Attempt to settle with only one of several Defendants backfires

Summary

  • The Defender v HSBC decision highlights the pitfalls that can arise when several parties have contributed to the same loss, especially if a claimant fails to pursue both defendants, particularly if it settles with one of the guilty parties.
  • Defender Limited, an investment fund, invested $540 million with a Bernie Madoff company (Madoff). After Madoff was exposed as the world's largest Ponzi scheme, Defender entered into a settlement agreement with Madoff's trustee in liquidation.
  • Defender then sued its custodian, HSBC alleging that HSBC negligently failed to monitor Madoff. The trial was to last at least five months.
  • After opening submissions, Twomey J. identified a preliminary issue which could resolve the dispute in days. One HSBC defence was that, even if it was negligent (which it denied), Madoff  was a concurrent wrongdoer under the Civil Liability Act 1961 (CLA). As Defender had settled with Madoff, Defender was identified with Madoff in accordance with the provisions of the CLA (i.e. Defender stepped into Madoff's shoes) for the purposes of apportioning liability between Madoff and HSBC in accordance with the CLA. HSBC argued that liability should be apportioned 100% to Madoff/Defender. This would mean that Defender had no claim against HSBC (even if HSBC had been negligent).
  • The High Court accepted HSBC's argument and dismissed the claim, holding that a civil concurrent wrongdoer will normally be entitled to a complete indemnity from a criminal concurrent wrongdoer.
  • The same result would presumably have been achieved if the claim against Madoff was allowed to have become statute barred.
  • The decision is being appealed. Presumably a key issue will be whether it was equitable to attribute 100% of the blameworthiness to the fraudulent party – Madoff with zero liability to the allegedly negligent one. 
  • If Defender had instead pursued both parties to trial and proven Madoff's fraud and HSBC's negligence, Madoff and HSBC would have been jointly and severally liable for the claimant's damages. Given Madoff's insolvency, the claimant could then have sought 100% recovery against HSBC (subject to HSBC's other defences, including as to causation). 

Key findings

The Court is entitled to identify the CLA point as a preliminary issue and deal with it at the outset, without the parties' instigation

  • There is an onus on the Court and on lawyers to efficiently use scarce court resources.
  • The preliminary issue could result in a five month trial being avoided by a five day trial.
  • The Court was also sceptical about the need for a five month trial in any event, commenting that it was the money at stake and the deep pockets of the parties which was causing a five month trial, not the complexity of the issues.

The Court held that the essence of Defender's claims against both Madoff and HSBC was the recovery of losses invested in the Ponzi scheme

  • The Court rejected the argument that HSBC and Madoff were not concurrent wrongdoers because they had not caused the same damage.
  • Defender had argued that it had claimed different types of damages against Madoff and HSBC (e.g. part of the claim against HSBC was for restitution of fees paid for custodian services). 

Apportionment under the CLA should be in accordance with Irish law

  • The settlement agreement between Defender and Madoff was governed by New York law. Defender argued that this required any apportionment of liability between Madoff and HSBC to be in accordance with New York law (given that the settlement agreement was causing Defender to be identified with Madoff). 
  • The Court rejected this argument, holding that New York law was only relevant to considering whether the settlement agreement constituted an "accord" under the CLA. 
  • Any apportionment of liability was governed by Irish law as Defender's claim was brought in the Irish courts and the CLA was invoked in those Irish proceedings.
  • The Court rejected Defender's argument that O'Donnell J.'s judgment in the Supreme Court decision Caffola v O'Reilly  [2017] 3 IR 209 suggested that a settlement governed by Northern Irish law required the Court to make any apportionments as if Northern Irish law applied.

The New York law settlement agreement could not be used to circumvent HSBC's Irish statutory rights under the CLA

  • The Court rejected Defender's contention that Rome I (Reg (EC) No 593/2008) required the High Court to apply New York law in apportioning liability under the Civil Liability Act. 
  • Defender claimed that HSBC's apportionment claim only arises on the basis that a settlement agreement exists, and that that claim should therefore be governed by the law governing the settlement agreement.
  • The Court held that HSBC was not a party to the New York settlement agreement and that there was no privity of contract between Defender and HSBC in that respect and, as such, Rome I could not be invoked against HSBC.

In considering what would be a "just and equitable" apportionment, the test is to consider the parties' blameworthiness, as opposed to their causative link to the loss

  • In assessing blameworthiness:
    • the Court noted that HSBC may have been negligent, but Madoff was guilty of a massive fraud, which included the forging of over 46 million fake investment transactions; and
    • it was relevant that HSBC had also invested and lost approximately $1 billion of its own money with Madoff. In that respect, HSBC was also a victim of Madoff's criminality.

A civil concurrent wrongdoer will normally be entitled to a complete indemnity from the criminal concurrent wrongdoer

  • The Court noted that a concurrent wrongdoer can be exempt from making any contribution, notwithstanding that they are a concurrent wrongdoer. 
  • The Court found there to be a qualitative difference between Madoff's criminal wrongdoing and HSBC's civil wrongdoing. 
  • The Court cited with approval the Australian case of Burke v LFOT [2002] HCA 17, which involved a property transaction where the buyer's solicitor negligently failed to identify the seller's deceptive behaviour. The seller was sued for misrepresentation by the buyer, and the seller sought a contribution from the negligent solicitor. The Australian High Court refused contribution, noting the different character of the seller's deceptive conduct and the solicitor's negligent conduct. The seller was the "primary wrongdoer" and had to indemnify the solicitor, who had also been deceived by the fraudulent conduct.
  • The Court held it would be absurd if HSBC was not entitled to a full indemnity from Madoff, given their respective conduct. It would be absurd if a company who stole money and was ordered to repay that stolen money, could then seek contribution from a third party who was supposed to be safeguarding the money.

The Court rejected Defender's argument that it would unjust and inequitable to deny recovery from HSBC due to Defender's settlement with Madoff

  • The Court cited the 1% rule, where a concurrent wrongdoer who is found to be only 1% liable for a plaintiff's loss is liable to pay for 100% of the damages. It found that the alleged injustice and inequity suffered by Defender in being identified with Madoff due to the settlement agreement was less than that which applies to the 1% rule.  
  • Defender had freely entered into the settlement agreement (with the benefit of extensive legal advice) after proceedings were issued against HSBC, and should have been aware of the CLA consequences of settling with Madoff.

For more information please contact Liam Kennedy, Stephen King or any member of the Litigation & Dispute Resolution team.

Date published: 16 January 2019