Hong Kong Court of Final Appeal provides important analysis on the Quincecare duty
In PT Asuransi Tugu Pratama Indonesia TBK v Citibank N.A. [2023] HKCFA 3, Lord Sumption (a former Justice of the UK Supreme Court who was sitting as a Non-Permanent Judge of the Hong Kong Court of Final Appeal (“CFA”)) provided an analysis of the scope of the Quincecare duty. This is the duty owed by a bank to its customer not to make, in certain circumstances, an authorised payment from that customer’s account which has been prompted by fraud. In recent years, there have also been a number of English Court and Privy Council decisions that have widened the scope of this duty. We are currently waiting for the UK Supreme Court’s decision in Philipp v Barclays on the question of whether the Quincecare duty can arise even where the individual authorising the payment is the account holder themselves rather than an agent and only the payee is motivated by fraud.
Background
The Appellant (“Tugu”) sought recovery of monies paid out from its bank account at the Respondent bank (the “Bank”) on the dishonest instructions of Tugu’s authorised signatories.
The bank mandate provided that any two of the three officers who had opened the account were authorized to give instructions relating to the account. Between June 1994 and July 1998, pursuant to instructions given by two of the signatories, substantial sums were paid out of the account to their personal accounts and to another dishonest officer of Tugu. By the final payment instruction, the Bank was directed to close the account as the account balance was nil, and accordingly the Bank executed all transfers and closed the account.
In 2006, Tugu informed the Bank that the relevant transfers were dishonestly authorised and demanded payment of their aggregate value. Tugu brought a claim against the Bank in 2007, on the basis that the Bank ought to have known that the transfers were out of the ordinary course of business and were not for its benefit. Tugu argued that its claim was a debt claim because the debit entries resulting from the unauthorized transfer instructions and the unauthorized closure instruction were invalid, and accordingly the account remained in existence and the disputed debit entries should be reversed. Alternatively, Tugu claimed the same amount as damages for breach of duty of care owed by the Bank in contract and/or tort as the Bank knew of facts which would lead a reasonable and honest bank to consider that there was a serious or real possibility that Tugu might be defrauded. The Bank argued that Tugu was contributorily negligent and in any event the claim should have been time-barred.
Decisions of lower courts
The first instance Judge ruled in favour of the Bank, and the Court of Appeal dismissed the appeal by Tugu. Both courts held that the claim was time-barred even though the Bank had been put on inquiry at the time of the third payment instruction when a pattern had emerged indicating the improper character of the way that the account was being operated, i.e. the account had been improperly used as a “temporary repository of funds” en route to the pockets of the officers. The first instance Judge held that the Bank had breached its duty by failing to make inquiries by the time of the third transfer. However, since the closure instruction was authorized, Tugu’s cause of action arose upon the purported closure of the account in 1998, and therefore the claim (commenced in 2007) was time-barred. The Court of Appeal also held that Tugu’s claim was time-barred but on a different basis.
The Court of Appeal held that the closure of the account was unauthorized and repudiatory but that it was nevertheless effective to bring the banker-customer relation to an end and hence operated as a waiver of the need for a demand. It followed that the cause of action for the wrongful payments accrued in 1998 instead of 2006 (when Tugu informed the Bank that the relevant transfers were dishonestly authorised).
Although both courts held that the claim failed in its entirety for limitation, both courts went on to consider the issue of contributory negligence. They held that but for limitation, contributory negligence would have been upheld and Tugu’s contribution would have been assessed at 50 per cent.
Decision of the CFA
Tugu then appealed to the CFA and the appeal was allowed. The CFA found that Tugu was entitled to the aggregate amount of the unauthorized debits apart from the first two payments. Below are the key elements of Lord Sumption’s judgment:
1. The signatories’ authority and the nature of the Bank’s duties
The two judicial sources in relation to a bank’s duties in effecting payments out of an account include: (i) the customer’s mandate whereby the Bank, being a third party having no notice of the lack of actual authority, may be able to rely on the agent’s apparent (or ostensible) authority by virtue of their position as a signatory and/or officer of the company; and (ii) the Bank’s Quincecare duty of care owed to the customer, including the duty to exercise reasonable skill and care when performing its obligations. Although Lord Sumption noted that the differences between the two sources for a bank’s duty may affect remedies, limitation and contributory negligence, His Lordship is of the view that the standard of duty is the same under either head, because the duty of care is a duty in the performance of the mandate, and “[t]he law cannot coherently treat compliance with an authorized instruction as a breach of duty; or treat a transfer made in breach of duty as authorized”.
The critical question was therefore what constituted sufficient notice of a lack of actual authority. If a bank knows of facts which on their face indicate a lack of actual authority, it is not entitled to proceed with paying out without inquiry. This is different to constructive notice. The leading authority for this proposition was stated by Steyn J in Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, as follows:
“…a banker must refrain from executing an order if and for as long as the banker is 'put on inquiry' in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company…”
As regards the account closure instruction, the CFA held that 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’s discussion with the dishonest signatories on the commercial rationale for the closure was an inadequate response to the concern apparent from the way the account had been used.
2. Nature of Tugu’s claim and the implications on limitation and the defence of contributory negligence
The CFA held that Tugu’s claim to recover the balance which ought to be standing to its credit in its account with the Bank was for a debt instead of a claim for damages for breach of duty. If a bank has debited an account without authority, the customer is entitled to require the account to be reconstituted as it should have been. What is reconstituted is simply the bank’s records but not its liability, which has always been for the balance undiminished by the unauthorised debits. The customer’s only effective financial remedy is accordingly in debt for the reconstituted balance of the account and such debt is payable on demand. The obligation of a bank is to pay to or to the order of the customer on the latter’s demand and and a cause of action in debt only arises when a demand is made. The closure of the account did not discharge the debt because Tugu did not accept the repudiation of the banking contract due to the unauthorised closure of the account. Therefore, the Bank’s debt owed to Tugu subsisted when it was demanded in 2006, and time did not begin to run for limitation purposes until then. Accordingly, the proceedings commenced in 2007 were not time-barred. Further, since Tugu’s claim was not dependent on proof of negligence, the Bank was unable to rely on the defence of contributory negligence.
Key takeaways
The CFA’s decision gave an important analysis of the scope of Quincecare duty owed by the Bank to its customers. Before acting in accordance with a customer mandate, a bank should be cautious as to what will be sufficient to give rise to a duty to make inquiries as to the agent’s authority. Examples of relevant factors include the agent having a conflict of interest in respect of the transaction, a lack of benefit for the customer, the commercial purpose on the face of the transaction or unusual aspects of the transaction. This is not constructive notice on the bank, but a question of what was known to the bank at the time it failed to make inquiry.