Will we hear the term “Quincecare Duty” again? Supreme Court sides with banks in Philipp v Barclays decision

On 12 July 2023, the Supreme Court handed down its much-anticipated judgment in Philipp v Barclays Bank UK PLC [2023] UKSC 25, finding that the bank did not owe a duty to protect its customer, the claimant, by refusing to carry out her payment instructions if it had reasonable grounds to believe that she was being defrauded. In doing so, the Supreme Court examined the true nature of the relationship between banks and their customers and held that as long as the instruction from the customer was clear and had either been given directly by the customer or an agent acting with apparent authority, then the bank was not required to undertake inquiries to verify the instruction or stop the payment.

The decision will be a welcome relief for financial institutions and their insurers, as it clarifies the scope of the duty which was in danger of being expanded, and as a result, it precludes a wave of potential claims against these companies. The news will be less well received, however, by these victims of fraud.    

Background

In 2018, Mrs. Philipp and her husband became victims of authorised push payment (APP) fraud, when they were deceived into instructing the transfer of £700,000 in two payments from their Barclays Bank (“the Bank”) account to bank accounts in the UAE. The fraudsters persuaded them that they were acting as a legitimate entity by posing as an operative of the Financial Conduct Authority, in conjunction with the National Crime Agency. The Bank attempted to recall the funds but was ultimately unsuccessful and the money was lost. Mrs. Philipp consequently brought a claim against the Bank, claiming it owed her a duty under contract and at common law to refrain from carrying out her instructions if the Bank had reasonable grounds for believing that she was being defrauded. 

The duty allegedly breached by the Bank has come to be known as the “Quincecare Duty”, following the case of Barclays Bank Plc v Quincecare [1992] 4 All ER 363. In broad terms, under the Quincecare Duty, a financial institution must protect its customer from itself in circumstances where the bank is on reasonable inquiry that there may be a risk of fraud on the account. 

Mrs. Philipp’s claim alleged that the Bank should have had reasonable grounds for believing the instructions were an attempt at misappropriating funds from her account, and therefore the Bank breached its duty by (i) making payments from her account; and (ii) not taking adequate steps to recover the payments once made. 

In response, the Bank successfully applied to have the claim summarily dismissed on the grounds that it did not owe Mrs. Philipp the alleged duty. Mrs. Philipp appealed to the Court of Appeal, who held that, in principle, a bank owes a contractual duty to its customer of the kind alleged by Mrs. Philipp. This was seen by many as a significant expansion of the Quincecare Duty and, if ultimately successful at trial, could have triggered a flood of claims against banks given the prevalence of APP fraud.

The Supreme Court decision

In a unanimous decision, the Supreme Court held that the Court of Appeal was wrong in its reasoning and conclusion, which it considered to be inconsistent with the first principles of banking law. The Supreme Court relied upon the basic duty of a bank under contract, which is to make payments from the account in compliance with the customer’s instructions. If a payment has been authorised, it is for the bank to carry out the instruction promptly and, if it fails to do so, it could be in breach of duty. Compliance with this mandate is strict and can only be departed from in circumstances where carrying out a customer’s instructions would result in the bank acting unlawfully or facilitating money laundering. However, in carrying out its mandate, it is not for the bank to concern itself with the wisdom and risks of its customer’s payment decisions. 

The Court of Appeal had found that there was a conflict between the duty to execute a customer’s instruction and the bank’s duty to act with reasonable skill and care and resolved this by turning to broader considerations of fairness. However, the Supreme Court held that this approach was flawed as this conflict did not exist. The duty to carry out services with reasonable care and skill only arises where the contract gives the bank latitude as to how the relevant services are carried out; for example, where the contract between them allows the bank to choose the transfer method, or where the customer’s instruction leaves it unclear as to what the bank is being instructed to do. However, “[w]here the bank receives a valid payment order which is clear and leaves no room for interpretation or choice about what is required in order to carry out the order, the bank’s duty is simply to execute the order by making the requisite payment. The duty of care does not apply.” Further, the Supreme Court iterated that the role of the courts was not to make policy or resolve perceived unfairness – that was for parliament and regulators. Of relevance, it noted the recent reforms requiring reimbursement by banks to victims of APP fraud in certain circumstances.

The Supreme Court noted that what had been identified as the defining characteristic of the reasoning in Barclays v Quincecare (and the cases that subsequently applied it, such as Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [20170 EWHC 257 (Ch)), seemingly without question, was that a payment instruction had been given to the bank by an agent who was an authorised signatory of the customer’s account but was perpetrating a fraud against the customer. This was too simplistic and required further analysis.

Having reviewed the case law on agency, the Supreme Court clarified that an agency relationship does not give the agent authority to act dishonestly in pursuit of the agent’s own interests and in the conduct of a fraud against the customer (the agent’s principal). If the agent acts in this way, it has no actual authority to do so. Nevertheless, the agent will still 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.” However, if the bank is put on notice that there may be fraud on the account, the bank should make inquiries to verify the agent’s authority. If it fails to do so, the bank will be acting in breach of duty. 

The Supreme Court dismissed the idea that the “Quincecare Duty” is, therefore, “some special or idiosyncratic rule of law”. Rather, 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.  In circumstances where an instruction is being given by an agent, if a bank is “put on inquiry” by having reasonable grounds for believing that the agent’s payment instruction is an attempt to defraud the customer, this duty requires the bank to first make enquiries to verify that the instruction is authorised by the customer before executing it. These principles were not limited to corporate customers; they could also apply where individuals hold joint accounts or where the bank is on notice that a customer lacks mental capacity to give instructions, for example.

The Supreme Court rejected that the above applied in Mrs Philipp’s case because “the validity of the instruction [was] not in doubt.” It was held that, provided the instructions were clear and given by the customer personally or by an agent acting with apparent authority, no inquiries were needed to clarify or verify what the bank must do. Mrs Philipp had attended the branch in person and been quite emphatic that she intended to make the transfers. The mandate was therefore strict and bore no latitude. The bank completed its duty by executing the instruction as asked. Conversely, if it had failed to do so, that would have been the breach of duty not the breach that Mrs Philipp had alleged. 

Counsel for Mrs Philipp sought to argue that Mrs Philipp’s instruction did not reflect her true, genuinely-held intention as Mrs Philipp had been induced by fraud into giving the instruction. In consideration of the appropriate weight to give the customer’s instructions, the Supreme Court’s view was that the intention behind instructions was no less genuine if it came from a place of mistaken belief. Furthermore, this principle applies irrespective of how a mistaken belief comes to be held, including if it was induced by deceit. In such circumstances, the instruction is not automatically invalidated. The customer therefore only has recourse to seek recovery from the fraudster (unlikely as it is that such a claim would be successful).

Notwithstanding the above analysis, the Supreme Court acknowledged, referring to an Australian case called Ryan v Bank of New South Wales [1978] VR 555, that there could be circumstances where a bank should not comply with an instruction “if a reasonable banker properly applying his mind to the situation would know that the [account holders] would not desire their orders to be carried out if they were aware of the circumstances known to the bank.” The Supreme Court opined that if, for example, the police had notified the bank that a customer was being scammed, it may be right for the bank not to comply with the instruction and to verify it with the customer. This suggests that there are potential exceptions to the principles enforced by the Supreme Court’s latest decision on this question, albeit the Supreme Court noted that the examples quoted from the Ryan case all involved the agent being aware of information that its principal was not.  

Inevitably, the analysis will depend on the facts  and unfortunately for Mrs Philipp, this point was of no assistance to her as: (a) there was no such report; (b) she was aware of all the unusual elements of the instruction (such as the large amounts to be transferred, the fact they were being sent to the UAE and to companies to which she had no previous dealings); and (c) she had insisted the payments were made, by confirming them in person at the branch of the bank. 

Whilst it may be difficult for Mrs Philipp (and other victims of APP fraud) to accept this decision,  it does provide some welcome clarity regarding the applicability of the “Quincecare Duty” (assuming the name endures), and should prevent (or at least severely limit) the torrent of potential litigation which could have otherwise been pursued against financial institutions and subsequently their insurers given the prevalence of APP fraud. 

On a practical level, the judgment noted that a bank’s terms and conditions could contain express terms that the bank would not comply with an instruction it thought was provided as a result of a scam. Whilst there was no such express term in Barclays’ Ts & Cs, it did include certain express exceptions to the bank’s duty to carry out the customer’s instructions, including where “we reasonably think that a payment into or out of an account is connected to fraud or any other criminal activity, including where the funds are being obtained through deception.” The Supreme Court held that this term gave the Bank a right and was not to be construed as giving rise to or imposing a duty, thus drawing a distinction between the terms that may give rise to an exception in this regard. 

It was not all a loss for Mrs Philipp, however. The Supreme Court recognised that the Court of Appeal had only considered the main claim asserted by Mrs Philipp and having decided it in Mrs Philipp’s favour, had not separately addressed Mrs. Philipp’s claim that the Bank was in breach of duty for failing to take adequate steps to recover the money once the fraud was discovered. As such, the Supreme Court refused summary judgment for this alternative case, which Mrs Philipp remains free to pursue. The scope of banks’ duties to protect its customers may therefore face further scrutiny before long.