CLA News / Malaysian High Court Decision: Does your Bank owe you a Quincecare Duty in a Fraudulent Transaction?

Author : Vivian Kuan, YCLA Malaysia Committee member

The Quincecare duty is derived from the English case of Barclays Bank plc v Quincecare [1992] 4 All ER 363. Simply put, a Quincecare duty is where the banker has the duty to refrain from executing an order if the banker is ‘has reasonable grounds’ (not necessarily proof) that the order is an attempt to misappropriate the funds of the company. The duty can be an implied term in a contract and can also exist in tort.

Does the bank have the duty to investigate a customer’s order (Quincecare duty) before carrying out a transaction if the banker suspects that the order is an attempt to misappropriate funds?

This issue was dealt with in a recently reported Malaysian High Court case of Alliance Bank Malaysia Bhd v. Khee San Food Industries Sdn Bhd & Anor. Briefly, the claim revolved around the issue of whether the Bank was negligent is allowing the drawdown of RM892,000 (approximately £156,738.75) based on forged/fictitious documents.

The Defendants argued that by virtue of the banker-customer relationship, the Bank owes a duty in both contract and in tort, in that:

(i) The Bank should refrain from allowing a drawdown of the facility if the Bank had reasonable grounds for believing there was an attempt to misappropriate funds;

(ii) The Bank has the duty of care to make reasonable inquiries to satisfy itself that a transaction was bona fide if circumstance suggests that the transaction was part of a breach of trust/fiduciary or fraudulent scheme.

In essence, the High Court was posed with this issue: Did the Bank owe the Defendants a Quincecare duty?

The High Court ultimately found that the Quincecare duty does not apply to this case. The Quincecare duty cannot be imposed on a bank as the bank has no duty to inquire into transactions between its customer and third parties which the bank is not privy to. Though the Quincecare duty is implied in the contract between the bank and its customer, it must be subordinate to other contractual duties of the bank. A tortious duty cannot be greater than parties’ obligations in a contract.

The Bank’s duty is imposed on actual knowledge, not constructive knowledge. In other words, the liability of the bank would be clear where the “bank executes the order knowing to be dishonestly given, shutting its eyes to the obvious fact of the dishonestly or acting recklessly in failing to make such inquiries as an honest and reasonable man would make”. As an example, the bank should apply caution where it encounters a cheque for payment without a signature or clearly containing a signature of someone other than the authorised signatory or where the bank receives conflicting instructions. In these exceptional circumstances, the bank needs to be proactive in preventing misappropriation of the customer’s fund. But beyond that, to impose such a duty would simply be too onerous and render banking business impracticable.

Most pertinently, the Quincecare duty does not apply to all banker-customer relationship. This duty only applies where the bank acts on instructions of the customer in respect of the customer’s own bank account, i.e. money moving out of that account. In this context, the Bank is the agent of the customer and owes a fiduciary duty to its customer. The Bank as “custodian” of the money needs to be more careful as the customer naturally stands to lose more than the bank.

In this case, the drawdown funds were monies borrowed from the Bank, not monies from the customer’s own bank account. The Bank bears the greater risk and stands to lose more than the Defendants. The Bank does not have a duty to inquire into commercial documents where the bank is not a party to (i.e. a sale and purchase agreement). The Bank was entitled to presume the validity of the said agreement.

The Bank is entitled to treat the customer’s mandate at face value save in extreme circumstances. The Bank is not required to act as an amateur detective nor obliged to question any transaction in accordance with mandate given by the customer, unless it has grounds for believing that the transactions were for the purposes of defrauding the principal. As the Quincecare duty did not apply, it was irrelevant whether the Bank was put on notice or not.

This High Court decision is amongst the 16 High Court decisions which are up on appeal (all on the same Quincecare issue: whether the Banks were negligent/breached their duty of care, in that, the Banks were required to check the veracity of the documents prior to effecting the drawdowns).

These 16 appeals will be heard together in the Malaysian Court of Appeal in December 2021. We shall analyse the findings of the Court of Appeal at the coming juncture.