In this article, we examine two recent decisions that provide useful guidance on the scope and content of the Quincecare duty and consider the impact these decisions will have on banks.

The Quincecare duty of care was established in Barclays Bank Plc v Quincecare [1992] 4 All ER 363. It is an implied negative duty imposed on a bank to its customer to refrain from executing an order/making payments if, and for as long as, the bank has been “put on inquiry”. A bank will be put on inquiry for as long as there are reasonable grounds (though not necessarily proof) for believing that any instruction regarding payment may be an attempt to misappropriate funds.

We consider two recent decisions on the Quincecare duty: JP Morgan Chase Bank N.A. v The Federal Republic of Nigeria [2019] EWCA Civ 1641 and Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd [2019] UKSC.

Singularis Holdings Ltd v Daiwa

Singularis Holdings Ltd (Singularis) was a Cayman company set up to manage the personal assets of a Mr Al Sanea. Mr Al Sanea was the sole shareholder of the company, as well as its chairman, president and treasurer, and was one of seven company directors (though the remainder did not exercise any influence over the management of the company). The appellant, Daiwa Capital Markets Europe Ltd (Daiwa), had entered into a stock financing arrangement with Singularis, pursuant to which it provided Singularis with a loan to assist the company with acquiring a share portfolio. In June 2009, the shares were sold and the loan was repaid. Thereafter, Daiwa held a cash surplus on account for Singularis.

Mr Al Sanea instructed Daiwa to make eight payments (totalling over $200m) from the funds held on account to other companies within Mr Al Sanea’s group. It was common ground that there was no “proper basis” for the payments to have been made.

In July 2014, the liquidators of Singularis brought a claim against Daiwa, alleging breach of the Quincecare duty of care.

At first instance, the High Court found that Daiwa had breached the Quincecare duty of care. The judge rejected Daiwa’s defences of illegality, attribution and exclusion of liability. The Court of Appeal reached the same view. Daiwa appealed to the Supreme Court, which considered the following issues:

1.Attribution: can the fraud of the authorised employee be attributed to the company?

Daiwa argued that given Mr Al Sanea’s position in the company, Singularis was effectively a “one-man company”, with Mr Al Sanea as its controlling mind and will. Consequently, his fraud should be attributed to Singularis. As a result of that attribution, Singularis’ claim should be defeated by illegality, lack of causation or deceit.

In advancing its argument, Daiwa relied on the decision in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39. The House of Lords in that case held that as the fraudulent activities in question were committed by the beneficial owner, who was the “directing mind and will” of the company, knowledge of the individual’s fraudulent activities was attributable to the company. As a result, the company was unable to claim against its auditors for failing to detect the fraud.

In Singularis, the Supreme Court noted the criticisms of Stone & Rolls, and that it deprived the company’s creditors of a remedy. The Supreme Court noted the conclusion of the judge at first instance: “Singularis was not a one-man company in the sense that the phrase was used in Stone & Rolls…[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 and there was no reason why they should have been complicit in his misappropriation of the money.”

However, the Supreme Court went further than simply distinguishing the facts of Singularis from those in Stone & Rolls, stating 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”. In doing so, the Supreme Court has brought some much-needed clarity to this issue and has left practitioners in no doubt that Stone & Rolls can finally be laid to rest.

Importantly, the Supreme Court then went on to explain that the correct approach to take when considering attribution is that promulgated in Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23: “The answer to any question whether to attribute the knowledge of the fraudulent director to the company is always to be found in consideration of the context and purpose for which the attribution is relevant.” Applying this to the present case, the court noted that the purpose of the Quincecare duty of care is to protect a company from exactly the type of misappropriation of funds as was undertaken by Mr Al Sanea. To attribute his fraud to Singularis would be to “denude the duty of any value in cases where it is most needed”.

2. Was the claim defeated on illegality, causation or an opposing claim of deceit against the company?

The court ruled that even if Mr Al Sanea’s fraud had been attributed to Singularis, none of the defences referred to above would have succeeded.

With regards to illegality, the Supreme Court agreed with the lower courts that this defence should fail for (i) reasons of public policy (banks should play an important part in reducing and uncovering financial crime and money laundering), and (ii) fairness (denial of the claim would be an unfair and disproportionate response to any wrongdoing on the part of Singularis. Such wrongdoing would be more appropriately dealt with by way of contributory negligence as opposed to the “blunt instrument” of illegality).

In relation to causation, the Supreme Court appeared to be persuaded by the argument that “had it not been for that breach [of Daiwa’s duty of care], the money would still have been in the company’s account and available to liquidators and creditors”.

As for deceit, the Supreme Court rejected Daiwa’s argument that it should be entitled to an equal and counterclaiming claim in deceit that would effectively “cancel out” Singularis’ claim for negligence. In doing so, the Supreme Court referred to the wording used by the Court of Appeal: “The existence of the fraud was a precondition for Singularis’ claim based on breach of Daiwa’s Quincecare duty, and it would be a surprising result if Daiwa, having breached that duty, could escape liability by placing reliance on the existence of the fraud.”

The Supreme Court dismissed Daiwa’s appeal.

JP Morgan Chase Bank N.A. (JP Morgan) and the Federal Republic of Nigeria (FRN)

In this case, JP Morgan had agreed to act as depository in respect of settlement monies put up by the FRN in relation to a long-running dispute about an offshore Nigerian oilfield. The FRN alleged that JP Morgan had been put on inquiry that the payment transfers requested from the deposit account were part of a corrupt scheme and that in making the transfers JP Morgan had acted in breach of the Quincecare duty of care. JP Morgan argued that they should be given strike out/reverse summary judgment on the basis that the Quincecare duty had been excluded by virtue of express wording used in the contract between the parties. The High Court dismissed its strike-out application.

The Court of Appeal (upholding the decision of the High Court) noted that the case law was very much against JP Morgan. In particular, it quoted from the judgment in Gilbert-Ash Northern v Ltd Modern Engineering (Bristol) Ltd 1974 AC 689, where the court noted that (i) one starts with the presumption that neither party intends to abandon any remedies for breach of contract arising by operation of law, and (ii) such a presumption could only be rebutted by way of “clear express words”.

The Court of Appeal went on to comment that the Quincecare duty of care is “inherent” in the relationship between a bank and its customer and that, while it is “not impossible for a bank and its client to agree that the Quincecare duty should not arise (such that a bank would be entitled to pay out on instruction of the authorised signatory even if it suspects the payment is in furtherance of a fraud), “clear” wording would be required.

On the facts of the case, the wording used in the agreement between the parties “was nowhere near” clear enough.

Comment

Burden on the banks

The above cases indicate that banks hoping to escape either the application of the Quincecare duty of care in the first place (or the consequences of breaching it) will have a very difficult time in doing so. The judiciary has underlined the important role that banks are expected to play in combating fraud and will go to considerable lengths to ensure that they perform that role well.

Post Singularis, the circumstances in which a bank will be able to raise a successful defence against claimants who have suffered loss as a result of a breach of the Quincecare duty of care will be extremely limited. Although FRN v JP Morgan would seem (at first glance) to offer some comfort to banks in that it confirms that it is at least possible for parties to exclude the duty (to some extent), banks should be under no illusions as to how difficult this will be. Unsurprisingly, the Court of Appeal declined to give any practical guidance on what sort of wording would be regarded as “clear enough” to exclude the duty. No doubt, however, the threshold will be high. It will be interesting to see what approach will be taken to this issue when the case goes to trial.

Scope of the duty

Until now, many have thought that the “core” of the Quincecare duty was simply a negative duty not to pay and that any positive duty of enquiry or investigation would be “additional” to that negative duty. However, the Court of Appeal in FRN v JP Morgan has arguably thrown this into doubt. It expressed its view that in most cases “something more” will be required than simply deciding not to comply with a payment instruction, though declined to give any further detail as to what this “something more” might include.

Banks will no doubt be hoping for a steer in due course on the question of what, if anything, they will be expected to do (in addition to refraining from making payment) when they have been put on inquiry. Given the appetite from the judiciary evidenced in the above two cases to increase the burden on banks, they may not like the answer.