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A Bank Can Be Liable If It Acts On The Fraudulent Instructions Of A Customer – The Singularis Saga

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The UK Supreme Court (“UKSC”) in Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, recently upheld the decisions of the Court of Appeal (“CA”) and High Court (“HC”) in finding that a bank had breached its Quincecare duty of care owed to a company who was the bank’s customer. The bank was put on notice in light of the unusual circumstances surrounding the fraudulent payment instructions given by the director of the company. Proper inquiries were not made by the bank and the payments were executed. The bank was held liable for the loss suffered by the company.

Facts

The company, Singularis Holdings Ltd (“Singularis”), was incorporated to manage the personal assets of Mr Maan Al Sanea (“Al Sanea”) separately from his other business groups (“Saad Group”). Mr Al Sanea was a director, chairman and sole shareholder of Singularis. Daiwa Capital Markets Ltd (“Daiwa”) is the London subsidiary of a Japanese investment bank and brokerage firm.

In 2007, Daiwa provided loan financing to Singularis to purchase shares. The shares stood as security for the loan. By 2009, the shares were sold and the loan was repaid. Daiwa was left holding a cash surplus in Singularis’ account.

Singularis subsequently instructed Daiwa to make payments out of the cash surplus in its account to companies in the Saad Group. These instructions were given with the approval and authority of Mr Al Sanea. The payments were executed with little to no verifications done by Daiwa despite being aware of a real possibility, albeit not amounting to a probability of fraud, on Mr Al Sanea’s part.

Shortly after, Singularis was placed in voluntary liquidation. The liquidators brought a claim against Daiwa for breaching their Quincecare duty of care owed to Singularis, by giving effect to the payment instructions.

Decisions

The HC found that Daiwa owed a Quincecare duty to Singularis and that this duty was clearly breached. There were many glaring signs that Mr Al Sanea was possibly perpetrating fraud on Singularis, which put Daiwa on notice. Some of these signs included:

For failing to make proper or even any inquiry into the payments executed, Daiwa breached their Quincecare duty and was held liable for the payments made. Damages were reduced by 25% to take into account Singularis’ contributory negligence for failing to prevent the fraud perpetrated by its own director.

Daiwa’s appeal to the CA was dismissed and they subsequently appealed to the UKSC. At the SC, Daiwa raised the following defences:

The UKSC dismissed the appeal stating that for the purpose of the Quincecare duty, Mr Al Sanea’s fraud could not be attributed to the company. In any case, none of the defences advanced by Daiwa would succeed. The Quincecare duty is predicated on the assumption that the person whose fraud is suspected is a trusted officer or authorised signatory of the bank’s customer. To decide otherwise would denude the value of the Quincecare duty when it is needed the most.

Analysis and Learning Points

Banks are under a contractual duty to act promptly upon their customers’ instructions. However, this contractual duty is subject to a countervailing duty known as the Quincecare duty of care. The Quincecare duty, as identified in Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, arises when a bank is “put on notice” by particular circumstances surrounding a customer’s instructions. It is a duty owed by banks to their customers to not make payments, if the bank reasonably suspects that the instructions were dishonestly given or given with an intention to defraud. In such scenarios, a bank will be in breach of the Quincecare duty if they simply execute the orders without making reasonable inquiries an ordinary and prudent bank would make.

Therefore, banks should consider the following to mitigate the risk of a breach of the Quincecare duty of care:

(a)       Regular training and reminders to bankers to ensure that they are aware of this duty of care and the risk involved;

(b)      Introduction of clear policy, guidelines, accountability and reporting procedures;

(c)       Implementation of a system for the detection, monitoring and dissemination and exchange of information between various departments of the bank in relation to high risk transactions; and

(d)      Incorporation of appropriate and clearly and precisely worded exclusion and indemnity provisions which must establish situations where a Quincecare duty may arise and the rights and obligations of parties (Major Shipping & Trading Inc v Standard Chartered Bank (Singapore) Ltd [2018] SGHC, JP Morgan Chase Bank, N.A. v The Federal Republic of Nigeria [2019] EWCA Civ 1641).

Conclusion

Banks have to act promptly on a vast number of transactions on a daily basis.  In addition, banks have also embraced automation and digitisation to improve efficiency.  The case of Singularis serves as a timely reminder to banks on their legal duty of care when executing instructions of clients and to take appropriate measures and steps to mitigate such risks in an increasingly fast paced, complex and competitive environment.

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This article is written by Liew Kai Zee from Shook Lin & Bok LLP and was first published on Shook Lin & Bok’s website.

This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.

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