Agency and authority in Hong Kong - Quincecare duty in the Court of Final Appeal

Lord Sumption recently handed down a judgment in the Hong Kong Court of Final Appeal (CFA) which is essential reading for those who have followed the development of the Quincecare duty.  Although a judgment in Hong Kong, as it was written by Lord Sumption it is expected to be persuasive in England and other common law jurisdictions.

PT Asurani Tugu Pratama Indonesia TBK v Citibank N.A. primarily concerned limitation but the judgment also addresses the Quincecare duty and the circumstances in which a bank is put "on inquiry". As Lord Sumption explains when opening his judgment, it is "a dispute about limitation. In reality however, it is about one of the oldest and most litigated questions in commercial law".

When must a bank ask further questions of its instructions? Lord Sumption's impeccably reasoned answer: if an explanation is required by the circumstances.

Background of the case

In 1990, three officers of PT Asurani Tugu Pratama Indonesia TBK (Tugu) opened an account with a Citibank subsidiary (the Bank). Then, between 1994 and 1998, substantial sums were paid into the account from Tugu subsidiaries before being paid to one or more of four officers of the company. A total of USD $51.64 million was paid out of the account before it was purportedly closed on 30 July 1998.

It was not until 6 October 2006 that Tugu alleged that the transfers (26 in total) were dishonestly authorised. Tugu then demanded payment of the funds from the Bank and in February 2007 began proceedings on the basis that the Bank ought to have known that the transactions were not in the ordinary course of business. The officers were fraudulently operating the account and executed the transfers for their own benefit. 

Previous decisions

The Judge at first instance found that all 26 transfers were fraudulent and established that "a reasonable and prudent banker would have been on inquiry by the time of the third transfer". Tugu was therefore entitled to have the account reinstated with reversals of all but the first two debits. However, the Judge also found that the claim was time barred as the contractual relationship between Tugu and the bank ended with the instruction to close the account and that the cause of action accrued on that date.

The Court of Appeal dismissed Tugu's appeal, upholding that the action was time barred. It adopted slightly different grounds: a cause of action for the wrongful payments accrued in 1998 and so was out of time.

CFA's judgment: the claim was one of debt and therefore not time barred

The bank's argument throughout was that Tugu's claim was properly characterised as one of breach of contractual duties of care and negligence, with a limitation period of 6 years under the Limitation Ordinance which started with the account closure.

Tugu, in contrast, argued its claim was one in debt. The limitation period ran from the date of its first demand in 2006. Lord Sumption agreed.

As the bank was on notice of the potential impropriety and lack of authority as to the operation of the account and the transfers made from it, it ought to have been on notice that the individuals instructing the closure of the account had no authority to do so. The closure of the account should not have been made without further enquiries. The reconstituted account was a debt repayable on demand, and the limitation period only began running from the period when the demand for payment was made in 2006.

On inquiry?

In addressing the appeal on limitation, the CFA's judgment also commented on key principles of the Quincecare duty: authority, agency and the bank's duty of care to investigate the circumstances of a transaction and its instructions.

Whether a bank is on inquiry as to the nature and circumstance of an instruction and the actual authority of the person(s) instructing on behalf of the banks' customer is not determined by a general duty to inquire into the customer's transactions but rather by the remarkable facts actually known to the bank at the time which are so remarkable they indicate impropriety unless properly explained.

The judgment emphasises inquiries may need to be carried out and puts the circumstances when questions need to be asked of the instructions in a commercial context. It is about what the bank actually knew and not constructive notice. A bank must consider whether the actual knowledge it has suggests the transaction requires special explanation? If so, a bank must seek that explanation and be satisfied with it before authorising a transfer.

Limitation and the risk of time

The case is a cautionary tale of the importance of banks exercising due diligence in the context of a Quincecare duty where any request to close the account is made.

If no further inquiries are made, the limitation period will only run from the time at which demand for repayment is made. This potentially exposes banks to the risk of claims being made many years after the closure of the account. Staff with knowledge of the operation of the account may have moved on and the bank will be faced with difficulties in gathering evidence to establish that it properly discharged its duties.

What next for Quincecare?

The recent privy council case of Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) rejected the extension of Quincecare duty to a third party who is not a customer of the bank.

Lord Sumption's judgment here puts a similar boundary around the Quincecare duty grounding it in the key principles of authority and agency. The judgment is an interesting prelude to potential developments in the UK Supreme court with the Philipp v Barclays Bank UK plc summary judgment. This is one to watch where authority came from the customer herself and so whether the bank was "on inquiry" is likely to be evermore central to the Quincecare duty. We await the Supreme Court's judgment on that later this year.

Cases: PT Asuransi Tugu Pratama Indonesia TBK V Citibank N.A. [2023] HKCFA 3, Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) (Isle of Man) [2022] UKPC 18, Philipp v Barclays Bank UK Plc [2022] EWCA Civ 318 (on appeal to UKSC).

Authors: Lynn Dunne, James Comber and Angus Rance