Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) (Isle of Man) [2022] UKPC 18

Introduction

The term Quincecare duty is certainly on legal and banking minds at the moment, following a raft of recent judgments where claims for breaches of the Quincecare duty have been invoked against banks in a bid to broaden the scope of the duties that a bank owes to its customers and third parties. The Quincecare duty (established in the case of Barclays Bank Plc v Quincecare [1992] 4 All ER 363) prevents a bank from executing a payment instruction where it has reasonable grounds to believe that the instruction is an attempt to misappropriate the account holder's funds. The duty is an aspect of the bank's duty of reasonable care and skill in executing the customer's instructions. It arises by virtue of an implied term of the contract between the bank and the customer or as a co-extensive duty in tort. For further details on the Quincecare Duty see here.

On 12 May 2022, the Privy Council handed down its judgment in the case of Royal Bank of Scotland International v JP SPC4, where it concluded that a bank’s Quincecare duty could not be extended to a duty of care owed in tort to the beneficiary of an account known by the bank to be a trust account. The Privy Council upheld the striking out of the claim in what is a landmark appellate decision under the modern law of negligence to address a bank’s duties in tort in respect of trust accounts holding that:

“on the present state of the authorities, there is nothing in Quincecare itself or in the cases subsequently applying it (including the decision in Philipp v Barclays Bank UK plc [2022] EWCA Civ 318; [2022] Bus LR 353 which was handed down after the hearing in this case) to support the argument that the Quincecare tortious duty of care extends beyond being a duty owed to the bank’s customer which arises as an aspect of the bank’s implied contractual duty of care and co-extensive tortious duty of care.” [44]

What is the background to the case?

JP SPC 4 was a Cayman Island based investment fund (the “Fund”). The fund operated a litigation funding scheme in England and Wales (the “Scheme”). Any loans made under the scheme were to be advanced and repaid through the company, Synergy (Isle of Man) Ltd (“SIOM”) via two separate bank accounts (the “Accounts”) held with Royal Bank of Scotland (the “Bank”). It was alleged that any funds held within the accounts beneficially belonged to the fund and that the bank was aware of this fact.

Between July 2009 and October 2012, the joint directors of SIOM misapplied approximately £77.8 million of the fund's money from the accounts held with the bank (of which at least £60 million was misappropriated following the bank’s classification of the accounts as "high risk"). The fund subsequently commenced proceedings against the bank for breach of an implied duty to take reasonable care to protect the fund from losses caused by the fraudulent misappropriation of funds from the accounts.

The fund alleged that, notwithstanding the fact that the fund was not the bank’s customer, the bank was under a duty to take reasonable care to protect the fund from losses caused by the fraud from the date that the bank knew that the money in the accounts was beneficially owned by the fund. It was also argued that the bank assumed responsibility towards the fund on the assumed facts, by relying on the case of Baden and that there was an incremental development of the law to recognise a duty owed to the fund. The bank applied to strike out the proceedings on the basis that there was no arguable pleaded basis on which the bank could be said to owe a duty of care nor was the assertion of assumption of responsibility made in the pleadings. The bank’s application was dismissed at first instance but allowed on appeal to the Court of Appeal. The fund then appealed to the Privy Council.

The Privy Council’s decision

The Privy Council considered whether in law the bank owed a duty of care to the fund. In reaching its decision, the Privy Council reviewed all recent Quincecare duty authorities and carefully analysed the original judgment of Steyn J in Barclays Bank Plc v Quincecare [1992], which emphasised the limited scope of the Quincecare duty, protecting only a bank’s customer.

The limited scope of the Quincecare duty was further emphasised in the Supreme Court judgment of Singularis Holdings Ltd (In Liquidation) v Daiwa Capital Markets Europe Ltd [2019], which affirmed that a customer’s separate legal identity that relied on its trusted agent was one of the prerequisites for a Quincecare duty to arise.

In line with the preceding case law, the Privy Council could not see any basis for an alleged duty of care to be extended to third parties based on existing authorities or an incremental extension of them.

The implied assumption of responsibility pursuant to Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] was firmly rejected by the Privy Council. It stated that former principles of extending the duty of care to third parties if the bank was put on notice that a customer was a fiduciary, and therefore held the money on trust for other beneficiaries, was replaced with a three stage Caparo test for all novel duties of care, and although Baden was not formally overruled, it could no longer stand as good law.

The Privy Council also confirmed that, following Royal Brunei v Tan [1995], it was well-established that banks and other parties who are alleged to be assisting a breach of fiduciary duty are liable only if they are dishonest and not if they are merely negligent. Ultimately, in this case, the Bank did not create the fraud nor were they a party to it. It had no special level of control over the arrangements, it had no contractual relationship or any dealings with the Fund, and thus had not assumed any responsibility to protect the Fund from the fraud.

To conclude

Although the decision is only persuasive in England and Wales, its analysis was solely based on English case law and, therefore, it provides significant clarity and comfort in restating the well-established legal position in relation to banks’ responsibilities to their customers and third parties. This is particularly helpful, after the recent judgment in Phillips involving an authorised push payment fraud perpetrated on the bank’s personal customer, which arguably could be interpreted to have extended the bank’s duties to individuals, albeit this particular issue is yet to be fully decided at trial.

The Privy Council concluded that there was no good reason for incrementally developing the tort of negligence, beyond the well-established Quincecare duty of care.

The legal community waits with baited breath to see what the Supreme Court will decide when it delivers its judgment in Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC, which will be particularly relevant to insolvent companies’ creditors and insolvency practitioners who are pursuing recoveries for insolvent estates.

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