A number of recent decisions have put the spotlight back on the scope of the "Quincecare" duty owed by banks to their customers.
We previously considered this subject following news that the Supreme Court had granted permission to appeal in respect of the Court of Appeal's decision in Stanford International Bank Ltd v HSBC Bank plc. [1] The Supreme Court heard the appeal in January of this year and judgment is awaited. Supreme Court to consider Quincecare duty: Could this be good news for creditors and bad news for banks?
In this article we consider the impact of the recent Court of Appeal decision in Philipp v Barclays Bank UK Plc [2].
The duty
The Quincecare duty was established in Barclays Bank plc v Quincecare Ltd [3]. Banks owe a duty to exercise reasonable care and skill when carrying out a customer's instructions. Specifically, Quincecare prevents a bank from executing a payment instruction where it has reasonable grounds to believe that the instruction is an attempt to misappropriate the account holder's funds.
Philipp v Barclays Bank UK Plc
In this case, Mrs Philipp became the victim of an Authorised Push Payment ("APP") fraud when a fraudster convinced her and her husband that they were cooperating with the FCA and NCA to protect Mrs Philipp's funds from fraud. Mrs Philipp instructed Barclays bank to make payments totalling £700,000 to bank accounts in the United Arab Emirates.
Mrs Philipp argued that a prudent bank ought to have had policies and procedures in place to detect and prevent potential APP frauds and that various features of the payments she requested would have alerted such a bank to a problem. Further, it was argued that, once alerted, a bank should take steps to delay the payment, ask questions, and provide the customer with "impactful" warnings.
The bank applied to strike out the case on two grounds. It argued that (1) there was no duty of care arising in these circumstances, and (2) Mrs Philipp and her husband had been so thoroughly deceived that, even if the bank had taken the preventative steps that Mrs Philipp argued ought to have been taken, Mrs Philipp would have gone ahead with the transfer anyway.
The High Court decision
At first instance, the bank's arguments were accepted and the court struck out the action. The judge accepted the bank's submission that the duty expected of the bank by Mrs Philipp would be unworkable in practice.
Further, the judge held that the Quincecare duty should be limited to situations where there has been an attempted misappropriation of the customer's funds by an agent of the customer. Where the customer has given their authority, by way of instructing the bank to make a payment, that should be taken by the bank to be a genuine authorisation.
The Court of Appeal decision
Mrs Philipp appealed, and the Court of Appeal reversed the decision on two points. First, on a point of law as to the application of the Quincecare duty, and second, on the basis that the case was not suitable to be decided summarily.
Birss LJ's reasoning in Philipp on how the Quincecare duty should be applied derives from paragraph 1 of Lady Hale's judgment in the case of Singularis [4] in which she summarised key features of the Quincecare duty. Lady Hale said that it was an implied term of the contract between a bank and its customer that the bank would use reasonable skill and care in executing payment instructions and that liability would arise where a bank "executed an order knowing it to be dishonestly given, or shut its eyes to the obvious fact of the dishonesty, or acted recklessly in failing to make such inquiries as an honest and reasonable man would make".
On this basis, Birss LJ confirmed that, while the factual circumstances of the major Quincecare cases involved instructions from a fraudulent agent acting for a company or firm, this was not a pre-requisite for the duty to arise. The correct reasoning in establishing the Quincecare duty, is as follows:
- The relationship between the customer and the bank in the context of an instruction to pay is one of agent (the bank) and principal (the customer).
- In that context, where a banker knew that the relevant instruction was an attempt to misappropriate funds, and executed the instruction in those circumstances, the bank will be liable to the customer.
- As to what lesser state of knowledge will put the bank under a legal obligation, the answer is that if the circumstances surrounding the instruction are such that a prudent banker would be "on inquiry", then the duty arises.
Birss LJ found that, whilst a Bank's primary duty may be to execute orders promptly, it has a parallel duty to refrain from executing any order which would "put an ordinary prudent banker on inquiry".
It is a significant feature of the decision that the reasoning does not require the payment instruction to be given to the bank by an agent. Birss LJ described the reasoning as applying with "equal force" to cases involving the victims of APP frauds and who provide payment instructions directly to the bank.
Comment
The Court of Appeal judgment in Philipp has provided clarity on the potential for the Quincecare duty to arise where the customer providing the payment instruction is the victim of APP fraud and in circumstances where the relevant instruction is given by the customer themselves, rather than by an agent.
From the bank's perspective, the test of the ordinary prudent banker, means that it is not enough for banks to say they did not, in fact, know the customer was being defrauded. This highlights the need for effective policies and procedures within banks to identify suspicious payment instructions.
Whilst banks may feel that their obligations have been made more onerous, the decision will be welcomed by victims of fraud, in particular where options to pursue the perpetrator of the fraud are limited as is often the case.
[1] Stanford International Bank Ltd (In Liquidation) v HSBC Bank Plc [2021] EWCA Civ 535
[2] Philipp v Barclays Bank UK Plc [2022] EWCA Civ 318
[3] Barclays Bank v Quincecare [1992] 4 All ER 363
[4] Singularis Holdings v Daiwa Capital Markets [2019] UKSC 50
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