Malaysia: Case Update: No Duty Of Care Owed By Financial Institutions To Non-Customers

LAW OF TORT
Bank – Negligence – Financial Institution – Duty of Care – Customers – Pure Economic Loss – Put on Inquiry

RHB Investment Bank Berhad v Koperasi Sahabat Amanah Ikhtiar Berhad
Civil Appeal No. 02(f)-98-11/2022(W) | Federal Court
- see the grounds of judgment here

Facts In 2013, Lotfi Bin Maskam approached Koperasi Sahabat Amanah Ikhtiar Berhad (the 'Respondent') and had represented that he was an officer, representative, or agent of RHB Investment Bank Berhad (the 'Appellant'), and in that capacity, Lotfi proposed that the Respondent invest with the Appellant, a sum of RM10 Million for 3 years in an equity fund/special issue/IPO. The same was presented to the Respondent's board of directors' meeting. The Respondent's investment committee decided to proceed with the investment and proceeded to issue a cheque for the sum of RM10 Million payable to the Appellant. The cheque was given to Lotfi to be deposited with the Appellant. Lotfi then proceeded to deposit the cheque. However, he informed the employee of the Appellant that the deposit of the cheque was for the share trading account held by Lotfi's company and the bank-in slip stated the same. The Appellant then allocated the RM10 Million into Lotfi Company's trading account held with the Appellant. Subsequently, the Respondent received a letter purportedly with the Appellant's letterhead confirming the Respondent's investment with the detailed particular of the said investment. The Respondent thereafter received another letter purportedly with the Appellant's letterhead attaching a cheque in a sum of RM73,000 as the first dividends from the Respondent's investment with the Appellant. Eventually it was discovered that there was no such investment and that Lotfi was not the Appellant's employee and all the purported letters sent were forged. The funds deposited in Lotfi's company account had also been taken out and the account was closed. The Respondent then filed a claim against the Appellant, Lotfi and Lotfi's company respectively. The Respondent's case against the Appellant was for the tort of negligence, essentially, in transferring the RM10 Million into Lotfi Company's trading account without further inquiring or seeking confirmation from the Respondent on the purpose of the RM10 Million deposit. After a full trial, the trial judge held that the Respondent had failed to establish a duty of care owed by the Appellant to the Respondent. On appeal, the Court of Appeal held that the Appellant did owe a duty of care to the Respondent and that the moment a sum of money was deposited with an investment bank, the Appellant ought to have found out whose money it is and whether the depositor was already its customer. If the depositor was not a customer, the Appellant ought to have verified who the depositor was. Unsatisfied, the Appellant filed an appeal at the Federal Court. Hence, this appeal.

Issues 1. 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.
2. 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.

Held In allowing the appeal, Dato' Nordin Bin Hassan, Judge of the Federal Court in its Brief Grounds of Judgement held that on the facts of the case, the Respondent has failed to establish any duty of care by the Appellant to the Respondent. The Respondent did not have an account with the Appellant, had no relationship or prior dealings with the Appellant, and was not a customer of the Appellant. Therefore, the Federal Court held that it is a reasonable conclusion that there was no voluntary assumption of responsibility by the Appellant and that there was no special relationship of sufficient legal proximity between the Appellant and the Respondent to give rise to a duty of care for pure economic care. Further, the Federal Court held that the Court of Appeal fell into error in deciding that there existed a duty of care owed to the Respondent because of the alleged non-conduct of verification or inquires. The Federal Court explained that the duty must first be established before the Court considers whether there has been a breach of the duty of care and that the Court of Appeal had conflated the issue of duty of care with the standard of care. In conclusion, the appeal was allowed and the decision of the Court of Appeal was set aside and the High Court decision was reinstated.

Case Update: No Duty Of Care Owed By Financial Institutions To Non-Customers

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