Apparent authority post Philipp v Barclays – looking beyond Quincecare duty

At first glance, Philipp v Barclays Bank UK plc [2023] 3 W.L.R. 384 appears to be the climax of the recent line of cases relying on the so-called Quincecare duty, however the Supreme Court’s decision used general principles of agency law as its foundation for the application of the Quincecare duty. In the process, it confirmed the English law test for a third party's reasonable reliance on the apparent authority of an agent. As commercial parties are now finding, it has much wider implications and may affect any commercial relations where reliance is placed on the authority of each other’s agents (including directors, trustees and employees).

A brief history of the Quincecare duty

The so-called Quincecare duty derived from the judgment in Barclays Bank plc v Quincecare Ltd [1992] 4 All E.R. 363 and has been relied on in the past years by fraud victims who sought to recover money from their own banks in cases where an internal fraud by an agent acting for the victim had been perpetrated by way of fraudulent payment instructions given to those banks. Simply put, the Quincecare duty requires a bank to refrain from executing a customer’s instructions where it is put on enquiry, in the sense that it has reasonable grounds for believing, that the order is an attempt to misappropriate the customer's funds.

The duty reached its limit in the Supreme Court judgment Philipp v Barclays Bank UK plc [2023] 3 W.L.R. 384^[1] (Philipp v Barclays) in which the applicant sought to extend the scope of the Quincecare duty by relying on it in the case of an authorised push payment fraud, i.e. circumstances where the payment instructions were issued directly by the customer. The case notably differed from the existing Quincecare cases which largely concerned scenarios where there had been an internal fraud by an agent acting for the customer. The Supreme Court held that the bank did not owe the customer a duty not to carry out their payment instructions even if Barclays had reasonable grounds for believing that the customer was being defrauded.

In arriving at its decision,  the Supreme Court re-visited the justification for the Quincecare duty in previous case law and reaffirmed the duty, albeit based on a different rationale than seen in previous case law. In that respect, the Supreme Court looked to the general principles of agency law and the doctrines of actual and apparent authority and confirmed the test in English law for reliance as to apparent authority.

Apparent authority under Philipp v Barclays

It is a well-established principle that apparent authority protects the expectations of a third party which acts in reliance on a representation by a principal that an agent has authority to bind the principal.

However, in Phillipp v Barclays, the Supreme Court found that such protection is only justified if the reliance is reasonable; the correct test was whether or not a third party has reason to believe that the agent is acting without authority and made or failed to make the inquiries that a reasonable person would have made in all the circumstances to verify that the agent had that authority.

Applying the test to the Quincecare duty scenario, the Supreme Court held that a bank cannot rely on the apparent authority of an agent to give payment instructions on a customer’s behalf, by virtue of the customer's representation to the bank, 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. The bank’s duty to exercise reasonable skill and care in executing the customer's instructions in these circumstances will require it to make inquiries to ascertain whether the instruction given was actually authorised by the customer, and if the bank proceeds to execute such payment instructions without making any such inquiries it will be in breach of this duty.

A consequence of particular importance is that the bank in these circumstances will be acting outside the scope of its mandate. The mandate is the terms on which the bank is authorised and undertakes to carry out the customer’s instructions to make payments. Where the bank acts outside the mandate by making a payment which the customer has not authorised, it cannot debit the customer’s account. As such, if the customer is claiming damages for consequential losses by reference to the amount debited (only), it is unnecessary for the customer to prove that, if reasonable inquiries had been made, the agent's dishonesty would have been revealed and the loss avoided. Therefore, causation does not apply.

The case of East Asia

In Philipp v Barclays, in determining whether reliance was reasonable, the Supreme Court applied the test from the Privy Council’s decision in East Asia Co Ltd v PT Satria Tirtatama Energindo [2020] 2 All ER 294 (East Asia Co v PT Satria). That was not a Quincecare duty case. Instead, it concerned a dispute as to the validity of a share sale agreement and share transfer.In that case, the directors of the transferor company lacked apparent authority to enter and execute the transaction, and the transferee company had been put on inquiry as to the directors' lack of actual authority but had failed to seek evidence that the transaction had board approval.

When deciding whether reliance was reasonable in the context, the Privy Council found that a reasonable person in these circumstances is one that has all the background knowledge which would reasonably have been available to the parties in the situation in which they were, at the time of the contract. In East Asia Co v PT Satria:

• the transferee company knew that only the board of the transferor company could approve the share sale agreement and share transfer but did not seek or obtain any evidence that such approval had been given;
• the transferee company knew that the transferor company had five directors but had only dealt or been in contact with two directors; and
• the transaction had many highly unusual features such as, the transferor company was selling its only asset; the transferor company was merely an intermediate holding company and the transferee company had not made contact with the parent company; and the two directors had a financial interest in the transaction.

In these circumstances, the Privy Council held that the transferee company could not presume in its favour that things had been rightly done. If a third party had actual or constructive notice that the steps necessary for the formal validity of the acts of the agent (in this case, the director) had not been taken, the third party could not rely upon the principle of apparent authority.

Application of “reason to believe that the agent is acting without authority”

What constitutes “reason to believe” is highly fact sensitive. In Philipp v Barclays, the Supreme Court indicated that “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” would be sufficient to satisfy the threshold. In previous cases, we have seen considerations of whether that be “other circumstances giving rise to suspicion” in Hopkins v TL Dallas Group Ltd [2004] EWHC 1379 (Ch); or “unusual terms of [a] transaction” in Business Mortgage Finance 6 Plc v Roundstone Technologies Ltd [2019] EWHC 2917 (Ch). In the latter case, among other unusual terms, the consideration of £237 million was to be paid in two instalments with £1 payable in initial consideration and the remainder in deferred consideration – the defendant’s own board was sufficiently concerned about the position at the time to have expressly included and relied on third party protections in the documentation, which was noted in the judgment.

Speaking more broadly, the question of reasonable belief is an objective one as to whether the circumstances are sufficiently odd or suspicious that they should have prompted the third party to make further inquiries, to confirm the agent’s authority in these circumstances. However, it does not have to rise to the level of the third party turning a blind eye or acting irrationally.

Whilst section 40 of the Companies Act 2006 does provide some protection to third parties dealing with directors of companies, it certainly will not extend to all cases where there are reasons to believe that the directors are acting without authority. Section 40 provides that a person dealing with a company (which specifically includes being a party to a transaction with the company) in good faith is entitled to assume that the directors have the authority to bind the company. Although there is a rebuttable presumption of good faith, and knowing that the transaction is beyond the directors’ powers is not in and of itself regarded as acting in bad faith, awareness of unusual, odd, or suspicious circumstances will be sufficient to rebut the presumption and to require the party to make inquiries that a transaction has been properly authorised. In any case, section 40 only applies to directors and does not extend to any other agents of a company.

Wider commercial considerations

The authors of this article had to recently consider this test in a non-Quincecare type matter, where trades were executed with a bank for a client pursuant to an ISDA Master Agreement on instructions of an (employee) agent. The circumstances surrounding the actions of the agent were such that there was a question of whether the bank should have had cause for concern about the agent's motivations and self-interest and, therefore, could not rely on the agent’s apparent authority.

As set out above, the test laid down by the Supreme Court in Philipp v Barclays has a much wider scope of applicability to questions concerning reasonable reliance on apparent authority than simply in the category of cases involving payment instructions executed by banks. It extends to any case where a third party (including third parties other than banks) seeks to rely on the apparent authority of an agent (which could be a director, trustee or employee). In all such cases, the parties will have to consider (i) whether the third party has reason to believe that the agent is acting without authority and (ii) whether it failed to make the inquiries that a reasonable person would have made in all the circumstances to verify that the agent had relevant authority. 

[1] Philipp (Respondent) v Barclays Bank UK PLC (Appellant) (supremecourt.uk)