Scams – Does your bank owe you a duty to warn you about potential scammers?

It seems to be the case nowadays that when one flips through the news or social media, we get word about someone who was scammed and lost a huge amount of money. Time and time again, people are enticed by online investment gurus or fake trading websites who promise high returns from investments. But what happens when you have invested and payment has already been made through the bank? Does the bank owe a duty to warn you against suspicious merchants or potential scammers?

This issue was explored in the recent case of Lee Cheong Chee v HSBC Bank Malaysia Berhad [2021] MLJU 574 (“Lee Cheong Chee”) where the Plaintiff (Customer) sued the Defendant (Bank) arguing that the Bank was negligent in failing to impose safeguards to protect the Customer from financial scams. The Bank, in its attempt to strike out the Customer’s suit, argued that there are no such duties owed under tort law since the parties’ relationship is contractual in nature. The High Court allowed the Bank’s application to strike out and held that the banker-customer relationship is purely contractual; thus, there was no negligence as alleged by the Customer.

To fully understand the impact of the decision of Lee Cheong Chee, it is worth looking into the differences between tort and contract. 

Difference between tort and contract

A contract is a legally binding document with a set of terms which governs the rights and obligations of the parties. Tort law relates to civil wrongs committed which causes a person to suffer loss or harm resulting in legal liability for the person who committed the tortious act. 

To illustrate, a duty under tort arises in fiduciary relationships such as solicitor-client relationships and doctor-patient relationships. In Lee Cheong Chee, the Customer’s claim against the Bank is for negligence – failing to safeguard his rights against financial scams.

The facts of Lee Cheong Chee’s case are straightforward. The Customer held two credit cards issued by the Bank and entered into a Cardholder Agreement/(s) with the bank (the “Banking Contracts”). Over the course of 10 months, the Customer made several payments using those credit cards (the “Transactions”) to 4 purported foreign brokerage companies (the “Merchants”). 

The Customer authorized the Transactions, relying on the Merchants’ promise of high return profits. The Customer also repaid the Bank for all the payments made. However, the Customer never received any profits promised by the Merchants and could not access his brokerage accounts from the Merchants. The Customer subsequently notified the Bank of the alleged scam amounting to RM 1,061,957.00 and claimed that the Bank was negligent for failing to protect him against the scam.

The Customer alleged that the Bank has a duty of care to do, amongst others, the following:-

1. Inform him of the risk and carry out due diligence on the accounts used by the Merchants (alleged scammers);
2. Suspend any transactions made by the Customer to the Merchants and inform him that the accounts are suspicious; and
3. Carry out searches with Bank Negara Malaysia or the Securities Commission of Malaysia to determine whether the Merchants are licensed to provide services for financial instruments.

Does the bank owe a duty to its customer under tort law? 

In the present case, the High Court looked into whether there is a duty of care in tort between banks and customers or whether the said relationship is purely contractual. 

It is the Customer’s case that there should be a common law duty on banks to use reasonable skill and care in executing its customer’s orders. This duty requires a bank to suspend a payment instruction upon there being reasonable grounds of belief that it was an attempt to misappropriate funds. 

The Customer relied heavily on the English case of Barclays Bank plc v Quincecare [1992] 4 All ER 363 to show that this duty of care exists. This is also known as the ‘Quincecare’ duty of care:-

“Given that the bank owes a legal duty to exercise reasonable care in and about executing a customer’s order to transfer money, it is nevertheless a duty which must generally speaking be subordinate to the bank’s other conflicting contractual duties….

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…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…”

In other words, whenever there is something suspicious going on, the bank must suspend the payment and make reasonable enquiries to satisfy itself that the payments were properly made.

On the other hand, the Bank argued that the bank-customer relationship is purely contractual. Thus, having no duty under the contract to inquire into the Transactions, investigate the purported risks, legality or licensing requirements or inform the Customer of the same. 

The Bank relied on the Federal Court’s judgment in Chang Yun Tai & Ors v HSBC Bank (M) Bhd and other appeals [2014] 1 MLJ on 134 (“Chang Yun Tai”) where the Court found that a Sale and Purchase Agreement (the “SPAs”) which was void rendered the financial agreement/loan between the appellants and the respondent (“HSBC Bank”) void as well. 

One of the arguments advanced by the appellants was that HSBC bank had a duty to enquire into the legality of the SPAs. Failure to do so would mean that HSBC bank cannot insist that the appellants repay their loans. Therefore, the illegality of the SPAs discharged the appellants from their obligations to repay the HSBC bank for the loans disbursed.

The Federal Court held that the relationship between banks and customers are contractual in nature, and it is the duty of the appellants themselves (not the bank) to ensure that the SPA is proper (being the ones who entered into a contract with the Developer):- 

“[13] The respondent is not a party to the SPA. The SPA is the respective appellant’s contract with the developer. Therefore, the duty is cast on the appellants rather than the respondent to ensure that the SPA is free from any legal infirmity. If they have omitted to do so, we are of the view they cannot rely on their default to defeat the respondent’s claim to repay their loans…

…

[21] The relationship between the respondent as the lending bank and the appellants as the borrowers is a contractual one and is purely a commercial in nature. It is one of debtor and creditor. The respondent did no more than to lend the monies as requested. In return, the appellants promised to repay the monies lent. The alleged illegality of the SPA does not in any way discharge the appellants’ obligation. It would be odd and indeed unjust if the appellants can be permitted to transfer the loss under their investment due to the alleged illegality to their financiers. The alleged illegality of the SPA is irrelevant to the appellants’ obligation under the financing agreement or to use the words of O’Driscoll J in Canadian Imperial Bank of Commerce’s case is ‘a red herring hidden in thick fog’.”

In the same vein, the High Court in Lee Cheong Chee agreed with the Bank’s argument that a bank’s relationship with its customers is purely contractual. Additionally, this must take precedence especially if the duty of care in tort seeks to impose a duty on banks that is wider than the contractual terms agreed between the bank and its customers. 

Similarly, the relationship between the Customer and Bank in Lee Cheong Chee is governed by the terms of the Banking Contracts which includes the following:-

The Cardholder agrees to verify all transactions in the Bank Statements within 60 days and notify the Bank of any alleged errors, discrepancies, and irregularities. The absence of any notification on the same shall be deemed as correct and the Customer is deemed to have waived all rights to raise any objections.

• The Bank is not liable for any act or omission of any merchant in terms of goods or services supplied to the Customer.
• The Customer shall resolve any dispute and complaints against the merchants directly and will not involve the Bank. 
• Any dispute with the merchants shall not relieve the Customer of the obligation to pay the amounts due to the Bank.
• The Bank shall not be liable for any loss suffered by the Customer as a result of any circumstance beyond the Bank’s control.

Based on the above, the Customer’s claim against the Bank is not in line with the contractual terms agreed between parties. It is clear that the terms in the Banking Contracts specifically negated such a duty of care and also limited the liability of the Bank.

The High Court also made the following findings after considering the nature of the Transactions, the contractual relationship between the Bank and Customer, as well as the Customer’s own conduct:- 

1. The Customer admitted that he authorized the Transactions in reliance of the representations/promises made by the Merchants;
2. The Customer paid the Bank in full for all the Transactions without raising any objections within 60 days under the Banking Contracts;
3. The Banking Contracts excludes the liability of the Bank in circumstances beyond the Bank’s control;
4. There is no duty on the part of the Bank to inquire into the Transactions;
5. The Bank is not privy to the dealings between the Customer and the Merchants. As such, the Bank should not be made liable for any losses as a result; and
6. It would be unjust if the Bank is made liable for alleged fraud committed by the Merchants.

Based on the above, the terms of the Banking Contracts do not impose a duty of care on the Bank or even the ‘Quincecare’ duty of care as pleaded by the Customer.

It is worth noting that the High Court also appears to draw a distinction on the relationship between a bank and its customers in a financing bank as opposed to an advisory bank. This is because the High Court highlighted that the Customer in the present case did not seek the Bank’s advice in respect of the Transactions. Therefore, it is not the Bank’s responsibility to ensure that the Customer made a correct or wise commercial decision when he authorized the Transactions. 

The Federal Court in Chang Yun Tai referred to an excerpt from the case of Redmond v Allied Irish Banks PLC [1987] Lexis Citation 1801 which perfectly encapsulates the same point:-

“I can see no basis for a duty to advise or warn a customer that there are risks attendant upon something which the customer wishes to do.”

Should the duty of care under tort be imposed on banks?

It is worth noting that the Bank also argued that the duties pleaded by the Customer in its claim are too onerous and would render banking businesses impracticable as the same would disrupt the proper functioning of the commercial community. The Federal Court in Chang Yun Tai hit the hammer on the head when contemplating the difficulty that banks would face if they were to investigate transactions which they are not privy to:-

“[15] It is to be noted the SPA has already been executed before the end financing facilities were granted. Therefore, the respondent can presume that the SPA which the appellants had entered into has been ascertained by the appellants to be valid. It would be too onerous to require the respondent to investigate or enquire into a transaction or contract to which they are not a party. Banking business will be rendered impracticable and burdensome if this was so. In this regard the courts should not impose such a requirement that may impede the flow of commerce. On this point Edgar Joseph Jr FCJ in Co-operative Central Bank Ltd (In receivership) v Feyen Development Sdn Bhd [1995] 3 MLJ 313; [1995] 4 CLJ 300 in delivering the judgment of this court cautioned at p 328 (MLJ); p 313 (CLJ) as follows: 

... a commercial Judge must be anxious about the impact that a decision may have on the proper functioning of the commercial community.”

Coming back to the present case, the principle remains that the relationship between the Bank and the Customer is purely contractual, ie. governed by the terms of the Banking Contract. As such, the High Court in Lee Cheong Chee held that it would be grossly unreasonable if the Bank is also required to perform due diligence work and investigate the investment decision made by the Customer himself. If this were the case, it would be commercially impracticable for banks to check each and every transaction made by its customers, especially when the bank is not privy to the dealings between the customers and merchants.  

The key takeaway from this case is that the relationship between a bank and its customers are purely contractual. By imposing onerous duties on the banks under tort law, would not only cause banking transactions to slow down considerably but also have the effect of putting them to a complete halt in certain situations. At the end of the day, customers are solely responsible for any transaction that they make with the respective merchants (be it for investment or not) and the bank’s role is merely to facilitate such transactions, seek authorization and carry out the customer’s order.