Can banks escape their duty of care to customers when fraud is in play?

In the recent case of Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50 the Supreme Court maintained that a bank (Daiwa) had breached the duty of care owed to its customer (Singularis), and the bank could not be excused as a result of fraud carried out by its customer’s controlling director.

Summary

  • Banks owe a duty of care to customers to take reasonable care when making a payment on the instructions of the customer. This is known as the “Quincecare” duty, following the case in which it was established, namely Barclays Bank Plc v Quincecare [1992] 4 All ER 363.
  • This is the first time a Court has decided that a bank was in breach of the Quincecare duty since it was first established.
  • The judgment is arguably of greater concern for smaller banks, as opposed to high-street banks, as the Court took the view that a smaller operation would have more opportunity to discover the fraud.
  • The fraud was unusually obvious in this case, and therefore it remains to be seen whether the courts will hold banks to the same duty where the fraud is less blatant. Therefore, whilst helpful, the case also reminds us that the outcome of each case will depend on its own facts.

Facts

The customer, Singularis Holdings Ltd , was set up in the Cayman Islands to manage the personal assets of Mr Maan Al Sanea. He was the sole shareholder and a director of Singularis. There were six other directors, but they did not exercise any influence over the management of Singularis, and therefore, Mr Al Sanea was considered the “controlling mind” of Singularis. Mr Al Sanea was also the sole signatory on Singularis’ bank accounts.

In 2009, Daiwa Capital Markets Europe Limited  (a bank holding deposits of US$204m in an account in the name of Singularis), complied with the instructions of Mr Al Sanea to pay out those funds to third parties via eight payments totalling approximately US$204,500,000. At trial, the judge held that such payments were a misuse of Singularis’ funds as there was no proper basis for any of them. There was no appeal against this finding.

In August 2009, Mr Al Sanea placed Singularis in voluntary liquidation. In 2014, Singularis, acting through its joint liquidators brought a claim against Daiwa for the full amount on the basis of i) dishonest assistance in aiding Mr Al Sanea’s own breach of duty in misapplying the company funds; and ii) breach of the Quincecare duty of care to the company by giving effect to the payment instructions. At first instance, the dishonest assistance claim was dismissed as it was found that Daiwa’s employees had acted honestly. However, the negligence claim was upheld against Daiwa, with a deduction of 25% to reflect Singularis’ contributory negligence.

Daiwa appealed against the finding of negligence.

Quincecare Duty

In Barclays Bank Plc v Quincecare [1992] 4 All ER 363 it was established that it is an implied term of a contract between a bank and its customer that the bank owes the customer a duty of care to take reasonable care when making a payment on the instructions of the customer. In that case Steyn J explained the scope of the duty as follows: “…a banker must refrain from executing an order if and for as long as the banker is “put on enquiry” in the sense that he has reasonable grounds for believing that the order is an attempt to misappropriate the funds of the company…”.[1]

However, the Quincecare duty has been narrowly interpreted since then with the Courts recognising that the duty would only be breached in rare circumstances.

Judgement

The basis of Daiwa’s  appeal was as follows:

  • Mr Al Sanea was the controlling mind of Singularis;
  • As a result, Singularis should be held to have carried out the fraud;
  • Therefore, the fault could not be attributed to Daiwa.

The Supreme Court unanimously dismissed Daiwa’s appeal.

In its judgment, the Supreme Court highlighted the finding at trial that denial of the claim would undermine the public interest in requiring banks to play an important part in uncovering financial crime and money laundering. At para 219 of the initial judgment, Rose J stated that: “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.”

The Supreme Court also resisted the notion that Singularis could be held accountable for Mr Al Sanea’s fraud, noting the long-established principle that “…a properly incorporated company has an identity and legal personality quite separate from that of its subscribers, shareholders and directors.”[2] The Court cited the finding of Rose J that: “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).”[3]

Conclusion

Fundamentally, this was a fraud that was so obvious, the fact that the bank had breached its Quincecare duty was described as “incontrovertible”. At paragraph 39, Lady Hale states that: “Daiwa should have realised that something suspicious was going on and suspended payment until it had made reasonable enquiries to satisfy itself that the payments were properly to be made.” However, banks do have to tread a fine line between carrying out its customer’s instructions without undue delay and being alert to potentially fraudulent payments.

Rose J stated however, that: “Any reasonable banker would have realised that there were many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company. He was clearly using the funds for his own purposes and not for the purposes of benefiting Singularis (para 192). Daiwa was well aware of the dire financial straits… and was aware that Singularis might have other substantial creditors with an interest in the money.”

The initial judgement then went on to state that: “Everyone recognised that the account needed to be closely monitored … But no one in fact exercised care or caution or monitored the account themselves and no one checked that anyone else was actually doing any exercising or monitoring either” at paragraph 202, therefore highlighting the paramount need to monitor suspected fraudulent activity closely, and for banks to take a high level of accountability and responsibility for doing so.

It appears that the Supreme Court’s judgment was, in some ways, policy driven. In fact, Lady Hale concluded at paragraph 35 of the judgement that: “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.”

This case highlights the importance of the Quincecare duty of care that banks have to their customers. It must be ensured that due diligence is given by banks to prevent any suspicious payments, fulfill their duty of care, prevent fraudulent activity and, consequently be held accountable for it – as this case emphasises.

If you require advice or assistance in relation to this issue, please contact us at arun.chauhan@tenetlaw.co.uk or esther.phillips@tenetlaw.co.uk

[1] Barclays Bank Plc v Quincecare [1992] 4 All ER 363 per 376G

[2] Salomon v A Salomon and Co Ltd [1897] AC 22

[3] Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50 per 35

View More Articles

Food Fraud – an evolving crime

Fraud investigation

View article

Food fraud – an evolving crime

The food landscape is everchanging. With the rise in veganism, heightened focus on allergens and higher demand for organic food products – both in the home and in restaurants – the food industry is having to take measures to keep pace.

Article

LexisNexis Awards

Fraud investigation

View article

Tenet shortlisted for Legal Services Innovation at LexisNexis Awards 2020

Tenet has been shortlisted for the prestigious LexisNexis Legal Awards in the category “Legal Services Innovation”. The awards will take place on 11th March 2020.
Article

Leadership and employee mental health

Fraud investigation

View article

The style of leadership within your company plays a pivotal role in forming its culture. It impacts your business environment, the drive of your team, and fundamentally, the sustainability of your organisation. Leaders who instil a positive environment and working culture will enjoy the benefits of a highly involved and driven team, with everyone pulling in the same direction for a central cause.
Article

We are here
to listen and help…

Call us at 0121 796 4020
Email us at info@tenetlaw.co.uk

Not ready,
to get in touch?

Find out what makes us different
from most law firm's... Read more

Tenet Compliance & Litigation Limited. Registered Office, 10th Floor, Lyndon House, 62 Hagley Road, Birmingham, B16 8PE. Registered in England and Wales. Registered No: 09776405. Authorised and regulated by the Solicitors Regulation Authority. SRA Identification No. 626562.
Copyright © Tenet Law. All Rights Reserved.
Created by Gritt & Co