Singularis v Daiwa: Court of Appeal dismisses financial institution's appeal on liability for fraudulent transactions

Financial Services Alert

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In February 2017 Mrs Justice Rose delivered judgment in the first case in the courts of England and Wales in which a financial institution was found to have breached what is commonly known as the "Quincecare duty". That duty follows the 1992 decision of Steyn J in Barclays Bank plc v Quincecare Ltd, which remains the leading authority for a bank's duty in negligence to its customer to refrain from executing a payment instruction when and for so long as it has "reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company". Despite clearly acknowledging that there can be a number of factors why it would be "impractical to impose too heavy a duty on a bank", Mrs Justice Rose had no hesitation in finding that Daiwa had breached its Quincecare duty to Singularis, albeit noting that the case before her was an unusual one.

A reminder of the facts

  • The claim concerned eight instructions given to Daiwa to make payments totalling US$204 million out of Singularis's client account with it. The payments were fraudulently instructed by Mr Al-Sanea, the sole shareholder and one of the directors of Singularis, which had been established to manage Mr Al-Sanea's personal assets
  • The payments were made at a time when Singularis turned out to be on the verge of insolvency, to companies within a group owned and controlled by Mr Al-Sanea (the Saad group). They followed Daiwa raising concerns, not satisfactorily addressed, about Singularis's financial health, the freezing of Mr Al-Sanea's assets, the Saad group seeking to restructure its lending arrangements with 40 banks and the Saad group's downgrading to "junk" and default by credit rating agencies
  • These events had caused Daiwa's Head of Compliance to issue a warning internally about "the need for care and caution in terms of any activity on [Singularis's] account with us" and to ensure that "any payment requests we receive [are] properly authorised and […] 'appropriate' in the context of our business relationship with them"
  • Despite this warning, Daiwa employees (including a senior compliance officer) authorised the payment instructions either with no enquiry at all or, having made enquiries, following explanations for the transactions having been "produced like a rabbit from a magician's hat after the first explanation was rejected"

The appeal

Daiwa's appeal raised six issues for the Court of Appeal to consider. Tellingly, almost certainly in recognition of the force of Mrs Justice Rose's decision on the point, those issues did not include whether Daiwa had breached its Quincecare duty to Singularis. The only point on the scope of the duty was the narrower question of whether the duty arises where only the creditors of the company, to whom it is not directly owed, stand to benefit from it. Daiwa argued that the duty should not apply in these circumstances, relying on cases which have decided the scope of auditors' duties to third parties. The Court of Appeal firmly rejected that analogy and Daiwa's submissions on that point.

The other main points of appeal concerned whether Mr Al-Sanea's fraudulent knowledge and conduct could be attributed to Singularis, and if so, whether Singularis's claim should be barred by an illegality defence. The Court of Appeal endorsed Mrs Justice Rose's decision on the former issue, finding that attribution did not arise where Singularis was not a "one-man company", because it had directors other than Mr Al-Sanea who were not involved in the fraud, and because attribution would not be right when it would "denude the duty of any value in cases where it is most needed", i.e. where the payment is apparently properly authorised by someone with authority to make it. That finding meant the question of the illegality defence did not arise, but the Court considered it nonetheless and found that Singularis's claim would not have been barred even if Mr Al-Sanea's knowledge and conduct had been attributed to it. One of the factors in the Court's reasoning was that barring Singularis's claim on these grounds would undermine the "carefully calibrated" Quincecare duty and would not be proportionate where "Daiwa's breaches were so extensive and the fraud was so obvious".

Comment

Whilst financial institutions are bound to remain concerned by the first finding in this jurisdiction of a breach of the Quincecare duty, both the first-instance and appellate courts were at pains to emphasise the unusual nature of the case before them. The Court of Appeal did so in forceful terms, the concluding paragraphs of the judgment reiterating that "it will be a rare situation for a bank to be put on inquiry; there is a high threshold", the case is "an unusual one, the circumstances of which are unlikely often to arise" and "a banker's duties in respect of properly authorised instructions to make payments are strictly limited". In our view those remarks clearly indicate to the judiciary hearing any follow-on cases that these Courts' findings should not be applied to drive a coach and horses through long-established case law on Quincecare duty claims.

Nonetheless, the Court of Appeal's judgment ends with a conspicuous re-endorsement of Steyn J's statement in Quincecare 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". The unusual facts of this case are not instructive in determining what that reasonable standard of care might entail in cases of more "routine" or "typical" fraudulent transactions, and particularly where fraud is perpetrated via a customer's online banking facility, when the transactions are not scrutinised in real time by a human being. There are, in our view, good grounds on which claims against banks in respect of those types of transaction might be defended, but the reality is that the law still has some way to go to catch up with modern banking practices and the legal and policy arguments as to why the same high threshold for a bank to be put on inquiry in those cases as in more traditional banking transactions have yet to be aired before the courts.