Counsel Kate Gee and Partners Simon Fawell and Paul Brehony examine the Quincecare duty following a recent Court of Appeal decision regarding banks’ duty to protect customers from fraud in Compliance Monitor.
Kate, Simon and Paul’s article was originally published in Compliance Monitor, 25 April 2022, and can be found here.
When is a bank under a duty to protect its customers from fraud? After years of inactivity, the so-called Quincecare duty has been the subject of a number of recent cases testing its scope and application. A decision of the Court of Appeal in March may have set the cat among the pigeons, confirming that the duty applies much more widely than had previously been thought, meaning that victims of push payment frauds are now likely to look to their banks as potential sources of compensation.
The duty arises from the landmark decision in Barclays v Quincecare in 1992. However, despite making a significant splash in the legal world and around the City at the time, it generated relatively few claims in the English courts and did not receive significant consideration from the English courts until 2019 when the UK Supreme Court upheld the first successful claim for breach of the duty in Singularis Holdings Ltd v Daiwa.
The Quincecare duty is founded on an implied term in the bank-customer relationship that the bank will use “reasonable skill and care” when carrying out a customer’s instructions. A bank will breach that duty where it executes payment instructions when ‘on inquiry’ (i.e. a reasonable banker would have grounds to believe) that the instruction may be fraudulent without first taking steps to satisfy itself that the proposed payment is legitimate. A bank that breaches the duty will be liable to the customer for the value of the fraudulent payment.
The fact patterns in Barclays v Quincecare and Singularis v Daiwa led to the view that the duty applied only in relatively limited circumstances, namely where the payment instruction itself is fraudulent (i.e. the fraudster is an authorised signatory of a company who deliberately misdirects company monies for their own benefit).
The recent Court of Appeal decision in Philipp v Barclays potentially changes that, finding that the duty extends further so that banks are under a duty to protect their customers whenever they suspect a payment is being made as a result of fraud and not only where they suspect the payment instruction may itself be fraudulent. This is big news for banks and fraud victims alike, particularly in a world where fraud is on the rise and increasingly sophisticated scammers are harder to track down.
Philipp v Barclays concerned a defrauded couple who were deceived into transferring over £700,000 to a fraudster’s account outside of the UK. Mrs Philipp, the account holder, asked Barclays to recover the lost money and in subsequent proceedings, argued that Barclays had breached its duty of care to her as there were a number of flags that she was being defrauded. The bank, she said, should have questioned her actions more thoroughly and blocked her account. In summarily dismissing Mrs Philipp’s claim at first instance, the judge agreed with the prevailing view and held that the Quincecare duty was restricted to circumstances in which an agent of a company authorised a payment deliberately to perpetrate a fraud. Accordingly, the duty could not apply to protect individuals and did not extend to circumstances such as authorised push payment frauds where the fraudster was a third party rather than the individual authorising payment. In those circumstances, the bank’s duty to act upon its customers’ instructions took precedence.
The Court of Appeal, however, disagreed, holding that the Quincecare duty is more widely applicable than previously considered. It ruled that the duty was not restricted as the High Court had suggested and, in fact, applies in any circumstances where the bank is put on inquiry that its customer might be a victim of fraud, whether or not the instructions were properly authorised.
The question of whether or not Barclays breached its duty to Mrs Philipp on the facts was not determined and will be a matter for trial at a later date. It remains to be seen whether the bank will be found liable, particularly as it did take steps to confirm the instructions with Mrs Philipp, who went on to authorise them expressly. While Mrs Philipp maintains the bank did not go far enough, it is the bank’s position that the inquiries it made were sufficient to comply with its duty and, in any event, Mrs Philipp had been so thoroughly convinced by the fraudster (and his elaborate backstory) that she would have gone on to make the payment whatever additional inquiries they may have made or further steps they might have taken.
Coincidentally, the interpretation of Quincecare has also been the focus of another ongoing case brought by the Government of Nigeria against JP Morgan Chase which reached trial in March of this year. The bank’s staff have given evidence that despite identifying multiple red flags regarding a disputed oilfield deal worth $875 million, there was no reason for them to distrust the payment instructions given to them from a senior government official. JP Morgan argued that, in those circumstances, the Quincecare duty, was either not engaged or was satisfied as no reasonable banker would have been ‘on inquiry’ at the time the payment was made. The judgment, when available, will provide further important guidance as to how the banks’ duty will be applied in practice and how they are to balance the competing obligations under Quincecare and to execute payment instructions efficiently.
Next steps in the Philipp case will be hugely important. An appeal to the UK Supreme Court appears highly likely, given the potential implications of the Court of Appeal ruling for banks. If the Court of Appeal ruling is upheld, the battle ground will move on to trial which will provide further clarification on when a ‘reasonable banker’ should be ‘on inquiry’ and the steps it must take in those circumstances. The question of when a ‘reasonable banker’ should be put on inquiry is, itself, a developing one. As banks find themselves under increasing pressure from government and regulators to detect fraud and the fraud detection technology continues to advance, the circumstances in which a bank “should” be put on inquiry will doubtless increase over time. Certainly, with the increase in fraudulent activity over recent years, the Quincecare duty, as interpreted by the Court of Appeal in Philipp will be triggered more often.
The long-term fallout from the Philipp v Barclays litigation may well re-shape a banks’ duty of care to their customers and could leave them on the hook for payments made by account holders even where the payment authorisation itself is honestly given. As noted in the first instance decision of Philipp v Barclays, there is at present no clear or defined framework applicable to banks against which compliance with the Quincecare duty could sensibly be judged. Banks will no-doubt be reviewing their fraud and payment execution policies in light of the decision in Philipp and the introduction of some form of industry consensus on handling situations where fraud is flagged appears likely in the future.
What is clear is that, for the moment at least, fraud victims will be looking with interest at the possibility of claiming against their banks who, with their deep pockets and reputational concerns, are often a more attractive target than the prospect of tracking down the fraudsters themselves.
Sylvie Gallage-Alwis and Nikita Yahouedeou discuss the DGCCRF’s recent practical guide to online shopping and consumer rights in Le Monde du Droit
28 November 2023
28 November 2023