Banks may rest assured as Hong Kong Court refuses to expand scope of Quincecare duty

In the recent case of Luk Wing Yan v CMB Wing Lung Bank Ltd [2021] HKCFI 279, the Hong Kong Court of First Instance (the “Court”) found that the defendant bank (the “Bank”) was not liable for losses caused to an investor arising out of investments offered by an employee of the Bank which turned out to be fraudulent. In dismissing a claim for breach by the Bank of the so-called Quincecare duty of care, the Court held that the Quincecare duty could only arise in circumstances where misappropriation of a customer’s funds occurred by an authorised or trusted agent of the customer, rather than where the customer itself instructed payment as a result of being tricked or defrauded by a third-party to do so.

Background

From September 2010 on, the Plaintiff, Ms. Luk, entered into a number of “investments” (the “Investments”) offered by one of the Bank’s employees, Ms. Liu (the “Employee”), a securities manager of the Bank. The Plaintiff had agreed to transfer HK$24 million to the Employee’s personal account (with the Bank) for the purposes of making the Investments, under the impression that they were “internal” Investments normally offered exclusively to the Bank's staff, but which the Employee was also making available to her.

The Court noted that the Investments “had an extremely attractive 'upside' and no apparent 'downside'. The return was high-yielding - around 100 times the amount that banks were otherwise paying on deposits. The Employee forged receipts and agreements bearing the letterhead of the Bank, which led the Plaintiff to believe that the Investments were genuine.  Of course, they were not.

In related criminal proceedings, the Employee was convicted of three counts of fraud and sentenced to over 10 years in imprisonment. The key issues for the Court to decide here were (i) whether the Bank was vicariously liable for all the losses suffered by the Plaintiff due to the Employee’s fraud; and/or (ii) whether a Quincecare duty arose (deriving from the English case of Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363), making the Bank liable to the Plaintiff for the Employee’s acts.

Vicarious Liability

The Court rejected the Plaintiff’s claim that the Bank was vicariously liable for the acts of the Employee.   In doing so, the court provided a helpful summary of the law on vicarious liability and the use of the ‘close connection’ test as opposed to the ‘apparent or ostensible authority’ test.  In particular, the Court held that, although the ‘close connection’ test was firmly established, the correct test for cases with factual circumstances similar to this one was the ‘apparent authority’ test.   The Court held that “apparent authority is found where a principal (by words or conduct) has represented to the third party that the agent has actual authority to enter into the kind of transaction in question, and the third party enters into a transaction in reliance on that representation which reliance must be reasonable”.

The Court found that the Bank was not vicariously liable as the Plaintiff knew that the Investments were “internal” to the Bank, and hence it must follow that she knew that the Bank could not have intended to offer, or have authorised its staff to offer on its behalf, such “internal” investments to outsiders such as the Plaintiff. As such, the Bank had not made any representation that the Employee had authority to offer the Investments to the Plaintiff, and so the Employee could not clothe herself with apparent authority. The Court further commented that the Plaintiff was “a victim of her own greed and gullibility”, as the Investments were “indeed too good to be true”.

The Quincecare Duty

The Quincecare duty, which formed the basis of the Plaintiff’s claim in negligence, is a bank’s duty to refrain from executing a customer’s order when the bank is put on inquiry that the order is an attempt to defraud the customer.  The duty arises when the bank is acting on an order or instruction to transfer monies.  The traditional scope of the Quincecare duty, which applies in Hong Kong, was arguably expanded in England & Wales by the recent English Court of Appeal judgment in JP Morgan Chase Bank NA v The Federal Republic of Nigeria [2019] EWCA Civ 1641 where it was held that, the Quincecare duty comprises both (i) a negative duty to refrain from making payment; and (ii) a positive duty on the bank proactively to do “something more” when put on such inquiry. In the High Court, the judge was inclined to the view that the positive duty was a duty of inquiry. However, the English Court of Appeal’s formulation of the positive duty was not limited to one of inquiry or investigation and for that reason it arguably expanded the scope of the Quincecare duty. For an analysis of this judgment and other English and Hong Kong cases on the duty, please see our previous blog post here.

The Plaintiff sought to rely on Federal Republic of Nigeria v JP Morgan Chase Bank NA [2019] EWHC 347, the first instance decision in the JP Morgan case mentioned above, which describes the ‘core’ of the Quincecare duty as “the negative duty on a bank to refrain from making a payment (despite an instruction on behalf of its customer to do so) where it has reasonable grounds for believing that that payment is part of a scheme to defraud the customer”. The Plaintiff argued that the Bank had the duty to put orders “on inquiry” as long as it had reasonable grounds for believing that the orders were an attempt to defraud the customer.

In Luk Wing, the Court dismissed the Plaintiff’s claim as over onerous, stating that it “would require a significant extension to the previously described delineation of that duty”.  This is because the Court held that the Plaintiff seemed to suggest that the bank’s duty arises when it has reasonable grounds for believing that the payment is meant to defraud the customer in any way and by any person.  Coleman J held that the starting point ought to be where the bank has received an instruction on behalf of its customer i.e., from an authorised agent, rather than directly from its customer.  Coleman J held that the Plaintiff‘s argument was fundamentally different and it would require the bank to be potentially alert to factual circumstances of a very different nature than the relationship between the bank and its customer.  What the Plaintiff was suggesting would be significantly more onerous than had been envisaged even in the first instance decision in JP Morgan Chase.

Comments

Based on the analysis in this judgment, Hong Kong law follows the scope of the Quincecare duty in line with recent English cases Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50 and Philipp v Barclays Bank UK plc [2021] EWHC 10 (Comm).  The Plaintiff attempted to expand that scope to impose upon the Bank certain professional standards of detective and investigative work, aimed at establishing whether or not a payment which potentially may have been made in furtherance of a fraud really is suspect. Coleman J held that the Quincecare duty remains subordinate or ancillary (and intrinsic) to a bank’s primary duty to comply with a customer's instructions in relation to the funds in his account. Any attempts at elevating or broadening such a duty would cast too much doubt over the effectiveness of the customer's instructions.  That would also dilute or weaken the primary duty (to act on the customer’s instruction) and impose a higher obligation on the subordinate duty to ‘second-guess’ the customer’s instruction.

If a bank is to be held to that sort of a standard, then something equivalent to a code for intervention is required and the bank needs to know its terms, which would have industry-wide application, and would require industry-wide consultation and implementation.  At present, there is no such clear framework rules by reference to which the duty, if it had been extended, might sensibly operate.

The Hong Kong Court has, therefore, not extended the Quincecare duty to protect attempted misappropriation of the customer’s funds when a customer directly induces or instructs payments. Notably however, Coleman J remarked that in this era of sophisticated use of artificial intelligence, banks may be increasingly placed or pressured into a position and duty to monitor the operation of the bank accounts of their customers from fraud conducted by employees. Any such change, though, would require industry-wide consultation and implementation, which has yet to occur.