Privy Council confirms that Quincecare duty is limited to protecting customers and does not extend to protect third parties

In the latest decision to consider the Quincecare duty, the Board of the Privy Council has confirmed that the duty is limited to protecting the customers of a bank, and does not extend to protecting any third party beneficiaries of its customer's accounts. In doing so, the Board dismissed a claim by an investment fund against a bank for an alleged breach of duty to protect it from losses caused by the fraudulent misappropriation of monies from certain bank accounts which belonged beneficially to the fund: Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) (Isle of Man) [2022] UKPC 18.

Historically, the Quincecare duty has arisen where a bank receives a payment instruction from an authorised signatory of its customer, and executes the order, in circumstances where (allegedly) there were red flags to suggest that the order was an attempt to misappropriate the funds of the customer. The Board rejected firmly the suggestion that the Quincecare duty (as we know it) is owed to anyone except the customer of a bank.

The Board also rejected the suggestion that the duty should be extended beyond its existing boundaries to protect third parties. It could see no good reason in this case for incrementally developing the tort of negligence, beyond the well-established Quincecare duty of care, so as to impose on a bank an equivalent duty of care to a third party who is not a customer of the bank. In the view of the Board, it would not be fair, just and reasonable in this case to impose a duty of care on the bank to the third party beneficiary of the account. The Board said this would place an unacceptable burden on banks, going outside of their contractual relationships with their customers.

The Board placed great emphasis on the purpose of the Quincecare duty, both to define the existing parameters of the duty and in the context of considering whether it would be appropriate to make an incremental development from existing case law. In each analysis, the Board circled back repeatedly to the purpose of the existing Quincecare duty found in existing authorities (i.e. to protect customers) and the purpose of the service provided by the bank (to benefit the customer, not to benefit third parties). This analysis provides a stark contrast to the approach taken recently by the Court of Appeal in Philipp v Barclays Bank UK plc [2022] EWCA Civ 318 (see our banking litigation blog post), where the court considered the scope of the existing Quincecare duty by looking at the reasoning behind the duty, rather than focusing on the purpose of the duty established in previous case law.

While decisions of the Privy Council are not binding on English courts, they are regarded as having great weight and persuasive value (unless inconsistent with a decision that would otherwise be binding on the lower court). Given the constitution of the Board of the Privy Council in this case, it is highly likely that the decision will be followed the next time the same issue arises in an English case. Noting the contrast in approach between the present case and Philipp v Barclays, it may also suggest a more cautious and purpose-focused approach to defining the existing boundaries of the Quincecare duty in future cases.

The Board also dismissed an alternative line of argument made by the fund, and in doing so confirmed that the decision in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 is no longer good law. Under the Baden duty, a bank which knew that an account with it was a trust account, and which was negligent in transacting banking business in relation to the account, could be liable not only in contract to its customer but also in tort to the customer and others. The Board explained that the case relied on in establishing the Baden duty (Anns v Merton London Borough Council [1977] UKHL 4) has been overturned by the House of Lords, and therefore all cases decided subsequently in reliance on that case should be overruled.

We consider the decision in more detail below.

Background

In 2009 an investment fund (the Fund) set up an investment scheme, pursuant to which investor funds flowed from the Fund's account in the Cayman Islands to a main account (the Account) held at an Isle of Man bank (the Bank). The Account was held by an Isle of Man company, Synergy (Isle of Man) Ltd (SIOM), which held the money in the Account on trust for the benefit of the Fund, and was responsible for the disposition and investment of Fund money in accordance with the investment scheme documentation.

Between 2009 and 2012, the owners of SIOM misapplied the Fund's monies by diverting the funds sent to the Account to numerous third-party accounts in which they had a beneficial interest and to their own personal accounts. Once the fraud was discovered, the Fund's dealings were suspended and advances to the Account held by SIOM were stopped.

The Fund subsequently brought a claim against the Bank for losses which it had allegedly suffered as a consequence of the fraud. The Fund's case was that the Bank owed it a duty of care in tort to exercise reasonable care and skill. As a result of this duty, the Fund said that "if the circumstances were such that a reasonable banker would have had grounds for considering that there was a serious or real possibility that the [Fund] was being defrauded and/or its funds were being misapplied …, [the Bank] was obliged not to honour instructions in relation to [the Accounts] until such time as it had made reasonable enquiry and satisfied itself as to the propriety of the conduct of [the Accounts]”.

On the Fund's case, the effect of such a duty was that the Bank was required to take reasonable care to protect the Fund from losses caused by the fraudulent misappropriation of funds from the Account. In the Fund's view, the Bank had not taken the steps that it ought to have taken in response to the evidence of potential fraud.

The Bank denied the claim and applied for strike out or summary dismissal of the claim on the basis that there was no arguable pleaded basis on which the Fund could establish that the Bank owed the alleged duty of care. No such duty could have been owed by the Bank to the Fund as a non-customer.

Decision of the High Court of the Isle of Man

The High Court dismissed the Bank's application for strike out or summary dismissal of the claim (see judgment).

The High Court held that there was a realistic argument that a duty of care in tort can be owed to non-customers and that the claim pleaded by the Fund was not fanciful and ought to be allowed to proceed.

The High Court also opined that if an incremental extension of the law in this area was required to impose a duty on the Bank, such an extension was arguable and had at the very least a more than fanciful chance of succeeding.

The Bank appealed the High Court's decision.

Decision of the Court of Appeal of the Isle of Man

The Court of Appeal allowed the Bank's appeal (see judgment).

The Court of Appeal held that there was nothing unusual in a bank holding customer accounts which it knows are designated by the bank in a way that indicates the funds in the accounts are beneficially owned by a person or persons other than the customer. Although there have been many instances of frauds being perpetrated on such accounts, no legal authority had established that a duty of care in negligence was owed to the beneficiaries of the monies by the bank in the absence of dishonesty. As the Fund had not pleaded any allegation of dishonesty on the part of the Bank, the High Court was wrong in law to hold that the claim disclosed a case that was sufficiently arguable.

The Court of Appeal also noted that this was not a novel or exceptional case. Bank accounts in which funds are held not for the account holder (the bank's customer) but for other persons and are designated as such, to the knowledge of the banker, are not at all uncommon. To extend the alleged duty of care to the Fund would be more than an incremental development of existing case law; it would be a massive extension with significant consequences for banking law.

The Fund appealed the Court of Appeal's decision.

Decision of the Board of the Privy Council

The Board found in favour of the Bank and dismissed the appeal for the reasons explained below.

The Quincecare duty of care

The Board found that the Bank was not subject to the Quincecare duty of care.

The Board noted that, as per Barclays Bank v Quincecare [1992] 4 All ER 363, there is a duty on a bank 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 order is an attempt to defraud the customer. The Board highlighted three main points about the Quincecare duty as explained by Steyn J in Quincecare:

1. Duty arises as an implied term of the contract. The Quincecare duty is an implied term of the contract between the bank and the customer (and a co-extensive duty of care) that the bank will exercise reasonable skill and care in and about executing the customer's order.
2. Duty runs counter to the bank's standard contractual duty to comply with a valid order of the customer. The Quincecare duty must be carefully calibrated to reflect the fact that the duty of care is counteracting the receipt by the bank of what appears to be a valid and proper order which it is prima facie bound to execute. Steyn J was at pains to make clear that the standard of care imposed should not place too onerous a burden on banks.
3. Duty imposed to protect only the customer and not innocent third parties. Steyn J’s statement that “the law should guard against the facilitation of fraud, and exact a reasonable standard of care in order to combat fraud and to protect bank customers and innocent third parties” (emphasis added) must be read in context. The Board said it was clear that the reference to protecting innocent third parties was merely to the effect that combating fraud by recognising the Quincecare duty is owed to the customer, protects not only the customer, but other innocent victims of fraud.

The Board highlighted that in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, the Supreme Court had stressed that the purpose of the Quincecare duty of care was to protect the bank's customer. There was no hint in that judgment that the duty might be owed to anyone other than the bank's customer. Indeed, the Court of Appeal in Singularis [2018] EWCA Civ 84, drew a contrast between the limited Quincecare duty of care (necessarily limited to claims by only a customer) and the potentially more wide-ranging duty of care owed by an auditor in reporting on a company’s financial statements (where any number of potential claimants may wish to claim that they suffered loss as a result of what the auditor said having been inaccurate).

A similar position was taken by the Court of Appeal in JP Morgan Chase Bank NA v Federal Republic of Nigeria [2019] EWCA Civ 1641, where the judgment was entirely framed in terms of the Quincecare duty being owed by a bank to its customer and with no indication at all that it might be a duty owed to others.

The Board concluded that there was nothing in Quincecare itself or the cases subsequently applying it (including the decision in Philipp v Barclays) to support the argument that the Quincecare 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 Baden duty of care

The Board found that the Bank was not subject to a Baden duty of care.

The Board said that the decision in Baden on the existence of a duty of care could not stand today as good law. In that case, the High Court accepted that a duty of care was owed by the defendant bank to third party beneficiaries, and not merely to its customer, in a situation where the bank knew that the accounts were held by its customer as a fiduciary for known beneficiaries.

The court in Baden had relied on the two-stage approach in Anns v Merton in determining whether there was a duty of care owed by the defendant to the claimant. But the House of Lords in Murphy v Brentwood District Council [1991] UKHL 2 overruled Anns v Merton and stated that all cases decided subsequent to it in reliance on it should also be overruled.

Accordingly, the Board determined that the duty of care owed to third party beneficiaries of an account, held to exist in Baden, could not stand as good law because of the demise of the two-stage approach in Anns v Merton on which it rested.

Duty of care based on incremental development

The Fund argued that, if the duty of care alleged did not fall within an established category of duties, it would be an incremental development justified by analogy with existing case law. The Board disagreed.

The Board held that this was not a case in which practical justice demanded that there should be a remedy to fill the lacuna that would otherwise arise. In this way, the present case was distinguishable from White v Jones [1995] UKHL 5, where solicitors negligently failed to draw up a will in favour of the intended beneficiaries prior to the testator's death, and would otherwise be left without a cause of action. In the present case, SIOM (as the customer of the Bank) had a valid claim for negligence in contract and tort against the Bank under which (if successful), it would have been legally entitled to recover the loss suffered by the Fund, and hence the beneficiaries for which it was the trustee. In turn, the Fund would have a claim to recover its loss against SIOM for breach of fiduciary duty. This contrasted with White v Jones where there was no possible action by the intended beneficiaries against the testator or his estate (who committed no legal wrong).

The Board noted that - even without a legal lacuna - it is possible (exceptionally) for a duty of care to be owed by a professional or a bank to someone who is not a client or customer as regards pure economic loss, for example in Dean v Allin & Watts [2001] EWCA Civ 758 and Golden Belt 1 Sukuk Co BSC(c) v BNP Paribas [2017] EWHC 3182 (see our banking litigation blog post). However, the Board noted that in both of those cases the purpose of the service provided by the defendant was to benefit the third party. Here, the Board could not say that the purpose of the Bank's service was to benefit third party beneficiaries of the Account. Rather the purpose was to benefit the customer. Equally, it could not say that the Fund placed direct reliance on the Bank or that it was or ought to have been known to the Bank that any such reliance was being placed.

The Board emphasised that the incremental test for the identification of a novel duty should not be considered in isolation and must go together with the test from Caparo v Dickman [1990] UKHL 2 as to what is fair, just and reasonable. In the Board's view, without a close analogy in terms of purpose and reliance, and without any legal lacuna, it would not be fair, just and reasonable to impose a duty of care on the Bank to the Fund. This would place an unacceptable burden on the banks going outside their contractual relationships with their customers. In other words, the Board saw no good reason in this case for incrementally developing the tort of negligence, beyond the well-established Quincecare duty of care, so as to impose on a bank an equivalent duty of care to a third party who is not a customer of the bank.

Finally, the Board noted that the incremental extension of the duty considered in this case was concerned not merely with pure economic loss, but also with an omission, i.e. what was alleged was the failure of the bank to step in to prevent harm being caused to the claimant by the wrong of a third party. Put another way, the duty of care would be one to protect the claimant against the fraud of the Bank’s customer. The Board noted that the Supreme Court has examined extensively the law on the duty of care in the context of such failures, in particular in the recent case of N v Poole Borough Council [2019] UKSC 25. In this case, the Supreme Court emphasised that the common law does not generally impose liability for failure to prevent harm caused by others, and for a duty of care to arise restrictive principles must be satisfied, including that the defendant has some special level of control over the source of danger or has assumed a responsibility to protect the claimant from the danger. In the present case, the Board said it could be seen that the Bank had no special level of control over the source of danger (i.e. it was not in control of the fraudsters) and could not be said to have assumed responsibility to protect the Fund from the fraud. The Board noted that this conclusion further supported the decision that the Bank owed no duty of care to the Fund.

Reliance on authorities concerning accessory liability

The Bank relied (in support of its submissions that no duty of care should be owed by the Bank to the Fund in this case) on the decision in Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4. Although the decision in Tan was concerned with accessory or secondary liability, and not the primary wrong of negligence (at the heart of the present case), the Board considered that the decision in Tan supported the view that no duty of care should be owed by the Bank to the Fund.

The Board said that Tan confirmed that banks and other parties who are alleged to be assisting a breach of fiduciary duty are liable only if they are dishonest and not if they are merely negligent.

On the assumption that there was a breach of fiduciary duty by the Bank’s customer (i.e. SIOM) to the Fund, if one were to treat the Bank as liable to the Fund for the tort of negligence, this would be tantamount to holding it liable for having negligently assisted a breach of fiduciary duty. It would therefore undermine Tan.

Accordingly, for the reasons given above, the Board dismissed the Fund's appeal.