Nigeria: The Quincecare Duty Of Care: Lessons For Nigerian Banks & Fintechs

The Quincecare duty is an implied legal duty of care placed on commercial banks, investment banks, fintechs¹ and other financial institutions ("Banks") to refrain from executing a payment instruction where there are reasonable grounds for believing that, a payment instruction is given dishonestly or that such payment instruction is an attempt to misappropriate customer funds. Commercial banks in Nigeria may have some level of exposure to Fintech customers in view of the spate of authorised transactions and payment fraud in the fintech space. In the same vein, Fintechs may have some exposure to their own customers if Fintechs are found to be in breach of the Quincecare rule. With the Quincecare rule, English courts are essentially affirming that Banks have a role in preventing financial crime and must use reasonable care and skill in executing payment instructions on behalf of customers. The Quincecare duty on Banks goes beyond just refraining from making such "fraudulent" payments but also includes a duty to investigate and to file suspicious activity reports where necessary. Accordingly, Banks cannot "shut their eyes" to obvious dishonesty or act recklessly, in failing to make inquiries. A Bank needs not have actual proof of fraud but is required to act circumspectly when there are reasonable grounds for believing that a transaction with a customer is fraudulent. Where a Bank fails to prevent such payment instructions and there are reasonable grounds for believing a payment instruction is an attempt to misappropriate a customer's funds or as a result of fraud, a Bank can be held liable for a breach of the Quincecare duty and made to pay damages to a customer or anyone claiming on a customer's behalf. The Quincecare rule was first laid down in the case of Barclays Bank Plc v Quincecare Ltd. It is to be noted that the Quincecare is generally owed to a bank's corporate customers which have a separate legal entity. Within this context, the Quincecare duty generally exists to protect a corporate entity from a misappropriation of the entity's funds.²

Application of the Quincecare Principle

One of the more recent cases which highlights the application of the Quincecare duty is Singularis Holdings Ltd (In Liquidation) v Daiwa Capital Markets Europe Ltd (UK Supreme Court 2019). In that case, an investment bank ("Daiwa") granted a loan to a company ("Singularis") set up to manage the personal assets of one Mr. AI Sanea. Mr. AI Sanea was the sole shareholder, a director, chairman, president and treasurer of Singularis. Although there were 6 other directors in Singularis, they did not exercise any influence over the management of Singularis. The sole signing powers over Singularis's bank accounts rested with Mr. AI Sanea. In 2007, Daiwa capital granted a loan to Singularis to finance the purchase of shares. The shares so purchased were the security for the repayment of the said loan. In 2009, the shares were sold and the loan was repaid to Daiwa. After the shares were sold, Daiwa held a cash surplus of over $200,000,000 for the account of Singularis. When Singularis ran into financial difficulty, Mr. AI Sanea instructed Daiwa to pay out the circa $200,000,000 in the account of Singularis to entities with which he was associated, thereby leaving Singularis unable to meet the demands of its Creditors.

Judgement: The Trial Court held that the payment by Daiwa of the circa $200,000,000 on the instructions of Mr. AI Santa was a breach of the Quincecare duty of care which Daiwa owed to Singularity. The Trial Court noted that, any reasonable banker would have realized that there were many obvious even glaring signs that Mr. AI Sanea was perpetrating a fraud on the Company, as Mr. AI Sanea was clearly using the funds for his own purposes and not for the benefit of Singularis. Daiwa was aware of the dire straits in which AI Sanea and his "Saad" group of companies found itself at the time. Daiwa was aware that Singularis had other creditors with interest in the monies in Singularis account. The Trial Court held that Daiwa should have realized that something suspicious was going on and ought to have suspended payments until it had made reasonable enquiries and satisfied itself that the payments were properly to be made and that Singularity was a victim of Daiwa's negligence. The Trial Judge ordered Daiwa to pay damages to Singularis albeit with a 25% discount for Singularis's own contributory negligence. Daiwa's appeal to the Appeal Court and to the Supreme Court were dismissed by both courts.

Comments

It is important to note that the Quincecare rule is an established principle of English banking law and therefore requires a prudent review by Banks. We do not find any local cases where the Quincecare rule has been "argued" in Nigeria. However, being a principle of English law, Nigerian Banks can have some exposure under the Quincecare rule as Nigerian courts will generally rely on decisions of English Courts where there are no known Nigerian judicial decisions, in an area of law. Accordingly, it would be prudent for Nigerian Banks to review the relevant banking contracts with a view to contractually addressing liability issues connected to a possible action by a customer, based on an application of the Quincecare principle.

Footnotes

1 We expect that the Quincecare rule will apply to Fintechs to the extent that are considered as a category of financial institutions under Nigeria's extant Banks and other Financial Institutions Act 2020

2 The decision of the English Court of Appeal in Philipp v Barclays Bank UK plc is noteworthy. In that case, English courts held for the first time that the Quincecare duty could apply to bank accounts held by private individuals as well as corporate customers

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.