Daiwa did not appeal against the finding of the trial judge that they had breached their duty of care as a bank to take reasonable care (the so-called Quincecare duty, after the decision of Steyn J in Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363). Instead they appealed against the decision of Rose J on five separate grounds: [6]
Court of Appeal
Sir Geoffrey Vos gave the judgment of the Court of Appeal. After reviewing the facts and the relevant authorities, Sir Geoffrey expressed the view that there were essentially six core issues.
The first issue was whether the fraud of Mr Al Sanea should be attributed to Singularis. Counsel for Daiwa strongly urged that as Singularis was a "one man company" the fraud of Mr Al Sanea should be the fraud of the company. The Court of Appeal held that Rose J had correctly applied the test set out by the Supreme Court in Jetivia SA v Bilta (UK) Limited (in liquidation) [2015] UKSC 23, and that Singularis should not have that knowledge attributed to it. He cited with approval the comments of Lord Sumption in Jetivia:
The first was that the illegality defence is available against a company only where it was directly, as opposed to vicariously, responsible for it… Secondly, the majority was agreed in rejecting the primary argument of the auditors that once it was shown that the directing mind and will of a company (whether generally or for the relevant purpose) had caused it to defraud a third party and that the company was relying on that fraud to found its cause of action, the illegality defence necessarily barred the claim. Both Lord Phillips (para 63) and Lord Walker (para 173) rejected this submission as too broad, because it would involve the attribution of the agent's dishonesty to the company even if there were innocent directors or shareholders. Accordingly, both of them regarded it as critical that Stone & Rolls was a "one-man company", ie a company in which, whether there was one or more than one controller, there were no innocent directors or shareholders. Third, Lord Phillips and Lord Walker were agreed that, as between a "one-man" company and a third party, the latter could raise the illegality defence on account of the agent's dishonesty, at any rate where it was not itself involved in the dishonesty. [7]
He further went on to elaborate that he did not find the phrase "one-man company" to be a helpful one. He noted in this case that Mr Al Sanea was not the sole director, although the other directors of Singularis were described as "supine". [8]
The second issue was whether, if Daiwa succeeded on the first issue, the illegality defence would bar the claim of Singularis. The key authority in relation to illegality as a defence was now Patel v Mirza [2016] UKSC 42. As Daiwa had not succeeded on the first issue, Sir Geoffrey declined to spend a great deal of time considering the second issue, but he added only that if he had been called upon to determine the point, he was satisfied that Rose J had correctly applied the test at first instance. Rose J had considered the point fairly shortly herself, dismissing it in only five short paragraphs, but she had formed the view that "Applying the test set out by Lord Toulson points firmly in favour of rejecting the illegality defence put forward by Daiwa." [9]
The third issue was whether the claim ought to fail because any breach by Daiwa was not causative of the loss. The appellants relied upon Berg Sons & Co v Adams [1992] BCC 661. In that case Hobhouse J had held that the directing mind of the company, to whom an auditor's report was directed, already knew the true facts. Therefore, his knowledge was attributed to the company, which meant that the company did not rely on the auditor's report, and the claim failed. The situation here, the appellants submitted, was exactly the same: once Singularis is identified with Mr Al Sanea's fraud, it is a dishonest company, and was not relying on Daiwa to perform its Quincecare duty.
The Court of Appeal dismissed that argument. It has already held that the fraud of its principal was not to be attributed to Singularis. But the court went on to hold that, even if Mr Al Sanea's fraud were to be attributed, the claim would still be rejected because the directors of Singularis who were not acting fraudulently were indeed relying on Daiwa for the performance of its Quincecare duty.
The appellants argued, in reliance upon the decision of Evans-Lombe J's decision in Barings plc v Coopers & Lybrand [2003] PNLR 34, that Daiwa should have an equal and opposite claim in deceit against Singularis.
The Court of Appeal rejected that contention. The court accepted that, ordinarily, a third party who was misled by Mr Al Sanea's false statements into entering into a transaction would be able to recover all losses flowing from that transaction. But in this case Daiwa was not an ordinary third party; it was in breach of a pre-existing legal duty to Singularis to refrain from making the payments whilst the circumstances put it on inquiry. Accordingly, the court held that, even if Mr Al Sanea's fraud were to be attributed to Singularis (which it was not), Singularis' claim cannot be defeated by an equal and opposite claim in deceit by Daiwa against Singularis.
The appellants argued that these claims were all brought by, and for the indirect benefit of, the creditors of Singularis (through the liquidator). The trial judge had held that there was no principle of law which entitled the court to consider what a party intended to do with the money it recovers, and that the solvency or insolvency of Singularis did not affect that principle. The Court of Appeal broadly endorsed that, holding "the identity of those creditors cannot in this situation affect the question of whether the company in liquidation has a claim against Daiwa for breach of its Quincecare duty." [10]
The Court of Appeal indicated that to set aside an assessment of contributory the appellants would need to show that the trial judge had either made an error of principle or reached a conclusion wholly outside the range of reasonable possibilities. [11] They quickly dismissed the suggestion saying that appellant's arguments "do not get off the ground".
The Court of Appeal dismissed all of Daiwa's claims in the appeal, and upheld the decision of the trial judge that it was liable to Singularis for its breach of the Quincecare duty to scrutinise instructions which would put an ordinary banker on notice of fraud.
Sir Geoffrey added a few remarks in closing. He stressed that it will be a rare situation for a bank to be put on inquiry under the Quincecare duty, and that there is a high threshold. In this case "any reasonable banker would have realised that there were many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company when he instructed that the money be paid to other parts of his business operations". He stressed that this case was an unusual one. [12]
He also noted Daiwa sought to rely at every level of its argument on the existence of a prior fraud as a reason why it ought to have a successful defence. But this ignored the fact that the prior fraud is an essential ingredient of the claim for breach of the Quincecare duty. [12]
Finally, he stressed in relation to the authorities that there is no proper comparison between the duties of an auditor and the duty of a banker. A banker's duties in respect of properly authorised instructions to make payments are strictly limited. The banker's duty only arises where, abnormally, the banker is put on inquiry by the particular circumstances. He approved the comments of Steyn J said in Quincecare that "trust, not distrust, is the basis of a bank's dealings with its customers". [12]
