Examining Quincecare duty


9th June 2022

The Quincecare duty requires financial institutions to not follow a customer's payment instruction where there are reasonable grounds to believe that the payment is an attempt to misappropriate funds. Misappropriation is the unauthorised, improper or unlawful use of funds or other property for purposes other than that for which intended. For example, the Quicecare duty can be applied where a relevant bank is “put on enquiry” that it may in fact facilitate a fraud on the customer.

Claims for breach of the duty against the bank are fairly common, particularly in the context of authorised push payment (APP) fraud, where a victim is tricked into making large bank transfers to an account posing as a legitimate payee. The frequency of claims made by customers under this duty and financial implication of banks having to compensate for fraud claims poses a significant risk for lenders and warrants further examination.

The case

The Quincecare duty originated from the case of Barclays Bank plc v Quincecare Limited. Quincecare Ltd wished to purchase four chemist shops and secured a loan from Barclays to do so, guaranteed by U.Q Ltd. Barclays later refused to comply with a request to drawdown £344,000 to a firm of solicitors without written authorisation from Quincecare’s chairman. The chairman subsequently transferred the funds to the USA, misappropriating them. The Queen’s Bench held Barclays was entitled to repayment from Quincecare and, following their insolvency, the guarantee from U. Q Ltd.

In making the decision, Steyn J, held generally that:

  1. A bank owes an implied duty to exercise reasonable care and skill when executing customers’ instructions; and
  2. This includes not executing payment instructions if there are reasonable grounds (although not necessarily proof) for believing they are an attempt to misappropriate funds.

The duty aims to find a fair balance between three main principles:

  • (1) the need for banks to protect customers from fraud;
  • (2) the avoidance of overbearing obligations on banks; and
  • (3) the obligation to follow customers’ instructions.

Despite these well minded intentions, the courts have since struggled to apply the duty in a way that gives clear guidance to financial institutions.

Expansion of the duty and a lack of clarity

The duty succeeded in application for the first time in 2019, in the case of Singularis Holdings Ltd v Daiwa Capital Markets Europe. Singularis came before the Supreme Court and involved asset stripping fraud: where company funds or assets are transferred while leaving behind the debts.

Singularis was wholly owned by Mr Al Sanea, who instructed Daiwa (the lender) to pay out funds in excess of US $200m to entities ultimately controlled by him. Joint liquidators of Singularis subsequently successfully recovered these sums on the basis that Daiwa committed a breach of their Quincecare duty, with Rose J finding that this duty is “to protect the company against just the sort of misappropriation of its funds as took place here”. In relation to the scope of the Quincecare duty, the Supreme Court held that a bank will be liable if it executed an order “knowing it to be dishonestly given, or shut its eyes to the obvious fact of the dishonesty, or acted recklessly in failing to make such inquiries as an honest and reasonable man would make”.

In 2019, the Court of Appeal in Federal Republic of Nigeria (FRN) v JP Morgan Chase (JPMC) applied the Quincecare judgment to a modern fraudulent payment; in this case, JPMC had complied with payment instructions made by authorised signatories of the FRN, who were senior Nigerian officials. The FRN later alleged that JPMC should have realised the instructions and payments themselves should not have been trusted. The Court of Appeal found that the Quincecare duty will require “something more” from a bank than non-compliance with a payment instruction and that a duty of enquire was in line with “sound policy”. The FRN decision places greater weight on the duty of banks to spot and prevent fraud, requiring some positive action, but does not define this in practical terms or give any instruction as to when a customer’s instructions should not be followed. This causes potential increases in costs of time and money for lenders who, following the FRN decision, are under an expanded duty to invest further in their anti-fraud processes.

Individual account holders

Last year, the case of Philipp v Barclays Bank UK Plc made the law clearer where payment instructions are from individual account holders. In Philipp, an individual customer was tricked into transferring of £700,000 to the UAE by fraudsters impersonating the FCA and subsequently brought a claim against Barclays for allegedly failing to protect her in line with their Quincecare duty.

The High Court confirmed that the Quincecare duty is to protect corporate customers or unincorporated associations from fraud but, unlike the original case, stated that this does not extend to individual customers. The Philip judgment is a landmark decision in which corporate customers are protected over individual customers. This is done to balance the bank’s both treat smaller customers proportionately and to respect the duty to follow customers’ instructions. Critically, the exception protects banks from potential a tide of claims from individual customers as a result of APP fraud. Importantly, the duty is also limited to situations where payment instructions are not properly authorised, for example, where they are made by an agent acting fraudulently.

Despite what seems to be a moment of clarity, the Financial Ombudsman has seemingly broken from the Philipp judgment and has regularly upheld complaints arguing the Quincecare duty was breached for individual customers. In December 2020, it concluded there are “certain cases where, on those specific facts, it would have been fair and reasonable for a bank to take action because the fraud alerts that they are supposed to deploy for regulatory and legal reasons, probably could and should have been triggered.”

The current position of banks

Significant uncertainty remains in the form of two main outstanding questions:

  1. Under what circumstances should a bank refuse payment instructions from an authorised payee and how can this be balanced against its duty to follow its customers’ instructions?
  2. Will individual account holder’s claims continue to succeed when an application is made to the Financial Ombudsman despite the decision in Philipp?

The obligation remains a significant burden on banks, who should take the necessary steps to show regulatory and legal standards have been adhered to before a payment has been authorised. Those directly and indirectly affected should keep an eye out for the appeal of Philipp, which is likely to go to the Court of Appeal in February this year and presents an opportunity for the court to answer the above and clarify in more detail how financial institutions are supposed to meet what are superficially inconsistent obligations.

References:

  • Barclays Bank plc v Quincecare Limited [1992] 4 All ER 363
  • Singularis Holdings Ltd (In Liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50
  • Federal Republic of Nigeria (FRN) v JP Morgan Chase (JPMC) [2019] EWCA Civ 1641
  • Philipp v Barclays Bank plc [2021] EWHC 10 (Comm)
  • Ref: DRN5297527 18 December 2020

If you need legal advice about anything in this article

Speak to one of our Banking and Financial Services law specialists

Arrange a call

Enjoy That? You Might Like These:


events

19 July -
What is the state of health and social care at present and how is the sector moving forward? This opening event will explore significant areas of consideration for the sector. Read More

articles

22 June -
"ESG", or Environment, Social and Governance is the latest acronym that all businesses now have to deal with. The decoding of the letters is the easy part, but what does... Read More