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26 Apr 2022

The Quincecare duty: when shouldn’t you follow instructions?

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In this sponsored briefing originally published in the 'Disputes Yearbook 2022' for Legal Business, we consider the current scope of the Quincecare duty and some of the practical issues of which banks need to be aware following the latest judgment from the Court of Appeal.

Banks are under a duty to obey their customers’ instructions. However, they are also under a duty not to obey them, in certain circumstances. Navigating the line between these duties has become increasingly difficult as the scope of the Quincecare duty has evolved. We consider the current scope of the duty and some of the practical issues of which banks need to be aware following the latest judgment on this key doctrine from the Court of Appeal in Philipp v Barclays Bank UK Plc.

What is the Quincecare duty?

The Quincecare duty is best defined as the duty placed on financial institutions not to follow their customer’s instructions when they are ‘put on enquiry’ that following them might facilitate a fraud on their customer.

Although the Quincecare duty was first established in a 1992 case, (Barclays Bank plc v Quincecare Limited1), it was not until 2019 that a bank was first held liable for breach. Since then, the courts have struggled to apply it in practice.

The Quincecare duty was originally framed as a negative duty (ie the duty to refrain from following a customer’s instructions). However, the Court of Appeal in the 2019 case of Federal Republic of Nigeria v JP Morgan Chase found that the Quincecare duty will require ‘something more’ from a bank than simply deciding not to comply with a payment instruction. Quite what that something more is, however, is an elusive concept.

Key points from recent case law

There have been four significant cases in recent years relating to the Quincecare duty which shed some light on its parameters. It is perhaps a sign of the difficulty with the doctrine that all four decisions have been appealed at least once, with two cases being appealed to the Supreme Court.

JP Morgan Chase Bank N.A v The Federal Republic of Nigeria 2

This case considered the scope of the action which a bank should take when ‘on notice’ of a possible fraud. Although the Court of Appeal did not make any finding on the facts, (upholding the first instance decision not to grant strike out or summary judgment in the bank’s favour), it raises some important issues. Here, the bank had complied with payment instructions made by authorised signatories. However, the Republic of Nigeria later alleged that the bank (which had submitted suspicious activity reports due to various red flags being raised) should have realised that it could not trust the senior Nigerian officials from whom it took instructions and should not have made the payments it was instructed to make. Precisely what the bank should have done instead of following its customer’s instructions was deemed to be a matter for the trial judge.

There remains a distinct lack of clarity, therefore, surrounding what a bank’s so-called duty of enquiry means in practical terms and how this ought to be reconciled with a bank’s duty to follow its customer’s instructions. The trial commenced in February 2022 and the outcome is keenly anticipated.

Singularis Holdings Ltd (in Official Liquidation) v Daiwa Capital Markets Europe Ltd 3

The Supreme Court next considered the scope of the duty in Singularis Holdings Ltd (in Official Liquidation) v Daiwa Capital Markets Europe Ltd, which was handed down just days after the judgment in Nigeria.

This case was brought by the liquidator of Singularis. Mr Al Sanea (Singularis’ sole shareholder (and a director)) had instructed Daiwa to transfer US$204m to accounts in the names of other group companies. At first instance, Daiwa was held to have breached the Quincecare duty as this was a particularly obvious fraud – and it did not appeal that finding. It instead appealed on the basis that Singularis was effectively a one-man company controlled by Mr Al Sanea and that the claim should fail for illegality, lack of causation or deceit. In dismissing Daiwa’s appeal, the Supreme Court (again) did not address the steps that Daiwa ought to have taken to comply with its duty because the breach was such an obvious one. However, it made it clear that the Quincecare duty is not an easily escapable one, observing that if the appellant’s argument had been accepted ‘there would in reality be no Quincecare duty of care or its breach would cease to have consequences’, something the court described as being a ‘retrograde step’. The question of what practical steps a bank should take when on notice that following its customer’s instructions might result in facilitating a fraud on that customer was not therefore answered in this judgment.

Stanford International Bank Ltd (in liquidation) v HSBC Bank Plc [2021] EWCA Civ 535

In another case brought by liquidators, a claim was brought against HSBC for breach of the Quincecare duty and dishonest assistance. The payments in this case were effected by HSBC back in 2008 when, it was alleged, HSBC knew or should have known that Mr Stanford was using his company to operate a massive Ponzi scheme. The company went into insolvent liquidation shortly afterwards. Of the £118.5m paid out by HSBC, all but £2.4m were payments to genuine creditors and the judgment here turned on whether or not any loss had been sustained. Overturning the decision of the lower court, the Court of Appeal held that the fact that the payments reduced the dividend to creditors was not a loss attributable to any breach of the Quincecare duty because HSBC owed its Quincecare duty to the company (its client) and not to the company’s creditors. This contrasted with the position of the company’s directors, who did owe a duty to its creditors during the relevant period.

Because it found there had been no loss, once again the Court of Appeal was not required to consider whether or not there had been a breach of the Quincecare duty, confirming only that the Quincecare duty is not owed to creditors. However, the case is being appealed to the Supreme Court and it therefore remains to be seen whether there will be any further modification of the duty as it applies to insolvent companies.

Philipp v Barclays Bank plc [2022] EWCA Civ 318

In Philipp v Barclays Bank plc4, (a case relating to authorised push payment ‘APP’ fraud) the High Court granted summary judgment to Barclays because it held that the duty was limited to situations where payment instructions are not properly authorised, ie they are made by a customer’s agent in an attempt to misappropriate funds. While in Singularis it was held that even a sole shareholder can steal from a company for whom they are a signatory, the High Court held that an individual could not steal from themselves.

However, the Court of Appeal has recently overturned that decision. It held that so long as a bank was put ‘on inquiry’ that complying with a customer’s instructions (even those of an individual) might help facilitate fraud, the bank was obliged to make further inquiries and delay acting on the instructions given.

The court held that the Quincecare duty as developed by authority was not limited to circumstances where the bank was instructed by the customer’s agent. The duty arises in any case where a bank is put on inquiry. The extent to which Barclays Bank in this case had been put on inquiry will be for the trial judge to decide. However, the court listed the factors which might be relevant:

  • Mrs Philipp’s account history;
  • her attendance at a branch which was not her own;
  • seeking to transfer an enormous and, for her account, unprecedented sum of money;
  • the money only moving into Mrs Philipp’s account days before the transfer; and
  • the fact that the payee was a petroleum company in the UAE.

If, at trial, it is determined that the bank had been put on inquiry, the court will have to decide whether an ordinary prudent banker acting with reasonable skill and care would have delayed the payment pending further inquiries. Such further inquiries, the Court of Appeal suggested, could have resulted in the payment not being made and Mrs Philipp not losing her life savings.

The court rejected two other issues which Barclays argued prevented the duty from operating in relation to individuals:

1. The ‘onerous and unworkable’ burden it would place on banks; and

2. The allegedly ‘novel’ nature of the duty if extended to individuals.

The court placed reliance on the expert evidence that applying the duty to individuals in 2018 (the relevant time of the transactions) would not have been unworkable or onerous. A voluntary code was already in existence and although the circumstances of this case might have put a bank on inquiry, that did not mean that a bank would be put on inquiry in the many millions of low value BACS transfers it conducted. Careful calibration of the Quincecare duty was key and it was not to be expected that it would apply across the board.

As to whether the decision would create a novel duty of care or impermissibly extend the scope of the Quincecare duty, the court concluded that the Quincecare duty has not been restricted to circumstances where the instruction to the bank comes from an agent. There has therefore been no ‘extension’.

Practical points arising from case law

As can be seen from this summary of recent case law, the current scope of the Quincecare duty is unclear. Because of this, it is key from a practical perspective that financial institutions ensure that whenever a red flag is raised in relation to a customer’s instructions, the process by which those instructions are dealt with is properly documented and a fully reasoned decision is taken. The transaction in Philipp pre-dated the introduction of the industry-wide CRM code designed to reimburse victims of APP fraud. However, as this does not apply to international payments, the Court of Appeal’s conclusion that the Quincecare duty extends to individual customers means that banks need to remain vigilant in relation to APP fraud in the context of international transactions.

At the same time, it needs to be borne in mind that the disclosure of documents relating to these kinds of decisions is a developing area in case law. In IFT SAL Offshore v Barclays Bank plc [2020] EWHC 3125 (Comm), the court granted permission for information obtained in a Norwich Pharmacal disclosure application to be used, potentially, to bring proceedings against the bank who had provided the information in its capacity as a ‘neutral’ third party. Further, in a recent decision in the Nigeria case, (Federal Republic of Nigeria v JP Morgan Chase Bank [2021] EWHC 1192 (Comm)), the court ordered the bank to disclose documents from its compliance and AML teams which Nigeria argued were necessary to establish whether or not JP Morgan had breached its duty to take reasonable care in executing payment instructions. In particular, Nigeria requested (and was granted) disclosure of documents relating to alleged concerns held by the US compliance team.

In that case, the court appeared willing to accept that a broad scope of disclosure is required from banks in Quincecare cases and that the seniority of custodians is a relevant consideration. Documentation is therefore likely to be a key battleground in evidencing whether or not the duty has been breached.

In conclusion, further judicial clarification on the scope of the Quincecare duty is required to allow financial institutions to understand the standard against which they are to be judged. If the Court of Appeal’s decision in Barclays v Philipp is any indication, it seems that the scope of the Quincecare duty is likely to grow wider rather than narrower. The court observed that the purpose of the duty is to protect consumers and that the duty of inquiry aspect is in line with sound policy because ‘in the fight to combat fraud, banks with the relevant reasonable grounds for belief should not sit back and do nothing’. Decisions following trial in the Nigeria case (and any trial in Philipp) are eagerly awaited, as is any eventual judgment by the Supreme Court on the scope of the duty as it applies to insolvent companies in Stanford.

1 [1992] 4 All ER 363
2 [2019] EWCA Civ 1641
3 [2019] UKSC 50
4 [2021] EWHC 10 (Comm)

 

Note: This article was first published as part of the 'Disputes Yearbook 2022' for Legal Business. You can view the article here and the full 'Disputes Yearbook 2022' here.

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Sue Millar

Sue Millar
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Harriet Campbell
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