In the recent case of Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants)  UKPC 18, the Judicial Committee of the Privy Council (sitting as the final court of appeal to the Isle of Man) (the “Privy Council”) has held that a bank’s Quincecare duty does not extend beyond being a duty owed to the bank’s customer.
What is the “Quincecare duty”?
The Quincecare duty, which derives from the English case of Barclays Bank plc v Quincecare Ltd  4 All ER 363, requires banks to refrain from executing a customer’s instructions if the bank has reasonable grounds for believing that those instructions may be an attempt to misappropriate the customer’s funds.
The claimants, which were investment funds based in the Cayman Islands (the “Funds”), established schemes by which investors could make a profit by lending money to solicitors in England and Wales to finance their pursuit of high volume, low value litigation. The loans were processed through bank accounts (the “Accounts”) held in the name of an Isle of Man incorporated entity called Synergy (IOM) Limited (“SIOM”) and maintained by The Royal Bank of Scotland International Limited (the “Bank”). The Funds alleged that two individuals controlling SIOM had fraudulently misappropriated moneys from those accounts.
The Funds, relying on the decision in Quincecare, argued that the Bank owed them a duty of care in tort to exercise reasonable care and skill. It was argued that this duty arose by reason of the Bank’s knowledge that the moneys held in the Accounts were beneficially owned by the Funds (or alternatively, that the moneys were not beneficially owned by SIOM).
The effect of the alleged duty, if established, would have been that the Bank was under a duty to take reasonable care to protect the Funds from losses caused by the fraudulent misappropriation.
The Bank applied to strike out the claim. Its application was dismissed at first instance but subsequently allowed by the Isle of Man’s Appeal Court (The Staff of Government Division). The Privy Council gave the Funds permission to appeal and ultimately granted the Bank’s request that the claim be struck out on the basis the claim was “bound to fail”.
In its ruling, the Privy Council concluded that there was nothing in the original Quincecare case itself, or in the subsequent cases applying it, which supported the argument that the Quincecare tortious duty of care could extend beyond being a duty owed by the bank to the bank’s customer, which duty arises as an aspect of the bank’s implied contractual duty of care and co-extensive tortious duty of care to its customer. It was therefore confirmed that the duty does not extend to a third party with whom the bank has no contractual relationship, even if the bank is aware, or ought to be aware, that the third party is the beneficial owner of the moneys held in the customer’s account.
Clarification on approach to determining the existence of a duty of care in negligence
In coming to its decision, the Privy Council considered the decision in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA  1 WLR 509 in which the English High Courts ruled 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 in a fiduciary capacity for known beneficiaries. It was noted that the Baden decision, which was decided before Quincecare, had been decided when the law of negligence was in a state of expansion and that, since that decision, the approach to determining whether a duty of care exists between a defendant and a claimant had been significantly curtailed. In light of the subsequent developments in the law, the Privy Council confirmed that the Baden decision cannot stand as good law today. It was confirmed that the appropriate approach that a court should now take is to apply the three-stage test for novel duties of care (foreseeability, proximity, and whether fair, just and reasonable) and/or the incremental approach.
Whilst the decision will doubtless be welcomed by banks who, for now at least, have clarity that the scope of their Quincecare duty applies only to their customers and does not extend to third parties, there remain a number of areas of uncertainty surrounding the duty. For example, until there is judicial guidance on the points it is still unclear:
- what practical steps a bank should take in order to discharge their Quincecare obligations; and
- whether a bank would be liable for losses if it refuses to effect a transaction due to a suspicion of fraud, which subsequently turns out to be genuine.
We expect that claimants will continue to test the ambit of the Quincecare duty (both in the Isle of Man and in other common law jurisdictions, most notably in England and Wales) and this area of law will continue to develop over time.