ON APPEAL FROM THE HIGH COURT
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
Professor Andrew Burrows QC (sitting as a Deputy Judge of the High Court)
Strand, London, WC2A 2LL
B e f o r e :
LADY JUSTICE ROSE
SIR BERNARD RIX
| JP MORGAN CHASE BANK, N.A.
- and –
| THE FEDERAL REPUBLIC OF NIGERIA
Deringer LLP) for the Appellant
Roger Masefield QC and Richard Blakeley (instructed by Reynolds Porter
Chamberlain LLP) for the Respondent
Hearing dates : 24 and 25 July 2019
Crown Copyright ©
Lady Justice Rose:
i) the FRN has been defrauded of the money paid out by Morgan Chase from the depository account by way of a fraudulent and corrupt scheme;
ii) before the payments were made, Morgan Chase had been put on inquiry about the circumstances of the instructions to pay out the money, that is to say Morgan Chase had reasonable grounds for believing that the payment instructions it received were part of an attempt to defraud the FRN; and
iii) despite being on inquiry, Morgan Chase had gone ahead and made the payments.
Ground 1: the ambit and nature of the Quincecare duty
"Ex hypothesi one is considering a case where the bank received a valid and proper order which it is prima facie bound to execute promptly on pain of incurring liability for consequential loss to the customer. How are these conflicting duties to be reconciled in a case where the customer suffers loss because it is subsequently established that the order to transfer money was an act of misappropriation of money by the director or officer? If the bank executes the order knowing it to be dishonestly given, shutting its eyes to the obvious fact of the dishonesty, or acting recklessly in failing to make such inquiries as an honest and reasonable man would make, no problem arises: the bank will plainly be liable. But in real life such a stark situation seldom arises. The critical question is: what lesser state of knowledge on the part of the bank will oblige the bank to make inquiries as to the legitimacy of the order? In judging where the line is to be drawn there are countervailing policy considerations. The law should not impose too burdensome an obligation on bankers, which hampers the effective transacting of banking business unnecessarily. On the other hand, 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. To hold that a bank is only liable when it has displayed a lack of probity would be much too restrictive an approach. On the other hand, to impose liability whenever speculation might suggest dishonesty would impose wholly impractical standards on bankers. In my judgment the sensible compromise, which strikes a fair balance between competing considerations, is simply to say that a banker must refrain from executing an order if and for as long as the banker is 'put on inquiry' in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company … And, the external standard of the likely perception of an ordinary prudent banker is the governing one. That in my judgment is not too high a standard."
"If a reasonable banker would have had reasonable grounds for believing that Cass was operating the client account in fraud, then, in continuing to pay the cash cheques without inquiry the bank would, in my view, be negligent and thus liable for breach of contract, …."
"I would not, however, accept that a bank could always properly pay if it had reasonable grounds for a belief falling short of probability. The question must be whether, if a reasonable and honest banker knew of the relevant facts, he would have considered that there was a serious or real possibility albeit not amounting to a probability that its customer might be being defrauded, or, in this case, that there was a serious or real possibility that Cass was drawing on the client account and using the funds so obtained for his own and not the solicitors' or beneficiaries' purposes. That, at least, the customer must establish. If it is established, then in my view a reasonable banker would be in breach of duty if he continued to pay cheques without inquiry. He could not simply sit back and ignore the situation."
"… make clear that the core of the Quincecare duty of care is the negative duty on a bank to refrain from making a payment (despite an instruction on behalf of its customer to do so) where it has reasonable grounds for believing that that payment is part of a scheme to defraud the customer. What is not entirely clear is whether, in addition to that core duty, a bank with such reasonable grounds has a duty to make reasonable enquiries so as to ascertain whether or not there is substance to those reasonable grounds. I strongly incline to the view (although, as will become clear … below, I do not ultimately need to decide this) that Ms Phelps is correct in her submission that the cases do envisage there as being an additional duty of enquiry."
Ground 2: the judge's approach to construing the depository agreement
i) The entire agreement clause, that is clause 5.1. Morgan Chase says that the wording of this clause makes clear that it was not undertaking any implied duties in respect of the cash in the depository account.
ii) The clauses which define and delimit the primary obligations undertaken by Morgan Chase under the depository agreement. These are clauses 7.2, 7.4, 5.8 and 11.5. Morgan Chase says that these, properly interpreted, are inconsistent with there being a tortious Quincecare duty and so have the effect of preventing that duty from being part of the rights and obligations under the depository agreement.
iii) An exemption clause, that is clause 8.2(d), which Morgan Chase says expressly relieves it from liability when it acted on what it believed in good faith to be the instructions of its customer.
iv) An indemnity provision, that is clause 10.1(a), under which the FRN agreed to indemnify Morgan Chase in respect of all losses caused by the Bank following instructions by which the Bank was authorised to act pursuant to the depository agreement. This is the clause which gives rise to the circularity defence that if the FRN is liable to indemnify Morgan Chase for any damages that Morgan Chase has to pay the FRN, there is no value in the claim proceeding.
"40. … But given that the Quincecare duty of care is imposed for good policy reasons and is a valuable right for the customer, clear wording, including clear inconsistency, will be needed before a court concludes that that duty of care does not arise."
Grounds 3 to 6: the proper construction of the terms of the depository agreement
(1) Clause 5.1: the entire agreement clause
"5.1 The duties and obligations of the Depository in respect of the Depository Cash shall be determined solely by the express provisions of this Agreement. The Depository has no knowledge of the terms and provisions of any separate agreement or any agreement relating to the Depositor's Obligations, and shall have no responsibility for compliance by the Depositor with the terms of any other agreement, or for ensuring that the terms of any such agreement are reflected in this Agreement and shall have no duties to anyone other than the Depositor."
"… seeking to make clear that the terms of this contract, and no other agreement, govern. In other words, one cannot go outside the provisions of this agreement (for example, to the resolution agreements of 29 April 2011 which are mentioned in the preamble/recital on page 1 of the agreement) to determine what the parties have agreed."
Clause 5.1 (entire agreement clause): discussion
"It is, of course, open to parties to a contract for sale of goods or for work and labour or for both to exclude by express agreement a remedy for its breach which would otherwise arise by operation of law … But in construing such a contract one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption."
"23. … I would accept that, but I would not accept his suggestion that as the law stands today there are two competing approaches struggling for supremacy: one requiring clear express words, the other favouring the natural meaning of the words used. It is important to remember that any clause in a contract must be construed in the context in which one finds it, both the immediate context of the other terms and the wider context of the transaction as a whole. The court is unlikely to be satisfied that a party to a contract has abandoned valuable rights arising by operation of law unless the terms of the contract make it sufficiently clear that that was intended. The more valuable the right, the clearer the language will need to be."
"28. … When para 501 refers to obligations and liabilities which the contractor has "specifically assumed" it must naturally refer to the obligations which arise out of the express terms of the contract with all the incidents which the law ordinarily attaches to them, since those incidents are inherent in them. It may, of course, be possible for the parties to agree otherwise, but unless they have done so, they can only be presumed to have accepted that the ordinary incidents apply. To proceed on any other basis would make commercial life impossible. To say, therefore, that under this form of contract the contractor specifically assumes an obligation to operate the rig but does not specifically assume an obligation to do so carefully is to approach the question from the wrong end. Prima facie it assumes the obligation as expressed and all that the law attaches to it, unless there is agreement to the contrary."
"8.3 The Depository shall be liable only for reasonably foreseeable loss or damage which the Depositor suffers or incurs arising from the Depository's gross negligence or wilful misconduct and shall not be liable for any other loss or damage of any nature. For the purposes of this section "reasonably foreseeable loss or damage" is loss or damage of a kind which the Depository should reasonably have foreseen at the date of the signature by the Party of this Agreement for as a serious possibility in the event of the breach in question occurring and which arises in the ordinary course of things. Nothing in this Agreement (including clauses 5.1, 8.1 and 8.2) is intended to exclude or restrict any duty or liability of the Depository to the Depositor in respect of fraud on the part of the Depository,"
(2) Clauses 7.2, 7.4, 5.8 and 11.5: clauses inconsistent with the existence of the Quincecare duty
"The Depository shall be under no duty to enquire into or investigate the validity, accuracy or content of any instruction or other communication."
"The Depository need not act upon instructions which it reasonably believes to be contrary to law, regulation or market practice but is under no duty to investigate whether any instructions comply with any application law, regulation or market practice. …"
"48. The correct interpretation of clauses 7.2 and 7.4 is that, apart from the opening sentence in clause 7.4 (which is plainly consistent with a Quincecare duty of care), they do not apply at all where the bank has reasonable grounds for believing that the customer is being defrauded. In other words, the references to there being no duty to enquire or investigate are making clear, consistently with the law as I have summarised it in the last paragraph, that there is no duty of care to enquire or investigate prior to the point at which the bank has the relevant reasonable grounds for belief. Put another way still, clauses 7.2 and 7.4 are consistent with the Quincecare duty of care even if it is correct that that duty of care imposes an additional positive duty to enquire/investigate along with the core negative duty not to pay."
Discussion: inconsistent clauses 7.2 and 7.4
Discussion: clauses 5.8 and 11.5
"5.8 The Depositor hereby authorises the Depository to act hereunder notwithstanding that: (i) the Depository … may have a material interest in the transaction or … a potential conflict of duty or interest … or (ii) the Depository … may be in possession of information tending to show that the instructions received may not be in the best interests of the Depositor and the Depositor agrees that the Depository is not under any duty to disclose any such information."
"11. The Depositor hereby represents and warrants to the Depository on a continuing basis that: ...
11.5 the execution, delivery and performance of and the transactions to be effected under this Agreement will not violate any law, regulation, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected and it is not restricted under the terms of its constitution or in any other manner from performing its obligations hereunder; ..."
(3) Clause 8.2(d): exclusion clause
"Notwithstanding Clause 8.1, neither the Depository, its affiliates, nor any of their directors, officers or employees, shall in any circumstances be liable to … the Depositor for any expense, loss or damage suffered by or occasioned to … the Depositor by:
(d) the Depository acting on what it in good faith believes to be instructions or in relation to notices, requests, waivers, consents, receipts, or other documents which the Depository in good faith believes to be genuine and to have been given or signed by the appropriate parties;"
"18. In my judgment the underlying rationale for the principle that, if necessary to resolve ambiguity, exclusion clauses should be narrowly construed has nothing to do with the identification of the proferens, either of the document as a whole or of the clause in question. Nor is it a principle derived from the identification of the person seeking to rely upon it. Ambiguity in an exclusion clause may have to be resolved by a narrow construction because an exclusion clause cuts down or detracts from the ambit of some important obligation in a contract, or a remedy conferred by the general law such as (in the present case) an obligation to give effect to a contractual warranty by paying compensation for breach of it. The parties are not likely to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligations without using clear words having that effect see [Gilbert-Ash] and [Seadrill].
19. This approach to exclusion clauses is not now regarded as a presumption, still less as a special rule justifying the giving of a strained meaning to a provision merely because it is an exclusion clause. … The court must still use its tools of linguistic, contextual, purposive and common sense analysis to discern what the clause really means."
Discussion: clause 8.2(d)
(4) Clause 10.1(a): the indemnity clause
"The Depositor hereby irrevocably and unconditionally agrees on demand to indemnify, and keep fully and effectively indemnified, (and on an after Tax basis) the Depository, and its directors, officers, agents and employees (the "indemnitees") against all costs, claims, losses, liabilities, damages, expenses, fines, penalties, Tax and other matters ("Losses") which may be imposed on, incurred by or asserted against the indemnitees or any of them directly or indirectly in respect of:
(a) the following of any instruction or other directions upon which the indemnitees [are] authorised to act or rely pursuant to the terms of this Agreement, or arising as a result of entering into this Agreement or their status as holder of the Depository Cash;"
"(1) A clear intention must appear from the words used before the Court will reach the conclusion that one party has agreed to exempt the other from the consequences of his own negligence or indemnify him against losses so caused. The underlying rationale is that clear words are needed because it is inherently improbable that one party should agree to assume responsibility for the consequences of the other's negligence …
(2) The Canada Steamship principles are not to be applied mechanistically and ought to be considered as no more than guidelines; the task is always to ascertain what the parties intended in their particular commercial context in accordance with the established principles of construction … They nevertheless form a useful guide to the approach where the commercial context makes it improbable that in the absence of clear words one party would have agreed to assume responsibility for the relevant negligence of the other.
(3) These principles apply with even greater force to dishonest wrongdoing, because of the inherent improbability of one party assuming responsibility for the consequences of dishonest wrongdoing by the other. The law, on public policy grounds, does not permit a party to exclude liability for the consequences of his own fraud; and if the consequences of fraudulent or dishonest misrepresentation or deceit by his agent are to be excluded, such intention must be expressed in clear and unmistakeable terms on the face of the contract. General words will not serve. The language must be such as will alert a commercial party to the extraordinary bargain he is invited to make because in the absence of words which expressly refer to dishonesty the common assumption is that the parties will act honestly …"
"79. The existence of the fraud was a precondition for Singularis's claim based on breach of Daiwa's Quincecare duty, and it would be a surprising result if Daiwa, having breached that duty, could escape liability by placing reliance on the existence of the fraud that was itself a pre-condition for its liability. … The judge was right for the reasons she gave.
80. I would, therefore, hold that, even if Mr Al Sanea's fraud were to be attributed to Singularis (which it is not), Singularis's claim cannot be defeated by an equal and opposite claim in deceit by Daiwa against Singularis."
Sir Bernard Rix:
Lord Justice Baker:
THE FEDERAL REPUBLIC OF NIGERIA
JPMORGAN CHASE BANK, N.A.
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(a) by reason of any action taken or omitted to be taken by any one or all of the Depository, its affiliates, affiliates, agents, or any directors, officers, employees or agents of such persons pursuant to this Agreement or in connection therewith; or
(b) in the event of any loss, damage, destruction or mis-delivery of or to the Depository Cash howsoever caused; or
(c) by any act or omission of any person not affiliated with the Depository,
unless caused by the fraud, gross negligence or wilful misconduct of the Depository, in which event the extent of the liability of the Depository shall be limited to the market value of the Depository Cash at the date of discovery of the loss, and in no circumstances shall the Depository be liable under this Agreement or for obligations relating to this Agreement (including, without limitation, obligations in tort) for any indirect, special, punitive or consequential loss or damages, even if the Depository has been advised of the possibility of such damages, or for any loss of profit, good will or opportunity.
(a) the insolvency of any Agent or other entity; or
(b) any act, omission or insolvency of any settlement system; or
(c) delivery or payment being effected against an expectation of receipt, save where such delivery or payment was contrary to local market practice; or
(d) the Depository acting on what it in good faith believes to be instructions or in relation to notices, requests, waivers, consents, receipts, or other documents which the Depository in good faith believes to be genuine and to have been given or signed by the appropriate parties; or
(e) the general risks of investing, or investing or holding assets in a particular country, including, but not limited to, losses arising from nationalisation, expropriation or other governmental actions; regulations of the banking or securities industries, including changes in market rules; currency restrictions, devaluations or fluctuations; market conditions affecting the orderly execution of securities transactions or affecting the value of assets; or
(f) any forces beyond the control of the Depository, including, but not limited to, strikes, work stoppages, acts of war or terrorism, insurrection, revolution, nuclear fusion, fission or radiation, catastrophe, fire, flood or electrical, computer, mechanical or telecommunications failure, or failure of any agent or correspondent, or unavailability of a payment system act of governmental authority, de jure or de facto, legal constraint or acts of God; or
(g) The Depository shall not in any event be liable for loss of business or profits or goodwill or any indirect or consequential or punitive or special loss or damage, in each case whether or not reasonably foreseeable, even if the Depository has been advised of the likelihood of such loss or damage and whether arising from negligence, breach of contract or otherwise.
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(a) the following of any instruction or other directions upon which the indemnitees is authorised to act or rely pursuant to the terms of this Agreement, or arising as a result of entering into this Agreement or their status as holder of the Depository Cash; and
(b) of a breach by Depositor (or their agents) of their respective obligations, warranties or representations under this Agreement, or otherwise arising under or in connection with this Agreement or the performance of the Depository's obligations (including, without limitation, the costs of the Depository defending itself successfully against alleged fraud, negligence or wilful default), save in respect of the fraud, negligence or wilful default of the Depository and save in respect of loss arising from the action of any indemnitee for which the Depository is liable pursuant to, and in accordance with, this agreement; ...
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The Depositor hereby represents and warrants to the Depository on a continuing basis that: