The Quincecare duty: Privy Council confirms it is limited to protecting a bank’s customers and not third parties

In the latest decision to consider the Quincecare duty, the Board of the Privy Council has confirmed that the duty is limited to protecting the customers of a bank, and does not extend to protecting any third party beneficiaries of its customer’s accounts. In doing so, the Board dismissed a claim by an investment fund against a bank for an alleged breach of duty to protect it from losses caused by the fraudulent misappropriation of monies from certain bank accounts which belonged beneficially to the fund: Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) (Isle of Man) [2022] UKPC 18.

Historically, the Quincecare duty has arisen where a bank receives a payment instruction from an authorised signatory of its customer, and executes the order, in circumstances where (allegedly) there were red flags to suggest that the order was an attempt to misappropriate the funds of the customer. The Board rejected firmly the suggestion that the Quincecare duty is owed to anyone except the customer of a bank, or that the existing boundaries of the duty should be extended to protect third parties.

For more on the decision see this post on our Banking Litigation Notes blog.

 

Court of Appeal confirms that the Quincecare duty does not extend to protect creditors

The Court of Appeal has struck out Quincecare duty and dishonest assistance claims brought by the liquidators of a company running a Ponzi scheme against a correspondent bank that operated various accounts for the company. In doing so, the Court of Appeal confirmed that the scope of the Quincecare duty is limited to protecting customers of the financial institution, and does not extend to protect the customer’s creditors: Stanford International Bank Ltd v HSBC Bank plc [2021] EWCA Civ 535.

The Court of Appeal found that the company had no claim in damages because it suffered no loss. The way the Ponzi scheme operated, payments made by the bank to genuine investors reduced the company’s assets, but equally discharged the company’s liabilities to those investors by the same amount. The net asset position therefore remained the same in the period between: (a) when the liquidators said the bank should have recognised the “red flags” and stopped processing its customers’ payments, thereby exposing the fraud; and (b) the date upon which the accounts were eventually frozen by the bank.

The Court of Appeal upheld the High Court’s decision to strike out the dishonest assistance claim, emphasising that dishonesty and blind-eye knowledge allegations against corporations (large or small) must still be evidenced by the dishonesty of one or more natural persons.

For more information see this post on our Banking Litigation Notes blog.

High Court confirms Quincecare duty does not extend to individuals

The High Court has granted reverse summary judgment in favour of a defendant bank on the basis that the so-called Quincecare duty of care did not operate in the context of an authorised push payment (APP) fraud, where a third party fraudster tricked the bank’s customer willingly to instruct the bank to transfer large sums out of her account, which were then misappropriated: Philipp v Barclays Bank UK plc [2021] EWHC 10 (Comm).

The judgment is the latest in a line of judgments concerning the parameters of the Quincecare duty. It confirms that existing authorities limit the Quincecare duty to protect corporate customers or unincorporated associations such as partnerships (i.e. where the instruction to the bank has been given by a trusted agent of the customer). The decision confirms that the Quincecare duty does not currently extend to individual customers. On the facts of the present case, the court was not persuaded to extend the Quincecare duty to protect an individual customer in the context of an APP fraud, saying to do so would be contrary to the principles underpinning the duty.

For more information see this post on our Banking Litigation Notes blog.

Important Supreme Court decision on “Quincecare” duties of care and corporate attribution

The Supreme Court has upheld the first successful 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 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 Supreme Court’s judgment in this case follows hot on the heels of the Court of Appeal’s refusal to strike out a separate claim for breach of a Quincecare duty (see our banking litigation blog post on that decision here).

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.

The decision has important implications for financial institutions, as it demonstrates the challenges they are likely to face in seeking to establish an illegality defence in circumstances where the existence and breach of a Quincecare duty has been established. It therefore highlights the importance of having in place appropriate safeguards and procedures governing payment processing.

It is also of significance to corporate claimants – and insolvency office holders – in particular in clarifying the test for corporate attribution. 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”.

For more detail on the decision, please see this post on our Banking Litigation Notes blog.