment of 50% contributory negligence in place of the 75% reduction determined by the trial judge in the claim against the Bank.

The relevant statutory contributory negligence defence is contained in section 8(1) of the Cayman Torts (Reform) Law (1996 Revision) which provides:

“Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage: Provided that – (a) this subsection shall not operate to defeat any defence arising under a contract; and (b) where any contract or enactment providing for the limitation of liability is applicable to the claim, the amount of damages recoverable by the claimant by virtue of this subsection shall not exceed the maximum limit so applicable.”

After a lengthy analysis of the authorities, “fault” in the provision was determined as being concerned with the conduct giving rise to the cause of action rather than the cause of action on which the claim is based. The Privy Council also came to the firm conclusion that Vesta v Butcher [1989] AC 852, which is authority for the proposition that contributory negligence is available as a defence to a claim in contract where there exist concurrent and co-extensive duties in contract and in tort, was correctly decided (dismissing Primeo’s argument that it was not), noting that it had been settled law for 35 years. 

Applying this to the facts of the case, the claim against the Bank in respect of the NAV calculations was based upon an implied term of the contract that it would exercise reasonable skill and care. This contractual duty was co-extensive with the tortious duty of care which arose from the Bank’s position, for it was to be regarded as holding the office of administrator under Primeo’s articles of association, and here too it was required to act with reasonable skill and care. Accordingly, a contributory negligence defence was available to the Bank and, in agreement with the Court of Appeal, the claim was reduced by 50%.

The position of HSBC, as custodian, was different. There was never a contract between Primeo and HSBC, as custodian, under which HSBC was required to perform professional custodial services subject to a relevant express or implied obligation to exercise reasonable skill and care, and where there was a concurrent duty of care in tort to exercise reasonable care in the provision of those services. The relevant duty imposed on and undertaken by HSBC under the Custodian Agreement was a duty to do something specific – to require the sub-custodian to put in place the most effective safeguards in order to ensure the most effective protection of the assets. In the context of this case, that meant making the appropriate recommendations to Primeo, and that is what it failed to do. As such, the Privy Council held (overturning the Court of Appeal on this point) that a contributory negligence defence was not available to HSBC in respect of the claim against it under the Custodian Agreement.


This is an interesting decision on a number of fronts, providing a senior court’s view on a range of matters which are often in dispute in professional liability cases. The Privy Council’s agreement with the Supreme Court’s interpretation of ‘deliberate concealment’ and ‘deliberate breach of duty’ further reinforces that reckless conduct is not sufficient to prevent time from running for limitation purposes and its endorsement of Vesta v Butcher provides clarity on when a contributory negligence defence can apply. The Privy Council’s scepticism regarding the application of counterfactuals is also in line with the Supreme Court and shows clearly that such arguments will continue to be scrutinised by the courts going forward.