There are a plethora of cases across the Commonwealth where banks are found to be negligent by Courts towards their customers.
What is less common is for banks to be found liable towards non-customers. After all, the bedrock of negligence is the existence of a duty of care. At first blush, it does seem counter-intuitive for banks to owe a duty of care to non-customers, who have not opened an account or engaged the services of the bank concerned.
However, the Court of Appeal in Koperasi Sahabat Amanah Ikhtiar Bhd v RHB Investment Bank Bhd [2022] 6 MLJ 722 delivered a thorough analysis on why such duty of care can be imposed by law in certain circumstances.
The Facts
The Appellant is a cooperative body which handles 9-figure investments annually for its 133,843 members. The 1st Respondent (“RHB”) is an investment bank. The 2nd Respondent (“R2”) had falsely misrepresented that it was an agent of RHB, and convinced the Appellant to invest RM10million with a promised 10.5% annual profit/dividend.
The Appellant then passed a cheque for RM10million to R2. R2 brought the cheque to RHB & instructed RHB’s employee to deposit the RM10million into the 3rd Respondent company (“R3”) belonging to R2’s sons – R3 operated a share trading account with RHB. The RM10million was deposited into RHB’s pool account & then subsequently transferred to R3. R3 then siphoned off the RM10million. The Appellant sued RHB, R2 & R3 for inter alia negligence.
The High Court dismissed the Appellant’s claim. At the Court of Appeal (“COA”), the crux was whether RHB was liable for negligence towards the Appellant, notwithstanding that the Appellant was not RHB’s customer & had no banking facilities with RHB.
The Decision
Lee Swee Seng JCA for the COA rejected the rigid notion from certain jurisdictions that a provider of professional services such as an investment bank cannot under any circumstance owe a duty of care to a non-customer.
The COA acknowledged that the law on negligence was versatile, and held that banks owe a duty of care in preventing its facilities from being used to perpetrate fraud. It acknowledged Canadian jurisprudence which held that, although common law imposes no duty to rescue a stranger, because of the unique position of banks as a focal point of commerce & where they operate in a regulated environment with few participants, banks owe a duty to not permit their facilities to be used for fraudulent purposes.
In this case, the COA held that, the moment a sum of money is deposited into a bank, the bank owes a duty of care to find out whose money it is – if it does not belong to a customer, it must take the effort to verify the depositor’s identity & to return to the depositor.
The COA was satisfied that RHB breached its duty of care to the Appellant when it failed to verify the identity of the RM10million depositor, the purpose of the deposit & to check with the Appellant on whether it had instructed for the RM10million to be transferred to R3. The COA ultimately ordered for RHB to pay the Appellant RM10million in damages.
Implications
This is the first case in Malaysia which held that banks owe a duty of care to non-customers. This will leave an impact on the financial services industry as it now opens up the possibility of legal duties being owed to all kinds of victims of banking fraud or any unfair banking transactions (irrespective of whether they are customers). Banks would have to set up additional measures to ensure that they are not being used as a vehicle for fraud, failing which they may be at risk of being held liable to pay large sums of damages.
Wei Jiet acted as co-counsel together with Ambiga Sreenevasan & Fadly Zakariya for the successful Appellant.
(Note: RHB Investment Bank Berhad has since successfully obtained leave to appeal from the Federal Court recently on precisely the question of law on whether banks owe a duty of care to non-customers. We will update this post once the apex court reaches a decision)