Gross Negligence Revisited

Primeo Fund (In Official Liquidation) and Bank of Bermuda (Cayman) Limited, HSBC Securities Services (Luxembourg) SA (Cayman Islands Court of Appeal 13 June 2019).

In recent years the conduct of professional service providers in the Cayman Islands has come under scrutiny by the courts in respect of their failure to prevent large scale investment fund frauds. This has included auditors, administrators and custodians, as well as persons serving as independent directors. A recurring issue in professional negligence litigation in the Cayman Islands is the scope of exculpatory and indemnity provisions which typically require proof of wilful neglect or default or gross negligence before liability can be established.

In Weavering Macro Fixed Income Fund Limited (In Liquidation) -v- Peterson and Ekstrom (the "Company"), the Company's articles of association protected directors from liability for conduct falling short of "wilful neglect or default". The Court of Appeal held1 that in order to overcome this hurdle it was necessary for the Company to prove "that the director made a deliberate and conscious decision to act or to fail to act in knowing breach of his duty: negligence, however gross, is not enough."2 The Court of Appeal also observed that for a director to be liable on the basis of being recklessly careless, in the sense of not caring whether his act or omission is or is not a breach of duty, he had (at the least) to suspect that his conduct might constitute a breach of duty in order for such conduct to constitute wilful neglect or default. The Court reversed the decision of the trial Judge and held that the facts did not support the Judge's inference in that case that the directors had consciously chosen not to perform their duties to the Company.

In Primeo Fund (In Official Liquidation) and Bank of Bermuda (Cayman) Limited, HSBC Securities Services (Luxembourg) SA3 the Court of Appeal has recently had to consider the meaning of the common exclusion for acts and omissions falling short of "gross negligence". Primeo was an investment fund promoted, marketed and managed by Bank Austria AG, which invested its funds in a managed account with Bernard L Madoff Investment Securities LLC ("BLMIS") owned and controlled by the now long-term guest of the US Federal Bureau of Prisons, Bernard Madoff. It was a feature of the business model of BLMIS that it operated as investment manager, broker and custodian, and its trading strategy remained secret...