Over 25 years ago, the case of Barclays Bank Plc v Quincecare  4 All ER 363 established that a bank owes a duty of care to both its customer and third parties to protect against fraud. In summary, a bank will be liable if it has reasonable grounds for believing that a payment it makes will be defrauding the customer.
The case of Singularis Holdings Limited v Daiwa Capital Markets Europe Ltd  EWHC 257 (Ch) was significant, as it was the first instance in which a bank was found to have breached a “Quincecare duty”. The recent appeal of Mrs Justice Rose’s judgment in this case was unsuccessful in the Court of Appeal. An brief analysis of the judgment, as well as the associated implications for financial institutions, is detailed below.
Daiwa Capital Markets Europe Ltd (“Daiwa”), a stockbroker, paid $204 million out of the client account of Singularis Holdings Limited (“Singularis”) to bank accounts of related entities. The payment was made at the request of Mr Al Sanea, a director and the only shareholder of Singularis.
Singularis went into liquidation and the money was lost. The liquidators of Singularis claimed that Daiwa had breached its duty to protect the company from fraudulent activity when it made these payments. The liquidators sought repayment of the money from Daiwa on behalf of the company, in order to repay the company’s creditors.
Daiwa argued that their Quincecare duty applied to the company, but did not extend to the company’s creditors.
Daiwa also claimed that Singularis was a “one-man company” and the company was complicit in the fraudulent payments. Therefore, Daiwa sought to rely on the “illegality defence” in order to defeat the claim (a claimant may not pursue a legal remedy if it arises from his own illegal act).
Decision at first instance
Mrs Justice Rose ruled that Daiwa owed Singularis a “Quincecare duty” and had breached this duty through making the payments at the request of Mr Al Sanea. The judge, did however, reduce the quantum of damages recoverable by Singularis by 25% to account for the company’s contributory negligence.
The judge found that the fact that the damages would ultimately benefit the creditors, not the company, was irrelevant. Daiwa had breached its duty to the company and was therefore liable to pay damages.
The judge also rejected the submission that the company was a “one-man company” and therefore could not recover from its own illegality. This is because the company was not set up purely to perpetrate the fraud, nor were the company’s two other directors complicit in Mr Al Sanea’s fraud.
Daiwa appealed the firts instance decision.
The central question for the Court of Appeal was whether Daiwa could rely on the illegality defence. The Court unanimously agreed with Mrs Justice Rose that Singulairs was not guilty of any illegality, as Mr Al Sanea’s had acted independently in his fraud. Therefore, the defendant could not rely on the illegality defence.
Daiwa raised a number of subsidiary questions to the court in their appeal:
- whether the judge’s assessment of contributory negligence should be re-evaluated;
- whether Daiwa should be liable to pay damages if only the creditors of the company will benefit; and
- whether bringing a tort of deceit claim against Singulairs would preclude the company’s claim.
The Court of Appeal unanimously agreed with the reasoning of Mrs Justice Rose and accordingly dismissed each of these questions in turn.
Ramifications for the industry
Whilst at first glance this case may be the cause of great concern for financial institutions handling client monies, this would likely be an over-simplification.
In order to establish a Quincecare duty, a very high threshold needs to be met. Daiwa was not a stereotypical bank; they were not responsible for thousands of weekly payment instructions. Daiwa had sufficient knowledge of Singularis and its account history to be “put on inquiry” in relation to the fraud and was negligent in failing to take necessary steps to protect the company.
Nevertheless, financial institutions should be alert to the fact that they are under a duty to protect against fraudulent activity and ensure that they have implemented appropriate safeguards. These may include anti-fraud controls and training staff to follow agreed protocols when processing and authorising payments.