Privy Council declines to expand banks’ duty of care to third parties

Out-Law News | 24 May 2022 | 3:05 pm | 2 min. read

The Privy Council has re-confirmed the scope of a bank’s duty of care to beneficiaries, deciding that the duty should not extend to third parties to the banking relationship.

The Privy Council dismissed attempts by an investment fund to claim that a bank owed it a duty of care as the beneficial owner of funds that had been misappropriated as part of an alleged fraud, in which money belonging to the fund was paid out for the benefit of the bank’s customer and two individuals behind the company.

The fund’s primary allegation was that the bank knew that the misappropriated funds belonged to it and thus it had a claim in negligence against the bank, which should have prevented the fraud. Notably, the beneficiary claimed that the duty arose as part of the Quincecare duty of care, established in a 1992 case, which requires banks "to observe reasonable care and skill in and about executing the customer's orders".

Civil fraud expert Michael Reading of Pinsent Masons said this was a novel argument, as previous Quincecare cases have all involved the loss being suffered by the bank's customer, not a third party.

The Privy Council decided not to expand the duty, saying there was no support in the relevant case law to suggest the Quincecare duty extended beyond the duty that a bank owes to its customer.

“This is an important decision for all practitioners in the financial services sector. It re-confirms the scope of a bank's duty of care owed to third parties at a time when the scope of the so called Quincecare duty, has received significant judicial scrutiny,” Reading said.

Reading Michael

Michael Reading

Senior Associate

This is a strong indication that the court will take a firm line in response to claims that seek to expand accepted legal principles, such as Quincecare and accessory liability, in cases where there is no firm basis in law for such an expansion

The investment fund also tried several alternative arguments to support its negligence claim, including an attempt to persuade the Privy Council to find the bank liable for having negligently assisted a breach of fiduciary duty.

However, the Privy Council rejected this argument on the basis that dishonesty is a key ingredient of any accessory liability claim, and that this was something which was entirely absent from the fund’s pleaded case.

“This decision will be welcomed by the financial services industry. The Privy Council's decision is a strong indication that the court will take a firm line in response to claims that seek to expand accepted legal principles, such as Quincecare and accessory liability, in cases where there is no firm basis in law for such an expansion,” Reading said.

Civil fraud expert Alan Sheeley of Pinsent Masons said the judgment landed in an environment of increasing fraud risk.

“The courts should be very concerned about increasing banks’ liability to third parties more generally as to do so will inevitably increase internal and external processes, reduce business efficiency and increase the overall costs of banking,” Sheeley said.

“This is a societal and cultural issue, and accordingly we need to be more wary of fraud on a day-to-day basis. As the value of fraud continues to increase year-on-year, victims do need to be armed and educated about how to avoid fraud primarily and in the event of the worst-case scenario understand the self-help remedies and how these can be used,” Sheeley said. “Ultimately victims of fraud need to understand how to best recover the monies they have lost. In all situations, time is of the essence along with the right specialist civil fraud advice.”