A bank does not owe the beneficial owner of account monies any duty of care in negligence, including any Quincecare duty: this was the conclusion of the Privy Council in the Isle of Man case Royal Bank of Scotland International Ltd v JP SPC4 and another.1 The appeal concerned a fraud where the account holder had defrauded the beneficial owner of the monies, an investment fund, by paying funds out of the relevant bank accounts in contravention of a legitimate investment scheme.

The Privy Council's main conclusion was that an extension of the duty to cover a beneficiary, who effectively sits behind the bank account customer, should be declined. It therefore rejected what would have represented a significant extension of the duty which would have required banks to monitor transactions for fraud not only with their customers in mind, but also any beneficial owners. While this decision will undoubtedly come as a relief banks, it is really the logical conclusion given that none of the Quincecare cases or other authorities supported the expansion of a bank's duty in this way. The Quincecare duty itself that a bank owes to their customer however remains as it has always been.

The decision will likely be viewed with great interest in England and Wales where the scope and nature of the Quincecare duty has recently commanded significant judicial attention. Although the decision is not formally binding on the English courts, it is likely to be highly influential especially given the Board of the Privy Council2, and the fact that the analysis is based on English case law. Interestingly, the specific fact pattern of the case seems to have taken a back seat in the mind of the Privy Council, who focused on the analysis of the scope of the duty, deciding it mainly on the basis of precedent. This is unusual for a Quincecare case, which are generally decided on the basis of the specific facts at hand, but indicates that this decision will likely be universally followed.

This more bank-friendly decision follows a number of claimant-friendly decisions, in particular the decisions of the English Court of Appeal in Philipp v Barclays Bank UK plc3 and JP Morgan Chase Bank NA v Federal Republic of Nigeria4 in which strike out applications by the banks were rejected and the claims were allowed to proceed to trial. Trial in the latter case was earlier this year and judgment is awaited5.

Background

The appeal was brought by the investment fund JP SPC 4 (the Fund) against the respondent Royal Bank of Scotland International Ltd (the Bank).

The Fund was a Cayman Island based investment fund which established a scheme by which investors lent to solicitors in England and Wales to finance high-volume, low-value litigation (the Scheme). The basis for the Scheme was that these claims would be profitable for the solicitors, so that the loans would be repaid to the Fund with interest. The loans were going to be advanced and repaid through an Isle of Man company, Synergy (Isle of Man) Ltd (SIOM). SIOM held two bank accounts with the Bank, and the Fund alleged that it was the beneficial owner of the monies in the bank accounts, which the Bank was alleged to have known.

The Fund had commenced proceedings against the Bank, alleging that SIOM and two individuals, Mr Schools and Mr Kennedy, behind it were parties to a fraud, resulting in money that belonged beneficially to the Fund being paid out for their benefit and that of associated third parties, rather than being invested in the Scheme. The Bank itself was not alleged to have been a participant in the fraud.

The Fund argued that the bank owed it a duty of care in tort that, if established, would mean that the Bank was under a duty to take reasonable care to protect the Fund from losses caused by the fraudulent misappropriation of funds from the accounts.

Mr Schools and Mr Kennedy were able to transfer approximately £37.8m to third parties and personal accounts. Of about £65m that did go to law firms, around £40m went to law firms in which Mr Schools had an interest, which had not been disclosed to investors, in contradiction of the terms of the Scheme.

In 2011, the Bank, after consultation with its legal team, renamed the accounts so that they referenced "JP SPC 4", ie the Fund, and later categorised them as high risk. The misappropriation of funds after this re-categorisation amounted to at least £60m. The Fund was never part of the fraud, and had no ability to monitor the accounts.

At first instance, the Bank applied for strike out or summary dismissal of the Fund's claim, which was dismissed, but the Bank's appeal to the Isle of Man Court of Appeal was successful. The Fund appealed to the Privy Council.

The Privy Council's decision Quincecare duty extends only to the customer – and not any further The Privy Council considered whether a duty of care was owed by the Bank on the basis of "assumed facts" ie -

  1. The Bank knew or ought to have known that the monies were not beneficially the property of SIOM but instead of the Fund and
  2. the circumstances were such that a reasonable banker would have had grounds for considering that there was a real possibility that the Fund was being defrauded.

The Privy Council held that the assumed facts were the relevant facts when considering whether the Bank owed a duty of care to the Fund. Accordingly, the lower courts had been correct to "grasp the nettle" (in relation to the strike out / summary judgment application), and decide one way or another whether the alleged duty of care existed.

It rejected the Fund's argument that the Bank owed a duty of care that was already established in law on the basis of the Quincecare case itself, and Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA7: neither case supported the Fund's argument.

The Privy Council held that the case of Quincecare established that a bank has a duty to refrain from executing a customer's order if, and for so long as, the bank is "put on inquiry" in the sense that the bank has reasonable grounds for believing, assessed according to the standards of an ordinary prudent banker, that the payment order is an attempt to defraud the customer.

The Privy Council noted that Steyn J had held in Quincecare that in the context of the duty there was a consideration of protecting innocent third parties. The Privy Council clarified that the reference to protecting innocent third parties was only to say that combating fraud against the customer by recognising a duty owed to the customer protects the customer, but also other innocent victims of fraud. That case never considered a duty of care owed by the bank to innocent third parties, and only considered the bank and its customer as relevant parties.

The Privy Council also reviewed other Quincecare authorities. It noted in relation to Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd8 that even though the Supreme Court had found that the purpose of the duty was to protect the bank's customer, there was no hint in the judgment that the duty might be owed to anyone else. Further, in JP Morgan Chase Bank NA v Federal Republic of Nigeria9, a case considering the duty in the context of defrauding a sovereign state, there was similarly no indication that the duty could be owed to others who are not the bank's customer. The Privy Council also considered the recent case of Philipp v Barclays Bank UK plc10 (for our commentary on this decision, see here). Overall, it concluded that the authorities do not support the argument that the duty extends beyond being a duty owed to the bank's customer, which arises as an aspect of the bank's implied contractual duty of care and co-extensive tortious duty of care.

The Privy Council in addition considered Baden in detail, where it had been held that a duty of care owed to third party beneficiaries of an account existed, and it did not matter that the loss in this case was pure economic loss and both acts and omissions were held to be covered. However, the Privy Council held that this decision was no longer good law as it rested on the two-stage approach in Anns v Merton London Borough Council11 in determining whether a duty of care existed, which has been overruled.

Therefore, the Fund's case that the Bank arguably owed it a duty of care on the existing authorities was rejected. The claim had no real prospects of success and there was no reasonable ground for bringing it. Assumption of responsibility by the Bank to the Fund cannot be established

The Fund argued that on the assumed facts there was an implied assumption of responsibility by the Bank towards the Fund. The Privy Council reviewed various authorities on the assumption of responsibility in relation to a task or service. It concluded that no express assertion of assumption of responsibility had been made in the pleadings and none of the relevant factors were alleged to be present. It was not alleged that the Bank undertook to perform any task or service for the Fund or that there were any exchanges crossing the line between them. The Bank only undertook to provide a service for its customer, SIOM. The Fund and the Bank were not alleged to have dealt with each other at all.

As for the re-naming of the bank accounts, there was no suggestion that this arose from any dealings between the Fund and the Bank12. Rather, one of the directors of SIOM had dealt with the Bank on the re-naming.

Further, the Privy Council rejected an argument that the Fund's reliance on the Bank could be inferred because the Fund was unable to monitor the accounts, as there had been no evidence of reliance by the Fund. Therefore, there were no pleaded facts and nothing in the assumed facts to establish a duty of care based on an assumption of responsibility by the Bank.

No duty of care based on incremental development of the law

The Privy Council also fully rejected the argument that there was an incremental development of the law to recognise a duty owed to the Fund. Unlike the authorities on the incremental development of a duty of care, here there was no legal lacuna which meant that a party suffering loss was left without legal remedy. SIOM, as customer of the bank, had a valid claim for negligence in contract and tort against the Bank for the loss suffered by the Fund, and would recover this as trustee for the beneficiaries. It was irrelevant that SIOM was now in practice unlikely to bring a claim against the Bank. The Fund would have a claim for loss against SIOM for breach of fiduciary duty.

Some of the authorities made it clear that even without a legal lacuna, there can, exceptionally, exist a duty of care owed by a bank to a non-customer for pure economic loss. However, in these cases the purpose of the service was to benefit the non-customer, and in one of them the non-customer was relying directly on the bank to draw up a document. The purpose of the Bank's service was to benefit the customer, and the Fund did not place direct reliance on the Bank, nor did the Bank know or ought to have known of any such reliance.

The Privy Council also found that it would not be fair, just and reasonable to impose a duty of care on the Bank to the Fund. This would be an unacceptable burden on banks going outside their contractual relationship with their customers, and there was no good reason for incremental development beyond the well-established Quinceare duty of care. It was also a consideration that this was a situation of pure economic loss, and that the conduct of the Bank was an omission, not an action. The Bank had no special level of control over the fraud and could not be said to have assumed responsibility to protect the Fund from the fraud.

Accessory liability

The Privy Council also considered accessory liability and the leading authority on dishonest assistance in Royal Brunei Airlines Sdn Bhd v Tan13. It found that Tan decided that banks who are alleged to be assisting a breach of fiduciary duty are liable only if they are dishonest and not merely negligent. Assuming that there had been a breach of fiduciary duty by the Bank's customer to the Fund, if the Bank were treated as liable to the Fund for negligence this would be tantamount to holding it liable for having negligently assisted a breach of fiduciary duty. This would undermine Tan. The general position established in Tan, which was that there is no duty of care owed by the bank to the beneficiaries, applied here.

Conclusion

If the duty of care arose whenever a bank knew or ought to have known that the funds were beneficially the property of someone other than the customer, then this would have radical implications, and this was correctly highlighted by the Isle of Man Court of Appeal as a "massive" extension of the Quincecare duty owed by banks, with significant consequences for banking law and practice. The Isle of Man Court of Appeal had been correct to decide that there was no reason for the Fund's claim to proceed to trial because it was bound to fail.