Oct 13, 2023
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And as sums defrauded usually disappear, victims search for an alternative source to recover their losses. Unsurprisingly, the search often identifies banks' resources as a potential first call. However, the UK Supreme Court has limited the scope of banks' responsibilities, clarifying their duties to customers in Philipp v Barclays Bank UK Plc1.
In Philipp, Dr Philipp was contacted by the fraudster who claimed to be working for the Financial Conduct Authority in conjunction with the National Crime Agency. The fraudster told Dr Philipp he was investigating a fraud within HSBC and an investment firm where Dr Philipp held substantial savings.
Over a series of conversations, Dr and Mrs Philipp were persuaded they needed to move their money to "safe accounts" - which they did in two transfers, totalling £700,000, to bank accounts in the United Arab Emirates.
This type of fraud is known as "authorised push payment" fraud ("APP") because the victim is induced by fraudulent means to authorise their bank to send a payment to a bank account controlled by the fraudster. The bank was aware that this was likely to be a fraud and acted together with the police in attempting to dissuade Dr and Mrs Philipp from cooperating with the fraudsters.
Nevertheless, the Philipps argued that their bank was under a duty to refrain from executing an instruction if it had reasonable grounds to believe that the instruction constituted an attempt to misappropriate funds from its customer.
The basis for this argument was the 'Quincecare duty' – a principle ostensibly developed by Barclays Bank plc v Quincecare Ltd2 to the effect that a bank must refrain from executing an order if and for as long as it is 'put on inquiry' in the sense that it has reasonable grounds for believing that the order is an attempt to misappropriate the funds of the company.
In Philipp, however, the Supreme Court re-examined this duty and in doing so, limited its potential scope.
Banks' basic duty to customers
The starting point of the Supreme Court was to look closely at the fundamental nature of the bank's relationship with its customer and its mandate. This relationship is contractual, and so can be altered in any given instance by the specific terms of the banking contract. However, subject to any such specific terms, that contractual relationship has certain characteristics as a matter of general law.
First, "money in an account" is not the customer's, but the bank's. If the account is in credit, the bank is simply a debtor like any other to the customer in the sum of the account balance.
The bank's principal obligation is discharge that debt by paying to the customer the balance due when asked. However, as a development of that, the bank must also pay money to third parties when instructed to do so by the customer. In doing so, the bank is recognised in law as the customer's agent.
As such, the Court affirmed that, as in the case of every contractual agency, the bank is bound to act in accordance with the authority conferred upon it by its principal, the customer, and perform what it has agreed to do.
This duty to comply is strict – where the customer has authorised and instructed the bank to make a payment, the bank must carry out the instruction promptly. The Supreme Court accepted that there would be limitations on this duty, examples of which include:
Is there a 'Quincecare duty' to protect customers from fraud, and if so, what is it?
As noted above, the Quincecare duty was the duty of care owed by a bank to its customer which requires it not to execute a payment instruction if the bank has reasonable grounds for believing that the instruction is an attempt to misappropriate the customer's funds. In the original Quincecare case, this arose where the instruction was given by an agent (such as an employee) of the bank's customer, whom the customer had authorised as a signatory to operate its account.
Where there were circumstances indicating to the bank that its customer's agent or employee was operating the account fraudulently, such as for his or her own interests rather than the customer's, the bank was put "on inquiry", and if it did not make reasonable inquiries to satisfy itself of the legitimacy of the transaction, it would be liable for sums paid away and lost.
The Philipps therefore argued the Quincecare duty applied whenever the bank is on inquiry that its customer is the victim of a fraud. They also argued that the Quincecare duty is simply one aspect of the bank's duty, implied in contract, of reasonable skill and care in and about executing the customer's orders which requires a bank to refrain from executing an order without making inquiries if it has reasonable grounds for believing the customer is a victim of fraud.
The Supreme Court rejected this argument. It held that the Quincecare duty of the bank is not a special rule of law, but rather an application of the basic duty of care owed by a bank to interpret, ascertain and act in accordance with its customer's instructions.
Where a bank has reasonable grounds for believing that a payment instruction given by an agent purportedly on behalf of the customer is an attempt to defraud the customer, this duty requires the bank to refrain from executing the instruction without first making reasonable inquiries to verify that the instruction has actually been authorised by the customer. If the bank executes the instruction 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.
The Supreme Court also noted that this reflected the law of agency as it applies to the customer's agent. Where the customer delegates the operation of its account to an agent, the customer gives that agent both actual and apparent authority. Actual authority is the authority actually conferred by a principal on its agent. However, the exact extent of this might only be known by the principal and agent as a matter between them. Where, therefore, a principal holds out a person as his or her agent, third parties are entitled to rely on the authority the principal has apparently given that agent, being the authority it is reasonable to infer was given in the circumstances.
So, the bank's customer's agent has actual authority only to operate the account honestly for the purposes of the customer. It does not have authority to do so dishonestly for anyone else's purposes.
However, as the authority given is prima facie to operate the account, the bank can rely on the agent having authority to do in respect of any transaction unless the circumstances make it unreasonable to infer that he or she does so - such as them indicating that the agent is doing so as a fraud on the customer. If there are no such circumstances, the bank is entitled to take the agent's instructions at face value, as being within his or her ordinary (and actual) authority.
As a result, the Supreme Court found that the Quincecare duty was not applicable to a situation such as the one before it, where the customer was the victim of APP fraud. In such a case, the validity of the instruction is not in doubt – provided that the instruction is clear and is given by the customer personally or by an agent acting with apparent authority, no inquiries are needed to clarify or verify what the bank must do. The bank's duty is to execute the instruction and any refusal or failure to do so will prima facie be a breach of the bank's own duty as an agent of the customer.
Guernsey and Jersey
Although Philipp is a decision of the UK Supreme Court in respect of English law, it would likely be influential in respect of Jersey law and Guernsey law matters coming before the islands' Royal Courts. Previous Jersey case law has matched the English approach to the relationship of bank and customer, albeit it has done so by referring to the Quincecare case and accepting it at face as correctly stating the legal position.
Although that case has now been revisited by Philipp, Philipp re-evaluated and explained Quincecare, rather than overruled it outright. Further, the position stated previously in Jersey even by reference to Quincecare was not out of step with the Supreme Court's analysis in Philipp.
The Royal Court held that a bank's primary obligation was to honour its customer's instructions in accordance with its mandate, and an authorised signatory's ostensible authority to give payment instructions. Any duty to exercise care in deciding whether or not to do so must be limited in scope, and the bank is entitled to approach its relationship with the customer with trust, rather than mistrust, in the context of numerous banking transactions taking place in real time.
As a result, even before Philipp the Royal Court was cautious of finding a bank unreasonable in accepting an apparently valid instruction with the benefit of leisured hindsight.
Cayman Islands and British Virgin Islands
Similarly, in both the Cayman Islands and the British Virgin Islands ("BVI"), whilst Philipp is a decision of the UK Supreme Court, it is likely to be highly persuasive when considering the existence of, and limitations to, the Quincecare duty of care.
To the writers' knowledge, the existence of the Quincecare duty has not, to date, been considered by either the Cayman Islands or the BVI courts. When the question falls to be considered by the courts of the Cayman Islands and those of the BVI, Philipp will no doubt inform those analyses.
Conclusion: banking back to basics
The Philipp decision is plainly good news for banks. It limits their liability for frauds carried out by third parties on bank customers. Further, in doing so it reaffirms the fundamental nature of the banking relationship and a bank's liabilities within it as a matter of contract law.
Unless it has reason to suppose it should not do so, the bank must carry out what appear to be valid instructions from or on behalf of its customer in accordance with their contract. As it can be held liable for not doing so, it should not (without more) be held liable for doing so.
1 [2023] UKSC 25
2 [1992] 4 All ER 363
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