By M. GLENN HAMEL-SMITH & AKEEM LOPEZ
In a previous article featured in the February 16, 2020 edition of this newspaper (also available here: https://trinidadlaw.com/bankers-beware-duty-protect-customers-fraud/), we discussed the decision in Singularis Holdings Limited (in liquidation) v Daiwa Capital Markets Europe Limited [2019] UKSC 50 where it was held that a bank had a duty of care to a customer when it processed transactions that amounted to a fraud on the customer. This article is written in response to the latest developments in this area based on the recent decision of the UK Supreme Court (‘UKSC’) in Philipp v Barclays Bank UK plc [2024] 1 All ER (Comm) 1 (‘Phillip’). First, we look at what has come to be known as the Quincecare Duty. Following this, we explore the decision of the UKSC in Phillip and then provide an overview of the key principles and implications arising out of that decision.
The ‘Quincecare’ Duty
In Barclays Bank plc v Quincecare Ltd and another [1992] 4 All ER 363, the bank agreed to lend money to Quincecare to purchase four shops. Quincecare’s chairman instructed the bank to transfer the funds to a firm of solicitors and the bank complied. Quincecare’s chairman then instructed the firm of solicitors to transfer the money to an account in the United States. After this was done, Quincecare’s chairman left for the United States and misappropriated the money. It was held that a banker was under a duty to refrain from executing a customer’s payment order if, and for as long as, the banker had reasonable grounds (although not necessarily proof) for believing that the order was an attempt to misappropriate funds, although the duty was not engaged based on the facts of the case.
The common thread running through the Quincecare case and similar cases along this line of authority is that they all involved an agent acting on behalf of its principal (the bank’s customer) in giving the payment instruction.
The Facts and Decision in Phillip
In Philipp, Mrs. Phillip was deceived by criminals into transferring £700,000 from her current account at Barclays Bank to accounts in the United Arab Emirates. Mrs. Phillip brought an action against Barclays contending that the bank owed her a duty to not carry out her payment instructions if there were reasonable grounds for believing she was being defrauded. The bank took the position that it did not owe any such duty to Mrs. Phillip. The High Court agreed and granted the bank summary judgement. Mrs. Phillip successfully appealed to the Court of Appeal which accepted that, in principle, a bank owes a contractual duty to its customer to not carry out payment instructions where the bank has reasonable grounds for believing the customer was being defrauded. The UKSC allowed the bank’s appeal, in part.
The UKSC considered the fraud perpetrated on Mrs. Phillip to be that of Authorized Push Payment (‘APP’) fraud. APP fraud is a type of fraud whereby the victim is induced by fraudulent means to authorize their bank to send a payment to a bank account controlled by a fraudster.
Mrs. Phillip’s argument (rejected by the UKSC) was that the Quincecare duty should apply equally to cases where the instruction is directly given by the bank’s customer as an unwitting victim of fraud. The UKSC distinguished where a payment instruction is given directly by the customer to the bank versus a payment instruction given by an agent acting on behalf of a customer. The essence of the distinction is that a customer, who is tricked by a fraudster into instructing their bank to make a payment, is not misappropriating funds, as the customer is disposing of the funds according to his or her own (albeit misguided) wishes. This is unlike a situation where a person gives a payment instruction, purportedly on behalf of a customer, in an attempt to misappropriate the customer’s funds.
Principles and Practical Considerations
The principles to be extracted from, and the main implications of the Phillip Case are:
- Where a bank has a customer with a current account in credit (i.e. an account with sufficient funds), the bank has a contractual duty to make payments from the account in strict compliance with the customer’s instructions. Where the customer authorizes and instructs the bank to make a payment, the bank has to carry out the instruction promptly.
- A bank is not to concern itself with the wisdom or risk associated with a customer’s payment decisions.
- Where a bank acts outside the mandate by making a payment which the customer had not authorised, it cannot debit the customer’s account.
- The bank’s duty to carry out its customer’s authorized payment instructions is limited by the bank’s right not to incur legal liability. In other words, a bank cannot be obliged to act unlawfully by, for example, executing an instruction that facilitates money laundering contrary to the Proceeds of Crime Act Chap. 11:27. However, it is not enough for the bank to have a genuine or reasonable concern that it might incur legal liability- the bank’s concern must be valid and it must be able to show that, if it carried out the customer’s instruction, it would have actually incurred liability for wrongdoing.
- The ‘Quincecare duty’ is the general duty of care owed by a bank to interpret, ascertain and act in accordance with its customer’s instructions. Where a bank has reasonable grounds for believing that a payment instruction given by an agent, purportedly on behalf of a customer, was an attempt to defraud the customer, the Quincecare duty requires the bank to refrain from executing the instruction without first making inquiries to verify that the instruction has actually been authorised by the customer.
- If the bank executes an agent’s instruction without making such inquiries, and the instruction proves to have been given without the customer’s authority, the bank would breach its duty to the customer. The bank would also, in making the payment, be acting outside the scope of its own authority from the customer and would therefore not be entitled to debit the payment from the customer’s account.
- The principles in (v) and (vi) above would not apply to situations where (as occurred in the Phillip Case) the customer is a victim of APP fraud.
- In instances of APP fraud, the payment instruction cannot be doubted (as it comes from the customer directly). Once the instruction is clear and comes from the customer personally, or an agent acting with apparent authority, the bank need not make any inquiries as to what should be done. The bank’s duty would be to execute the instruction, and any refusal or failure to do so would be a breach of duty by the bank. There is, however, a limit to the extent to which a bank could rely on the apparent authority of someone transacting on its customer’s behalf. The nature of this limitation is that a bank cannot rely on the apparent authority of an agent if it failed to make inquiries that a reasonable person would have made in all the circumstances to verify that the agent had that authority.
- Fraud perpetrated on a customer does not negate his or her intention. Therefore, a customer transacting under a mistaken belief (such as where he or she is induced by deceit) does not mean that the customer did not intend to act the way he or she did.
Bankers Beware: Part 3?
Interestingly, there was an alternative claim made by Mrs. Phillip in the Phillip Case that the bank was in breach of duty after the fraud had been discovered since it failed to take adequate steps to recover the money after it had been transferred. Since the bank did try to recover the funds some two months after it was already aware that Mrs. Phillip had been defrauded, the UKSC considered that such an attempt did raise questions as to why the bank did not act sooner. The UKSC therefore reasoned that Mrs. Phillip’s claim for loss of a chance of recovering money should not have been summarily dismissed. Mrs. Phillip’s alternative claim was accordingly allowed to proceed to trial. It would be incumbent upon bankers to keenly observe this space since it may have further implications for banking operations.
Conclusion The decision in the Phillip case brings much needed clarification to an area that has been the subject of staunch academic debate. Based on this ruling, and the somewhat narrowing of the Quincecare duty normally imposed on banks, customers ought to exercise heightened vigilance to avoid falling victim to APP fraud. However, this does not mean that banks are completely off the hook. In circumstances where a person is transacting on behalf of a bank’s customer in which the bank has reasonable grounds for believing that a payment instruction received is in furtherance of fraud, the bank would be under a duty of care to verify that the purported payment instruction was, in fact, authorized by the customer.
