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. However, recent developments in Malaysian jurisprudence have resulted in a limitation of this duty of care to customers only. This can be seen in the grounds of judgement of the Federal Court decision of RHB Investment Bank Bhd v Koperasi Sahabat Amanah Ikhtiar Bhd Civil Appeal: No. 02(f)-98-11/2022(W).
RWC previously wrote about this in an article which can be accessed here.
Facts of the case
The case involved the Respondent, Koperasi Sahabat Amanah Ikhtiar Bhd (“Koperasi”), a cooperative, suing the Appellant, RHB Investment Bank Bhd (“the Bank”) which was an investment bank together with the Second and Third Defendants for negligence.
The Second Defendant, 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 Defendant company.
When the fraud by the Second Defendant 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.
Federal’s Court Stance on Duty of Care
This is an appeal by RHB Investment Bank (“the Bank”) against the decision of the Court of Appeal which overturned the decision of the High Court and allowed the respondent’s claim for negligence in transferring or allocating an amount of RM 10 million into the trading account of Abhar Capital Holdings Berhad (the 3rd defendant”).
In the Federal Court, two issues arose for determination:
- Whether a financial institution owes a duty of care to third parties who are not its customers and to whom it had not assumed any responsibility in a case of pure economic loss.
- If such a duty of care exists, is the applicable standard of care that of whether the financial institution is ‘put on inquiry’ on a particular transaction.
In the case under consideration, the central issue revolves around whether a financial institution owes a duty of care to third parties who are not its customers, especially in cases of pure economic loss. To establish the existence of a duty of care, the court employs a three-fold test comprising reasonable foreseeability, legal proximity, and policy considerations.
In the context of reasonable foreseeability, the court examines whether it was reasonable to expect that the bank, particularly a specific employee (referred to as SP2), could have foreseen harm to the respondent resulting from the bank’s alleged negligence. The court highlights that the RM10 million in question was deposited into the bank’s pool account by an individual associated with a third party, and this practice was a well-established industry norm. Moreover, the accompanying bank-in slip contained information related solely to the third party and the bank, which means that inquiries about authorization should have been directed to another entity. Given these facts, the court concludes that there was no reasonable basis to suspect that transferring the funds was unauthorized, making the misappropriation unforeseeable to both the employee and the bank.
Regarding legal proximity, the court notes that the respondent had no established account or prior interactions with the bank. The only connection was the fraudulent deposit into a pool account. The court determines that the bank did not voluntarily assume any duty of care or responsibility towards the respondent, leading to the conclusion that there was no legal proximity or relationship between the bank and the respondent that would establish a duty of care.
Lastly, the court’s decision underscores policy considerations. The court deems it unjust and unreasonable to impose a duty of care on the bank toward the respondent, especially when there was no established customer relationship. The court is concerned about the potential negative consequences of such an extension, as it could render financial institutions commercially inert and expose them to unpredictable liabilities.
In summary, the court’s decision, based on the three-fold test, results in a negative answer to whether the financial institution owed a duty of care to the third-party respondent for the pure economic loss, emphasizing that there was no reasonable foreseeability, legal proximity, or compelling policy justification to establish such a duty.
Conclusion
In conclusion, the court’s deliberation in this case illustrates a rigorous application of the three-fold test involving reasonable foreseeability, legal proximity, and policy considerations to determine whether a financial institution owes a duty of care to a third party in cases of pure economic loss. The court’s decision hinged on the absence of reasonable foreseeability, given the circumstances surrounding the transaction and the lack of indicators to suggest any wrongdoing by the bank’s employee. Legal proximity was also deemed non-existent due to the absence of any established relationship or voluntary assumption of responsibility by the bank. Moreover, the court’s strong emphasis on policy considerations underscores the potential adverse consequences of imposing such a duty on financial institutions without a clear and compelling rationale, which could stifle their commercial activity and expose them to unpredictable liabilities. In light of these factors, the court determined that the financial institution did not owe a duty of care to the third party, thereby offering valuable legal guidance on issues related to financial institutions and third-party claims for pure economic loss.
