In a leading case on a financial institution’s Quincecare duty of care to its customer, the Supreme Court has dismissed Daiwa’s appeal in Singularis Holdings Limited (in liquidation) v Daiwa Capital Markets Europe Limited[1].

Yesterday, the Supreme Court found that Daiwa breached its Quincecare duty of care to Singularis when it processed fraudulent payments of approximately USD 204 million out of Singularis’ account.

Singularis is, so far, the only case in which a financial institution has been found to be in breach of its Quincecare duty of care and, whilst the facts of the case are unusual, it will therefore be of interest to banks and other financial institutions in the UK.

The Facts

Singularis is a company that was set up to manage the personal assets of Mr Al Sanea, who was its sole shareholder and one of its directors. There were six other directors, but they did not have any influence over the management of the company.

In 2007, Daiwa entered into a stock financing agreement with Singularis. The lending was repaid in June 2009 and the total held in Singularis’ account was approximately USD 204 million (including a USD 80 million deposit made by Singularis on 2 June 2009).

On 5 June 2009, Daiwa’s compliance division warned staff to be cautious in their dealings with the Singularis account and to ensure that any payment requests they received were properly authorised and related to normal business activities. This was because Daiwa had become aware that Mr Al Sanea and his wider business group (the “Saad Group”) were in financial difficulty.

Between 12 June and 27 July 2009, Daiwa was instructed by Singularis to make payments totalling around USD 204 million from its account to companies within the Saad Group. The instructions were approved by Mr Al Sanea, who had authority to give those instructions.Daiwa made the payments.

Singularis subsequently entered into liquidation.

The Claim

In 2014, Singularis (in liquidation) brought a claim against Daiwa for the full amount of the payments (less any sums received from Mr Al Sanea or the recipients).

The claim was on two bases:

  1. Dishonest assistance, i.e. that Daiwa had dishonestly assisted Mr Al Sanea to breach his fiduciary duties to Singularis.
  2. Breach of Quincecare duty, i.e. that Daiwa had breached its Quincecare duty of care to Singularis by acting on the payment instructions.

The Quincecare duty[2] provides that a bank will be liable to its customer in negligence if it makes a payment in circumstances where it had reasonable grounds for believing that the payment instruction was an attempt to misappropriate the funds of its customer.

The High Court’s judgment (16 February 2017)[3]

The High Court (Rose J) dismissed Singularis’ claim based on dishonest assistance, but found that Daiwa had breached its Quincecare duty to the company:

  1. Dishonest assistance – Singularis was insolvent or on the verge of insolvency at the time the payments were made.Mr Al Sanea’s duty as director was therefore to act in the interests of the company’s creditors (and not simply his own interests as shareholder).The gratuitous payments to Saad group companies were misappropriations of Singularis’ money by Mr Al Sanea, made in breach of his fiduciary duties to Singularis.However, Daiwa’s staff had not acted dishonestly in processing the payments and so the claim based on dishonest assistance failed.
  2. Breach of Quincecare duty – The High Court found that any reasonable banker would have realised there were “many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company” and that he was “using the funds for his own purpose and not for the purpose of benefiting Singularis[4]:
    • Daiwa knew that Mr Al Sanea and the Saad Group were in financial difficulty.
    • It knew that Singularis might have other creditors with an interest in the funds.
    • There was evidence that there was something wrong with the way in which Mr Al Sanea was operating the account.
    • A “hospital expenses agreement” used to justify the most substantial payments had never been mentioned before.
    • There was a striking contrast between the way in which some previous payment requests had been processed, with more stringent checks, and the way in which the relevant payments were processed.

Singularis not precluded from bringing the claim

The court rejected two arguments by Daiwa that Singularis was precluded from bringing its claim for breach of Quincecare duty:

  1. The first argument was that the claim was being brought on behalf of Singularis’ creditors (and not Singularis), who could not rely on the Quincecare duty of care that Daiwa owed to its customer, Singularis.Rose J rejected this argument.She held that Singularis was not precluded from pursuing the claim.The Quincecare duty of care was owed to Singularis and it was Singularis that was bringing the claim, even if the ultimate recipient of any damages would be its creditors.
  2. The second argument was that Mr Al Sanea was the directing mind of Singularis and that his fraudulent conduct should be attributed to the company, precluding it from bringing the claim.Rose J rejected this argument, saying it would deprive the Quincecare duty of any value in the cases where it was most needed: “The duty is only relevant in a situation where the instructions to pay out the money are given by the person who has been entrusted by the company as a signatory on the bank account.If there were no properly authorised instruction to transfer the money, the company would not need to rely on the Quincecare duty”.[5]

Defences

Daiwa was unable to raise a defence to the claim, save that Singularis’ damages were reduced on the basis of contributory negligence:

However, in any event, Rose J also took into consideration that it would neither be contrary to the public interest nor harmful to the integrity of the legal system to allow the claim to proceed (following the test for illegality set out in Patel v Mirza[6]):

Rose J also explained that although usually a third party misled by false statements into entering into a transaction would be able to recover its losses stemming from that transaction, Daiwa was in a different position here as it was in breach of its Quincecare duty of care to Singularis. Daiwa’s breach of this duty, and not Mr Al Sanea's misrepresentations, was, therefore, the cause of Daiwa’s exposure to the claim for Singularis' loss.

  1. Illegality – Daiwa argued that Singularis’ claim was barred by the principle of ex turpa causa or illegality.Singularis was, it said, relying on its own illegal conduct to bring the claim.This argument relied on the court finding that Mr Al Sanea’s illegal conduct should be attributed to Singularis, and so it failed.
    • The purpose of the prohibition on breach of fiduciary duty is to protect companies from becoming the victim of the wrongful exercise of power by their officers.That purpose would not be enforced by barring Singularis from recovering the payments.
    • Denial of the claim would have a material impact on the growing reliance on financial institutions to play an important part in reducing and uncovering financial crime and money laundering.
    • Denial of the claim would be an unfair and disproportionate response to the wrongdoing on the part of Singularis (see “Contributory negligence” below)
  2. Causation and counter-vailing claim in deceit – Daiwa argued that Singularis’ claim was defeated by an equal and opposite claim which Daiwa had in deceit against Singularis.They argued that they had been persuaded to make the payments based on the deceit of Mr Al Sanea.This argument again relied on the court finding that Mr Al Sanea’s illegal conduct should be attributed to Singularis, and so it failed.
  3. Exclusion clause – Daiwa argued that their General Terms of Business excluded liability for negligence except for gross negligence, wilful deceit or fraud.However, Rose J found there was no possible basis on which to find that Singularis had been sent these terms of business.
  4. Contributory negligence – Rose J made a 25% deduction to Singularis’ damages to reflect the contributory fault of Mr Al Sanea and Singularis’ inactive directors.

The Court of Appeal’s judgment (1 February 2018)[7]

Daiwa did not appeal against the dismissal of the dishonest assistance claim but it did appeal against the finding that it was liable under the Quincecare duty negligence claim.The focus of the appeal was not on whether Daiwa had acted in breach of its Quincecare duty. Rather, it was focused on the arguments that Rose J had dismissed concerning whether Singularis was precluded from bringing the claim and/or that Daiwa could rely on defences to the claim. The Court of Appeal unanimously dismissed the appeal in its entirety, agreeing with the reasoning of Rose J on those issues.

The Supreme Court’s judgment (30 October 2019)[8]

Daiwa appealed to the Supreme Court, where the case was heard in July 2019. Handing down its judgment on 30 October 2019, the Supreme Court unanimously dismissed the appeal, with Lady Hale stating that this was a case “bristling with simplicity”.

Like the lower courts, the Supreme Court rejected Daiwa’s arguments around attribution, illegality and deceit:

  • Attribution – The Supreme Court emphasised the basic principle that a properly incorporated company has a separate legal identity from its shareholders and directors.The acts of those persons who control or operate a company can only be attributed to the company in certain circumstances as specified by the company constitution, or rules of agency or vicarious liability. The context will be relevant. However, in the circumstances of this case, Mr Al Sanea’s fraud could not be attributed to the company itself. The Supreme Court commented further that the context in this case was the breach of Daiwa’s Quincecare duty of care and that the very purpose of the Quincecare duty is to protect a company against misappropriation of funds by a trusted agent of the company who is authorised to withdraw money from its account. Therefore, “to attribute the fraud of a trusted agent of the company to the company would denude the duty of any value in cases where it is most needed and be a retrograde step.”[9]
  • Illegality – Daiwa’s reliance on this defence necessarily rested on a finding that Mr Al Sanea’s fraud could be attributed to the company, which the Supreme Court agreed should be dismissed. However, the Supreme Court nevertheless examined the argument and emphasised that the very purpose of fiduciary duties was to protect a company from becoming a victim of wrongdoing by the company’s officers.Preventing Singularis from recovering the payments would not go towards assisting that purpose.The Court commented that “the Quincecare duty strikes a careful balance between the interests of the customer and those of the bank and denying the claim would not enhance the integrity of the law”.Like the High Court, it said that denying the claim would undermine the public interest in requiring financial institutions to play an important part in uncovering financial crime and money laundering.It found that contributory negligence was a more appropriate method of responding to any wrongdoing on the part of Singularis, rather than finding that the Quincecare duty did not apply.
  • Causation and counter-vailing claim in deceit – The Supreme Court agreed that the very purpose of the Quincecare duty is to protect customers from harm caused by officers or employees of the customer. The fraudulent instructions given to Daiwa gave rise to the Quincecare duty in the circumstances of this case. In terms of causation, Daiwa acted in breach of that duty and it was that breach that caused the loss to Singularis. Had Daiwa not acted in breach of the Quincecare duty, the money would still be in the company’s account. In terms of this and Daiwa’s argument that it should have a counter-vailing claim in deceit, the Supreme Court agreed with and quoted 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 that was itself a pre-condition for its liability”.[10]

Singularis is the only case so far in which a financial institution has been found to be in breach of its Quincecare duty. Sir Geoffrey Vos commented specifically on this in his concluding remarks in the Court of Appeal judgment and emphasised that “it will be a rare situation for a bank to be put on inquiry; there is a high threshold".[11]

Singularis was slightly unusual on its facts. The relationship between Daiwa and Singularis was based on a stock financing agreement, whereas the Quincecare duty is more commonly thought of as arising in a typical bank/customer relationship. The Court of Appeal also noted, in particular, the “glaring” signs that Mr Al Sanea was perpetrating a fraud and described the case as “an unusual one, the circumstances of which are unlikely often to arise.”[12]

However, the Quincecare duty and questions around how a bank should act when fraud is suspected are gaining prominence. These issues were not only examined in Singularis, but also stand to be considered in the ongoing case of Federal Republic of Nigeria v JP Morgan Chase Bank (the subject of separate Law-Now articles which can be found here and here).

We expect to see the Quincecare duty examined further to reflect the upwards trend in vishing and phishing frauds. The Supreme Court’s comments in Singularis on the public policy value of the Quincecare duty demonstrate that financial institutions bear a share of the responsibility for stopping fraud and, if they fail to do so, can bear a share of the blame. We will be watching to see what further guidance the courts may give as to the level of responsibility that financial institutions have and the precautionary measures that they should take to stop fraud.