Privy Council holds Quincecare duty is limited to a bank’s customers

Overview

In Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) [2022] UKPC 18 the Privy Council (which has persuasive authority in England and Wales) held that the existing authorities do not support the extension of the Quincecare duty of care beyond the duty owed to a bank’s customer. This duty results from an implied duty of ‘reasonable care and skill’ owed by the bank to its direct customer under their contractual relationship. Accordingly, the duty does not extend to beneficiaries of customer’s funds. The Privy Council held that there was no authority to widen the scope of the Quincecare duty and warned that doing so would be “a massive extension with significant consequences for banking law”.

The Quincecare duty requires a bank to refrain from executing a customer’s order if, and for so long as, the bank is “put on inquiry” that the order is an attempt to defraud the customer. A bank is ‘put on inquiry’ if there are reasonable grounds for believing that said order is an attempt to misappropriate the monies of the customer.

Background

The claimant, a Cayman-based investment fund (the Fund), provided litigation funding to UK law firms. Funding was advanced through Synergy (Isle of Man) Ltd (SIOM), which held bank accounts with Royal Bank of Scotland International Ltd (the Bank). The Fund alleged that SIOM and two of the individuals behind it were parties to a long-running fraud that involved money which beneficially belonged to the Fund (but which was held in accounts with the Bank by SIOM) being paid out for the benefit of these two individuals.

The Fund commenced proceedings against the Bank before the Isle of Man courts. The Bank’s application to strike out the claim was originally dismissed, but was successful on appeal. The Fund subsequently appealed to the Privy Council. The question for the Privy Council was whether a bank owes a duty of care to a person who is known to be the beneficial owner of monies held in the account of a customer of the bank.

The Fund’s Case

The Fund argued that a duty of care arose by reason of the Bank’s (actual or constructive) knowledge of the Fund’s beneficial ownership of the monies held by SIOM with the Bank. The Fund alleged that there were numerous red flags putting the Bank on notice of potential or actual fraud. The Fund, alleged that the Bank did not take the steps that it ought to have to properly safeguard the Fund’s monies and that it failed in its obligations under the Quincecare duty.

The Narrower Scope of the Quincecare Duty

The Privy Council held that there was no basis on which the Fund could establish that the Bank owed it a duty of care. There was held to be nothing in principle or in case law to support the Fund’s argument that the tortious duty of care owed by a bank to its customer to exercise reasonable care and skill could be extended across to a third party with whom the bank has no contractual relationship. This was the case even if the bank knew or ought to have known that the third party was the beneficial owner of the monies in the customer’s account.

The Court closely analysed the original decision of Steyn J’s judgement in Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, which established the nature and scope of the duty and found that:

1. The Quincecare duty of care arises through an implied term of the contract between a bank and its customer and the co-extensive duty of care in the tort of negligence.

2. This duty of care has to be carefully calibrated to reflect the fact that it runs counter to the bank’s standard contractual duty to comply with a valid order of the customer and, therefore, Steyn J was at pains to make clear that it should not place too onerous a burden on banks.

3. 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) had to be read in this context. The reference to protecting innocent third parties was not meant to extend the duty of care specifically to them, but merely to note the effect that combating fraud committed against a bank’s customer protects not only the customer but also other innocent victims of a fraud.

The Court also considered the recent cases that have applied Quincecare. In particular, in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2020] AC 1189 (which you can read more on here) where Lady Hale stressed that the purpose of the Quincecare duty was to protect the bank’s customer and that in her judgment there was “no hint” that the duty might be owed to anyone else.

Commentary

Whilst the Privy Council’s decision is not strictly binding as a matter of precedent, it is an important and highly influential guidepost in limiting the scope of the Quincecare duty and financial institutions will welcome this greater clarity, particularly in light of the general uncertainty in recent years around this relatively new and evolving area of law.

However, one important aspect of the Quincecare duty that this case hasn’t provided any colour around is exactly what steps a bank needs to take in order to fulfil its Quincecare duty obligations if it is deemed to be “on enquiry” of fraud. The Court in JPMorgan Chase Bank, N.A. v The Federal Republic of Nigeria [2019] EWCA Civ 1641 held that this will be fact dependent, which is not particularly helpful for banks seeking to establish the scope of their duties to customers.

Looking to the year ahead, we expect the Courts to provide greater clarity around the scope of the Quincecare duty as three important cases are heard at trial: Nigeria v JP Morgan Chase; Stanford International Bank Ltd v HSBC Bank plc; and Philipp v Barclays Bank Plc.

Simmons & Simmons LLP has a team that is experienced in working on Quincecare duty cases, made up of dispute resolution specialists in the financial institutions sector. If you would like to know more, please contact one of the authors of this article.