On 24 August 2017, the High Court handed down its judgment in the case of Bernard Chudley and others v Clydesdale Bank PLC [2017] EWHC 2177 (Comm). In this case, the Court considered whether the defendant bank (Bank) was liable for a fraud perpetrated by its customer, Arck LLP (Arck).


The circumstances of this case were closely analogous to the facts in the Court of Appeal case of So v HSBC Bank Plc [2009]. In So, the Court of Appeal held that HSBC had acted in breach of a duty of care, having allowed a letter to be circulated which contained representations which defrauded investors had allegedly relied upon. The Court of Appeal found that the relationship between HSBC and the investors in that case was sufficiently proximate to establish a duty of care because HSBC knew that the letter was to be shown to the defrauded investors. The claimants’ case against HSBC failed however, as the Court found that the claimants had not in fact relied on the representations in the letter.

It is relatively rare that courts consider the vulnerability of banks and financial institutions to the actions of their fraudulent customers and the case of Bernard Chudley and others v Clydesdale Bank is the first significant case on this issue following the Court of Appeal’s decision in So. This briefing note discusses the background to the case and the court’s findings.


Arck had solicited investments from third party investors (including the Claimants) and had used its account with the Bank to receive the investment sums (Receiving Account). The Claimants in this case had invested over £1.6 million in a scheme offered by Arck and were led to believe that their investment sums would be applied towards an overseas property development project in Cape Verde. The profits from that property development were to be shared with them, representing the return on their investment. As it happens, the Claimants never received any of their investment sums back. Arck was placed into liquidation in 2012 and its principals, Kathryn Clark and Richard Clay pleaded guilty to various fraud charges in criminal proceedings following an SFO investigation.

The claims were directed against the Bank for two reasons. First, Arck was a customer of the Bank, and it was to an account held at the Bank that the investors had paid over their money (i.e. the Receiving Account). Second, a Bank employee (Arck’s relationship manager) had signed certain “letters of instruction” from Arck to the Bank, each of which contained statements about how the Bank was to open new accounts for Arck and deal with sums held in those accounts. These statements were not correct.

One such letter of instruction concerned the Paradise Beach investment scheme (the “LoI”). The investors said that they had been shown the LoI by Arck, and that they had relied on it in investing in the Paradise Beach scheme.

The investors’ claims against the Bank were for (1) breach of contract (which, they said, they were entitled to enforce under the Contracts (Right of Third Parties) Act 1999); (2) negligent misrepresentations made in the LoI; (3) breach of a Quistclose trust by the Bank; (4) dishonest assistance (by the Bank relationship manager) in Arck’s breach of trust; and (5) restitution.

The court’s findings

  • All of the Claimants’ causes of action failed and their claims were dismissed. Fundamentally, the Claimants failed to convince the Court that they had, as a matter of fact, seen and relied on the LoI in advance of making their investments. This is analogous with the position in So and represents a stark warning to potential claimants. Here, the events in question had taken place many years ago and Mr Chudley’s witness evidence was inconsistent with the contemporaneous documentation. In view of this, and with regard to the authority in Gestmin v Credit Suisse [2013] EWHC 3560 (Comm) regarding the dangers of relying on oral testimony of witnesses as opposed to contemporaneous written documentation, the Judge concluded that it was more likely that Mr Chudley’s alleged reliance on the LoI was “the product of reconstruction rather than reliance”.
  • The breach of contract claim failed as the Court held that the LoI was not objectively intended to be a legally binding contract between Arck and the Bank, so there was no contract to breach. The LoI contained a request, from Arck to the Bank, to open an account into which investment sums for the scheme the Claimants had invested in were intended to be received. The Claimants’ argument was that they had understood that the Receiving Account was the account referred to in the LoI and as such, the Bank was obliged to comply with other terms of the LoI pertaining to how their investment sums were to be handled. The Bank had not in fact opened an account as envisaged by the LoI. The Court therefore concluded that as such, there was no contract between Arck and the Bank. Accordingly, the breach of contract claim failed and that was effectively the end of the claim.
  • The Claimants’ negligent misrepresentation claim also failed. The Court’s finding that the Claimants had not in fact seen the LoI in advance of their investment was fatal to this claim. The Court also went onto find that there was no duty of care owed by the Bank to investors in Arck’s schemes arising from the LoI as “there was not the necessity proximity or relationship between the Claimants and the Bank to justify the imposition of a duty of care on the Bank… …the Bank had no contact with the individual Claimants and did not know of their identity”. This factual nexus was fundamentally different to that in So, and allowed the Judge to conclude that a duty of care could not be imposed on the Bank.
  • In terms of the trust arguments, the Court found that the Bank had not acted in breach of trust by paying the Claimants’ investments out of the Receiving Account. First, as the Claimants had not seen the LoI, “there was in fact no intention on the part of the Claimants to create the trust that [they were seeking] to rely on” at trial. Second, the Court accepted the Bank’s position that, even if there had been a trust arrangement arising following the Claimants’ investments, in accordance with standard banking practice, that trust would have been between Arck and the Claimants, and not the Claimants and the Bank. The Claimants went onto argue that if Arck held their investments on trust for them, on the terms of the LoI, the Bank had dishonestly assisted Arck’s breach of trust. This allegation was also dismissed. There was no trust to breach and the Judge noted the high evidential burden required for this claim to succeed and was satisfied that the Claimants had failed to satisfy this burden. Negligence is not sufficient to satisfy the Court of the requirements for dishonesty.
  • Finally, the Court also dismissed the Claimants’ claim for a restitutionary remedy. The Claimants’ investments could not have constituted a mistaken payment given that they had not seen the LoI in advance of investing and even if they had, the Bank could rely on the defence of ministerial receipt.

Concluding thoughts

There has been a significant rise in the number of claims being intimated against banks and other financial institutions from defrauded parties. In many cases, the banks faced with these claims have had no knowledge of the underlying fraud perpetrated and have simply provided banking facilities, through which funds have been transmitted. The Claimants in this case tried to argue that the Bank should be liable for the Claimants’ losses pursuant to a myriad of legal bases. All of which failed. This case demonstrates that Courts will be reluctant to render innocent banks liable for frauds perpetrated against others of which the bank has no knowledge.