In England and Jersey (as well as other jurisdictions) the law imposes a duty on banks to act with reasonable skill and care when executing the orders of its customers.
The origin of this duty is the English case of Barclays Bank Plc v Quincecare Limited. The ‘Quincecare duty’ exists both in contract (as an implied term in the contract between the bank and its customer) and tort.
This distinction carries greater significance in Jersey because the limitation periods in tort and contract are three and ten years respectively. In England both attract a six year period.
In Quincecare Steyn J (as he then was) described the duty: “A banker must refrain from executing an order if and for as long as the banker is 'put on enquiry' in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company …… And, the external standard of the likely perception of an ordinary prudent banker is the governing one."
Despite the importance of the banking industry in Jersey, the Quincecare duty has not been considered in a published judgment since Izodia Plc v Royal Bank of Scotland International Limited in 2006. This is, perhaps, unsurprising given that it took until 2017 for damages to be awarded for breach of the duty in England, and that case went all the way to the Supreme Court.
Quincecare was followed by Lipkin Gorman v Karpnale Limited. In both cases the court exercised caution in balancing a bank's duty to act upon its customers’ instructions and the need to exercise reasonable skill and care when doing so. In Jersey Birt, Deputy Bailiff (as he then was), summarised the caution of Quincecare and Lipkin Gorman in Izodia: “Trust, not distrust, was the basis of a bank's dealings with its customers and full weight must be given to that consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company.”
Banks are, for obvious reasons, a popular target when their clients’ assets are misappropriated. The caution of the courts in formulating and developing the Quincecare duty ensured that banks were not left over-exposed. The corollary being that claimants were left with a legal mountain to climb.
So what, if anything, has changed? The fundamentals for establishing liability have not softened, but some recent cases in England have reinvigorated the jurisdiction. Chief among these is Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd.
The liquidators of Singularis established breach of the Quincecare duty at first instance, and this was not under appeal in the Supreme Court where Daiwa argued that it had a defence because the fraudulent conduct of Singularis's sole shareholder, Mr Al Sanea, could be attributed to the company, and therefore Daiwa could raise defences of illegality and lack of causation, as well as a counterclaim in deceit.
Daiwa’s appeal was dismissed in a short but emphatic judgment. Notably the court overruled the House of Lords decision in Moore Stephens (a firm) v Stone & Rolls Limited (in liquidation) in favour of a more nuanced approach to illegality. There were obvious policy reasons not to diminish the Quincecare duty, which is designed to protect parties from wrongdoing by trusted officers, by allowing banks to rely on defences which rest on the very relationship which has been abused.
In Federal Republic of Nigeria v JP Morgan the English Court of Appeal held that, in most cases, the Quincecare duty will require more from a bank than just refusing payment when put on enquiry that the payment instruction is an attempt to misappropriate funds; however the exact steps required will depend on the facts of the case.
Importantly, the bank failed to establish that the duty was excluded by its contractual terms. The court held that to exclude the duty the contract must make clear “…that the bank should be entitled to pay out on instruction of the authorised signatory even if it suspects the payment is in furtherance of a fraud which that signatory is seeking to perpetrate on its client.” The bank’s additional argument that the duty was inconsistent with certain terms of the deposit agreement also failed.
Most recently in Stanford International Bank Ltd v HSBC Bank plc Nugee J (formerly a member of the Jersey Court of Appeal) dismissed the bank’s argument that no loss had been suffered because the payments in question were made to deposit holders in satisfaction of their contractual rights (and therefore the claimant was no worse off because its liabilities had been reduced by the amount of the payments).
The claimant was irredeemably insolvent at the time the payments were made. Therefore, the claimant did not need to give credit for the payments, because it did not leave it any better off. It was still insolvent and, on examination of the counter factual scenario, it would have had £80 million in the bank.
The decisions in Federal Republic of Nigeria and Stanford International Bank were applications by the defendant banks for strike out/reverse summary judgment. The cases continue and further developments are expected. Notwithstanding, along with Singularis, they represent a notable development and it will be interesting to see if the Quincecare revival reaches Jersey.
In common with other offshore centres, corporate service provision generates a high volume of accounts held by corporate entities, often within complex structures. Bankers must consider the wider implications of an instruction rather than viewing it in isolation. Where a transaction has unusual features appropriate steps should be taken to verify it.
On a more general level, it may assist offshore financial institutions to reassess whether their contractual terms and internal procedures provide adequate protection against a liability that has been dormant for a while.