In a keenly awaited decision, the Supreme Court has unanimously allowed the appeal in Philipp v Barclays Bank UK PLC1 and provided important clarity on the scope of the Quincecare duty owed by banks to their customers.
The Quincecare duty is derived from the decision in Barclays Bank plc v Quincecare Ltd2 (the “Quincecare Case”). In this and other similar cases, courts have held that a bank has a duty not to execute a payment instruction from a customer’s agent if it reasonably believes that the instruction is an attempt to misappropriate the customer’s funds.
The key issue to be determined in this case was whether the Quincecare duty could apply in cases of authorised push payment fraud (“APP Fraud”). APP Fraud arises when a customer is induced by fraudulent means to authorise its bank to transfer funds to an account controlled by the fraudster. The Supreme Court has now confirmed that the Quincecare duty does not have any application to cases of APP Fraud, where the customer itself explicitly instructs and authorises the bank to make a payment.
The claimant in this case, Mrs Philipp, became a victim of APP Fraud in 2018. Mrs Philip was deceived by fraudsters, posing as representatives of the National Crime Agency and the Financial Conduct Authority, into making a payment in the sum of £700,000 to an account in the UAE. The payment was made in two tranches. On each occasion, Mrs Philipp attended a branch of Barclays Bank (the “Bank”) in person and gave instructions for the international transfers to be made.
When Mrs Philipp discovered that she had fallen victim to a fraud, she brought a claim against the Bank alleging that it had breached its Quincecare duty by failing to implement policies and procedures to detect and prevent APP Fraud. The Bank argued that the Quincecare duty was limited to cases of attempted misappropriation by an agent of a customer and did not apply in situations, such as this case, where the customer had directly provided instructions to the bank.
High Court and Court of Appeal Decisions
The Bank applied for summary judgment and was successful at first instance3. The case then went to the Court of Appeal4 where, in March 2022, it was unanimously held that as a matter of principle the Quincecare duty could apply to any case where the bank is put on inquiry that the instructions may be an attempt to misappropriate funds. Importantly, the Court of Appeal held for the first time that the duty does not depend on a bank being instructed by an agent of the bank's customer, thereby expanding the potential application of the duty. The Bank appealed.
Supreme Court Decision
In a single judgment delivered by Lord Leggatt on 12 July 2023, the Supreme Court unanimously overturned the Court of Appeal’s decision, holding that it was “inconsistent with first principles of banking law”.
The Court rejected Mrs Philipp’s argument that a bank owes an implied duty to a customer not to follow an instruction given by the customer if it has reasonable grounds to believe that it is an attempt to misappropriate the customer’s funds. On the contrary, the Court confirmed that it is a basic duty of a bank under its contract with a customer who has a current account in credit to make payments from the account in compliance with its customers instructions. The Court emphasised that this duty is strict and where the customer has authorised the bank to make a payment, it must carry out that instruction promptly without concerning itself with the “wisdom or risks of its customer’s payment decisions”.
The Court noted that Mrs Philipp’s claim relied heavily on the Quincecare Case and the subsequent cases in which the Quincecare duty had been applied. The Court revisited this line of authorities and found that the reasoning applied in the Quincecare Case, which was followed by the Court of Appeal in this case, was fundamentally flawed. It proceeded from the false premise that it was necessary to resolve a perceived conflict between a bank’s duty to execute a payment order and its duty to act with reasonable skill and care.
The Supreme Court held that on a proper understanding of a bank’s duties there cannot be any such conflict. In the context of effecting a payment instruction from a customer, a bank’s duty to exercise reasonable skill and care will only arise where the validity or content of the customer’s instruction is unclear or leaves the bank with a choice about how to carry out the instruction. In such cases, the duty of skill and care is limited to “interpreting, ascertaining and acting in accordance with the instructions”5 of the customer. Where 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 it by making the requisite payment.
However, Lord Leggatt observed that rejecting the reasoning in the Quincecare Case should not lead to rejecting the conclusion. The Court explained that the true basis for the Quincecare duty can instead be found in the principles of agency. It confirmed that the authority of the agent to give payment instructions on the customer’s behalf does not include authority to defraud the customer. An agent acting in this way will lack actual authority to give the instruction on behalf of the customer. The Court clarified that the agent will still have apparent authority to give instructions on the customer’s behalf unless there are “circumstances suggestive of dishonesty” apparent to the bank. In that case, the bank’s duty to exercise reasonable skill and care in executing the customer’s instructions requires the bank to make inquiries to verify the agent’s authority. If the bank makes the payment without making these inquiries, it will breach its duty. It will also be acting without actual or apparent authority from the customer and will, therefore, not be entitled to debit the customer’s account.
The Court concluded that these principles have no application to cases such as the present one where there is no agent involved and the customer directly and unequivocally authorises the bank to make the payment. On this basis the Supreme Court allowed the Bank’s appeal and restored the order of the High Court giving summary judgment in favour of the Bank in respect of Mrs Philipp’s claim that the Bank had acted in breach of duty by effecting the payments in accordance with her instructions.
Mrs Philipp had an alternative claim that the Bank was in breach of duty by not acting promptly to recall the payments made to the UAE after being notified of the fraud. The Supreme Court found that the questions of: (i) whether the Bank owed such a duty; and (ii) whether there was any realistic prospect that the money would have been recovered if attempts had been made to recall the payments sooner; could not be decided without a fuller investigation of the facts. Therefore, the Court concluded that this alternative claim should not have been summarily dismissed by the High Court.
This decision by the Supreme Court confirms that the Quicecare duty is limited to cases concerning payment instructions that have been given by an agent on behalf of a customer. This is consistent with the position, as expressed in previous cases, including by the Supreme Court in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd6. However, the detailed judgment given by the Court in this case provides helpful guidance on the proper scope and application of the Quincecare duty and re-affirms the limits on a bank’s duties to its customers following the decision of the Court of Appeal.
While the Supreme Court acknowledged that APP Fraud is a growing social problem that can have cause great hardship for its victims, the Court made it clear that the question of whether the victims of such fraud should bear the loss themselves or whether banks should be required to reimburse victims of such crimes is ultimately a question of social policy for Parliament to consider.
Since the commencement of Mrs Philipp’s claim, there have been various regulatory and legislative developments in that regard, including most recently the Financial Services and Markets Act 2023 (“FSMA 2023”), which received Royal Assent on 29 June 2023 and will come into effect in 2024. Under FSMA 2023, liability for victims who have been defrauded of their funds will be imposed on banks and payment firms “where the payment order is executed subsequent to fraud or dishonesty.” It provides that the losses will be allocated equally between the sending and receiving providers, though the proposed new scheme is subject to certain limitations. It is, for example, confined to consumers, charities and “micro-enterprises” and does not apply to larger businesses. However, it will provide some recourse for victims of APP Fraud and demonstrates that the legislature is taking steps to address the issue.