With three appeal hearings in 2022, the Quincecare duty is firmly under the spotlight this year and these decisions will be of significant interest to banks and financial institutions.
The Quincecare duty, so-called following Barclays Bank plc v Quincecare Ltd [1992], requires that a bank must act with reasonable care and skill in carrying out its customer’s payment instructions. If the bank is put on inquiry that the instructions might be fraudulent, i.e. that the instructions are an attempt to misappropriate its customer’s funds, then the bank is under a duty to refrain from executing those instructions.
Despite recognition of the Quincecare duty for 30 years, the full extent of its reach is still being explored by the courts. The appeals (awaited and handed down) are expected to provide clarity on some important issues, including:
- Whether the scope of the Quincecare duty comprises a positive duty (as well as a negative duty) requiring a bank to investigate whether its suspicions of fraud are well-
- Whether the scope of the bank’s duty extends to protecting its customer’s creditors when insolvency is inevitable.
- Whether the duty extends to protecting personal banking customers (as opposed to
corporate customers) where the customer, unaware it is a victim of fraud, instructs the bank to make payments to the fraudster’s account.
Nigeria v JP Morgan Chase
The trial of the main issues in this long-running dispute began in the High Court in London at the end of February and is scheduled for six weeks.
The claim by Federal Republic of Nigeria (“FRN”) relates to three payments totalling approximately $875m made by JP Morgan Chase (“JPM”) from an escrow account to a Nigerian company, Malabu. FRN alleges JPM was “grossly negligent” when it transferred the funds, which were settlement monies relating to an offshore oilfield dispute held under a depository agreement, on instructions from FRN’s authorised signatories.
FRN’s case is that the payments by JPM were in breach of the Quincecare duty it owed to FRN. It alleges that JPM had been put on inquiry that the payment transfers were part of a corrupt scheme and JPM should have been aware that it could not trust the senior Nigerian officials providing the instructions to make payment. It should have refused to pay while it had reasonable grounds for believing its customer was being defrauded. FRN claims damages representing the sum of the payments.
JPM applied to strike out the claim on various grounds including that the Quincecare duty did not arise because it was inconsistent with, or expressly excluded by, the terms of the depository agreement. In particular, JPM relied on an express term providing that it “shall be under no duty to enquire into or investigate the validity, accuracy or content of any instruction” and “under no duty to investigate whether any instructions comply with any applicable law, regulation or market practice.”
Refusing JPM’s strike out application, Mr Justice Burrows held these express terms were not inconsistent with the core Quincecare duty and neither term applied to a situation where a bank had reasonable grounds for believing that its customer was being defrauded. The Court of Appeal upheld the decision, finding that the express terms were references to the obligations on JPM “prior” to the point where it had reasonable grounds for suspecting fraud and, as a matter of contractual interpretation, they were not inconsistent with the Quincecare duty.
The Court of Appeal noted that the Quincecare duty comprises both a negative duty to refrain from making payment and a positive duty to make enquiries or investigate where reasonable grounds for suspecting fraud arise. The positive duty will require “something more” from the bank when it is put on notice that the instructions may be an attempt to misappropriate funds.
The Court of Appeal also commented that while it is possible for a bank and its client to exclude the Quincecare duty, an exclusion would require clear terms, would need to comply with statutory restrictions and may be commercially unpalatable.
The present trial will determine what JPM should have done on the facts and specifically whether it was in breach of its Quincecare duty. The Court of Appeal’s obiter comments on the scope of the Quincecare duty do, however, suggest a willingness to expand the scope of Quincecare and require banks to do “something more” when it is on notice of possible fraud.
Stanford International Bank Ltd v HSBC Bank plc
In 2021, the Court of Appeal struck out Quincecare duty and dishonest assistance claims brought against HSBC by the liquidators of Stanford International Bank ("SIB"). SIB had been defrauded by its owner, Mr Stanford, via a multi-million pound Ponzi scheme and it was alleged that HSBC had breached its Quincecare duty by making payments out of SIB’s accounts to SIB’s investors on Stanford’s instructions when there were reasonable grounds for suspecting a fraud was being perpetrated. The liquidators argued these payments reduced the available funds for creditors.
The High Court found that had HSBC complied with its Quincecare duty, there would have been £80m in SIB’s account which the liquidators could have used to pursue claims or distribute to SIB’s creditors.
The Court of Appeal disagreed and overturned the decision. It held that HSBC owed its Quincecare duty to its customer, SIB, and there was no direct duty to SIB’s creditors. While SIB was heavily indebted, the formal statutory insolvency process had not commenced and SIB was, therefore, still able to trade. The Court of Appeal concluded that, by allowing the payments to be made to SIB’s investors, this had a neutral effect on the balance sheet because even though it meant that SIB had £80m less in cash assets to pay its creditors, it had reduced SIB’s debts to an equivalent amount and there was therefore no recoverable loss.
In January 2022, the Supreme Court heard SIB’s appeal and judgment is currently awaited. This will clarify the recoverability of losses where breach of the Quincecare duty is established and whether there is a difference between solvent and insolvent bank customers. In other words, it will determine whether a bank is liable to pay losses which are limited to payments which affect the customer’s balance sheet or whether liability extends to payments which deplete the assets available for distribution in its customer’s insolvency.
Philipp v Barclays Bank Plc
The Court of Appeal recently clarified that a bank may be subject to the Quincecare duty where a customer authorises a payment to a fraudster’s account unaware that it is a victim of “push payment” fraud.
Mr and Mrs Philipp believed they were assisting an investigation by the Financial Conduct Authority and National Crime Agency looking at rogue employees within the bank and, not knowing that this was part of a fraudulent scheme, they instructed Barclays to transfer
£700,000 in two tranches to the fraudster’s account in the UAE.
Barclays applied to strike out the Philipps’ claim for damages. It argued the Quincecare duty is limited to corporate clients where its agents have attempted to misappropriate the corporation’s funds on the basis that, in those circumstances, it could be said that there had been no true authorisation by the customer. That does not arise in cases where the instruction comes directly from the customer, as here.
Barclays was initially successful in striking out the claim but this was reversed by the Court of Appeal. Its unanimous decision was that the Quincecare duty was not limited to fraudulent agents acting for a company or firm, and could in principle be extended to protect customers who are victims of fraud: “The bank’s obligation is not simply and always to execute every payment instruction of whatever kind unthinkably.”
The Court of Appeal did not determine whether, on the facts, Barclays is liable but the case has been referred back to the High Court for determination at trial. This will include consideration of whether the bank should have investigated red flags that these payments were unusual for this account; Mrs Philipp had attended a different branch to her own; the sums in issue were vast; and the payee was a company in the UAE.
Given the ever-increasingly clever tricks used by fraudsters to scam innocent banking customers, and the corresponding difficulties for banks steering between fraud prevention and acting on genuine customer instructions, developments in this case will be closely monitored by banks and consumer protection groups.
