In a leading case, the Court examined the extent of the duty of care that a bank owes to its customers when executing their orders.

On 30 October 2019, the UK Supreme Court dismissed Daiwa’s appeal in the case of Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Limited [2019] UKSC 50. The decision marks the first successful claim for breach of the Quincecare duty that banks owe to their customers. Latham & Watkins expects to see further examination of the duty as instances of fraud continue to rise and the courts consider the degree of responsibility that banks should bear for stopping financial crime.

The Quincecare duty, which Justice Steyn set out in 1992, refers to an implied term of the contract between a bank and its customer that the bank will use reasonable skill and care in and about executing the customer’s orders. A bank will be in breach of this duty if it executes an order that it knows to be dishonestly given, shuts its eyes to the obvious fact of the dishonesty, or acts recklessly in failing to make reasonable enquiries.

The Facts

Singularis was a company incorporated in the Cayman Islands to manage the personal assets of Maan Al Sanea, the company’s sole shareholder, a director, and its chairman, president, and treasurer. Although there were six other directors, they did not exercise any influence over the management of the company, and Mr Al Sanea was the dominant director at all material times. In June 2009, Daiwa (the London subsidiary of a Japanese investment bank and brokerage firm) held the sum of approximately US$204 million to Singularis’ account.

Between 12 June and 27 July 2009, Daiwa made eight payments (totalling approximately US$204.5 million) from Singularis’ account on the instructions of Mr Al Sanea. The judge at first instance found that each of these payments was a misappropriation of Singularis’ funds, in some instances involving the provision by Mr Al Sanea of documents which he knew to be false. This point was not appealed.

Singularis entered into liquidation in August 2009 and subsequently brought claims against Daiwa for breach of the Quincecare duty of care in carrying out the payments and dishonest assistance in Mr Al Sanea’s breach of fiduciary duty in misapplying the company’s funds. The judge at first instance found that Daiwa’s employees had acted honestly but upheld the breach of duty claim (making a 25% deduction to reflect the contributory fault of Mr Al Sanea and the company’s inactive directors).

Daiwa’s appeal against the finding of breach of the Quincecare duty was unanimously dismissed by the court of appeal. Daiwa appealed that decision to the Supreme Court, arguing that:

  • Mr Al Sanea’s fraud should be attributed to Singularis; and
  • If it were, the claim for breach of duty would be defeated by (a) illegality; (b) lack of causation; and/or an equal and countervailing claim in deceit.

The Judgment

In a judgment given by Lady Hale, the Supreme Court dismissed the appeal in full.

Attribution

The Court emphasised the principle that a company has a separate identity and legal personality from its subscribers, shareholders, and directors. While there are certain circumstances in which those persons’ actions may be attributed to the company, this will be dependent on the context and purpose for which the attribution is relevant. The purpose of the Quincecare duty is to protect the company against just the sort of misappropriation that occurred in this case. If Daiwa’s position that the misappropriation should be attributed to the company were correct, the effect would be to “denude the duty of any value in cases where it is most needed” such that there would “in reality be no Quincecare duty of care or its breach would cease to have consequences”.

As well as making this finding, the Court also considered whether Daiwa’s defences to the claim of breach of the Quincecare duty would have succeeded if it had found that Mr Al Sanea’s fraud should be attributed to the company.

Illegality

Daiwa argued that Singularis’ claim was barred for illegality, relying on Mr Al Sanea’s provision of documents which he knew to be false and his breach of fiduciary duty towards Singularis. The Court approached the illegality defence by assessing its application in the context of: (a) the underlying purpose of the prohibition which had been transgressed; (b) other relevant public interests; and (c) the proportionality and fairness to Singularis of denying its claim. Considering each of these factors, the Court rejected the defence, considering that:

  • While the purpose of the prohibition on making false statements (which was transgressed in this case) was in part to protect the bank from being deceived, that purpose was achieved by ensuring that the bank would be liable to repay the money only if it had breached its Quincecare
  • There is public interest in financial institutions playing a part in reducing and uncovering financial crime and money laundering. This would be undermined if a bank can escape the consequences of failing to do so by reference to the illegal conduct of its customers.
  • Denial of the claim would be disproportionate to any wrongdoing by the company (particularly as it was possible to make a deduction for contributory negligence on the customer’s part).

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”.

Causation

The Court did not accept Daiwa’s argument that the Singularis’ loss had been caused by its own fault (in committing the fraud) rather than the fault of Daiwa. The very purpose of the Quincecare duty is to protect a bank’s customers from the harm caused by people for whom the customer is responsible. Accordingly, this was not a case in which the company’s act of dishonesty came after the bank’s breach of duty. Rather, the fraudulent instruction gave rise to the duty of care, which the bank then breached, causing the loss.

Countervailing claim in deceit

The Court considered this to be a variant of the causation argument. It held that Daiwa’s breach of the Quincecare duty (and not Mr Al Sanea’s misrepresentations) gave rise to the bank’s exposure to Singularis, quoting the court of appeal’s finding that “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”.

Conclusion

The question of how a bank should act when it suspects fraud can be complex and give rise to a number of competing issues and priorities. The Court’s decision in this case emphasises how important it is for financial institutions to get it right.

The Court’s decision was clearly influenced by the public policy interest of holding banks accountable for the detection of financial crime and tackling fraud. As instances of fraud continue to increase, financial institutions should therefore expect further consideration and analysis of the Quincecare duty.