Refusal to Strike Out/give Summary Judgment demonstrates the Court’s willingness to consider the expansion of the ambit of Quincecare Duties

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Refusal to Strike Out/give Summary Judgment demonstrates the Court’s willingness to consider the expansion of the ambit of Quincecare Duties

Published 13 October 2020

In Hamblin & Hamblin v World First Ltd and Moorwand NL Ltd, the High Court refused to strike out representative proceedings brought by the victims of a fraud against a payment services provider on grounds that the victims did not have standing to bring the claims and the causes of action were unsustainable. The decision indicates the Court’s willingness to consider the further expansion of the duties and responsibilities that financial institutions have when giving effect to payment instructions and a reluctance to allow potentially valid claims to be stifled. 

Facts

At the heart of this case is a fraud.  Mr and Mrs Hamblin thought they were investing money with a company, CEX Markets, which promised returns on high frequency FX dealing.  On this understanding, they paid money into an account in the name of Moorwand NL Ltd (“MNL”), held by World First Ltd (“WF”), a payment services provider.  Unknown to the Hamblins, CEX Markets was a fraudulent scheme; the fraudsters withdrew their money from the MNL account, it cannot be traced and the persons behind the fraud cannot be located or identified. 

The Hamblins brought representative proceedings against WF for (i) breach of statutory duty under the Money Laundering Regulations (ii) breach of the Payment Services Regulations, (iii) breach of mandate, and (iv) a breach of the Quincecare duty of care. WF applied to strike out and/or give summary judgment on the claim on grounds that the Hamblins did not have standing to bring the representative proceedings and the causes of action were not sustainable. The High Court refused.

Material to the Court’s decision are the circumstances in which MNL’s account held at WF was opened.  The Court found that MNL was, in May 2017, controlled by the fraudsters behind the scam.  In October 2017, an account was opened with WF on the application of a Mr Anthony Carter.  Mr Carter was a real person but his identity had been stolen by the fraudsters who were able to produce personal identification documents.  WF failed to take any steps to establish whether Mr Carter was a Director of MNL (he wasn’t, and never had been) and failed to discover that MNL had not had any person registered as a director since 11 May 2017. 

Representative action

The Hamblins pursued representative proceedings against WF on the basis the monies they paid to MNL were to be held on trust by WF pending those monies being applied as per the agreement made with CEX, and in breach of trust, the monies were not applied as agreed because they were stolen by the fraudsters behind the CEX scheme.  The Court was prepared to accept, for the purposes of this application, that MNL was a trustee of the monies paid into its account and the Hamblins had a right of action as beneficiaries of that trust.

Causes of action had realistic prospects of success

As this was an application for summary judgment, the Court was asked to determine whether the causes of action pursued by the Hamblins had a realistic prospect of success.  If they did, the matter would be allowed to proceed to a full trial.  If they didn’t, they would be struck out/dismissed. 

The Court held the claim for breach of the Money Laundering Regulations did not have a realistic prospect of success as no private cause of action exists under the Regulations.  Consequently, that claim was struck out. 

The majority of the Court’s time was spent dealing with argument on the breach of mandate and breach of Quincecare duties. 

Breach of Mandate

The Hamblins argued that breach of mandate gave rise to strict liability and that it was at least realistically arguable that WF had breached its mandate with MNL because it purported to act on the instruction of Mr Carter, who could not and did not give any instructions because his identity had been stolen, and where there was no registered director of MNL at the relevant time. 

WF’s position was that MNL would be estopped from alleging the mandate had been breached on the principles established in Bank of England v Vagliano Brothers [1891] AC 107 Vagliano determined that where a bank acted upon a representation that was in fact untrue but believed by the person making it to be true, it is a representation made in good faith and any loss that flows from it is a loss which the customer, not the bank, ought to bear.  This is a straightforward principle when it comes to individuals and partnerships (which was the case in Vagliano) but, potentially, less so for companies which have a separate legal existence to the individuals who own or run them.

This is precisely the distinction the Hamblins sought to rely on and referred to Lady Hale’s judgment in Singularis Holdings (in Liquidation) v Daiwa Capital Markets [2019] UKSC 50, for support. In her Judgment, Lady Hale emphasised that in the context of a bank’s duty of care, “companies are different from individuals.  They have their own legal existence and personality separate from that of any of the individuals who own or run them.  The shareholders own the company.  They do not own its assets, and a sole shareholder can steal from his own company.” 

While Singularis was not a breach of mandate case, the Court recognised there was scope to revisit the decision in Vagliano. The most important issue for the Court in this regard was that WF appears not to have undertaken any checks to establish whether Mr Carter was a director of MNL.  Had it done so, it would have discovered Mr Carter was not a director and would have realised that MNL did not have any person registered as a director.  Who, therefore, is said to have made the representations and on what basis can it be said they were believed to be true and made in good faith? The Court determined these were questions to be resolved by the Judge at trial and were not suitable for determination by way of summary judgment. 

Breach of Quincecare Duty

As a matter of law, it is an implied term of the contract between the bank and its customer that the bank will observe reasonable skill and care in and about executing the customer’s orders such that a bank must refrain from processing a payment mandate made by an authorised signatory of the customer for so long as the bank has reasonable grounds to believe that the payment instruction is an attempt to misappropriate funds from its customer.  That, in essence, is the Quincecare Duty.  Applying the Supreme Court’s ruling in Singularis, the Quincecare duty is owed to the company not to those in control of it. 

WF recognised that the Quincecare duty existed to protect the company but, as the company was controlled by fraudsters, any claim for breach of duty would be bound to fail because, it argued, no loss could be caused by a breach within the knowledge of those who controlled MNL, and that any such claim would give rise to a complete circuity of action as WF would then be entitled to sue MNL for fraudulent misrepresentation. 

The Court did not agree.  It made it clear that it was concerned with an issue specifically limited to the liability of financial institutions in relation to loss caused as a result of the fraudulent abuse of a corporate vehicle.  Again, it was a significant issue for the Court that MNL had no directors, that WF had apparently failed to take any steps to establish this fact and that as the Quincecare duty was owed to the company, not to those in control of it, the purpose of the duty is to protect the legally distinct company against the misappropriation of the company’s assets.  On this basis, the Court determined that it was realistically arguable that MNL had in fact also been the victim of fraud and “to attribute the knowledge of the fraudsters to the company so as to defeat the company from maintaining a claim in those circumstances would be to denude the duty of much of its practical utility.”

Comment

It is quite clear from the judgment that the High Court took an extremely dim view of the fact that WF appears to have failed to take any steps to establish whether Mr Carter was a Director of MNL.  Had it done so, it would have discovered that he was not and further that there was no person registered as a director of MNL.  This would have set alarm bells ringing and ought to have led inevitability to WF refusing to open an account on the application it had received.  Verifying that a person purporting to open an account on behalf of a corporate entity is authorised to do so is fundamental to the due diligence and compliance function of a financial institution. 

The facts here are unusual. It is difficult to comprehend circumstances where a financial institution, applying even basic levels of diligence would allow an account to be opened for a corporate entity without taking any steps to verify the authority of the person seeking to do so. Given the circumstances, having failed to strike out the claim on technical grounds, whether this case ever reaches a full trial must be considered doubtful and as such it would be left to other cases and circumstances to determine whether Vagliano should be distinguished and the application of the Quincecare duty expanded. 

With fraud an ever present and increasing risk in relation to online banking, investments and transactions, there are likely to be more nuanced cases arising in the future in which questions of breach of mandate and the Quincecare duty will arise.  The Court’s refusal to strike out the Hamblins’ case will give prospective claimants some encouragement that the court is open to considering development of the law in this area and claims with realistic prospects of success will not be stifled. 

Authors

Jonathan Brogden

Jonathan Brogden

London - Walbrook

+44 (0)20 7894 6290

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