Ritter and Geneva Insurance Spc Ltd (in Voluntary Liquidation) v Butterfield Bank (Cayman) Ltd

• Jurisdiction: Cayman Islands
• Judge: (Williams, J.)
• Judgment Date: 29 May 2018
• Court: Grand Court (Cayman Islands)
• Date: 29 May 2018

Grand Court (Cayman Islands)

(Williams, J.)

RITTER and GENEVA INSURANCE SPC LIMITED (in voluntary liquidation)

and

BUTTERFIELD BANK (CAYMAN) LIMITED

Cases cited:

(1)Avon County Council v. Howlett, [1983] 1 W.L.R. 605; [1983] 1 All E.R. 1073; [1983] I.R.L.R. 171, followed.

(2)Derby v. Scottish Equitable plc, [2001] EWCA Civ 369; [2001] 3 All E.R. 818; [2001] 2 All E.R. (Comm) 274; [2001] OPLR 181, distinguished.

(3)Ewing v. Dominion Bank, [1904] A.C. 806; (1904), 35 S.C.R. 133, considered.

(4)Foley v. Hill (1848), 9 E.R. 1002; 2 H.L. Cas. 28, referred to.

(5)Freeman v. Cooke (1848), 154 E.R. 652; 2 Ex. 654, dictum of Parke, B. considered.

(6)Fung Kai Sun v. Chan Fui Hing, [1951] A.C. 489, referred to.

(7)Greenwood v. Martins Bank, [1932] 1 K.B. 371; on appeal, [1933] A.C. 51, followed.

(8)Holt v. Markham, [1923] 1 K.B. 504, referred to.

(9)Kelly v. Fraser, [2012] UKPC 25; [2013] 1 A.C. 450; [2012]3 W.L.R. 1008; [2012] I.C.R. 1408, dicta of Lord Sumption considered.

(10)Lipkin Gorman v. Karpnale Ltd., [1991] 2 A.C. 548; [1991] 3 W.L.R. 10; [1992] 4 All E.R. 512, applied.

(11)McKenzie v. British Linen Co. (1881), 6 App. Cas. 82; 8 R. (H.L.) 8, considered.

(12)National Westminster Bank plc v. Somer Intl. (UK) Ltd., [2001] EWCA Civ 970; [2002] Q.B. 1286; [2002] 3 W.L.R. 64; [2002] 1 All E.R. 198; [2001] Lloyd’s Rep. Bank 263; [2001] CLC 1579, considered.

(13)Ogilvie v. West Australian Mortgage & Agency Corp. Ltd., [1896] A.C. 257, considered.

(14)Pickard v. Sears (1837), 112 E.R. 179; 6 Ad. & El. 469, considered.

(15)Publishers Representatives Ltd. v. UBS (C.I.) Ltd., 2000 CILR 473, distinguished.

(16)Royal Brunei Airlines Sdn. Bhd. v. Tan Kok Ming, [1995] 2 A.C. 378; [1995] 3 All E.R. 97, referred to.

(17)Singularis Holdings Ltd. v. Daiwa Capital Markets Europe Ltd., [2017] EWHC 257 (Ch); [2017] 2 All E.R. (Comm) 445; [2017] 1 Lloyd’s Rep. 226; [2017] 1 BCLC 625; [2017] Bus. L.R. 1386; on appeal, [2018] EWCA Civ 84; [2018] 1 W.L.R. 2777; [2018] Bus. L.R. 1115; [2018] 1 Lloyd’s Rep. 472; [2018] 2 BCLC 1, applied.

(18)Skyring v. Greenwood (1825), 107 E.R. 1064; 4 B. & C. 281, referred to.

(19)Stokors SA v. IG Markets Ltd., [2013] EWHC 631 (Comm), applied.

(20)Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd., [1986] A.C. 80; [1985] 2 All E.R. 947; [1985] 2 Lloyd’s Rep. 313; [1986] FLR 14; (1985), Sol. Jo. 503, applied.

S. Dobbyn for the plaintiffs;

S. Said and J. Hale for the defendant.

Estoppel — representation — forgery of bank customer’s signature — customer required promptly to report forgery to bank — intentional silence is representation — bank suffers detriment if chance of recovery from forger materially prejudiced by delay — may rely on estoppel in action by customer for damages

The plaintiffs sought damages for, inter alia, breach of contract, negligence and breach of fiduciary duty/dishonest assistance.

The first plaintiff was a director, sole shareholder and beneficial owner of the second plaintiff, a captive insurance company incorporated in the Cayman Islands. DS was a director of the second plaintiff and the company secretary. The second plaintiff was managed by a company licensed as an insurance manager (“Monkton”) which was the corporate entity of DS, who was its managing director. The second plaintiff and Monkton were regulated by the Cayman Islands Monetary Authority

In 2008, the second plaintiff opened a corporate bank account with the defendant bank. DS, who was an authorized signatory on the account and the main point of contact, made nine fraudulent transactions on the account between December 28th, 2008 and September 13th, 2010 by forging the first plaintiff’s signature. The payments were honoured by the bank, and the account was debited for a total of US$725,177.02. DS also defrauded the bank accounts of other Monkton clients at the bank.

In 2011, the first plaintiff had decided to wind down the second plaintiff’s operations and transfer the funds held in the account to the United States. On September 1st, 2011, he contacted the bank and wasinformed that the balance of the account was far less than he had believed, there was a shortfall of US$872,000. DS informed him on the same day that he had borrowed money from the account by forging the first plaintiff’s signature. DS said that he would make immediate arrangements to repay the sum. In order to do so, on the same day DS fraudulently transferred sums of US$550,000 and US$276,000, respectively, from accounts held by two other Monkton clients. Those transactions were likely completed by the bank on September 2nd, 2011. Payments totalling US$875,000 were made to the first defendant’s personal US account. The first plaintiff did not inform the bank of the forgeries.

Monkton was subsequently liquidated and controllers were appointed. From their investigations it became evident that the second plaintiff was not the only client of Monkton that had been defrauded. DS’s assets were frozen by a court order. Total realizable assets of around US$160,000 were available from the liquidation of DS’s estate.

On August 27th, 2012, Krys Global, whom the first plaintiff had initially instructed to conduct a forensic investigation, wrote to the bank to notify it of the fraud on the bank account and that the first plaintiff would challenge payments on the company’s account.

Monkton’s liquidators served notice of claim against the first plaintiff in Texas in June 2012 for the recovery of the US$875,000 paid to him fraudulently from the accounts of other clients of Monkton. The first plaintiff sought to join the bank as a third party in the Texan proceedings, which was refused. The bank incurred costs of US$183,000 in defending its position that it should not be joined to the proceedings. Those proceedings were subsequently settled by the first plaintiff.

The plaintiffs brought proceedings against the defendant in this court claiming damages for breach of contract, negligence and dishonest assistance. They contended that by allowing the withdrawals of money from the bank account based on forged signatures, the bank breached its mandate, and the resultant net loss was US$529,191.

The bank claimed that the first plaintiff became aware of the fraudulent transactions on September 1st, 2011 but failed to inform it until August 27th, 2012, depriving it of the opportunity to prevent a number of other transactions and to recover the money wrongfully paid. The plaintiffs should therefore be estopped from asserting the forgeries on which the claim was based.

The plaintiffs submitted that there was no estoppel by representation preventing it from claiming against the bank as (a) the bank had at least constructive notice of the fraud or forgery before August 2012, as inter alia DS had been arrested and Monkton’s assets were subject to a freezing order; (b) notification of the fraud by the first plaintiff in September 2011 would have alerted the authorities and Monkton’s controllers, who would have taken steps to limit recovery by the bank so that it had not been materially prejudiced by the first plaintiff’s failure to notify it; (c) had the bank had notice in September 2011 it was unlikely that it would have reimbursed the second plaintiff and commenced proceedings against DSas it would have first considered its legal position, in which time DS would likely have dissipated his assets; (d) the bank would in any event have had no cause of action between September 2011 and August 2012 as the plaintiffs believed that they had been repaid in full; (e) the legal fees incurred in the Texan proceedings could not be viewed as detriment for the purposes of estoppel; and (f) if the court were to find that the bank had been materially prejudiced by a loss of opportunity to sue DS, it should find that estoppel by representation operated pro tanto so that the plaintiffs should not be estopped to the full extent of their claims, but only to the extent of actual potential detriment found to have been suffered by the bank.

The bank submitted that (a) if it had been informed of the forgeries on September 1st, 2011 it could have brought proceedings against DS when he likely had assets greater than US$160,000; (b) the first plaintiff’s failure to notify the bank of the fraud or forgery amounted to a representation for the purposes of estoppel by representation; (c) the bank had relied on the representation by the first plaintiff to its detriment including lost opportunity to seek recovery from DS, and incurring significant legal fees in proceedings in Texas and the Cayman Islands; and (d) the plaintiffs’ dishonest assistance claim should be dismissed as it was not properly pleaded and failed to identify any individual employees of the bank who had acted dishonestly.

Held, ruling as follows:

(1) The responsibility and liability of a bank towards its customer was governed by the applicable law and the relevant contract entered into by the parties. The contract determined the manner in which services were to be provided and recorded the obligations of each party. In the event of an alleged breach by the bank of an express or implied term of a contract, three elements needed to be satisfied in order to establish liability: (i) proof of breach by the bank against the customer; (ii) damages; and (iii) causation between the breach and damage suffered by the customer. In the present case, the parties had agreed to limit the issues to be determined by the court to (i) whether the plaintiffs were estopped from advancing claims against the bank in contract and negligence; and (ii) whether the bank dishonestly assisted in a fraud involving forgeries of the first plaintiff’s signature by DS. The general rule was that a bank was ordinarily not entitled to debit a customer’s account if it had honoured a wire transfer bearing a forged signature. However, a defence available to a paying bank might arise if the customer breached his duty to the bank by failing to inform it of any forgery on...