Finance litigation update - July 2022

FINANCE LITIGATION UPDATE – JULY 2022 27 he stated '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'. However, on analysis the Privy Council concluded that this meant nothing more than acknowledging that protecting a customer against fraud (through the Quincecare duty) indirectly protects innocent third parties. Nothing in that case or in the other Quincecare authorities supported the argument that a bank's tortious duty of care extends beyond its customer. The Privy Council also took the opportunity to formally overrule the decision in Baden v Société Générale3 (a case decided before Barclays v Quincecare). In that case, the court had held that a duty of care was owed by the defendant bank to third party beneficiaries in circumstances where the bank knew that accounts were held by its customer as a fiduciary for known beneficiaries. However, Baden had been decided during a period of expansion of the law of negligence, in which only a two-stage test applied: 1) was it reasonably foreseeable to the defendant that the claimant would be likely to suffer loss from its careless conduct; and 2) were there any good reasons (of policy) why the duty should not apply. Since that period, the duty of care in negligence has been significantly curtailed to either the three-stage test for novel duties of care (foreseeability, proximity, and whether fair, just and reasonable) and/or the incremental approach. The duty of care held to exist in Baden, could not stand as good law because of the demise of the two-stage test from which it derived. Finally, the Privy Council rejected the Fund's alternative argument that if the duty were not already established, it should now be recognised as an appropriate incremental development from existing case law. While, exceptionally, a duty of care in respect of pure economic loss has been found to be owed by a bank to a third party, that has been in circumstances where the purpose of the service was to benefit the third party and / or where the bank knew (or should have known) that the third party was directly relying on the bank's services4. Neither such factor applied in this case: the Fund did not place direct reliance on RBS; RBS neither knew nor ought to have known that such reliance was being placed; and the purpose of its service was not to benefit the Fund, it was to benefit its actual customer. In those circumstances, the Privy Council 3 Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 4 Golden Belt 1 Sukuk Co BSC(c) v BNP Paribas [2017] EWHC 3182 (Comm) held that without a close analogy in terms of purpose and reliance (and without a legal lacuna which justice demanded should be filled by a remedy5), it would not be fair, just and reasonable to impose a duty of care on RBS to the Fund. In particular, the Privy Council clarified that it saw no good reason for incrementally developing the law of negligence, beyond the existing confines of the Quincecare duty, to impose an equivalent duty of care on a bank in relation to third parties. It also accepted RBS’s submission that additional caution should be exercised when considering incremental extensions of the duty of care in circumstances where the alleged failure related to an omission (i.e. a failure to step in to prevent harm) rather than an active harmful step. Contracting duty of care? The scope of a bank's duty of care has been in a state of flux in recent years. While the judgment in Federal Republic of Nigeria v JP Morgan Chase Bank6 has provided some guidance for banks on the way in which the Quincecare duty works in practice, significant questions remain. One element which is clear for now, is that the Quincecare duty is only owed to a bank's customers and not more widely. The reasoning of the Privy Council in this case echoes that of the recent judgment in Tulip Trading Ltd v Bitcoin Association for BSV7, which confirmed (albeit by way of analogy in the context of software developers), that the Quincecare duty is only owed to the contracting counterparty, not a wider class. In that case the court was also hesitant to incrementally extend the duty where the harm arose from an omission (an alleged failure to create a software patch) rather than an active harmful step. In conclusion, while a co-extensive duty of care in the tort of negligence may exist, the Quincecare duty itself arises from an implied contractual term and does not exist outside of a contractual relationship. Sue Millar and Harriet Campbell 5 White v Jones [1995] 2 AC 207 6 [2022] EWHC 1447 (Comm) 7 [2022] EWHC 667 (Ch)