Privy Council confirms that unauthorised transfer by bank from client's account must be brought as a debt claim: potential impact on Quincecare duty claims

The Board of the Privy Council has handed down its advice in the case of Sagicor Bank Jamaica Ltd v YP Seaton [2022] UKPC 48, providing some helpful analysis of the types of claims and remedies available where a bank has made an unauthorised transfer out of its client's account.

The Board held that, where a bank had frozen and debited accounts without authority, the correct remedy was to reconstitute the accounts. It said an accounting exercise was to be performed that should disregard any debits which the bank had no contractual right to make and should include interest on the sums in the reconstituted accounts at the contractual rates which applied or should have applied on those accounts. Such claims were in substance claims in debt. However, the further claims for loss of use of the withdrawn and frozen funds failed, as a claimant must plead and prove the relevant loss for which they claim damages and the claimant had not done so in this case.

Earlier this year, we reported on the Hong Kong Court of Final Appeal (CFA) case of PT Asuransi Tugu Pratama Indonesia TBK (formerly known as PT Tugu Pratama Indonesia) v Citibank N.A. [2023] HKCFA 3. As mentioned in our blog post, the leading judgment in that case was delivered by Lord Sumption (a former Justice of the UK Supreme Court who was sitting as a Non-Permanent Judge of the CFA) who made some important observations relating to the scope of the so-called Quincecare duty. Lord Sumption's judgment in the Citibank case made express reference to the advice of the Privy Council in the present case.

The question linking these two cases is the correct characterisation of a claim where the bank has made an unauthorised transfer out of its client's account. Both cases agree that if a bank has debited an account without authority, the customer is entitled to disregard the debit and require the account to be reconstituted as it should have been. In this event, what is reconstituted is simply the bank’s records (i.e. the bank’s liability to the customer remains unaffected by the unauthorised debits). The customer will have a claim in debt for the full reconstituted balance of the account, which is payable on demand. This analysis has important implications for Quincecare claims in terms of the availability of a contributory negligence argument, as ordinarily a party cannot claim contributory negligence in response to a debt claim.

While we await the Supreme Court's judgment in Philipp v Barclays Bank, the present case provides an interesting addition to the Quincecare landscape. Decisions of the Privy Council are not binding on English courts, although they are regarded as having great weight and persuasive value (unless inconsistent with a decision that would otherwise be binding on the lower court). It will be interesting to see whether the Supreme Court in Philipp takes the opportunity to clarify this characterisation issue, which could have a significant impact on future claims of this type.

We examine the key aspects of the judgment in Sagicor v Seaton below.

Background and issues under appeal

The background to this case has a long history. In short, a dispute arose between Sagicor Bank Jamaica Ltd and its predecessor (together the Bank) and Mr Seaton (a businessman in Jamaica) as to whether the Bank was entitled to freeze foreign currency accounts held in his name and to debit accounts of Mr Seaton and of two of his companies. There was a complex trial where the court held that the Bank was not entitled to debit the accounts, and that ruling was not challenged before the Privy Council. In the same proceedings Mr Seaton sought a remedy for the Bank’s breach of contract.

The issue on appeal to the Privy Council (considered under English law), was to identify the remedy to which Mr Seaton was entitled in order to restore him to the position he would have been in, if the Bank had not acted in breach of contract by freezing and debiting the bank accounts.

Mr Seaton claimed he was entitled to be compensated for breach of contract under four separate categories:

1. the money which the Bank wrongfully withdrew from the accounts;
2. compound interest at the contractual rates on the withdrawn money until the date when the Bank had repaid the money;
3. a claim for the loss of use of the withdrawn funds; and
4. a claim for the loss of use of the money in the foreign currency accounts in the period in which they were wrongfully frozen.

Mr Seaton submitted that claims (i) and (ii) involved the reconstitution of the accounts as if there had been no breach of contract. He submitted that claims (iii) and (iv) should be quantified by awarding compound interest on the relevant sums (with a necessary reduction to avoid double recovery of interest with category (ii)).

In relation to claims (i) and (ii), the Bank acknowledged that (as a general rule) the appropriate remedy was to reconstitute the account.

In support of claims (iii) and (iv), Mr Seaton relied on the judgment of the House of Lords in Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commissioners [2007] UKHL 34, which confirms that a claimant who has suffered loss through a breach of contract may in certain circumstances claim interest as damages if they plead and prove that they have suffered such loss. The Bank submitted that Mr Seaton had not pleaded or proved a sufficient case to entitle him to such interest as damages for breach of contract.

Decision

The Board of the Privy Council allowed the appeal in part in respect of the reconstitution of the relevant accounts (ie claims (i) and (ii)), which was to be ascertained by way of an accounting exercise set out by the Board in its advice. However, the appeal failed in respect of the claims for loss of use (ie claims (iii) and (iv)).

Claims to reconstitute the relevant accounts

The Board noted that although Mr Seaton’s pleaded claim was for breach of contract, claims (i) and (ii) were in substance claims in debt.

The Board commented that no question of remoteness arose in relation to Mr Seaton’s claim for the return of the principal sums withdrawn from the accounts and the contractual interest thereon because they were debt claims. It noted that such questions could potentially arise in relation to his claim for interest as damages (albeit the Board did not go on to consider the issue in this case because of the outcome of claims (iii) and (iv), as discussed below).

In considering the previous case law (in particular, Limpgrange Ltd v Bank of Credit and Commerce International SA [1986] FLR 36 and National Bank of Commerce v National Westminster Bank plc [1990] 2 Lloyd’s Rep 514), the Board considered that the correct approach was to reconstitute Mr Seaton's accounts as follows:

"…by adding back as at the date or dates of the withdrawal the sums which the Bank withdrew without authority and by calculating the interest which would have been due on the accounts in accordance with the contracts between the Bank and Mr Seaton if the sums withdrawn by the Bank had remained in those accounts until they were withdrawn by or paid to Mr Seaton."

The difficulty with this approach in the present case, was that there was a lack of available evidence as to the appropriate rates of contractual interest. The Board therefore gave guidance in its advice as to how to address this issue. As such, Mr Seaton was entitled to interest at the contractual rates on the funds for the periods in which they remained or should have remained in the accounts.

Claims for loss of use

Mr Seaton’s claims (iii) and (iv) for damages for loss of use were noted by the Board to be "more problematic". The Board said Mr Seaton's evidence at trial was very limited and nothing was pleaded about his entitlement to interest as damages for having been kept out of his money.

In support of his claims before the Privy Council, Mr Seaton relied on the decision in Sempra Metals. The Board carried out a detailed analysis of the law in this area and commented that it was "clear" from Sempra Metals that, "to claim compound interest as damages for a breach of contract which has deprived the plaintiff of money it is necessary to plead and prove that the plaintiff has suffered the relevant loss." The Board gave examples of what a claimant may plead and prove in support of such a claim, such as: (a) it had to borrow money on which it has incurred interest charges as a borrower; or (b) it lost the opportunity to invest the money; or (c) in being deprived of its money, it had to use funds that otherwise would have earned interest.

Given the limited evidence in this regard, Mr Seaton sought to rely on the High Court's decision in Equitas Ltd v Walsham Bros & Co Ltd [2013] EWHC 3263 (Comm), where the court stated it was open to the court to infer a loss of income at the rate the claimant could have borrowed money, and award that sum as damages for breach of contract. The Board agreed that in order to make such an inference, no detailed examination of the claimant's financial affairs was required and this would depend upon the circumstances of the case. However, the Board did not agree with the High Court's conclusion in Equitas that the common law has gone so far as to recognise, as a general rule, that a claimant kept out of its money in a commercial context is entitled to receive - as damages for breach of contract - interest on the withheld sums that is calculated by reference to the cost of borrowing such sums at a conventional rate, without evidence from which such a loss can be inferred.

Accordingly, the Privy Council held that interest, including compound interest, may be awarded as damages for breach of contract. However, a claimant seeking interest as damages where the defendant has withheld money in breach of contract, must plead and prove its loss. If a claimant pleads that it has incurred loss by having to borrow replacement funds, then it must prove the circumstances from which a court may properly infer on the balance of probabilities that it has borrowed funds to replace those which have been withheld from it.

The Board therefore held that Mr Seaton’s (iii) and (iv) category claims for loss of use of the withdrawn and of the frozen funds failed, because Mr Seaton had failed to plead and prove the relevant loss for which he claimed damages.