Fairfield BVI Appeal – 13 June 2012

A recent appeal heard by the Eastern Caribbean Court in respect of the on-going Fairfield BVI litigation is of interest to fund investors in respect of whether or not redemption proceeds lead to unjust enrichment, in circumstances where it subsequently becomes clear that the actual fund value was zero.  The principles applied are long-standing ones and bear significant similarities to the Irish position.  Fairfield had invested funds with Bernard L Madoff Investments Securities (“BMIS”) on behalf of investors, some of which had redeemed prior to the liquidation of both BMIS and Fairfield.  The redemption value was calculated by reference to the company’s Net Asset Value ("NAV") pursuant to Fairfield’s articles of association.  

Fairfield subsequently sought the return of distributed funds on the basis that the NAV value was a mistake, as BMIS was a Ponzi scheme, and the actual value of the investment had been zero.  Therefore Fairfield argued that shareholders had been unjustly enriched and should make restitution.  The investors argued that the redemption proceeds were paid out pursuant to Fairfield’s agreement with investors and were therefore binding on Fairfield.  

Various findings were made in the first set of proceedings and both parties appealed.  For the purposes of this article, the relevant appeal outcome was a ruling that the alleged mistaken calculation of the NAV did not undermine the legal obligations which required Fairfield to pay the redemption proceeds.  It was held that Fairfield’s contractual obligations gave rise to a debt obligation and that the investors’ surrender of the shares was good consideration.  

In addition, it was held that this was regardless of whether or not BMIS was involved in a Ponzi scheme on the basis that the shares were the subject matter of the contract and the contract was between the shareholders and Fairfield.  Accordingly, the value of Fairfield’s investment in BMIS was stated as not forming a part of any such contract.  

Further, in respect of an argument raised that there was an obvious valuation mistake, which should entitle Fairfield to rescind the contract, it was ruled that this would only impact if it was the mistake of both parties and fundamental to the identity of the contract.  

The UK case of Bell v Lever Bros, in which that principle is explained, was quoted by the court.  Similar principles are generally applied in Ireland, which suggests that there may be a similar approach taken in this jurisdiction.