The High Court’s judgment in Gareth Hamblin and Marilyn Hamblin v World First Limited and Moorwand NL Limited  EWHC 2383 (Comm) is the first decision to follow the Supreme Court’s ruling in Singularis Holdings Ltd v Daiwa Capital Markets  UKSC 50, considering the so-called Quincecare duty of care (see our banking litigation blog post).
As a reminder, the Quincecare duty arises where a bank or deposit holding financial institution must refrain from processing a payment mandate made by an authorised signatory of its customer for as long as the bank is “put on enquiry” i.e. it has reasonable grounds for believing that the instruction is an attempt to misappropriate funds from the customer. This is an objective test to be judged by the standard of an ordinary prudent banker.
The present decision considered a novel factual scenario not previously analysed by the court in the context of the Quincecare duty, namely whether such a claim can be brought against a financial institution (here, a payment services provider) where the customer was an insolvent shell company, without any directors, which had been hijacked by fraudulent individuals and used for the purpose of a fraud. Even in these extreme circumstances, the court found that a Quincecare claim was realistically arguable. Following Singularis, the court emphasised that the Quincecare duty is owed to the company not to those in control of it, and as such it was possible for the shell company itself to be a “victim” of the fraud.
The court refused to attribute the knowledge of the fraudsters to the shell company, arguably taking a conservative approach to the test for attribution in Singularis. In that case, the Supreme Court confirmed that there is no principle of law that the fraudulent conduct of a director is to be attributed to the company if it is a one-man company. The court applied this principle here, even though on the facts the company was not even a “one-man company” because it had no directors at all, it was in the control of those who were at best de facto directors, all of whom had been intimately involved in the prosecution of the fraudulent scheme. As per Singularis, the court said that the question of attribution in such circumstances is always to be found in consideration of the context and the purpose for which the attribution is relevant.
The decision highlights the creep in the scope of the Quincecare duty first established in Barclays Bank plc v Quincecare Ltd  4 All ER 343. Quincecare itself considered the duty in the context of a current account, but it has since been extended to depository accounts (JP Morgan Chase Bank, N.A. v The Federal Republic of Nigeria  EWCA Civ 1641, see our banking litigation blog post), investment banks (Singularis) and it is now being considered in the context of a payment service provider in the present case. It is presenting an increasing risk for financial institutions that process client payments, as the spate of recent judgments indicates (see also our recent banking litigation blog post on Stanford International Bank Ltd v HSBC Bank plc  EWHC 2232 (Ch)).
Further, it will be interesting to see the court’s decision on the merits of the claimants’ alternative breach of mandate claim against the bank (for purporting to act on the instructions of an individual whose identity had been stolen by the fraudsters, where in fact there were no registered directors of the company). The court held that the claimants had an arguable case to narrow the established principle that a customer is estopped from claiming damages resulting from its own instruction where the bank has acted in good faith and in the ordinary course of business (see Bank of England v Vagliano Brothers  AC 107). In the court’s view, this principle may need to be refined in the context of a corporate entity controlled by fraudsters, particularly in light of the distinction between where the customer is an individual vs a company, as highlighted in Singularis.
The claim arose out of a sophisticated investment fraud using the second defendant, Moorwand NL Limited (Moorwand NL) as the corporate vehicle by which the fraud was carried into effect by individuals unknown. Those individuals set up an account in the name of Moorwand NL on the application of a Mr Carter, whose identity had been stolen by the fraudsters. At no material time was Mr Carter a director of Moorwand NL, nor did Moorwand NL have any registered directors. Moorwand NL’s account was set up and maintained by the first defendant (against which no allegations of fraud were made), a payment service provider known as World First Limited (WF).
The claimants were persuaded by the fraudsters to open an investment account and transferred £140,000 to Moorwand NL’s account with WF. Subsequently, WF paid out the £140,000 credited to Moorwand NL’s account on instructions apparently received on behalf of Moorwand NL. The sums paid out were misappropriated and the individuals behind the investment fraud were never found.
The claimants commenced proceedings against both WF and Moorwand NL (now in insolvent liquidation) to recover the £140,000 they lost. The claim against WF was brought on the grounds that Moorwand NL was a trustee of the claimants’ funds and that the claimants (as beneficiaries of the trust) had standing to bring representative proceedings (i.e. claims belonging to Moorwand NL) directly against WF.
WF applied for strike out or reverse summary judgment on the grounds that the claims were bound to fail as a matter of law. This blog post focuses on the following issues in the application:
- Breach of the Quincecare duty i.e. that WF owed Moorwand NL a duty of care to use reasonable care and skill to not execute a payment instruction in circumstances where a reasonable service provider would be placed on notice that the payments had not been duly authorised.
- Breach of mandate because: (i) no authority to pay out from Moorwand NL’s account could have been obtained since Moorwand NL had no directors at any material time and/or (ii) payment out of the account was not authorised by Mr Carter since his identity was stolen and he was not asked nor gave authority for payment out of the account.
- The claimants’ right to bring representative proceedings.
For the purpose of the application, WF did not dispute that there was a proper factual basis for alleging that a reasonable service provider ought to have been on notice that the payments out were not duly authorised.
The High Court (Pelling J) ruled that the claimants had a realistically arguable case against WF for breach of the Quincecare duty and/or breach of mandate, and realistically arguable standing to bring the claim.
Breach of the Quincecare duty
WF submitted that no claim for breach of the Quincecare duty could succeed because:
- No loss could be caused by a breach of the Quincecare duty that was within the knowledge of those in control of the customer.
- As a matter of policy, the only claim available to a person in the position of the claimants was a claim for dishonest assistance (which was not available on the facts of this case).
Taking each of these arguments in turn, WF argued that the Quincecare duty requires the bank’s customer to have been the victim of the fraud, but here the customer (Moorwand NL) was controlled by fraudsters. Accordingly, any claim for breach of duty brought by Moorwand NL would be bound to be met with an assertion that no loss could be caused by a breach within the knowledge of those in control of Moorwand NL. Any such claim brought by Moorwand NL against WF would give rise to a complete circuity of action, since WF would then be entitled to sue Moorwand NL for fraudulent misrepresentation.
The court highlighted the emphasis given by Lady Hale in Singularis to the fact that the Quincecare duty is owed to the company not to those in control of it. This is because the purpose of the duty is to protect the legally distinct company against the misappropriation of the company’s assets. Taking Moorwand NL as a distinct legal entity, the court held that it was realistically arguable on the facts as they were assumed that Moorwand NL was itself a victim of the fraud.
On the question of whether to attribute the knowledge of the fraudsters to Moorwand NL, the court again cited Singularis, which confirmed that where a company (e.g. Moorwand NL, represented by the claimants) is suing a third party (e.g. WF) for breach of duty, there is no principle of law that the fraudulent conduct of a director is to be attributed to the company if it is a one-man company. In the court’s view, it was at least realistically arguable that this principle would apply here, even though on the facts Moorwand NL was not even a “one-man company” (because it had no directors at all, it was in the control of those who were at best de facto directors, all of whom had been intimately involved in the prosecution of the fraudulent scheme). As per Singularis, the court said that the question of attribution in such circumstances is always to be found in consideration of the context and the purpose for which the attribution is relevant. The court echoed the reasoning in Singularis that to attribute the knowledge of the fraudsters to Moorwand NL so as to defeat the claim would be to denude the Quincecare duty of much of its practical utility.
The court also disagreed with WF’s policy argument, that allowing the claimants to pursue a claim for breach of the Quincecare duty, would be contrary to the deliberate public policy of limiting the claims available to a person in the position of the claimants to a claim for dishonest assistance.
For the above reasons, the court ruled that the claimants had a realistically arguable case for breach of the Quincecare duty by WF.
Breach of mandate
The claim under this head was that WF breached its mandate with Moorwand NL because it purported to act on the instruction of Mr Carter, where Mr Carter could not and did not give any instructions (because his identity had been stolen by the fraudsters and in fact there were no registered directors).
WF relied on the principle set out in Vagliano Brothers, which held that if a bank acts upon a representation by a customer in good faith and in the ordinary course of business, the customer is estopped from suing the bank for any loss which occurred based on the representation, where that loss would not have occurred if the representation had been true. Accordingly, because the fraudsters (presumably on behalf of Moorwand NL) had impersonated Mr Carter, WF argued that this principle estopped the claimants from bringing the breach of mandate claim.
The claimants argued that the time may have come to review, refine or confine this proposition of law, so as not to apply to a situation where the “customer” was a corporate entity controlled by fraudsters. They said a distinction needed to be drawn between when an individual/partnership of individuals was the customer (as was the case in Vagliano Brothers) and when a company was the customer. In particular, the claimants relied on the following passage from Singularis (emphasis added):
“In Luscombe v Roberts (1962) 106 SJ 373, a solicitor’s claim against his negligent accountants failed because he knew that what he was doing – transferring money from his clients’ account into his firm’s account and using it for his own purposes – was wrong. But companies are different from individuals. They have their own legal existence and personality separate from that of any of the individuals who own or run them. The shareholders own the company. They do not own its assets, and a sole shareholder can steal from his own company.”
The court recognised that Singularis dealt with different facts and a different cause of action, but said that the principle of law was generally stated and well established. On the present application (and in a case where the defence had not been filed nor meaningful disclosure taken place), the court found that the distinction between an individual and a company observed in Singularis was maintainable. Further, the court was not prepared to conclude that Vagliano Brothers provided a certain answer to the claimants’ claim that WF was in breach of mandate, in circumstances where Moorwand NL had no directors and had come under the control of fraudsters who were at best de facto directors of the company.
The court suggested that this would amount to a “modest but incremental” development of the law, but that any development to that effect should be on the basis of facts properly established at trial and not assumed facts as was the case at the interim stage.
The final issue considered was whether the claimants had standing to bring the claim at all, which the court found was realistically arguable.
For the purpose of the application, the court found that Moorwand NL was a trustee. In such circumstances, Hayim v Citibank NA  AC 730 (PC) enabled the claimants to bring representative proceedings as a beneficiary where Moorwand NL had committed a breach of trust or “in other exceptional circumstances”. The court found that this requirement was satisfied (at least to the level of realistic argument) where Moorwand NL as the trustee was in insolvent liquidation and there was no dispute that it had been hijacked by fraudulent individuals and used as the means by which a fraud was carried into effect.
The court therefore dismissed the application for strike out or summary judgment.