A judgment handed down by the Hong Kong Court of Final Appeal (CFA) provides some important analysis of the so-called Quincecare duty of care: PT Asuransi Tugu Pratama Indonesia TBK (formerly known as PT Tugu Pratama Indonesia) v Citibank N.A.  HKCFA 3. While not binding on the courts of England and Wales, the leading judgment was delivered by Lord Sumption (a former Justice of the UK Supreme Court who was sitting as a Non-Permanent Judge of the CFA) and is likely to have influence within this jurisdiction.
The most important observations in the judgment relate to the scope of the Quincecare duty, the question of limitation in claims of this type and the availability of a claim for contributory negligence to reduce the sum payable by a bank, where it has been found liable.
- Scope of the Quincecare duty. Lord Sumption cast the Quincecare duty as one side of a coin, suggesting that there are two juridical sources for a bank's duty in making payments out of its customer's account. The first side of the coin is the classic Quincecare duty, where the bank owes all the ordinary duties to be expected from an agent of its customer, including the duty to exercise reasonable skill and care when performing its obligations. The second side of the coin involves the bank's duty only to make payments out of its customer's account when authorised to do (i.e. when the authorised signatory, as the customer's agent, is acting within the parameters of their actual or apparent/ostensible authority). In a novel approach to this area of the law, Lord Sumption suggested that the source of the duty was not critical and that the standard of duty under both is the same. Regardless of whether one looks at: (a) the law relating to the bank's duty of care to exercise reasonable skill and care (i.e. the Quincecare duty); or (b) whether the bank can rely upon the ostensible authority of the authorised signatories on an account; the critical question is what constitutes notice so as to require a bank to make inquiries before paying out in accordance with the mandate. Framing Quincecare in this way strongly suggests that the duty will be limited to where instructions to a bank have been given by an agent of its customer. It will be interesting to see if the Supreme Court agrees with this proposition in the appeal of Philipp v Barclays Bank UK plc  EWCA Civ 318, given that this agency requirement was rejected by the Court of Appeal.
- Limitation. Lord Sumption suggested that, if a bank has debited an account without authority, the customer is entitled to disregard the debit and require the account to be reconstituted as it should have been. In that case, what is reconstituted is simply the bank's records (i.e. the bank's liability to the customer remains unaffected by the unauthorised debits). The customer will have a claim in debt for the full reconstituted balance of the account, which is payable on demand. In Lord Sumption's view, the clock will not start to tick for the purpose of the limitation period until the customer demands payment from the bank for the reconstituted balance. The potential effect is that Quincecare-type claims could be deferred indefinitely by the customer until the time of making a demand.
- Contributory negligence. Lord Sumption's analysis of Quincecare-type claims as an action in debt (rather than a claim for damages for breach of a duty of care), has important implications for the availability of a contributory negligence argument, as ordinarily a party cannot claim contributory negligence in response to a debt claim. Interestingly, Lord Sumption rejected the suggestion that a claim of this type should be viewed as based on negligence, since the debt arises only because of the bank's failure to make the inquiries that a reasonable and prudent banker would have made, commenting that this did not convert a debt claim into a claim for "damage".
We consider the decision in more detail below.
In 1990, three officers of the appellant (Tugu) opened an account with the Hong Kong branch of the respondent bank (Bank). The banking mandate authorised any two of the three officers who opened the account to operate it. From June 1994 to July 1998, funds received into the account were paid out to four individual Tugu officers in 26 transfers totalling US$51.64 million. Each transfer was instructed by two of the Tugu officers authorised to operate the account. After all funds in the account were paid out, the Bank took steps to close the account on 30 July 1998 on the instructions of two of the Tugu officers, given on 16 July 1998.
Tugu wrote to the Bank on 6 October 2006, alleging that all 26 of the transfers were dishonestly authorised and demanded payment of the sums transferred out of the account in full.
Subsequently, Tugu commenced proceedings on 2 February 2007, claiming (among other things):
- The disputed debit entries resulting from the Tugu officers' instructions to pay out funds and to close the account, on the basis that they were all unauthorised and of no effect, such that the account remained in existence and fell to be reconstituted by reversing the disputed debit entries.
- Damages for breach of its Quincecare duty of care owed by the Bank either in contract or in tort not to carry out payment instructions in circumstances where the Bank knew of facts which would lead a reasonable and honest banker to consider that "there was a serious or real possibility that...[Tugu] might be being defrauded...by the giving of that payment instruction."
Decision of the Hong Kong Court of First Instance (CFI)
The CFI held that the transfers were fraudulent and that a reasonable and prudent banker would have been put on inquiry by the time the two Tugu officers instructed the third transaction. The Bank breached its Quincecare duty of care on the basis that it did not make any inquiries (which the CFI said was common ground). However, the CFI held that for limitation purposes, Tugu's cause of action arose upon the purported closure of the account on 30 July 1998, because the closure instruction was authorised. It followed that Tugu's claim commenced in 2007 was out of time under the relevant statutory provisions governing limitation periods in Hong Kong (the Limitation Ordnance (Cap. 347)), being more than six years from the termination of the contractual relationship with the Bank.
Decision of the Hong Kong Court of Appeal (CA)
Tugu's appeal against the first instance decision was dismissed by the CA for similar, but not identical, reasons. The CA upheld the CFI's finding that the Bank had been put on inquiry. Contrary to the CFI, it found that some inquiries had been made, but that the Bank had contacted only the Tugu signatories, when it should have contacted directors independent of the operators and beneficiaries of the fraud, and so the "necessary inquiries" were not made.
In contrast to the CFI, the CA held that the closure of the account was unauthorised and repudiatory, but it was nevertheless effective to bring the relationship of banker and customer to an end. Considering the limitation point, the CA noted that a cause of action in debt ordinarily arises when a customer demands from the bank the balance in its account. However, the CA held that the unauthorised closure/repudiation by the Bank operated as a waiver of the need for a demand and it was irrelevant that the repudiation was not accepted by the customer. Therefore, Tugu's cause of action for the wrongful payments by the Bank accrued in 1998 and the claims were time-barred by 2007.
While the issue did not arise due to Tugu's claims having been brought out of time, both the CFI and the CA held that the Bank would have been entitled to rely on the defence of contributory negligence.
Decision of the Hong Kong Court of Final Appeal
Lord Sumption (sitting as a Non-Permanent Judge of the CFA), gave the leading judgment, with which the rest of the CFA panel agreed. In summary, the CFA allowed Tugu's appeal and found that it was entitled to the aggregate amount of the unauthorised debits (apart from the first two payments).
The key elements of the judgment, which are likely to be of interest to financial institutions, are considered below.
Two sources of duty
In Lord Sumption's view, there are two juridical sources for a bank's duty in making payments out of its customer's account:
- Authorised signatory as the customer's agent. A bank has a duty to make payments out of an account when authorised to do so by the customer. However, the duty to pay in accordance with the mandate of a customer is not absolute. A mandatory (the authorised signatory) acts as agent of the customer, and its authority extends only to those acts which are in the interest of the customer. If the acts of the mandatory are outside of the parameters of its actual authority, a bank may still be able to rely on the mandatory's apparent (or ostensible) authority, by virtue of their position as signatory and/or officer of the company, provided the bank has no notice of the want of actual authority.
- Bank as the customer's agent. A bank owes all the ordinary duties to be expected from an agent, including the duty to exercise reasonable skill and care when performing its obligations. This is known as the so-called Quincecare duty of care, which arises in both tort and contract.
Lord Sumption noted that the differences between these two duties may affect the remedies available, limitation and the issue of contributory negligence.
However, in his view, the source of the duty was not critical. Regardless of whether one looks at the law relating to ostensible authority (source (1) above) or the bank's duty of care to exercise reasonable skill and care (source (2) above, i.e. the Quincecare duty), the critical question is what constitutes notice so as to require a bank to make inquiries before paying out in accordance with the mandate. Lord Sumption confirmed that the standard of duty under both (1) and (2) is the same.
What constitutes notice and when is there a duty to inquire
Lord Sumption articulated the following general propositions as to what constitutes notice and when there is a duty to make inquires in a commercial context (see Bowstead & Reynolds on Agency, as endorsed by the Privy Council in East Asia Co Ltd v PT Satria Tirtatama Energindo  2 All ER 294):
- Notice. If a third party has notice that the agent may be exceeding its authority, the agent's acts will not be binding on the principal. What constitutes notice and when there is a duty to inquire in commercial transactions is different to constructive notice.
- Duty to inquire. The court may infer from the circumstances that a person must have known of the facts (or at least ought to have been suspicious) to the extent that further inquiries would have been appropriate in the context.
- Objective test. In commercial cases, the proper approach is to apply an objective interpretation to the words/conduct used.
- Apparent authority. Whether a third party can rely on the apparent authority of an agent may differ according to the commercial context and the exigencies of business. In some cases the test of "irrationality" may apply, and in others, the test of "unreasonableness" may be more apt (although in practice there may be little difference between them) (see Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No. 2) (2010) 13 HKCFAR 479).
- Examples. In terms of what will be sufficient to put a third party on inquiry as to an agent's authority, a common example is the third party's knowledge that the agent has a substantial conflict of interest in respect of a transaction. However, other examples include a lack of benefit for the principal; or lack of commercial purpose on the face of the transaction; or unusual aspects of the transaction.
Lord Sumption summarised these propositions as follows:
"The starting point is what is actually known to the third party without inquiry (or would actually be known to [them] if [they] appreciated the meaning of the information in [their] hands). The question is whether the information which [they] actually have calls for inquiry. If, even without inquiry, the transaction is not apparently improper, then there is no justification for requiring the third party to make inquiries. But if there are features of the transaction apparent to a bank that indicate wrongdoing unless there is some special explanation, then an explanation must be sought before it can be assumed that all is well. In other words, if a bank actually knows of facts which to their face indicate a want of actual authority, it is not entitled to proceed regardless without inquiry."
In Lord Sumption's view, this was supported by the classic statement of a bank's duty of skill and care in executing its customer's instructions by Mr Justice Steyn in Quincecare itself and in the subsequent authorities considering the duty.
The present case
As noted above, Tugu argued that all 26 transfers out of the account were unauthorised; and that the instruction of 16 July 1998 to close the account was also unauthorised.
Unauthorised transfers out of the account
In the present case, the two Tugu officers could not have had any actual authority, as between themselves and Tugu, to direct the payment of the company's funds to themselves and their colleagues personally. The Bank accepted that, by the time of the third payment instruction, it knew enough to prevent it from relying on the ostensible authority of the signatories to direct the transfers. However, it argued that the claim in respect of the unauthorised transfers was statute-barred, given that the last one was completed in 1998 (see discussion below on Limitation).
Accordingly, the Bank's case on authority focused on the closure instruction given on 16 July 1998.
Unauthorised closure of the account
In contrast to the earlier transfers, the Bank argued that the closure of the account on 30 July 1998 was authorised and so it effectually put an end to the relationship of banker and customer.
In the view of Lord Sumption, the instruction to close the account was "a pure question of authority", which was no more within the apparent authority of the two Tugu officers than the 26 unauthorised transfers.
Applying the propositions set out above, Lord Sumption held that it was open to the CA to find that – on the face of the information in the Bank's hands by 1998 – the whole operation of the account was unauthorised, including its closure. Further, the impropriety of the transfers meant that the account could not properly be closed without an accounting exercise to restore the balance to what it should have been.
The Bank sought to present Tugu's claim as a claim for damages for breach of duty, which it said was statute-barred, given the date on which the unauthorised transfers and account closure took place.
This characterisation was rejected by Lord Sumption, who found that Tugu's claim was for a debt. He said that it is well settled that a customer has no proprietary interest in funds deposited with a banker, and that the obligation of a banker is to pay out on the customer's demand. It follows that a cause of action in debt arises when that demand is made, and not before (N. Joachimson (a firm) v Swiss Bank Corporation  3 KB 110).
In Lord Sumption's view, if a bank has debited an account without authority, the customer is entitled to disregard the debit and require the account to be reconstituted as it should have been. In that case, what is reconstituted is simply the bank's records. It is not the bank's liability, which has always been for the balance undiminished by the unauthorised debits. The customer will then have a claim in debt for the reconstituted balance of the account, which is likewise payable on demand.
Lord Sumption rejected the Bank's argument that no demand could be made by Tugu after the account was closed in 1998. Following the decision in Joachimson, the Bank argued that a balance on a bank account is payable by the bank on the termination of the relationship with or without a demand. However, Lord Sumption said that this principle had no application to the present case, because the closure of the account did not discharge the debt represented by the reconstituted balance, and for as long as that debt remained outstanding, the relationship of banker and customer subsisted.
Accordingly, the debt was not diminished by the unauthorised withdrawals, and it still subsisted in 2006 when it was demanded. For the purpose of the limitation period, time did not begin to run until the debt was demanded, and given that these proceedings were brought the following year, they were not statute-barred.
Lord Sumption also confirmed that the Bank could not rely on the defence of contributory negligence, having established that Tugu was entitled to succeed in its action in debt and was not advancing a claim for damages for breach of the Bank's duty of care in the making of payments to third parties.
He referred to provisions of Hong Kong law which are identical to the English Law Reform (Contributory Negligence) Act 1945, confirming that a party can make a claim for contributory negligence only where the defendant's liability in contract is the same as their liability in the tort of negligence independently of the existence of any contract (Forsikringsaktieselskapet Vesta v Butcher  2 All ER 488). Lord Sumption stated that this was not the case for a claim in debt.
Lord Sumption also rejected the Bank's suggestion that the claim should be regarded as a claim based on negligence, since the debt arises only because of the Bank's failure to make the inquiries that a reasonable and prudent banker would have made, commenting that this did not convert a debt claim into a claim for "damage".
Accordingly, the CFA held that Tugu's appeal should be allowed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.