Bankers beware: the Quincecare duty to query suspicious client requests
Singularis (In Official Liquidation)(Singularis) v Daiwa Capital Markets Europe Ltd (Daiwa) [31.10.19]
It is well established that a contract between a bank and its customer includes an implied term that the bank will use reasonable skill and care in and about executing a client’s instruction and will not execute instructions known to be dishonest or where there are reasonable grounds to believe that the instructions were given dishonestly. However, until recently, there was no reported case where this duty (known as the Quincecare duty) was found to have been breached.
The Supreme Court’s ruling in Singularis v Daiwa is of interest to both financial institutions and their errors and omissions insurers and highlights the importance for financial institutions to have appropriate procedures for verifying client payments, particularly for higher risk clients or where there is reason to suspect that a fraud may be taking place.
Singularis was a Cayman company of which a Mr Sanea was the sole shareholder and the dominant director. Daiwa, an investment bank, made a loan to Singularis for the purchase of shares which shares were held as security for the loan. Subsequently, the shares were sold and the loan repaid resulting in an excess of US$204m being held by Singularis in Daiwa’s account. Mr Sanea instructed Daiwa to use these funds to pay third parties, an instruction that amounted to a misappropriation the respondent’s funds and resulted in Singularis becoming insolvent. Thereafter Singularis was placed into compulsory liquidation.
Singularis’ liquidators brought a claim against Daiwa for recovery of the amounts paid to third parties, including on the basis that Daiwa had breached the Quincecare duty owed to Singularis in giving effect to Mr Sanea’s instructions.
In the Supreme Court Daiwa did not seek to challenge the existence of the Quincecare duty or that it had breached the duty. Rather, Daiwa argued that, as Singularis was a ‘one man company’, Mr Sanea’s dishonesty should be attributed to Singularis and therefore the loss was caused by Singularis and not by any omission of Daiwa. As such, Daiwa argued, it was entitled to rely on the defence of illegality whereby courts will not assist a party seeking to recover damages for the consequences of its own illegal conduct.
The Court rejected Daiwa’s argument finding that Singularis’ loss had been caused, not by the fraud of Mr Sanea or Singularis, but by Daiwa’s failure to discharge its Quincecare duty. The whole purpose of the Quincecare duty is to protect a bank’s customers from harm caused by persons for whom the customer is responsible, such as its directors. Indeed, it was the fraudulent instruction that engaged Daiwa’s duty of care, which it breached, causing Singularis to suffer loss. The court held that denial of the claim would undermine the public interest in banks being held accountable in the process of discovering fraud.
The Supreme Court’s decision is of interest to legal practitioners on the question of when a director’s conduct can be attributed to a company and relied upon in support of a defence of illegality. However, for financial institutions and their insurers the finding of breach of the Quincecare duty and the scale of the damages awarded against Daiwa (US$204m) is perhaps of greater interest, highlighting a need for clear risk management guidelines to ensure that suspicious instructions are subject to appropriate review before being executed, notwithstanding that the instructions may derive from a person with apparent authority from the corporate customer such as a director.
A separate point of interest, not apparent from the Supreme Court judgment, is that the claim against Daiwa was pursued with the aid of third party funding: Singularis’ Cayman lawyers are on record stating that, without third party funding, the claim against Daiwa would never have gone ahead. This case is therefore a striking example of the impact of the widespread use of litigation funding, including in the context of claims by liquidators against professionals and financial advisors.