The Supreme Court has set aside a High Court order that barred Defender Limited’s damages claim against HSBC France over losses linked to Bernard Madoff’s investment fraud. The case will return to trial; the Supreme Court did not decide whether HSBC France was negligent or liable for damages.
Defender invested more than US$502 million through HSBC Institutional Trust Services (Ireland) Limited and Bernard L. Madoff Investment Securities LLC (BLMIS) between 2007 and December 2008. BLMIS’s investment management business was a Ponzi scheme that collapsed when Madoff was arrested. Defender later claimed that HSBCITS had negligently failed to identify the risk of fraud and was vicariously liable for BLMIS’s conduct.
In 2015, Defender settled claims with the trustee overseeing BLMIS’s liquidation. The settlement allowed Defender a customer claim of US$522.84 million and required it to release claims against BLMIS. HSBCITS argued that this release reduced or extinguished Defender’s claim against it under the Civil Liability Act 1961. The High Court accepted the argument under section 17(2), treating Defender as responsible for BLMIS’s acts and concluding that BLMIS would have been liable for all the loss. It therefore dismissed the damages claim at the preliminary stage.
The Supreme Court held that the High Court was wrong to conclude, before trial, that the only possible apportionment was 100% against Defender and none against HSBCITS. The Court said it could not rule out the possibility that a trial court might find HSBCITS partly responsible, even if BLMIS’s fraud was established. That possibility was enough for the preliminary ruling to fail.
The Court also rejected two alternative grounds advanced by HSBCITS. It held that a contractual indemnity between HSBCITS and BLMIS did not, through the Civil Liability Act’s contribution provisions, bar Defender’s claim. It also found that the settlement with the bankruptcy trustee was not an agreed substitution for damages that would discharge other wrongdoers under section 16.
The Court did not resolve the underlying allegations, determine the eventual apportionment of responsibility, or decide whether Defender would recover damages. Any sums recovered through the bankruptcy are to be credited against the claim. A possible constitutional challenge to the operation of section 17 was left for a later stage if needed. The Court did not consider HSBCITS’s cross-appeal, which arose only if the High Court ruling was upheld.
By consent order dated 14 May 2020, HSBC France was substituted for HSBCITS. The action will proceed against HSBC France.