The Privy Council has handed down its decision in Royal Bank of Scotland International LLP (Bank) v JP SPC 4 and another  UKPC 18, in which it confirmed that as a matter of law, banks do not owe a duty of care, including a Quincecare duty, to beneficial owners of monies held in its bank accounts. The decision is not binding on courts in England and Wales, but this decision will have significant impact since it was based upon an analysis of English case law.
The account holder (SIOM) of two bank accounts had defrauded an investment fund (Fund), who was the beneficial owner of those monies, by paying out monies from two bank accounts held with the Bank. The Privy Council acknowledged that the case was problematic in that the losses being sought were pure economic loss, which had been incurred as a result of an alleged omission on the Bank’s part to prevent wrongdoing by the account holder.
The Fund alleged that the Bank owed it a “duty of care in tort to exercise reasonable care and skill”, such that “if […] a reasonable banker would have had grounds for considering that there was a serious or real possibility that the [Fund] was being defrauded and/or its funds were being misapplied …, [the Bank] was obliged not to honour instructions in relation to [the accounts] until such time as it had made reasonable enquiry and satisfied itself as to the propriety of the conduct of [the accounts]”. The effect of the alleged duty, if established, would be that the Bank would be under a duty to take reasonable care to protect the Fund from losses caused by the fraudulent misappropriation of funds from the Accounts. Further, the Fund submitted that the renaming of the accounts as being client accounts and their designation within the bank as being ‘high risk’, ought to have put the bank on notice of actual or potential fraud taking place.
The Bank applied to strike out or summarily dismiss the claim on the basis that there is no arguable pleaded basis on which the Fund can establish that the Bank owed it the alleged duty of care. At first instance, that application was dismissed. The bank’s appeal was allowed by the Court of Appeal and the Fund was given permission to appeal to the Privy Council.
The Privy Council proceeded to decide the case on that basis that: (1) the Bank knew or ought to have known that the monies in the bank accounts were not beneficially the property of SIOM, but instead of the Fund and (2) the circumstances were such that a reasonable banker would have had grounds for considering that there was a real possibility that the Fund was being defrauded (Assumed Facts).
The Quincecare decision
The Privy Council highlighted three points from the decision in Barclays Bank plc v Quincecare Ltd  4 All ER 363:
” (1) The Quincecare duty of care is an aspect of the bank’s duty of reasonable skill and care in and about executing the customer’s orders and arises by reason of an implied term of the contract and under a co-extensive duty of care in the tort of negligence.
(2) Steyn J recognised that this particular duty of care has to be carefully calibrated to reflect the fact that the duty of care is counteracting the receipt by the bank of what appears to be a valid and proper order which it is prima facie bound to execute. In other words, the duty of care runs counter to the bank’s standard contractual duty to comply with a valid order of the customer. In line with this, Steyn J was at pains to make clear that the standard of care imposed should not place too onerous a burden on banks.
(3) Steyn J’s statement that “the law should guard against the facilitation of fraud, and exact a reasonable standard of care in order to combat fraud and to protect bank customers and innocent third parties” must be read in context. There was no question on the facts of the case of any duty of care being owed by the bank to innocent third parties. That was not in issue. The relevant parties were the bank and the customer. They were in a contractual relationship and the question was how far an implied term or a duty of care in the tort of negligence should be imposed to protect the customer. It is therefore clear that the reference to protecting innocent third parties was merely to the effect that combating fraud committed against a bank’s customer, by recognising a duty owed to the customer, protects not only the customer but also other innocent victims of a fraud”.
The Privy Council concluded that on the existing case law, Quincecare did not extend beyond a duty of care being owed by a bank to its customer. Moreover, the duty of care owed to third party beneficiaries of an account, held to exist in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA  1 WLR 509, cannot stand as good law because of the demise of the two-stage approach to the duty of care in Anns v Merton London Borough Council  AC 728, on which it rested.
Therefore, the Privy Council rejected the Fund’s argument that the Bank arguably owed a duty of care to it on the basis of the existing authorities of Quincecare and Baden.
Assumption of responsibility
Counsel for the Fund also submitted that the Bank had assumed responsibility towards the Fund, as the beneficial owner of the monies, but a factual basis for this argument was not set out in the Fund’s statement of case.
The Privy Council concluded that the Fund had pleaded no factual basis and there was nothing in the Assumed Facts, upon which a duty of care based on assumption of responsibility could be established. The Fund had been unable to identify any evidence which could establish such a duty.
Incremental development of the law
Counsel for the Fund alternatively submitted that “even assuming that the relevant duty of care is not already established, recognition of that duty would constitute an appropriate incremental development from existing case law”.
The Privy Council examined a number of authorities and established that for a duty of care to arise, restrictive principles needed to be satisfied. In particular, one of those relevant principles was that the defendant had to have some special level of control over the source of danger or had to assume a responsibility to protect the claimant from the danger. In this case, the Bank had no special level of control over the source of danger (it was not in control of the fraudsters) and it cannot be said to have assumed responsibility to protect the Fund from the fraud.
The Privy Council then considered the submissions made in respect of the equitable wrong of dishonest assistance, based upon the decision in Royal Brunei Airlines Sdn Bhd v Tan  2 AC 378. In particular, the Privy Council stressed that for liability to arise, the required state of mind was dishonesty and there was nothing on the facts to suggest that the Bank had been dishonest.
“There is nothing in principle or in the cases to support the idea that the tortious duty of care owed by a bank to its customer to exercise reasonable care and skill, which is co-extensive with the contractual duty of care owed by a bank to its customer, can be extended across to a third party with whom the bank has no contractual relationship even if the bank knew or ought to have known that the third party was the beneficial owner of the moneys in the customer’s account”.
The Privy Council accepted the Court of Appeal’s conclusion that to extend the duty of care to cases whenever a bank knows, or ought to know, that the monies in a bank account were beneficially the property of another (whether or not identified), would “be a massive extension with significant consequences for banking law”.