Privy Council refuses to extend the Quincecare duty to protect third party beneficiaries of funds held in a bank account

In the recent decision of Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) (Isle of Man) [2022] UKPC 18, the Privy Council confirmed that a bank would not owe a Quincecare duty to any third party beneficial owners of monies held in an account. In this blog post, we briefly consider this decision’s potential implication to Hong Kong’s legal position on Quincecare duty. For a detailed summary of the judgment and the Privy Council’s reasoning, please refer to an earlier blog post written by our London team here. Continue reading

PRC Court recognises an English Court judgment for the first time

On 17 March 2022, the Shanghai Maritime Court of PRC (the “SMC“) issued a milestone ruling ((2018) Hu 72 Xie Wai Ren No.1) with the approval by the Supreme People’s Court of the PRC (the “SPC“), allowing for the recognition and enforcement of an English Court judgment based on the principle of reciprocity for the first time (the “Recognition Ruling“).

The English Judgment

Our previous blog here sets out the background to the underlying dispute which led to the English Court judgment in question (the “English Judgment“): Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2016] EWCA Civ 982. The case concerned the termination by a shipowner, Spar, of three long-term charter parties on the ground that the charterer failed to pay hire on time. Spar then sued the charterer under the guarantees for (i) the balance of unpaid hire under the charters; and (ii) damages for loss of bargain in respect of the unexpired term of the charters.

The English Court of Appeal found in favour of Spar and ordered the charterers’ parent company, as guarantor, to pay Spar the amounts due under the three charter parties including damages plus interest and costs.

Spar then sought to enforce the English Judgment against the charterers’ parent company in Mainland China, where the parent company had assets.

Principle of Reciprocity in recognising a foreign judgment

On 24 January 2022, the SPC issued a conference summary of the National Court’s Symposium on Foreign-related Commercial and Maritime Trials (“Conference Summary“), which clarified, among other issues, the principle of reciprocity in recognising a foreign judgment in Mainland China. Several notable points were made in the Conference Summary which include the following:

  • The Court shall first examine whether there is any applicable international treaty (Article 33 of the Conference Summary).
  • If there is no applicable international treaty, the Court should determine whether there is any reciprocal relationship. One of the conditions for satisfying the reciprocal relationship is that: “… according to the law of the country where the court is located, the civil and commercial judgments made by the People’s Court can be recognised and enforced by the courts of that country.” (Article 44 of the Conference Summary).
  • A reporting system (which is used in cases where there is a need to report the case to higher courts) is also prescribed for cases concerning the application of the principle of reciprocity (Article 49 of the Conference Summary). Under the reporting system, the lower courts shall first refer their opinion to the higher courts for examination. If the higher courts approve, they shall refer their opinions to the SPC for final approval and the final ruling will be issued once it has been approved by the SPC.

The Recognition Ruling

The case was first heard by the SMC in 2018 and was submitted to the SPC following the reporting system for examination and approval.

The key issue addressed in the Recognition Ruling was whether there was a reciprocal relationship between Mainland China and the UK as to the recognition and enforcement of civil and commercial judgments.

  • Traditionally, PRC law allows a PRC Court to recognise and enforce a judgment of a foreign Court only if a Court in the foreign jurisdiction has previously enforced a Chinese judgment.
  • Although the SMC did not find any previous precedent of an English Court recognising a Chinese judgment, the SMC went ahead to recognise the English judgment in this instance. The SMC held that it was unnecessary to provide such foreign precedents to prove that the PRC judgment can be recognised under foreign laws.
  • The SMC was satisfied that, as a matter of principle, a Chinese judgment could be recognised by an English Court.

Observations and practical Implications

The Recognition Ruling arguably opens the gates for the PRC Courts to allow the enforcement of English judgments and will come as good news to English Court judgment creditors where their counterparty has assets in Mainland China.

However, court decisions in China only hold persuasive value, unlike in common law jurisdictions such as the UK where higher court decisions are binding on the lower courts. Although it cannot be said, for certain, whether this decision paves the way for future English judgments to be recognised and enforced in Mainland China, there is hope.

In addition, foreign judgment creditors will be watching the space with interest to see whether this Recognition Ruling widens the gate to include the recognition and enforcement of judgments from other common law jurisdictions.

Though not binding, at the very least, the Conference Summary provides important guidance to lower courts in China. The SMC had followed the internal reporting requirements before issuing the Recognition Ruling, where the SPC clarified that it was unnecessary to provide foreign precedents to prove a reciprocal relationship. This reduced the practical difficulty in proving the reciprocal relationship and has, importantly, led to a judgment which has demonstrated China’s willingness to cooperate with other jurisdictions on mutual recognition and enforcement of civil and commercial judgments.

 

Gareth Thomas
Gareth Thomas
Partner, Hong Kong
+852 2101 4025
Jojo Fan
Jojo Fan
Partner, Hong Kong
+852 2101 4254
Cathy Liu
Cathy Liu
Partner, Kewei
+86 21 2322 2158

 

Hong Kong: will Courts accept cryptocurrency as a security for costs?

In a recent English High Court decision, Tulip Trading Limited v Bitcoin Association for BSV [2022] EWHC 2 (Ch) and [2022] EWHC 141 (Ch), the Court refused the claimant’s request for security for costs to be paid in Bitcoin. This is the first English case where a party to litigation has sought to provide security in the form of cryptocurrency and provides helpful guidance on the interaction between cryptocurrency and security for costs. Tulip Trading Limited discusses the considerations the Courts may take into account to determine whether Bitcoin or other forms of cryptocurrencies will be accepted as an alternative form of security for costs. It will be interesting to see how the Hong Kong Courts may approach this issue if a similar request is made in the future. Continue reading

English High Court finds acceleration clause capable of falling within the penalty doctrine

In a recent English judgment, Heritage Travel and Tourism Ltd v Windhorst [2021] EWHC 2380 (Comm), the English High Court held that a clause in a settlement agreement requiring immediate payment of all outstanding amounts in the event of a late payment (i.e. an acceleration clause) was capable of falling within the penalty doctrine, but an obligation to pay a daily sum accruing pro rata on any outstanding amounts was not. Continue reading

English High Court finds alleged frustration of contract due to COVID-19 pandemic is not sufficiently arguable to grant injunction restraining demand under letter of credit

The English High Court has dismissed an application for an injunction to prevent an airline group from making demands under bank-confirmed standby letters of credit (SBLCs), securing aircraft leases granted to the claimant (a budget passenger airline), on the basis that it was not sufficiently arguable that the leases were frustrated due to the effects of the COVID-19 pandemic: Salam Air SAOC v Latam Airlines Group SA [2020] EWHC 2414 (Comm). Continue reading

The English High Court strikes out classic claim for reflective loss brought by a shareholder against its company’s professional advisers in the context of an IPO

The English High Court recently struck out a claim by a parent company (i.e., a shareholder of its subsidiary) for negligence and breach of retainer against a law firm in conducting due diligence and preparing for the subsidiary’s IPO, on the basis that the loss claimed by the parent company was reflective of the loss claimed by the subsidiary and therefore fell squarely within the confines of the reflective loss principle: Naibu Global International Company plc & Anor v Daniel Stewart & Company plc & Anor [2020] EWHC 2719 (Ch) (Naibu).

The Reflective Loss Principle

This case applies the principle of reflective loss that was recently confirmed and restated by the English Supreme Court in Sevilleja v Marex Financial Ltd [2020] UKSC 31 (see our London office’s banking litigation e-bulletin for a detailed discussion of this case: Untangling, but not killing off, the Japanese knotweed: Supreme Court confirms existence and scope of “reflective loss” rule). According to this principle, a shareholder’s loss in respect of a diminution in share value is not, in the eyes of the law, damage which is separate and distinct from the damage suffered by the company, and is therefore irrecoverable by the shareholder. As a result, even if the shareholder has also, in addition to the company, been wronged by the defendant’s conduct and the company has not commenced proceedings against the defendant, any claim for damages brought by the shareholder  will be barred by this principle.

The Case

The claim in Naibu arose out of the dissipation of assets of a Chinese sportswear company, Naibu (China) Co Ltd (Naibu China), by its founder. Naibu China was wholly owned by Naibu (HK) International Investment Limited (Naibu HK), which in turn was wholly owned by Naibu Global International Company plc (Naibu Jersey).

Naibu Jersey was originally floated on the Alternative Investment Market (AIM) in London in 2012, but was subsequently delisted in 2015 following the dissipation of Naibu China’s assets and the closure of its factory. The shares of Naibu HK and Naibu Jersey in Naibu China became valueless as a result. A law firm was retained as the legal adviser to both Naibu China and Naibu HK in relation to the AIM flotation, and Naibu HK and Naibu Jersey argued that the law firm had acted negligently and in breach of their retainer in conducting due diligence and preparing for the IPO. Naibu Jersey alleged that it had incurred losses at different times which might be different in amount and nature from the losses sustained by Naibu HK.

The law firm argued that the loss claimed by Naibu Jersey was almost entirely reflective of the losses claimed by Naibu HK and was therefore irrecoverable under the principle of reflective loss.

Bacon J rejected Naibu Jersey’s argument, holding that the losses claimed by Naibu Jersey as the parent company were entirely reflected in the diminution in the value of its shareholding in its subsidiary, even though the amount of the losses caused to Naibu Jersey might not be identical to that caused to Naibu HK. Bacon J held that, if the application of the rule against reflective loss could be avoided by identifying different losses occurring at different times (as Naibu HK and Naibu Jersey sought to do) in order to argue that the losses of the two companies might not have been identical, that would entirely undermine the purpose of the rule. In particular, the supposedly separate category of losses named by Naibu HK/Naibu Jersey (i.e., disbursement of the proceeds of flotation) was, in reality, part of the same loss, representing the investment made by Naibu Jersey in Naibu China, through Naibu HK, the value of which was now reduced to nil. Accordingly, the correct legal position was that it is the nature of the loss, rather than the amount, that is decisive as to whether the reflective loss principle is engaged.

For a more detailed discussion of the case, please refer to our London office’s banking litigation e-bulletin here.

The Reflective Loss Principle in Hong Kong

A month before the English Supreme Court delivered its judgment in Sevilleja v Marex Financial Ltd [2020] UKSC 31, the Hong Kong Court of Appeal explored the same doctrine in Topping Chance Development Ltd v CCIF CPA Ltd [2020] HKCA 478, which was an application before the Hong Kong Court of Appeal to strike out a part of a claim brought by the plaintiff for infringing the rule against recovery of reflective loss. The Court of Appeal held that the two seminal authorities in Hong Kong on this point are Johnson v Gore Wood & Co [2002] 2 AC 1and Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370.

In Topping Chance, the Hong Kong Court of Appeal considered, on the facts, whether the rule against recovery of reflective loss should not apply because the circumstances of the case were akin to the second exception to the rule set out by Lord Bingham in Johnson v Gore Wood & Co i.e., where a company suffers loss but has no cause of action to sue to recover that loss, the shareholders of that company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding.

The Hong Kong Court of Appeal held that the ‘no reflective loss’ principle is engaged not only where the company had the right to sue but also where it had declined or failed to sue, whether for lack of merits or lack of financial resources caused by the wrongdoer.  It is not concerned with barring causes of action but with barring recovery of types of loss.  It is based on the nature of the loss and what is important is that the company’s loss would be made good if the shareholder recovers from the defendant.

Although the facts in Topping Chance were different from those in Naibu (in that in Naibu both the company and the shareholder had a cause of action, whereas in Topping Chance, the Hong Kong Court of Appeal found that the company did not have a realistic claim), both courts looked at the nature of the loss in determining whether the ‘no reflective loss’ principle was engaged. Given that the principle in Hong Kong closely resembles that in England, if a similar factual situation as in Naibu were to arise in Hong Kong, the Hong Kong court is likely to follow the reasoning in Naibu, and hold that it is the nature of the loss, rather than the amount or its timing, that is decisive in determining whether the ‘no reflective loss’ principle is engaged.

 

Gareth Thomas
Gareth Thomas
Partner, Head of Commercial Litigation, Hong Kong
+852 2101 4025
Dominic Geiser
Dominic Geiser
Partner, Hong Kong
+852 2101 4629
Jojo Fan
Jojo Fan
Partner, Hong Kong
+852 2101 4254
Priya Aswani
Priya Aswani
Professional Support Lawyer
+65 6868 8077

English Court of Appeal considers application of “SAAMCO” principle in context of auditor’s negligence case

The English Court of Appeal has held that, where an auditor negligently failed to detect management’s dishonest concealment of the claimant’s insolvency, it was liable for the losses suffered by the claimant in continuing to conduct its loss-making business: Assetco Plc v Grant Thornton UK LLP [2020] EWCA Civ 1151.

While the decision recognises that a negligent auditor will not be liable for losses suffered simply because a business continues to trade, in the circumstances of this case the claimant’s business was ostensibly sustainable only on the basis of management’s dishonest representations representations to the auditors in the course of the audits. By negligently issuing unqualified audit reports, the business appeared to be sustainable when in truth it was insolvent, and this deprived the claimant’s shareholders or non-executive directors of the opportunity to call the senior management to account. The English Court of Appeal found that the claimant’s losses from continuing that business fell within the scope of the defendant’s duty: the negligence was not merely the occasion for the losses but was a substantial cause of them.

The judgment is of particular interest for the English Court of Appeal’s discussion of the so-called SAAMCO principle, which was established in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 (SAAMCO) and expanded upon in Hughes-Holland v BPE Solicitors [2017] UKSC 21. Essentially, this says that where a professional is responsible only for providing information on which a decision will be taken, rather than advising on the merits of a transaction overall, the professional will be responsible only for the consequences of the information being wrong – not all the financial consequences of the transaction. This means that the claimant must establish that its loss would not have been suffered if the information had in fact been correct.

In the present case, the English Court of Appeal confirmed that the SAAMCO principle applies to general audit cases, even though the purpose of an audit is not to enable a decision to be taken in respect of a particular transaction. However, the decision emphasises that the SAAMCO principle may not need to be addressed in all cases, and in any event is not to be applied mechanistically. It is merely a tool the court may employ for determining which losses fall within the scope of the defendant’s duty, and it may be subject to exceptions.

As a result, it was not fatal to the claimant’s case that it had not asked the judge to determine whether the losses it claimed would have been suffered if the information in the audit reports had been correct, and the judge had not done so. However, in cases where the provision of negligent advice or information is alleged, it would be prudent for the parties to consider the application of the SAAMCO principle and be ready to persuade the court, if necessary, why it should not be applied.

The SAAMCO principle is due to be considered by the UK Supreme Court in an appeal against the decision in Manchester Building Society v Grant Thornton UK LLP [2019] EWCA Civ 40 (considered here), in which the English Court of Appeal applied the principle to conclude that an auditor was not liable for losses suffered following negligent advice regarding the accounting treatment of interest rate swaps. That decision was also considered by the English Court of Appeal in the present case.

The present decision is also of interest for the English Court of Appeal’s discussion of the correct approach to assessing damages in “loss of a chance” cases, where the claimant’s loss depends on the hypothetical acts of third parties. The decision illustrates in particular that, in some cases, it may be appropriate to treat the lost chance as a certainty.

For a full discussion of the case, please click here.

 

Gareth Thomas
Gareth Thomas
Partner, Head of Commercial Litigation, Hong Kong
+852 2101 4025
Jojo Fan
Jojo Fan
Partner, Hong Kong
+852 2101 4254
Dominic Geiser
Dominic Geiser
Partner, Hong Kong
+852 2101 4629

TRUSTEES TAKE COMFORT – HIGH COURT UPHOLDS BROAD SCOPE OF EXONERATION CLAUSES

Summary

Trustees often seek to limit their liability in the form of exoneration clauses in trust deeds. As such,  it is generally difficult for a beneficiary to challenge a trustee’s decision that falls within the scope of the exoneration clause.

In Sofer v SwissIndependent Trustees SA [2019] EWHC 2071 (Ch), the England and Wales High Court confirmed just how high the bar can be for beneficiaries to overcome the limitation on liability provided by exoneration clauses and also set out a test for doing so. Here the defendant (the trustee) applied for striking out or summary judgment of a claim pursued by a beneficiary for breach of trust, on the basis that the trustee’s relevant action was covered by an exoneration clause. The strike out was granted.

The judgment is also noteworthy in particular for Hong Kong and Australian trustees and beneficiaries. The judge relied on both English and Australian case law and highlighted that “the relative homogeneity of trust law in this and other Commonwealth jurisdictions” meant the Australian case law had “considerable persuasive value”.  Continue reading

When will the courts find it necessary to imply terms into agreements?

The English High Court in Lehman Brothers International (Europe) (In Administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch) found it necessary to imply a term to a debt security trade agreement that was otherwise unworkable. It is generally uncommon for a Court to imply terms into a commercially negotiated agreement given the restrictive nature of the relevant test, although this is more often seen in the case of an oral agreement as in this case. This is even more so in the context of the securities market.

Background

In 2014, Lehman Brothers International (Europe) (In Administration) (“LBIE”) entered into a trade of Peruvian government-issued bonds (otherwise known as, Peruvian Government Global Depository Notes (“GDN”)) with Exotix Partners LLP (“Exotix“) by oral agreement.

The parties were, however, mistaken as to the nature and value of the debt securities being traded. In particular, the parties incorrectly thought that the securities involved were of insignificant value. The perceived value of the GDN was approximately US $7,000 but the securities were, in fact, worth over US $7 million. The parties were blind-sided by the fact that the GDN were issued in Peruvian Nuevo Sol, the local currency in Peru, and did not realise that the coupon payments accrued under the securities were in US Dollars. For this reason, their valuation was over 1,000 times off the mark.

Eventually, Exotix realised the mistake when it received a coupon payment vastly greater than what it had expected. Instead of notifying LBIE of their mistake, however, Exotix sold the GDN and profited massively from the sale.

The Court’s analysis

The court considered the true meaning and effect of the bargain struck between LBIE and Exotix. In doing so, the court looked at the objective intentions of the parties on the transaction.  The court had to decide whether the parties agreed to trade: (a) a specific number of GDN (Exotix’s case); or (b) a number of GDN equating to a particular value in the currency that they were issued (LBIE’s case).

The court found that the parties’ intention was most likely the latter i.e., the parties had intended to trade securities worth approximately US $7,000 as opposed to a specific number of GDN. Accordingly, it could not have been the objective intention of the parties to trade with over US $7 million at stake.

For this understanding to work, however, a term that enables the delivery and trade of a fraction of a GDN must be implied. A trade of an integer quantity of GDN would amount to a value exceeding the approximate US $7,000 traded, and would also contradict the court’s finding that the parties intended to trade on a value as opposed to a quantity.

In making the decision, the court relied on the Supreme Court case of Marks & Spencer plc v BNP Paribas [2015] UKSC 72 (“Marks & Spencer“), a leading authority on when an implied term should be read into the relevant contract. There, the court held that the relevant question is whether the term is so obvious and necessary to provide commercial and practical coherence to the agreement that it must be implied for the sake of business efficacy.

The court was understandably hesitant in finding that the proposed implied term was clearly obvious and necessary. At the same time, it noted that proper understanding of the parties at the time when the transaction was entered into would have led the parties to realise the blatant mistake they had made. This rendered the problem between the parties a misunderstanding as opposed to an omission (which would otherwise have likely led the court to find that the contract was fundamentally defective and void).

Relying on Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2 (“Nazir Ali“), another Supreme Court case, the court applied the principle that a term may be implied if the contract would otherwise lack commercial or practical coherence. In short, the term must be necessary to ensure that the agreement is workable.

Following the court’s analysis, it held that the trade agreement could only be made to work if an implied term for the settlement of a fraction of GDN was found. The court recognised that the law prefers giving effect to the parties’ agreement as opposed to dismissing the parties’ bargain altogether. For this reason, the court’s finding that the issue before it was due to a misunderstanding between parties rather than an omission of the parties was paramount to the court in finding in LBIE’s favour.

As relief, LBIE was awarded restitutionary relief on the basis that Exotix would have otherwise been unjustly enriched by the value of GDN it had received and the profit that it made from that amount.

Relevance to Hong Kong

While the impression is often that the courts will decline to enforce an agreement where obligations are omitted or ambiguous, the English High Court case serves as a helpful reminder that the courts can also be sympathetic and imply necessary terms into contracts where there is a genuine agreement between the parties. The case highlights the preference of the courts to uphold the parties’ bargain as opposed to dismissing the parties’ mutual understanding in its entirety.

References to Marks & Spencer and Nazir Ali in the High Court’s decision emphasises the relevance of these English Supreme Court authorities. It demonstrates a consistent approach taken by English courts when considering the matters of contractual interpretation.

Although the same authorities have not been considered by the Court of Final Appeal in Hong Kong, the application of principles derived from these cases provide a helpful indication as to the direction the Hong Kong courts are likely to take when similar issues are argued before them.

Take the Privy Council decision in Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10, for example, this case has been considered by the Hong Kong courts in Guo Jianjun v Dragon Fame Investment Ltd [2016] 2 HKC 213 and Tadjudin Sunny v Bank of America, National Association [2016] HKEC 1128 with the former being a Hong Kong Court of Appeal case. It would not be surprising to find the authorities of Marks & Spencer and Nazir Ali being discussed and applied before the Hong Kong courts in the near future.

 

Gareth Thomas
Gareth Thomas
Partner, Head of Commercial Litigation, Hong Kong
+852 2101 4025
Dominic Geiser
Dominic Geiser
Partner, Hong Kong
+852 2101 4629
Jojo Fan
Jojo Fan
Senior Consultant, Hong Kong
+852 2101 4254
Aaron Tang
Aaron Tang
Associate, Hong Kong
+852 2101 4102

Recent judgments in the UK consider Quincecare duty of care relevant to deposit holding financial institutions processing payment mandates

The UK Supreme Court has recently upheld a claim for breach of the so-called Quincecare duty of care, which requires a financial institution to refrain from executing a customer’s payment mandate if (and so long as) it is “put on inquiry” that the payment order is an attempt to misappropriate its customer’s funds: Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50.  The UK Supreme Court’s judgment in this case follows hot on the heels of the English Court of Appeal’s refusal to strike out a separate claim for breach of a Quincecare duty (in JP Morgan Chase Bank NA v The Federal Republic of Nigeria [2019] EWCA Civ 1641).  Of itself, the English Court of Appeal decision has, arguably, expanded the scope of the Quincecare duty of care.

The expanded scope in JP Morgan does not yet apply in Hong Kong. At present, the traditional Quincecare duty continues to apply: see DEX Asia Ltd v DBS Bank (HK) Ltd [2009] 5 HKLRD 160 and more recently PT Tugu Pratama Indonesia v Citibank N.A. [2018] 5 HKLRD 277, in which the Court of First Instance considered, obiter, the extent to which a bank’s duty of care owed to its customers requires the bank to make inquiries of suspicious transactions in their bank accounts.  The expanded scope of the Quincecare duty of care may, however, be considered in Hong Kong sooner rather than later, if Tugu Pratama were to be appealed.

The judicial attention that this cause of action is currently receiving in England & Wales, and to some extent, in Hong Kong, highlights this as a risk area for financial institutions handling client payments.  In particular, there is litigation risk where there are inadequate safeguards/processes governing payment processing at financial institutions.  This is a good time for financial institutions to review safeguards governing payment processing, and also review the protocols in place governing what steps must be taken in the event a red flag is raised.

Further, the UK Supreme Court decision in Singularis is also of significance to corporate claimants – and insolvency office holders – in particular in clarifying the test for corporate attribution in England & Wales. The court declared that the often criticised decision in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39 (considered here and here) can “finally be laid to rest”. In particular, it confirmed that whether the knowledge of a fraudulent director can be attributed to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant – even in the case of a “one-man company”.  This clarification is welcome as the law in England & Wales is now somewhat aligned to the Hong Kong position set out in the Court of Final Appeal decision of Moulin Global Eyecare Trading Limited (in liquidation) v The Commissioner of Inland Revenue FACV 5/2013, in which Lord Walker provided welcome clarification on whether the fraudulent knowledge of directors can be attributed to a company.  Lord Walker, in that case, admitted that his analysis in Stone & Rolls was wrong, in particular, to regard the fraud exception as being of general application, regardless of the nature of the proceedings.

JP MorganQuincecare duty of care

The claimant brought a claim against the defendant bank to recover funds held in its depository account, which the bank paid out in accordance with instructions given by the claimant (from persons authorised to give those instructions under the terms governing the account). The claimant alleged that the payments were made by the bank in breach of its Quincecare duty. This is the duty imposed on a bank to refrain from executing an order if (and for as long as) it is ‘put on inquiry’ in the sense that it has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of its customer. This is an objective test, judged by the standard of an ordinary prudent banker. The bank applied for reverse summary judgment/strike out on various grounds, including that there was no Quincecare duty of care applicable on the facts because such a duty was inconsistent with, or was excluded by, the express terms of the depository agreement. The English High Court refused the bank’s application and the bank appealed. The English Court of Appeal upheld the High Court’s decision, rejecting all grounds of appeal put forward by the bank. There are three particularly significant points arising from the judgment.

Amongst those, the English Court of Appeal held that, in most cases, the Quincecare duty will require “something more” from the bank than simply pausing and refusing to pay out on the mandate when put on enquiry that the order is an attempt to misappropriate funds.  The effect is that the Quincecare duty comprises both (i) a negative duty to refrain from making payment; and (ii) a positive duty on the bank proactively to do “something more”. In the English Court of Appeal’s view, these negative and positive duties carry equal weight, and neither is separate nor subsidiary nor additional to the other. In the High Court, the judge inclined to the view that the positive duty was a duty of enquiry. However, the English Court of Appeal’s formulation of the positive duty is not limited to one of enquiry or investigation and for that reason it has arguably expanded the scope of the Quincecare duty. The English Court of Appeal, however, consciously avoided identifying factors which might be relevant to assessing what the “something more” is or might consist of, thus offering banks little practical guidance; it will instead and unhelpfully depend on the facts of the case in question.  Other significant points are discussed in detail in our blog post here.

Quincecare duty of care in Hong Kong

The arguably expanded scope of the Quincecare duty of care in JP Morgan does not yet apply in Hong Kong.  At present, the traditional Quincecare duty continues to apply.  The Quincecare duty was considered and applied in Hong Kong in DEX Asia Ltd v DBS Bank (HK) Ltd [2009] 5 HKLRD 160 and more recently in PT Tugu Pratama Indonesia v Citibank N.A. [2018] 5 HKLRD 277, in which the Court of First Instance considered, obiter, the extent to which a bank’s duty of care owed to its customers requires the bank to make inquiries of suspicious transactions in their bank accounts.  The expanded scope of the Quincecare duty of care may, however, be considered in Hong Kong sooner rather than later if Tugu Pratama were to be appealed.

In Tugu Pratama, rogue directors of the plaintiff (an insurance company) instructed the defendant bank to make payments in excess of US$50 million (over four years) to their personal accounts from the plaintiff’s private banking account. The plaintiff alleged that the payments constituted misappropriation of its money and were made without its authority. Instructions for the payments, however, were given in accordance with the account opening mandate.  The Honourable Mr. Justice Anthony Chan held that the defendant bank had acted in breach of its duty of care to the plaintiff by effecting the payments (but on the facts of the case he held that the Plaintiff’s claim was time-barred).

Following both Barclays Bank Plc. v. Quince Care Limited and another [1992] 4 All ER 363 and DEX Asia, Anthony Chan J held that, in assessing whether the bank was put on inquiry, factors such as (i) the standing of the corporate customer; (ii) the bank’s knowledge of the signatory; (iii) the amount involved; (iv) the need for a prompt transfer; (v) the presence of unusual features; and (vi) the scope and means available to the bank for making reasonable inquiries, were all relevant.  Importantly, the judge held that the duty of inquiry is only triggered in a clear case.  Whilst it is a duty not to facilitate a fraud practised on its customer, it is clearly not the function of a bank to act as a fraud detector.  Had it been otherwise, banks would have to employ teams of additional and specialist staff to carry out such detective work.  This is contrary to the banking relationship, which is founded on trust. Therefore, the threshold which triggers the bank’s duty to make inquiries is quite high.

On the facts of the case, the factors that led the judge to conclude that the defendant bank had acted in breach of its Quincecare duty of care included the fact that there was no apparent connection between the plaintiff’s business and the payments, which were of high value, frequent, and often were directed by the directors into their personal accounts. In addition, there was little other activity on the account. The judge held that these factors, when viewed together, were sufficiently indicative of fraud to put the bank on enquiry.

In practice, some of the factors banks should look at when processing instructions include: (i) the connection between payments and the company’s business; (ii) the identities of the payees (e.g., in particular where they are directors of the company); and (iii) the value and frequency of the payments.

Singularis – corporate attribution where breach of Quincecare duty has been established

The claimant held sums on deposit with the defendant bank. An authorised signatory had extensive powers to take decisions on behalf of the claimant including signing powers over the company’s bank accounts, and was the sole shareholder, a director and also chairman, president and treasurer of the company. In 2009, the bank was instructed by the authorised signatory on the account to make payments out of the claimant’s account. The defendant bank approved and completed the transfers notwithstanding “many obvious, even glaring, signs that the authorised signatory was perpetrating a fraud on the company” and that he “was clearly using the funds for his own purposes and not for the purpose of benefiting the company”. It was common ground at trial that the authorised signatory was acting fraudulently when he instigated the transfers. In 2014, the claimant (acting by its joint official liquidators) issued a claim against the defendant bank for US$204m, the total of the sums transferred in 2009.  The matter went all the way up to the Supreme Court. The English High Court held that the bank acted in breach of its Quincecare duty by making the payments in question without proper inquiry.  The decision on the breach of Quincecare duty was not appealed.  The issue for the Supreme Court was of corporate attribution – whether the fraudulent state of mind of the authorised signatory could be attributed to the company (which had been defrauded) and, if so, whether the claim for breach of the Quincecare duty could be defeated by the defence of illegality (and certain other grounds of defence).  The Supreme Court found against the defendant on both points.  The Supreme Court’s decision and analysis is discussed in detail in our blog post here.

 Corporate attribution in Hong Kong

The law on corporate attribution in Hong Kong is neatly summarised in Moulin Global Eyecare Trading Limited (in liquidation) v The Commissioner of Inland Revenue FACV 5/2013, in which the Hong Kong Court of Final Appeal provided clarification on whether the fraudulent knowledge of directors can be attributed to a company.

The former directors of the company fraudulently inflated the profits of the company and paid almost HK$89 million in inflated profits tax to the Inland Revenue. When the company was subsequently wound up, and provisional liquidators appointed, the liquidators attempted to reclaim the tax paid, on the basis that the Company had not made any taxable profits in the relevant years. For a detailed discussion, please see our blog post here.

The majority of the Court of Final Appeal upheld the Court of Appeal’s decision and ruled, on the facts of the case, that the fraudulent knowledge of the company’s former directors regarding inflation of profits should be attributed to the company. Accordingly, the fraud exception did not apply and the liquidators of the company could not rely on provisions of the Inland Revenue Ordinance to claim repayment of excess tax payments made to the Inland Revenue.

The Court of Final Appeal in Moulin held (similar to the decision in Singularis) that context is crucial, such that questions of attribution are always sensitive to the factual and statutory background and the nature of the proceedings in which they arise.  In Singularis, it was held that whether knowledge of a fraudulent director can be attributed to the company is to be found in consideration of the context and the purpose for which the attribution is relevant, including where it is a ‘one-man show’, effectively laying the often criticised decision in Stone & Rolls to rest. In the Hong Kong case of Moulin, Lord Walker admitted that his analysis in Stone & Rolls was wrong, in particular to regard the fraud exception as being of general application, regardless of the nature of proceedings.

Lord Walker in Moulin, however, went further and shelved cases into two distinct categories – namely “redress’ and “liability” cases – the former being cases where the company is suing the director/officer for wrongs done to it and the latter being cases where the third party is suing the company for a wrong done.  For liability cases, he held that the fraud exception does not apply i.e., fraudulent knowledge of directors can be attributed to a company whilst for “redress” cases, fraudulent knowledge of directors cannot be attributed to the company.  He further went on to hold that there are some cases that fall in between and do not fit into either liability or redress categories. There is no clear analysis for these cases apart from a general view that “there is no reason for the law to apply the fraud exception“.  These cases include claims against insurers or auditors who have, for value, undertaken to provide protection against the risk of internal fraud, or to use reasonable professional skill to uncover internal fraud.  As it was held in Quincecare, in the relationship between a banker and a customer, there is an implied term of the contract that the bank will observe reasonable skill and care in executing the customer’s orders.  Arguably, therefore, claims against banks would fall into this middle category.  We have yet to see how the courts in Hong Kong will apply corporate attribution where the bank is held to have breached its Quincecare duty of care towards a company whose directors have fraudulently transferred money out of a company’s accounts at the detriment of the company.  If such a case was to see its day in the Hong Kong courts, the UK Supreme court’s analysis in Singularis may provide helpful guidance.

 

Gareth Thomas
Gareth Thomas
Partner, Head of Commercial Litigation, Hong Kong
+852 2101 4025
Dominic Geiser
Dominic Geiser
Partner, Hong Kong
+852 2101 4629
Jojo Fan
Jojo Fan
Senior Consultant, Hong Kong
+852 2101 4254
Priya Aswani
Priya Aswani
Professional Support Lawyer
+65 6868 8077