The customer comes first: Privy Council rules out duties owed by banks to third parties

In Royal Bank of Scotland International Ltd v JP SPC 4 & Anor [2022] UKPC 18, the Privy Council found that a bank does not owe a duty of care to third party beneficiaries with an economic interest in transactional banking services provided to a customer, such that the decision of the appeal court on the Isle of Man should be upheld.

The bank’s customer had paid away funds held on trust for the beneficiaries. The beneficiaries unsuccessfully sought to recover against the bank on the basis of duties owed to the beneficiaries. The report comprehensively addresses when a duty of care will be extended to third parties to banking services.

Background

The background to this decision is an investment scheme devised to fund solicitors taking on high-volume, low-value claims. Investors in the scheme would obtain their return through the repayments made by the solicitors of loans used to fund the claims pursued.

Synergy (Isle of Man) Limited (SIOM) was the lender. It held two accounts at the Royal Bank of Scotland International (the Bank): one to make loans and the other to receive repayment of the loans. The investors’ interests were represented by JP SPC 4 (the Fund), being the beneficial owner of the monies held in the repayments account.

The Fund received no money, however, as the controllers of SIOM are alleged to have instructed the Bank to pay the funds away to the benefit of their personal interests.

In the months prior to the closure of the scheme, the Bank renamed the accounts that it held in relation to the scheme to include the phrase ‘client account’ and the legal name of the Fund. The Bank designated the accounts as ‘high risk’. Subsequently in 2012, £60 million was allegedly removed from the accounts inconsistently with the provisions of the scheme.

The Fund, which was not a customer of the Bank, pleaded that the Bank owed four duties not to pay away the funds in defiance of the customer’s order. The common thread to these duties was that the Bank is said to have known of the Fund’s beneficial interest in the repayment account. The Privy Council advised that these duties do not arise.

Quincecare is owed to customers only

The Privy Council rejected the proposition that the Bank owed a Quincecare duty to the Fund.

The Quincecare duty obliges a bank to refrain from executing a customer’s order if the bank is put on inquiry that the order is an attempt to defraud the customer. It arises as an implied term of the contract between banker and customer and the ordinary tortious duty of care. Notwithstanding that there was no contract between the Bank and the Fund, the Fund relied on the judgment of Steyn J (as he then was) in Barclays Bank PLC v Quincecare Ltd [1992] 4 All ER 363 as the hook for the claim against the Bank. Specifically, Steyn J held that the purpose of the duty is to “protect bank customers and innocent third parties”. The Privy Council rejected any extension of the duty by reference to that remark. That is because the duty arises out of the contractual relationship between the parties and the duty in negligence co-extends with the contractual duty. As there was no contract between the Bank and the Fund, no Quincecare duty could arise.

No duty owed to trust beneficiaries

The Fund argued that the Bank owed a tortious duty to its customers’ beneficiaries not to act so as to injure the interests of those beneficiaries. It did so on the authority of Baden [1993] 1 WLR 509 (Baden). The Privy Council repudiated the existence of such a duty as it proceeded upon a suite of superseded rules for the imposition of duties of care.

At the time that Baden was decided, courts decided to impose duties of care in two steps. First, the duty would provisionally arise if it was reasonably foreseeable that the claimant would suffer loss. Second, the duty would not arise if there were good reasons of policy for not imposing it. This approach to considering whether to impose a duty of care was rejected in 2018 and with its rejection, Baden ceased to stand as good law.

No duty arising from assumption of responsibility on these facts

The Fund further relied on the principle that a duty of care may arise whether there is an express or implied undertaking of responsibility. The factual basis for a claim of this kind rests on the conduct between the claimant and the defendant. The Fund argued that the relevant conduct that gave rise to the duty was that the Bank changed the names of the accounts to reflect the interest that the Fund had in them. The Privy Council disposed of this claim by reference to the facts. There was neither any evidence nor any prospect of any evidence that (a) the Bank had any dealings with the Fund that amounted to an assumption of responsibility by the Bank; or (b) the Fund relied on the Bank to protect its interests.

No extension of duty to beneficiaries

The Fund finally argued that the Privy Council should extend a duty of care to non-customers such as the Fund who had suffered pure economic loss. The Privy Council pointed out that duties are typically extended to third parties on the basis of three criteria. First, the purpose of the service provided; second, whether the defendant actually knew that the claimant was relying on the defendant; and third, whether that reliance was reasonable.

On these facts the purpose of the banking services provided to SIOM were for the benefit of SIOM alone; and there was no ground to say that the Bank ought to have known that the Fund placed reliance on the Bank. The Privy Council cross-checked that conclusion by looking at the question through a different lens, namely through the general principles of imposing a duty of care. It concluded that it would be unacceptably burdensome for the Bank to owe a duty to non-parties that was equivalent to the duty that it owed to customers. This is point is particularly acute as the Bank had no control over the fraudulent conduct that caused the loss.

Key takeaways

It is not unknown for the law of tort to impose duties on parties as between whom there is no contractual relationship. However, the Privy Council has now limited the reach of such duties by concluding that a third party’s economic interest in the funds does not provide a basis for imposing a duty on the bank in favour of that third party. The Privy Council has left open the possibility that exceptional circumstances may justify such a duty, such as where the services are knowingly undertaken for the benefit of the third party. This decision goes a long way to minimising the scope of a bank’s liability to parties who have an economic, but not a legal interest, in their services.