The Supreme Court has upheld the first successful claim for breach of the so-called Quincecare duty of care: Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd  UKSC 50.
The Supreme Court’s judgment in this case follows hot on the heels of the Court of Appeal’s refusal to strike out a Quincecare duty claim in JPMorgan Chase Bank, N.A. v The Federal Republic of Nigeria  EWCA Civ 1641 (see our banking litigation blog post). The judicial attention that this cause of action is currently receiving highlights the litigation risks of inadequate safeguards/processes governing payment processing at financial institutions, and the recent decision is therefore likely to be of significant interest to the sector.
A brief recap on the Quincecare duty. The duty arises in the context of a deposit holding financial institution processing a payment mandate in relation to a customer’s account, where that mandate was made by an authorised signatory of its customer, but where the instructions turn out to have been made fraudulently and to the detriment of the customer. It is the duty imposed on the bank to refrain from executing the order if (and for as long as) it is “put on inquiry” that the order is an attempt to misappropriate its customer’s funds. This is an objective test, judged by the standard of an ordinary prudent banker.
In the present case, breach of the Quincecare duty was established at first instance and not appealed. The issue for the Supreme Court was 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 bank in respect of both points.
In reaching this conclusion, the Supreme Court clarified a number of important implications, including:
- Test for attribution: Declaring that the often criticised decision in Stone & Rolls Ltd v Moore Stephens  UKHL 39 can “finally be laid to rest”, the Supreme Court restated and clarified the test for attribution. It confirmed that whether 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. The Supreme Court expressly stated that there is no principle of law that, in any proceedings where the company is suing a third party for breach of a duty owed to it by that third party, the fraudulent conduct of a director is to be attributed to the company if it is a one-man company.
- Illegality defence in response to a Quincecare claim: In the present case the Supreme Court found that the bank did not meet the test for a successful illegality defence laid down in Patel v Mirza  UKSC 42. While this will be fact specific in any given case, the reasoning given by the court highlights the challenges which financial institutions may face to make good such a defence. In particular, as a matter of public policy, the Supreme Court said that denial of the claim would have a material impact upon the growing reliance on banks and other financial institutions to play an important part in reducing and uncovering financial crime and money laundering. If a regulated entity could escape from the consequences of failing to identify and prevent financial crime by casting on the customer the illegal conduct of its employees that policy would be undermined.
In combination with the JPMorgan v Nigeria decision, this judgment suggests that it may be prudent for financial instructions to review safeguards governing payment processing, to review protocols in place for what steps must be taken in the event that a red flag is raised, and also to consider reviewing the standard form wording of client account agreements seeking to exclude the Quincecare duty.
We consider the decision in more detail below.
For further detail on the background to the claim, please see our blog post on the Court of Appeal’s decision.
In summary, Singularis Holdings Limited (“Singularis”) held sums on deposit with Daiwa Capital Markets Europe Limited (the “Bank”). In 2009, the Bank was instructed by an authorised signatory on the account (Mr Al Sanea) to make payments out of Singularis’s account. Mr Al Sanea was the sole shareholder, a director and also chairman, president and treasurer of Singularis. There were six other directors, who were reputable people, but did not exercise any influence over the management of Singularis. Very extensive powers were delegated to Mr Al Sanea to take decisions on behalf of Singularis, including signing powers over the company’s bank accounts.
The Bank approved and completed the transfers notwithstanding “many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company” and that Mr Al Sanea “was clearly using the funds for his own purposes and not for the purpose of benefiting Singularis”. It was common ground at trial that Mr Al Sanea was acting fraudulently when he instigated the transfers.
In 2014, Singularis (acting by its joint official liquidators) issued a claim against the Bank for US$204m, the total of the sums transferred in 2009. There were two bases for the claim: (1) dishonest assistance in Mr Al Sanea’s breach of fiduciary duty in misapplying Singularis’ funds; and (2) breach of the Quincecare duty of care owed by the Bank to Singularis by giving effect to the payment instructions.
High Court decision
The High Court held that the claim of dishonest assistance failed, but that the Bank did act in breach of its Quincecare duty by making the payments in question without proper inquiry, finding that any reasonable banker would have noticed the signs that Mr Al Sanea was perpetrating a fraud on Singularis and that there was a failure at every level within the Bank: Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd  EWHC 257 (Ch).
The Bank advanced an illegality defence relying on the legal doctrine of ex turpi causa, which prevents a claimant from pursuing a civil claim if the claim arises in connection with some illegal act on the part of the claimant. In this instance, the claim against the Bank for breach of duty was brought by Singularis, but the illegal acts were carried out by Mr Al Sanea. The focus of the argument before the High Court on the illegality defence was therefore whether Mr Al Sanea’s dishonest conduct should be attributed to Singularis. However, this (and the Bank’s other defences) was rejected. The court reduced the damages payable by 25% to account for Singularis’s contributory negligence.
The Bank appealed. The grounds of appeal did not include an appeal against the finding of the Quincecare duty of care, or breach of that duty. The grounds related to the illegality defence and other defences, or alternatively (if remaining unsuccessful on those defences), the amount by which Singularis’s damages should be reduced for contributory negligence.
Court of Appeal decision
The Court of Appeal unanimously dismissed the appeal: Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd  EWCA Civ 84 (see our banking litigation blog post for more detail).
It upheld the High Court’s finding that Mr Al Sanea’s fraudulent state of mind could not be attributed to Singularis. However, the Court of Appeal held that, even if the Bank had been successful on attribution, the claim for breach of the Quincecare duty would still have been successful and not defeated by any of the Bank’s defences, and that the finding of 25% contributory negligence was a reasonable one.
The Bank appealed to the Supreme Court.
Supreme Court decision
Two broad issues arose for the Supreme Court to consider:
- When can the actions of a dominant personality, such as Mr Al Sanea, who owns and controls a company, even though there are other directors, be attributed to the company?
- If such actions are attributed to the company, is the claim defeated (i) by illegality; (ii) by lack of causation; or (iii) by an equal and countervailing claim in deceit?
We consider the Supreme Court’s response to these issues below (in reverse order).
The Bank’s defences
The Supreme Court rejected all three of the Bank’s defences, based on illegality, causation and a countervailing claim in deceit.
Defence of illegality
Both the High Court and Court of Appeal rejected the illegality defence raised by the Bank on two grounds: (1) that Mr Al Sanea’s fraud could not be attributed to Singularis (in other words, his fraud could not be held to be the company’s fraud) – considered below; and (2) in any event, the Bank did not meet the test for a successful illegality defence laid down in Patel v Mirza.
An illegality defence will operate in an appropriate case to prevent a claimant from pursuing a civil claim if the claim arises in connection with some illegal act on the part of the claimant. In this case, the illegality relied on was Mr Al Sanea’s provision of documents which he knew to be false and his breach of his fiduciary duty towards Singularis. The Bank argued that these illegal acts by Mr Al Sanea (attributed to Singularis) defeated the breach of Quincecare duty claim.
Looking at the test for a successful illegality defence, the Supreme Court noted that Patel v Mirza rejected a test which depended on whether or not the claimant had to plead the illegal agreement in order to succeed. Instead the Supreme Court in that case adopted an approach based on whether enforcing the claim would be harmful to the integrity of the legal system and therefore contrary to the public interest. It set out a three-fold test to assess whether the public interest would be harmed in that way:
“…it is necessary (a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, (b) to consider any other relevant public policy on which the denial of the claim may have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.”
The Supreme Court considered each element of the test, agreeing with the conclusions of the first instance judge and finding against the Bank in respect of each element.
(a) Purpose of the prohibition:
Prohibition against breach of fiduciary duty by Mr Al Sanea: The Supreme Court held this prohibition was to protect Singularis from becoming the victim of the wrongful exercise of power by officers of Singularis. That purpose would not be enhanced by preventing Singularis from getting back the money which had been wrongfully removed from its account.
Prohibition against false statements made by Mr Al Sanea: The Supreme Court held this prohibition was both to protect the Bank from being deceived and Singularis from having its funds misappropriated. That purpose would be achieved by ensuring that the Bank was only liable to repay the money if the Quincecare duty was breached: that duty struck a careful balance between the interests of the customer and the interests of the Bank.
Accordingly, the first limb of the Patel v Mirza test was not satisfied by the Bank, because denial of the Quincecare duty claim would not enhance the purpose of the relevant prohibitions (i.e. the prohibitions against breach of fiduciary duty or making false statements).
(b) Relevant public policy:
The Supreme Court said that denial of the claim would have a material impact upon the growing reliance on banks and other financial institutions to play an important part in reducing and uncovering financial crime and money laundering. If a regulated entity could escape from the consequences of failing to identify and prevent financial crime by casting on the customer the illegal conduct of its employees that policy would be undermined.
In the opinion of the Supreme Court, denial of the claim would be an unfair and disproportionate response to any wrongdoing on the part of Singularis. The possibility of making a deduction for contributory negligence on the customer’s part enables the court to make a more appropriate adjustment than the rather blunt instrument of the illegality defence.
Accordingly, the Supreme Court held that – even if the acts of Mr Al Sanea could be attributed to Singularis – the claim for breach of the Quincecare duty could not be defeated by the defence of illegality.
Defence of causation
The Bank argued that, if the fraud was attributed to the company, the company’s loss was caused by its own fault and not the Bank’s. The Supreme Court recognised that there is a there is a difference between protecting people against harm caused by third parties and protecting them against self-inflicted harm. However, the present case was one of the rare cases in which the Bank had a duty to protect against self-inflicted harm. That is the purpose of the Quincecare duty: to protect a bank’s customers from harm caused by those for whom the customer is, one way or another, responsible.
Countervailing claim in deceit
The Bank argued that, because it would have an equal and countervailing claim in deceit against the company, the company’s claim in negligence should fail for circularity. The Supreme Court dismissed this argument in brief terms, citing the Court of Appeal’s reasoning that, since the fraud was a precondition for the claim for breach of the Quincecare duty, it would be a surprising result if the Bank could escape liability by placing reliance on the existence of that same fraud.
Attribution of knowledge and conduct
The Bank argued that, as Singularis was effectively a one-man company and Mr Al Sanea was its controlling mind and will, his fraud should be attributed to Singularis.
In seeking to establish attribution in this case, the Bank relied on the decision in Stone & Rolls, in which the House of Lords held that the knowledge of the fraudulent activities of the beneficial owner and “directing mind and will” of a company was attributable to that company. In Stone & Rolls, this meant that the defrauded company (which was by that stage in liquidation) could not bring a claim against its auditors for failing to detect the fraud. The decision has been much criticised, in particular because it deprived the company’s creditors of a remedy.
The Supreme Court noted that Stone & Rolls was a case between a company and a third party, but a similar argument was subsequently considered in the context of a case brought by a company against its directors and others who were alleged to have dishonestly assisted the directors in a conspiracy to defraud the company: Bilta (UK) Ltd v Nazir (No 2)  UKSC 23. The Supreme Court in Bilta confirmed that the key to any question of attribution was always to be found in considerations of the context and the purpose for which the attribution was relevant.
However, the Supreme Court in the present case recognised that because of certain comments made by the majority in Bilta, the case has been treated as if it established a rule of law that the dishonesty of the controlling mind in a “one man company” could be attributed to the company whatever the context and purpose of the attribution in question.
Taking all of the above into consideration, the Supreme Court made two important findings:
- It confirmed that whether 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 (emphasis added). The Supreme Court expressly stated that there is no principle of law that in any proceedings where the company is suing a third party for breach of a duty owed to it by that third party, the fraudulent conduct of a director is to be attributed to the company if it is a one-man company. Accordingly, Stone & Rolls can “finally be laid to rest”.
- In any event, the Supreme Court held that Singularis was not a one-man company in the sense used in Stone & Rolls and Bilta because:
- Singularis had a board of reputable people and a substantial business.
- There was no evidence to show that the other directors were involved in or aware of Mr Al Sanea’s actions.
- There was no reason why the other directors should have been complicit in this misappropriation of the money.
Having confirmed the test for attribution at point (1) above, the Supreme Court proceeded to consider the context and purpose for which the attribution was relevant in the present case.
It said the context was the breach by Bank of its Quincecare duty of care towards Singularis. The purpose of that duty was to protect Singularis against the misappropriation of its funds by a trusted agent of the company who was authorised to withdraw its money from the account. In these circumstances, the Supreme Court held that the fraud of Mr Al Sanea could not be attributed to Singularis, commenting:
“To attribute the fraud of that person to the company would be, as the judge put it, to “denude the duty of any value in cases where it is most needed” (para 184). If the appellant’s argument were to be accepted in a case such as this, there would in reality be no Quincecare duty of care or its breach would cease to have consequences. This would be a retrograde step.”
Having found that the Bank’s defences failed, and that the fraudulent state of mind of Mr Al Sanea could not be attributed to Singularis in any event, the Supreme Court dismissed the Bank’s appeal.