Introduction
A bank is where customers deposit their money for safekeeping. As such, a bank, since its inception has always been regarded as a guardian of its customers’ monies. It therefore is quite natural that a bank owes a duty of care towards its customers. Accordingly, in performing its duties, a bank ought to exercise reasonable care and skill as such. Recently, the Malaysian courts expanded the said duty of care to non-customers as well. This can be seen in the Court of Appeal case of Koperasi Sahabat Amanah Ikhtiar Bhd v RHB Investment Bank Bhd [2022] 6 MLJ 722 (“the case”).
Facts of the case
The case involved the Appellant, Koperasi Sahabat Amanah Ikhtiar Bhd (“Koperasi”), a cooperative, suing the First Respondent, RHB Investment Bank Bhd (“the Bank”) which was an investment bank together with the Second and Third Respondents for negligence.
The Second Respondent, as an agent of the Bank, had misrepresented Koperasi into investing RM10 Million for a three-year investment scheme with annual dividend returns. Koperasi received a forged letter purportedly from the Bank considering Koperasi’s involvement in the investment. The Bank, without the authorisation of Koperasi, deposited the sum of RM10 Million from a cheque issued by Koperasi into its account and transferred it to a trading account of the Third Respondent company.
When the fraud by the Second Respondent was realised upon, Koperasi claims that the Bank was liable for negligence on the basis that it failed to inquire the proper instructions from Koperasi before receiving and transferring the sum amount.
At the High Court
The trial judge dismissed Koperasi’s claim. It was of the view that not only did Koperasi not prove that the investment was managed by the Bank, Koperasi was also not a customer of the Bank to whom no legal relationship arose to form a duty of care. Since Koperasi had not opened any account with the Bank, a duty of care cannot arise.
At the Court of Appeal
On appeal, the crux of the appeal was determining whether the Bank, a financial institution, owed a duty of care to Koperasi, a non-customer to the Bank. The Court of Appeal allowed Koperasi’s claim and overturned the High Court decision. It was held that the correct preposition of law for a breach of duty of care within the context of banking transactions is whether a reasonably prudent banker, like the Bank, would regard the course of action taken as justifiable.
Firstly, it was affirmed that the Bank had no knowledge as to who prepared the said RM10 Million cheque, to which the Bank could have then foresee that if it acts on an instruction from an unauthorised person, the real owner of the sum amount may lose his money altogether. The difficulty of ascertaining who deposited the sum amount is not a reasonable excuse for failing to verify the instructions to transfer the funds. Hence, it would be inaccurate for the High Court to rule that a provider of professional service, such as the Bank, cannot owe a duty of care to a non-customer.
Flowing from this, the Bank had breached its duty of care when, prior to transferring the RM10 Million into the Third Respondent’s trading account, it had failed to verify and ascertain the proper mandate as to whether Koperasi had instructed for the transfer of funds.
Taking into account the above, the Court of Appeal then affirms the certainty of the consequential and natural losses of Koperasi since it is foreseeable that the sum would then be outside the control of both Koperasi and the Bank once it had been transferred out without the proper mandate.
The Court emphasised that the law of negligence is both flexible and versatile where categories of negligence are not closed and that it is left to the courts to impose a duty of care where the justice of the case demands it.
Summary
This case opens up a new legal responsibility by the banks in managing their deposited dealings. By verifying the identity of the depositor and acquiring the proper instructions from the depositor, a bank may avoid the risk of fraudulent transactions and the liability to pay large sums of damages. It is crucial to note that this case places a burden on a bank that any payment received ought to be with the authority of the depositor and that the person who is being paid is indeed entitled to receive the payment. At the time of writing, leave has been sought to appeal the decision to the Federal Court. It would be interesting to monitor if this current position will be affirmed by the Federal Court.
For further information, please contact:
Darren Lai, Partner, Richard Wee
dl@richardweechambers.com
