Jenner & Block’s London office has secured judgment in the UK Supreme Court for client Singularis, a company in liquidation. The United Kingdom’s highest court has affirmed that the London brokerage arm of Japanese banking group Daiwa is liable to Singularis in negligence for facilitating the misappropriation of funds out of Singularis’ account in 2009. Including interest and costs, Daiwa faces a total liability to Singularis in the region of US$200 million.

This long-running litigation has developed the law with regard to the nature and scope of duty owed by financial institutions to their corporate customers in situations where fraud is suspected. It also provides important clarity on the circumstances in which an institution may - and may not - be able to avoid liability for breach of that duty. 

The claim by Singularis 

Singularis’ claim was brought by its Cayman-appointed liquidators, partners of Grant Thornton. In 2009, Daiwa made payments at the request of Singularis’ sole shareholder and chairman, Maan Al Sanea, to third-party accounts in the aggregate amount of US$204 million. The payments left Singularis unable to meet creditor demands and it entered insolvency. Singularis commenced proceedings against Daiwa in 2014, alleging that Daiwa had breached the duty of care that is owed by a financial institution to its customer in circumstances where there are reasonable grounds to suspect that a payment instruction has the purpose of defrauding the customer. In such circumstances, the institution is obliged to refrain from executing the payment instruction until it has been able to satisfy itself that there is a legitimate basis for the instruction. Once the duty is engaged, the duty takes priority over the usual obligation on a bank or broker to execute customer instructions promptly, pursuant to the contractual mandate. The duty in question is often referred to as the Quincecare duty, because it was established in the case of Barclays Bank plc v Quincecare Ltd.

The decisions in the litigation

In 2017, the English High Court found for Singularis and its liquidators. The trial Judge stated 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.” Daiwa appealed to the English Court of Appeal, arguing that Mr. Al Sanea and Singularis were, as a matter of law, effectively one and the same entity. Daiwa argued that Mr. Al Sanea’s fraud was therefore to be attributed to Singularis, which would in turn bar Singularis’ claim from succeeding. The Court of Appeal unanimously rejected that argument. Daiwa then appealed to the Supreme Court on the same grounds. 

Giving the unanimous judgment of the Supreme Court, the President Lady Hale said that “[t]he fraud of Mr. Al Sanea is not to be attributed to the company … The bank 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. The company (and through the company its creditors) has been the victim of the bank’s negligence.”

Commentary

The Quincecare duty is well established and requires financial institutions to take reasonable care and skill in executing customer orders. The duty will only arise in cases where it can be said that an ordinary prudent banker would have a reasonable basis for suspicion that a particular payment instruction would result in the misappropriation of a customer’s money. Typically, this will be in cases where an authorised account signatory, such as a director or partner, instructs a bank to transfer funds out of a company or partnership account to a third party. When the duty does arise, it can be discharged simply by refraining from executing the instruction unless and until such time as the bank has been able to establish that the instruction relates to a lawful corporate obligation. The bank is entitled to seek further information and documentation from the customer in order to help establish this. 

Daiwa defended the claim for breach of the Quincecare duty on many different grounds. One argument put forward by Daiwa was that the Quincecare duty could not apply in a case where the claim was for the ultimate benefit of creditors. The courts in this litigation have made clear that there is no such principle, which reinforces the ability of liquidators and other insolvency practitioners to pursue Quincecare claims on behalf of the estate. Daiwa also argued that the duty could only apply to a deposit-taking entity such as a bank and not to a broker such as Daiwa. It is now clear that this is a distinction without a difference for the purposes of the Quincecare duty – the key question is whether client monies are at risk.

On appeal, Daiwa’s primary argument was that the dishonesty of Singularis’ chairman and shareholder, Mr. Al Sanea, ought to be attributed to Singularis. If this had been right, then Daiwa would have had available a range of potential defences, including the defence that Singularis’ claim was barred because Singularis itself was responsible for the wrongdoing which gave rise to the claim. That argument was unanimously rejected and the decisions in this litigation provide important clarity on when such a defence will – and will not – be available. First, it is now clear that in cases of this sort the actions of a dishonest director will not be attributed to a company in circumstances where there are other directors on the board who are innocent of that wrongdoing (albeit they may have negligently failed to prevent it). Secondly, and equally importantly, the Supreme Court held that even in cases where a company is wholly owned and controlled by a single dishonest director (or several such directors), there is no rule of law that where the company is suing a third party for breach of a duty owed to it by that third party, the dishonest conduct of the director (or directors) will automatically be attributed to the company. Instead, the Court must always consider the context and purpose for which attribution is relevant. 

Implications for the financial services industry

This decision is important for financial institutions handling third-party payments. We do not, however, expect it to result in a flood of Quincecare claims. Whilst the litigation has helped develop the law with regard to the nature and scope of the Quincecare duty, the duty itself remains the same. Compliance departments should ensure that staff understand the legal requirements and that where there are suspicions, these suspicions must be communicated to all relevant personnel whilst they are investigated.

Where a bank does make a payment which renders it liable for breach of the Quincecare duty, there will generally be only limited defences available. In very particular circumstances, a bank may be able to argue that a Claimant ought to be treated as the wrongdoer and thereby defeat the claim. As the Supreme Court has now confirmed, this will depend heavily on the precise facts of the case, and the purpose and context of any arguments on attribution. 

The courts in this case also recognised the growing reliance which regulators and other authorities place on financial institutions to play a role in identifying and combatting financial crime. This goes beyond the responsibility to prevent money-laundering. It is worth bearing in mind that the Quincecare duty operates by reference to the standard of an ordinary prudent banker. Banks and brokers should therefore be aware that this duty of care may arise with increasing frequency as the expectations placed on the industry continue to grow.