On 4 December 2018 the High Court gave judgment on a preliminary issue in favour of the Defendant, HSBC Institutional Trust Services DAC ("HTIE") in a claim for $141 million taken against it by Defender Limited ("Defender"). The issue concerned the impact of the Civil Liability Act 1961 (the "Act") where a plaintiff settles its claim against one wrongdoer first.
The case involved Defender, a fund which invested into Bernard L Madoff Investment Securities LLC ("Madoff"), and concerned a number of allegations against HTIE, the fund's custodian.1 Madoff is now known to have operated the world's largest Ponzi scheme, defrauding his customers of billions of dollars. Upon discovery of the fraud, the US Securities Investor Protection Corporation appointed Irving Picard as trustee to manage the liquidation of Madoff (the "SIPC Trustee"). He was tasked with recovering the stolen assets and paying compensation to Madoff customers. Defender was a customer of Madoff and it made a claim in the US Bankruptcy. In March 2015 Defender entered a Settlement Agreement with the SIPC Trustee (the "Settlement Agreement") which included a wide release of all tort claims against the SIPC Trustee and Madoff.
Post this settlement, one of the defences put forward by HTIE related to the Act, and the question before Mr Justice Twomey was whether, by virtue of the terms of the Act, the effect of the Settlement Agreement was to identify Defender with Madoff, and thereby with his wrongdoings, such that Defender's claim against HTIE should be reduced to zero. While the trial was scheduled for 20 weeks, Mr Justice Twomey invited HTIE to have its defence under the Act heard as a preliminary issue after the conclusion of opening submissions, as it would be dispositive of the proceedings if HTIE was successful.
The hearing of the preliminary issue involved the Defendant proceeding on the assumption that the Plaintiff's allegations against it were proven in the Plaintiff's favour. HTIE agreed that it could fully defend the claim despite this unfavourable and artificial requirement, but would not be bound by any such admission if this defence under the Act was unsuccessful, in which case the trial would resume and evidence would be delivered.
Civil Liability Act defence put forward by HTIE
For the purpose of the preliminary issue only, HTIE admitted it was a concurrent wrongdoer with Madoff under the Act. HTIE argued that the Settlement Agreement constituted a "release or accord" under section 17(2) of the Act. In addition, under section 35(1)(h) Defender will be "identified with", and deemed to be responsible for, the acts of the wrongdoer whose liability is discharged by such a release or accord (in this case, Madoff). The impact of these sections is that, as Defender settled its claim against Madoff, its claim against HTIE must be reduced by the amount that the wrongdoer (here, Madoff) would have been liable to contribute if the plaintiff's total claim had been paid by the other wrongdoer (HTIE). In order to determine the extent of the reduction to Defender's claim against HTIE, the Court must determine the contribution HTIE could seek from Madoff, by considering the blameworthiness of each party. HTIE argued that, as Madoff committed the largest fraud in history, all blameworthiness should be attributed to it, even if HTIE were negligent or in breach of contract. Therefore, if HTIE had paid Defender's claim in full, HTIE would be entitled to a 100% contribution from Madoff, and Defender would have no claim against HTIE.
Mr Justice Twomey agreed with HTIE holding that, under the terms of the Act, HTIE and Madoff could be considered to be concurrent wrongdoers, and the Settlement Agreement constituted a release and accord with Madoff. The Court concluded that HTIE would be entitled to a 100% contribution from Madoff on the agreed assumption that it paid Defender's claim in full. As a result, Defender's claim against HTIE must be reduced by 100%. The Court ruled that the 100% contribution was just and equitable because of the qualitative differences between the wrongs committed by each party, namely criminal fraud by Madoff compared with civil wrongs alleged against HTIE in negligence and breach of contract. As a result, Defender has no claim against HTIE.
Prior to the judgment, Defender put the Court on notice of its intention to bring a constitutional challenge to HTIE's interpretation of the Act, should the Court find in HTIE's favour. Counsel for the Attorney General is currently taking instruction on the matter.
1 Matheson represented the successful Defendant. The factual and legal issues raised in these proceedings are complex and go beyond the scope of this brief update. Should you have any questions, or wish to discuss any aspect of this judgment, please contact the Commercial Litigation and Dispute Resolution Team
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