Privy Council Refuses To Extend The Quincecare Duty To Protect Third Party Beneficiaries Of Funds Held In A Bank Account

In the recent decision of Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) (Isle of Man) [2022] UKPC 18, ...
Hong Kong Finance and Banking
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In the recent decision of Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) (Isle of Man) [2022] UKPC 18, the Privy Council confirmed that a bank would not owe a Quincecare duty to any third party beneficial owners of monies held in an account. In this blog post, we briefly consider this decision's potential implication to Hong Kong's legal position on Quincecare duty. For a detailed summary of the judgment and the Privy Council's reasoning, please refer to an earlier blog post written by our London team here.

Background: Privy Council decision

Under an investment scheme, the appellant investment fund (the "Fund") provided funds from its own account in the Cayman Islands to an account (the "Account") held with the respondent bank (the "Bank"). The account was opened in the name of another Isle of Man company (the "Customer"). The Customer was responsible for the disposition and investment of the Funds' moneys held in the Account under an investment scheme. However, it transpired that the two directors of the Customer had been diverting the funds in the Account to various unrelated third party bank accounts that were ultimately controlled by these directors.

After discovering the misappropriation of funds, the Fund brought an action against the Bank for breach of its Quincecare duty of care, claiming for losses it had allegedly suffered as a result of the fraud.

As a reminder, under the Quincecare duty of care, a bank ought to refrain from processing payments requested by a customer, if the bank is "put on inquiry", meaning if there are circumstances suggesting that the order or instruction is an attempt to misappropriate the customer's funds. This situation often arises where a corporate customer's bank account is operated by "rogue" authorised signatories. The Quincecare duty of care has been recognised by Hong Kong Courts. See our previous blog posts on the topic here and here.

It was argued that the Bank owed the Fund a Quincecare duty of care by reason of the Bank's actual or constructive knowledge that the Fund was the beneficial owner of the monies held in the Account.

Upholding the decision of the Court of Appeal of the Isle of Man, the Privy Council ruled that the Bank did not owe such duty to the Fund. The Privy Council emphasised that the purpose of the Quincecare duty of care was to protect the bank's customer, and there was no hint in previous decisions that the duty might be owed to anyone else other than the bank's customer. Extending the Quincecare duty of care to the Fund in this case would be an incremental development, which would place an unacceptable burden on banks in having to go beyond their contractual obligations with their customers.

Comments

The approach taken by the Privy Council in this judgment is consistent with the narrow approach taken so far by the Hong Kong court. The duty, as currently established in Hong Kong, attempts to strike a balance between protecting bank customers and avoiding to place a duty too cumbersome on banks and financial institutions at the expense of banking efficiency.

Although the claim was not brought by a third party beneficiary, Coleman J's reasoning in Luk Wing Yan v CMB Wing Lung Bank Ltd [2021] HKCFI 279 (see our earlier blog post here) against finding a Quincecare duty of care (in that case) seems to shed light on how the Hong Kong Courts may rule on this issue and why. Coleman J, in that case, was against finding a Quincecare duty of care whenever a bank has reasonable grounds for believing that a payment instruction forms part of a scheme perpetrated by a person to defraud the customer in any way, because this "would require the bank to be potentially alert to factual circumstances of a very different nature than, and often if not usually wholly unconnected with, the relationship between the bank and its customer".

In any event, a refusal to extend the duty does not mean banks can take it easy. For one thing, the Privy Council observed in JP SPC 4 that the customer itself could well have a claim against the bank if the underlying facts could be established. Banks should continue to be mindful of the obligations to their customers arising from the Quincecare duty of care when processing payment instructions to avoid claims by their customers.

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.

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