Finance litigation update - July 2022

FINANCE LITIGATION UPDATE – JULY 2022 40 Standard of care Assuming (contrary to the court's findings) FRN had been defrauded, the court considered the relevant standard of care. A bank may generally be in breach of its Quincecare duty if it fails to meet the standard of a reasonable banker (i.e. the ordinary test for negligence). However, in this case JPMC had the benefit of a clause in its depository agreement excluding its liability in tort, save for gross negligence. The parties therefore accepted that for FRN to succeed in its claim, it needed to prove gross negligence, a 'notoriously slippery concept'. On analysis, the court concluded this meant moving beyond 'bad mistakes' to mistakes which have a 'jaw-dropping' quality to them. While recklessness is not required, mistakes or defaults constituting gross negligence are those so serious that the word reckless may 'often come to mind'. Translated into the circumstances of this case, the court held this meant that there must have been an 'obvious risk' rather than just 'a risk' of fraud, and that JPMC's conduct must have evidenced 'serious disregard' for that risk. In relation to the 2011 payment, the court found there was no serious or real possibility that FRN might be being defrauded. In relation to the 2013 payment, however, the court concluded that JPMC had been on notice of 'a risk' of fraud (possibly a real possibility) and it had failed to act. This was partly due to press articles alleging corruption on the part of Mr Adoke, which, combined with investigations by a number of authorities, moved JPMC much closer to being 'on inquiry'. However, the evidence did not meet the 'obvious risk' test required to establish gross negligence. Interestingly, the court was unpersuaded by JPMC's argument that even if it had raised its concerns with FRN, this would not have altered the outcome. It held: 'if (i) there were such a fraud on the FRN and (ii) the disclosure of the material which triggered the obvious risk had been made to the FRN, the risk involved in payment (and consequent JPMC exposure) would have resulted in JPMC taking steps by one route or another which would have prevented the payment taking place.' Conclusions There are a number of practical points that banks can glean from this case. First, the importance of limiting and/or excluding liability should not be underestimated. Had FRN not been required to establish gross negligence, (and had the court concluded FRN had been defrauded), it is possible that the outcome of the claim would have been very different, at least in relation to the 2013 payment. The case also highlights the importance of expert evidence. Much of the analysis of the standard required of the reasonable banker was derived from the parties' respective banking experts. However, Mrs Justice Cockerill observed that the experts opined in relation to fraud generically, whereas the question to be answered was specifically whether a risk of fraud would have been obvious in relation to the 2011 and 2013 transactions. In this type of case, it is clear that expert selection will require particular care. It is also important to note that while the court emphasized that the duty is a 'narrow' one, it did accept that the Court of Appeal's judgment in Philipp v Barclays means that the Quincecare duty is potentially extended beyond 'internal fraud' cases (i.e. where the fraud is perpetrated by the customer's agent) to any case in which a bank is put on notice of a possible fraud. Sue Millar and Harriet Campbell