Customer fraud and financial institutions’ liability: An update on Chudley v Clydesdale Bank

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Walker Morris has previously reported on the 2017 case in which the High Court rejected attempts by investors to recover investment losses from a bank following customer fraud. A recent appeal by the investors has overturned that ruling.  Walker Morris’ Head of Banking & Finance Litigation provides an update on the Chudley v Clydesdale Bank litigation [1] and explains why financial institutions should be alive to the increased risk of potential liability to third parties affected by the fraudulent activity or wrong doing of its customers.

Chudley v Clydesdale – what financial institutions need to know

The facts and wider background to this litigation are set out in our earlier briefing.  For present purposes it is relevant that a Letter of Instruction (LOI) from Arck, the customer, to the bank stated that deposits relating to one of its development schemes for which it had obtained funds from a number of investors were to be placed into a segregated account and held to investors’ order.  However, no separate account was opened; deposits were paid directly into Arck’s existing account; and investment funds were lost when Arck’s various schemes were found to be fraudulent.  It was only later that the investors became aware of the LOI.

In 2017 the High Court decided that the LOI between the Arck and the bank was not intended to be a legally binding contract. It followed that the investors could not, therefore, claim any benefit under the Contacts (Rights of Third Parties) Act 1999 (the C(RTP)A 1999) which would enable them to sue on the basis that the bank’s failure to open a separate account constituted a breach.

In February 2019, however, the Court of Appeal decided that the High Court had been wrong and that the LOI was a binding contract.

Liability to third parties

That finding led to the conclusion that the investors were entitled to claim the benefit of the contract under the C(RTP)A 1999.

The Court of Appeal went on to find that the primary purpose of the LOI was to protect the investors who, albeit not named parties, were nevertheless identified as members of a class of intended beneficiaries of the contract.  Despite being unaware of the existence of the LOI at the time of their investment and when they first sought to recover that investment, the Court of Appeal held that the investors could take the benefit of the LOI and could therefore sue the bank for breach of contract.

Finally, the Court of Appeal also clarified that it was not necessary in this case for the investors to establish the ‘counterfactual’ – that is, it was not a necessary element of the claim for the investors to demonstrate what would have happened to the monies if there had not been a breach.  The SAAMCO principle [2] was not engaged since the case was based on straightforward breach of contract and there was no question of the scope of the bank’s duty in negligence.

WM Comment

The Court of Appeal’s findings in this case may result in financial institutions increasingly becoming a target for claims made by third parties who have suffered loss as a result of a customer’s fraud or wrongdoing.

It is possible, however, to contract-out of the provisions of the C(RTP)A 1999, and so institutions may wish to consider expressly stating, on all of their contractual and even pre-contractual communications, that third parties’ rights to enforce any contract terms under the C(RTP)A 1999 are excluded.

Even where any third party is able to found a cause of action, there will, in such cases, often be a wide range of defensive and/or mitigating tactics which institutions can deploy and specialist legal advice should be sought on a case-by-case basis.


[1] [2019] EWCA Civ 344
[2] In South Australia Asset Management Corporation v York Montague [1996] UKHL 10, the House of Lords held that surveyors who provide negligent overvaluations are only liable for loss caused by the negligent valuation itself, and not for loss caused by any extraneous factor(s). That proposition has become known as the SAAMCO principle or ‘cap’, and is frequently relied upon to limit liability in professional negligence cases.