Earlier this summer, the much-anticipated Supreme Court judgment in Philipp v Barclays Bank UK PLC [2023] UKSC 25 put paid to the idea that the so called 'Quincecare duty' could or should be extended to protect customers in instances of authorised push payment fraud ("APP fraud").
While the decision was a blow for victims of this type of fraud, the Supreme Court's rationale is sound, rooted in established principles of banking law and the law of agency. Whilst there are clearly policy implications, the Supreme Court was clear that, whether or not victims of APP fraud should be compensated by banks, or left uncompensated, is a question of social policy for regulators, and ultimately for Parliament.
This article looks at the rationale of the decision and where it leaves victims of APP fraud.
Factual background
Mrs Philipp was a customer of Barclays Bank ("the Bank"). She and her husband fell victim to an APP fraud perpetrated by a third-party fraudster. The fraudster posed as an operative working for the Financial Conduct Authority in conjunction with the National Crime Agency. Mrs Philipp and her husband believed they were assisting the agencies to protect Mrs Philipp's funds from fraud. Instead, Mrs Philipp was deceived into transferring a total of £700,000 to two bank accounts in the UAE. Attempts to recall the funds were unsuccessful.
Mrs Philipp sued the Bank, alleging a breach of the duty established in the case of Barclays Bank plc v Quincecare [1992] 4 All E.R. 363 (the so called "Quincecare duty"). She claimed that the Bank owed a duty to observe reasonable care and skill in (and about) executing her instructions. Specifically, she 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. It was further 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 on two grounds: (1) that there was no duty of care arising in these circumstances; and (2) that 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 and Court of Appeal decisions
At first instance the court struck out the action. The judge held that the Quincecare duty should be limited to circumstances 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 subsequently reversed the High Court's decision on two bases. 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 reasoned that while the factual circumstances of the major Quincecare cases involved instructions from a fraudulent agent, this was not a pre-requisite for the Quincecare duty to arise. This opened the potential for the duty to be extended beyond its traditional scope.
Issues for the Supreme Court
The Supreme Court was required to decide whether or not Quincecare had any application in a case where the relevant payment instruction was not issued to the Bank by an agent of the Bank’s customer and, if not, whether or not the Quincecare duty could be extended so as to include the obligations contended for by Mrs Philipp in relation to APP fraud.
The Supreme Court's decision
The Supreme Court unanimously allowed the appeal. It held that the Bank did not owe the alleged duty to Mrs Philipp. The Court restored the order of the first instance judge granting the Bank summary judgment, but varied the order to permit Mrs Philipp to maintain an alternative claim based on the Bank's alleged failure to act promptly to try to recall the payments after the fraud was discovered.
Strict duty to make payments
Provided the customer's account is in credit, the ordinary duty of a bank when instructed by its customer to make a payment from the account, is to carry out the instruction and make the payment. This, the Supreme Court confirmed, is one of the first principles in banking law and the bank's duty as the customer's agent in this regard is strict. The court confirmed it would be possible for a bank to agree as an express term of its contract with its customer that it will not comply with a payment instruction given by the customer where it believes that the customer has been tricked by a third party into authorising the payment. However, that was not the case in Phillip.
With this in mind, the Supreme Court confirmed that the Quincecare duty should not be viewed as a special or idiosyncratic rule of law, but that: "Properly understood, it is simply an application of the general duty of care owed by a bank to interpret, ascertain and act in accordance with its customer’s instructions." [97]
The purpose of the Quincecare duty is to ensure that a bank does not make a payment which the customer has not in fact authorised. It cannot therefore apply to cases of APP fraud where the instruction comes directly from the customer and there is unequivocal authorisation for the payment.
The significance of the law of agency
The Supreme Court judgment emphasises the significance of the law of agency in the line of authority establishing the Quincecare duty. Each case follows the same basic factual situation: a payment instruction is given to the bank by an agent who is an authorised signatory of the customer’s account but is acting in a fraudulent manner in respect to the customer.
The judgment provides a clear explanation of the circumstances in which the Quincecare duty arises:
"The authority conferred on an agent by a customer of a bank to sign cheques or give other payment instructions on behalf of the customer does not include authority to act dishonestly in pursuit of the agent’s own interests and in fraud of the customer. An agent acting in this way will therefore lack actual authority to give the instruction on behalf of the customer. The agent will still in general have apparent authority to do so by virtue of the customer’s representation to the bank that the agent is authorised to give payment instructions on its behalf. But not if there are circumstances suggestive of dishonesty apparent to the bank which would cause a reasonable banker before executing an instruction to make inquiries to verify the agent’s authority." [90]
In that situation a bank's duty to execute its customer's instructions, and to exercise reasonable skill and care in the way that it does so, requires the bank to make inquiries to ascertain whether the instruction given is one actually authorised by the customer. A failure to do so will put the bank in breach of duty.
Policy considerations
The Supreme Court judgment recognised APP fraud as a growing social problem. However, it also made clear that questions around (1) whether victims of such frauds should be left to bear the loss themselves, and, if not, (2) how they might be reimbursed, should not fall to the courts to answer. These, it stated, are issues of social policy and should instead, be considered by regulators, government and ultimately Parliament.
Final thoughts
This reversal of the Court of Appeal's extension of the Quincecare duty has understandably been welcomed by banks but is a blow to victims of APP fraud. As the Supreme Court judgment notes, there has been an attempt to address the issue through legislative change. In particular, section 72 of the Financial Services and Markets Act 2023, which received Royal Assent on 29 June 2023, provides for a mandatory reimbursement scheme to be introduced. The scheme is to be the subject of consultation but, as it will apply only to domestic payments, it would not in any case have assisted Mrs Philipp.
The court's policy approach and the potentially limited impact of the anticipated regulatory change, begs the question whether more could and should be done to assist the victims of APP fraud in circumstances where the perpetrators are increasingly sophisticated and difficult to pursue directly.
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