Quincecare: Clarified and Confined

The claim in brief

In 2018, the claimants, Dr and Mrs Philipp found themselves the victims of an elaborate APP scheme. The couple was deceived into instructing Barclays (‘the bank’) to transfer £700,000 from Mrs Philipp’s current account to the UAE. The money, which represented the majority of their life savings, was transferred and lost.

Remarkably, the fraudsters convinced the couple that they were working with the Financial Conduct Authority and National Crime Agency to investigate a fraud within Barclays and an investment firm in which Dr Philipp held savings. Despite visits from a police officer alerting them to the risk of fraud, the couple were persuaded not to cooperate. The scheme even extended to phone calls from the fraudsters, purporting to come from the NCA and the police officer’s mobile. The couple was thus deceived into thinking that they were moving their money to safety.

While all fraud involves an abuse of trust, this case highlights the particularly devastating nature of APP fraud. Unlike ‘pull’ payment fraud, where money is removed from a victim’s bank account without their knowledge, ‘push’ payment schemes deceive victims into acting as the instruments of their own defrauding.

This characteristic of APP fraud forms the key point of distinction in Philipp, as a brief glance at the preceding case law shows.

Quincecare in the courts

In Quincecare, the fraud in question was different: the bank had been instructed to execute a payment by the customer’s agent, purporting to give instructions on behalf of their principal but in fact acting dishonestly in their own interests.

This triangle of ‘internal fraud’ – bank, customer and dishonest agent – formed the factual context for the duty as originally articulated by Steyn J: a bank should refrain from making payment if and for so long as it is ‘put on inquiry’, in the sense that it has reasonable grounds to believe that the order is an attempt to misappropriate funds. Subsequent decisions were likewise cases of ‘internal fraud’.

Philipp, however, was a case of ‘external fraud’: the bank’s payment instructions came directly from the customers, under the influence of fraudsters.  It was perhaps unsurprising, then, that the High Court found that the ‘Quincecare duty’ could not arise on such facts, granting summary judgment in the bank’s favour.

However, the Court of Appeal found for the claimants, holding that the existence of the duty did not depend upon the presence of a dishonest agent. It was thus arguable that the duty could arise in cases of APP fraud. Naturally, the prospect of an extended duty upon banks to protect their customers from fraud caused consternation among the financial community.

Key takeaways

A number of issues were addressed in the Supreme Court’s judgment:

First, Lord Leggatt identified the ‘mistaken premise’ in Quincecare, which led the Court of Appeal astray in Philipp. In Quincecare, it was assumed that the payment order given by the dishonest agent was a ‘valid and proper order’. This was seen to create a conflict between (i) the bank’s duty to execute a valid payment order; and (ii) the bank’s duty to exercise reasonable care in executing such an order. However, this misconstrued the effect of dishonesty upon an agent’s authority.

Second, Lord Leggatt confirmed that there is no conflict between competing duties. The basic duty of a bank is to comply with its mandate from the customer in making payments from the account. The bank’s duty of reasonable skill and care applies only where there is any scope for ambiguity or doubt about the execution of that instruction, and is thus subordinate.

Third, Lord Leggatt clarified the doctrines of actual and apparent authority:

• Actual authority does not include agents acting dishonestly. It is governed solely by the agreement between agent and principal. However, third parties will know nothing of this agreement, so will be ignorant of when a dishonest agent lacks actual authority.
• Hence, the law recognises the doctrine of apparent authority, in order to protect the expectations of a third party who has reasonably relied upon the principal’s representation that the agent is authorised to bind the principal to the relevant transaction.
• As regards apparent authority, agents may bind their principals even when acting dishonestly. However, the doctrine is limited. By definition, it cannot apply where the third party has notice that the agent lacks actual authority, such that the third party’s reliance is not reasonable.

Applying these agency principles to the Quincecare cases, the duty may be explained as follows:

• An agent who is authorised to give payment instructions on the customer’s behalf, but who acts to defraud its principal, will lack actual authority. If the bank executed the instruction, it would be making a payment which the customer has not actually authorised. [72], [90]
• The bank will still generally be entitled to rely on the agent having apparent authority to give payment instructions. However, that only applies where reliance is reasonable, i.e. there are no circumstances suggestive of dishonesty which would cause a reasonable banker to make inquiries to verify the agent’s authority before executing the instruction. [90]
• If such circumstances do exist, such that the bank is put on inquiry, the bank’s duty to exercise reasonable skill and care is engaged. The bank must refrain from executing the instruction without first making inquiries to verify that it was actually authorised by the customer. [90], [97]
• If the bank goes ahead without making such inquiries, and the instruction proves to have been given without the customer’s authority, the bank will be in breach of its duty of care. [97]

This has the following important implications:

• Since the dishonest agent has neither actual nor apparent authority, the bank will also be acting outside the scope of its mandate from the customer. As such, the payment instruction will not bind the customer, and the bank will not be entitled to debit the payment to the customer’s account. [96]
• In practical terms, this means that (unless consequential losses are sought) the success of the customer’s claim does not depend on proving that the loss would have been avoided if reasonable inquiries had been made. [96]

The Quincecare duty: clarified

Ultimately, the Quincecare duty is merely an application of the bank’s general duty of care to ‘interpret, ascertain or act in accordance with’ the customer’s instructions.

It has no application to APP fraud, where the instruction is given by the customer and its validity is not in doubt.

If the payment instruction is clear and given by the customer themselves, or by their agent acting with apparent authority, the bank need make no inquiries to clarify or verify what it must do. The commercial wisdom of its customer’s payment instructions is not the bank’s concern.

Nonetheless, a bank cannot expect to escape liability for relying unreasonably on an agent’s apparent authority.

Looking ahead:

The Supreme Court’s ruling offers useful clarity for claimants, defendants and practitioners.

Below are some key points to consider for the future:

1. Expanding the duty. The decision seems likely to curtail further attempts to expand the scope of the Quincecare duty. Nevertheless, the multitude of financial transactions conducted via agents, and the development of different types of fraud, suggests there is scope for the duty to develop even within its newly articulated confines.
2. Content of the duty. The Supreme Court has made clear that, once put on notice, a bank will be in breach if it proceeds without making further inquiries. It remains to be seen what level of inquiry will suffice in each case to discharge the bank’s duty of care. This seems likely to be highly fact-dependent.
3. Nature of the relief. Lord Leggatt’s comments at [96] suggest that a successful claim will sound in debt rather than damages. In acting outside its mandate, the bank is not entitled to debit the account, so presumably the customer may demand the reconstituted balance of the account. This echoes the conclusion reached by Lord Sumption NPJ in the Hong Kong Court of Final Appeal (PT Asuransi Tugu Pratama Indonesia TBK v Citibank NA (2023) 26 HKCFAR 1). A claim in debt has significant advantages for claimants, not only as regards causation, mitigation and remoteness, but also questions of limitation and contributory negligence.
4. Alternative claim. The Supreme Court refused summary judgment on the couple’s alternative claim that the bank was in breach of duty by failing to take sufficient steps to seek recovery of the money once notified of the fraud. Whether banks may owe such a ‘clawback duty’ remains for determination at trial – although, on the facts of Philipp, the likelihood of proving loss of a chance was judged to be ‘slim’.
5. Legislative scheme. Lord Leggatt cited the reimbursement scheme introduced under the Financial Services and Markets Act 2023 to protect victims of fraud. In doing so, he emphasised the court’s proper role as being adjudicative. Policy considerations as to whether banks should bear liability for loss caused by fraud remain for legislators and regulators.

Ultimately, the judgment endorses contractual clarity and commercial expediency: banks must in general be entitled to rely on the instructions they are given, and make prompt payment accordingly. Any exception, whereby further inquiry is required, simply proves this rule.