Financial institutions' duty of care in light of Singularis Holdings Ltd (in official liquidation) v Daiwa Capital Markets Europe Ltd

The Court of Appeal's much anticipated judgment in Singularis Holdings Ltd (in official liquidation) v Daiwa Capital Markets Europe Ltd [2018] EWCA Civ 84 was handed down in February. It upheld the decision of the High Court that Daiwa, a stockbroker, breached its Quincecare duty of care to its customer by making payments without inquiry, when it should have been on notice that its client's instruction was an attempt to misappropriate funds.

This is the first time the court has found against a bank in respect of the Quincecare duty. Whilst financial institutions are nervous that the decision creates a higher burden on them when discharging the Quincecare duty of care, the fraud in this case was so obvious and the breaches so extensive it can be regarded as an exceptional case. Indeed, the Court of Appeal reiterated that the Quincecare duty is a high threshold for a claimant. One would expect that it would be even more difficult to prove a breach by a large high-street bank.

The facts

Singularis was part of the Saad Group owned by Mr Al Sanea (a director and sole shareholder of Singularis). Mr Al Sanea instructed a stockbroker, Daiwa, to pay $204 million of Singularis' funds to the bank accounts of entities related to the Saad Group and not in the name of Singularis. Daiwa complied with the instructions knowing Singularis was in significant financial difficulties and despite a number of rather glaring signs that Mr Al Sanea's instructions may not have been bona fide. It was common ground that Mr Al Sanea had acted fraudulently. The monies were lost.

Singularis went into liquidation and the liquidators sought to recover the monies from Daiwa.

The claim in negligence (first instance)

Barclays Bank PLC v Quincecare [1992] 4 All ER 363 established that a bank will be liable to its customer for damages in negligence if it makes payments in circumstances where it had reasonable grounds for believing the payment instruction was an attempt to misappropriate funds (the Quincecare duty). Singularis claimed Daiwa was negligent in breaching that duty.

Daiwa argued it should not be subject to the Quincecare duty at all on the grounds that, inter alia, as a "one man company" the fraud was attributed to Singularis and it was therefore precluded from bringing its claim on the grounds of illegality (i.e. it perpetrated the fraud). This was rejected by the Judge, not least because Singularis was not a "one-man company". Further, such a finding would deprive the Quincecare duty of any value.

At first instance Mrs Justice Rose stated that the Quincecare duty "requires a bank to do something more than accept at face value whatever strange documents and implausible explanations are proffered by the officers of a company facing serious financial difficulties". The Court found that Daiwa was liable in negligence by breaching its Quincecare duty as any reasonable banker would have realised that there were many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud. Daiwa was ordered to pay Singularis $152,806,425 (damages were reduced by 25% to reflect Singularis' contributory negligence).

Daiwa appealed.

The appeal

The court dismissed all five grounds of appeal (a number of which did not require determination as they assumed that the fraud was attributed to Singularis (which it was not)).

Of note in relation to the Quincecare duty, the Court agreed with Mrs Justice Rose at first instance that Mr Al Sanea's fraud should not be attributed to Singularis so as to bar its Quincecare claim on grounds of illegality. Notwithstanding that the other directors of Singularis were not complicit in the fraud, Mrs Justice Rose had not erred in concluding that Singularis was not a one man company (Bilta (UK) Ltd (In Liquidation) v Nazir [2015] UKSC 23, [2016] A.C. 1 followed).

In considering whether Daiwa had been negligent in making the payments in question, Sir Geoffrey Vos, giving the lead judgment, stated the Quincecare duty required a bank to "refrain from executing an order if and for as long as the banker is 'put on inquiry'". "Put on inquiry", as per Quincecare, requires the banker to have reasonable grounds, but not necessarily proof, for believing that an order is a request to misappropriate funds.

The Quincecare duty is, the court held, a narrow and well defined duty solely to protect customer funds from being misappropriated in circumstances where the bank was, or should have been, on inquiry. Sir Geoffrey Vos, giving the lead judgment, concluded it is a rare situation where a bank is put on inquiry and would only happen in abnormal situations. He concluded that Mrs Justice Rose in the first instance found, correctly, that Daiwa made payments in circumstances where there were "obvious" and "even glaring" signs that a fraud was occurring; the high threshold was therefore met in this case.

Comment

Whilst Singularis is the first case where a financial institution has been found to have breached its Quincecare duty, the facts of the case are so extreme that its importance should not be overstated. The Quincecare duty remains intact and does not require banks to become amateur sleuths when processing payment instructions. The case has not lowered the general duty for a bank to prevent fraud once on notice and, in that sense, the tide has not turned.

Further, Daiwa was a stockbroker and not a bank. In cases against banks, the Court would likely continue to consider it impractical to impose too heavy a duty when processing thousands of transactions every week. As Steyn J said in Quincecare: trust, not distrust, is the basis of a bank’s dealings with its customers; and full weight must be given to this consideration before one can conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company.

Nevertheless, the decision should not be overlooked. It stands as a reminder that a bank should remain vigilant for "red flags" which may put it on inquiry and, if so, take reasonable steps to prevent fraud. It is also an illustration of the difficulty a bank will face in acting in accordance with its contractual relationship with its customers, whilst complying with other legal and regulatory duties.

In order to minimise the risks identified in this case, financial institutions should have robust and documented anti-fraud controls and a defined process for authorising payments. Further, information obtained about a customer, such as that it is in severe financial difficulties, should make its way to the operational teams processing payment instructions.