18 Nov 2019

Singularis: Quincecare revisited

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In a significant ruling regarding financial institutions’ duties of care to their customers, the Supreme Court has unanimously dismissed Daiwa’s appeal in Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, stating that this was a case “bristling with simplicity”.

The claim was brought by Singularis (through its liquidators) against Daiwa, the company’s bank and broker, for breach of the Quincecare duty of care.  The Quincecare duty of care arises from the case of Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, in which the Court held that it was an implied term of the contract between a bank and its customer that the bank would use reasonable skill and care when executing the customer’s orders but that the bank will be in breach of this duty if it knows that the order has been given dishonestly, shuts its eyes to obvious dishonesty or recklessly fails to make inquiries an honest and reasonable person would make.

In this case, the key issue was whether such a claim is defeated if the company’s instructions were given by the company’s Chairman, sole shareholder and “dominant influence over the affairs of the company”.  

Background

Singularis was set up to manage the personal assets of a Saudi Arabian businessman, Mr Al Sanea.  Although there were also six other directors, they did not exercise any influence over the management of the company and Mr Al Sanea, who was the chairman, president, treasurer and sole shareholder, had extensive powers to take decisions on behalf of the company on his own.

Daiwa, the London subsidiary of a Japanese investment bank and brokerage firm, held surplus cash of around $204 million for Singularis, following the repayment of a loan.   On the instructions of Mr Al Sanea, who had authority to give such instructions on behalf of Singularis, Daiwa made payments totalling $204,500,000 to Mr Al Sanea’s business group, in a misappropriation of funds, leaving Singularis unable to meet the demands of its creditors.  Mr Al Sanea then placed Singularis into liquidation. 

Singularis’ liquidators brought a claim against Daiwa on the basis of:

(1) dishonest assistance in Mr Al Sanea’s breach of fiduciary duty in misapplying the company’s funds; and

(2) breach of the Quincecare duty of care to the company by giving effect to the payment instructions. 

The first instance judge dismissed the dishonest assistance claim but found that Daiwa had acted in breach of its Quincecare duty, subject to a 25% deduction due to contributory negligence on behalf of Mr Al Sanea and the other directors, noting that there were “many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company”.  Daiwa appealed the decision in relation to its Quincecare duty.  That appeal was unanimously dismissed by the Court of Appeal on the grounds that Mr Al Sanea’s fraudulent state of mind could not be attributed to the company and, even if it could, it was the bank’s negligence that had caused the loss. 

Supreme Court Judgment

Daiwa appealed to the Supreme Court on the grounds that, (1) as Singularis was effectively a one man company, and Mr Al Sanea its controlling mind and will, his fraud should be attributed to the company and, as a result, (2) its Quincecare claim against Daiwa should fail for (i) illegality, (ii) lack of causation or (iii) because of a countervailing claim for deceit.

(1) Should Mr Al Sanea’s fraud be attributed to the company?

The Supreme Court held that Mr Al Sanea’s fraud should not be attributed to Singularis. 

The starting point was that a properly incorporated company had a separate identity and legal personality to its shareholders and directors.  Companies must however act through humans.  The issue for determination was when the acts and intentions of those humans were to be treated as the acts of the company.

In support of its arguments, Daiwa cited a controversial decision in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39; [2009] 1 AC 1391 in which the knowledge of the beneficial owner and controlling mind of the company of his fraudulent activities was attributed to the company, resulting in the company being unable to claim against its auditors for their negligence in failing to detect the fraud.  However, the Supreme Court held that this was a case which should properly be viewed as a decision on its own facts and not reflective of any wider principle or authority.

The Supreme Court in Singularis highlighted the distinction between cases in which the purpose was to apportion responsibility between the company and its agents so as to determine their rights and liabilities to one another and those where the purpose was to apportion responsibility between the company and a third party. The Supreme Court agreed with the first instance judge that “there is no principle of law that in any proceedings where the company is suing a third party for breach of a duty owed to it by that third party, the fraudulent conduct of a director is to be attributed to the company if it is a one-man company” and reiterated that the relevant context and purpose must be considered.

The context here was the breach of Daiwa’s Quincecare duty towards the company, the very purpose of which is to protect the company against the sort of misappropriation of its funds that had taken place. To “attribute the fraud of a trusted agent of the company to the company would denude the duty of any value in cases where it is most needed”.

(2) On the assumption that Mr Al Sanea’s fraud was to be attributed to the company, was the claim then defeated, on grounds of illegality, of lack of causation, or by an equal and opposite claim against the company in deceit?

Mr Al Sanea’s fraud was not to be attributed to the company in any case but, even if it were, none of the bank’s defences would have succeeded.

(i) Illegality

Daiwa raised arguments of illegality, relying on false documents that Mr Al Sanea had provided in relation to payments to his business group and Mr Al Sanea’s breach of fiduciary duty to Singularis.  The Supreme Court agreed with the first instance judge that denial of the claim would be unfair and disproportionate and that being able to make a finding of contributory negligence allowed the Court to make a more appropriate deduction. 

(ii) Causation

Daiwa argued that Singularis’ claim should fail for lack of causation because, if the fraud was attributed to the company, the company’s loss was caused by the company itself and not Daiwa.  This argument failed. The very purpose of the Quincecare duty is to protect the bank’s customers from harm caused by people for whom the customer is responsible. Had it not been for Daiwa’s breach of its Quincecare duty, the company would not have made the payments and would have suffered no loss. 

(iii) Deceit

Daiwa argued that because it would have an equal and countervailing claim in deceit against Singularis, the company’s claim in negligence should fail for circularity.  This argument also failed.  The Supreme Court agreed with the Court of Appeal that “The existence of the fraud was a precondition for Singularis’ claim based on breach of Daiwa’s Quincecare duty, and it would be a surprising result if Daiwa, having breached that duty, could escape liability by placing reliance on the existence of the fraud that was itself a pre-condition for its liability”.

Practical implications

This is the second recent case looking at the Quincecare duty of care1, the other being the Court of Appeal’s decision in JP Morgan Chase v Federal Republic of Nigeria [2019] EWCA Civ 1641.  These decisions reflect a strong judicial reluctance to allow the Quincecare duty of care to be diluted in any way.  In the circumstances, and given the significant uncertainty surrounding a bank’s ability to vary the Quincecare duty by contract, these decisions make it all the more incumbent on banks to exercise extreme caution when faced with payment instructions which give rise to suspicions. 

The Supreme Court’s decision does not touch on the steps which the bank ought to have taken to discharge its Quincecare duty.  We may have to wait until the trial of the JP Morgan Chase v Federal Republic of Nigeria case for guidance on this very important aspect.

1 The other being JP Morgan Chase v Federal Republic of Nigeria [2019] EWCA Civ 1641, a decision of the Court of Appeal

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