The Quincecare duty of care: recent developments analysed

Introduction

The "Quincecare" duty of care (derived from Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363) requires a bank to exercise reasonable care and skill in carrying out a customer's instructions. The duty arises once the bank has been "put on inquiry", meaning that there are reasonable grounds (though not necessarily proof) for believing that the instructions may be an attempt to misappropriate the customers' funds and requires the bank to (at least) refrain from executing the order. Historically, the Quincecare duty has rarely been relied on, however in the last three years there have been a spate of reported cases which have put the duty in the spotlight. These include:

• Singularis Holdings Ltd (In Liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50 ("Singularis")
• JP Morgan Chase Bank N.A. v The Federal Republic of Nigeria [2019] EWCA Civ 1641 ("JP Morgan")
• Philipp v Barclays Bank UK Plc [2021] EWHC 10 (Comm) ("Philipp")
• Stanford International Bank Ltd v HSBC Bank plc [2021] EWCA Civ 535 ("Stanford").

This article analyses these recent developments and takes stock of where this leaves customers and banks alike when dealing with a potential Quincecare claim.

Singularis: the Quincecare duty in cases of fraud on a one-person company by its director

Singularis concerned the application of the Quincecare duty in the context of a "one-man company" asset-stripping fraud. Singularis was wholly owned by a Mr Al Sanea, who had sole signing powers over its bank accounts and as a director acted as its chairman, president and treasurer. On the instructions of Mr Al Sanea, Daiwa paid out funds in excess of US$200m from the company's account to entities ultimately controlled by him. Singularis (by its joint liquidators) sought to recover these sums on the basis of dishonest assistance and, alternatively, breach of the Quincecare duty. The dishonest assistance claim failed in the High Court because it was found that Daiwa's employees had acted honestly (see [2017] EWHC 257 (Ch)).

Rose J allowed the Quincecare claim, finding (at [202]) that: "Everyone recognised that the account needed to be closely monitored . . . But no one in fact exercised care or caution or monitored the account themselves and no one checked that anyone else was actually doing any exercising or monitoring either". In short, Singularis was a stark case of lack of skill and care on the part of the bank in the context of a persistent fraud on the company by Mr Al Sanea spanning an extended period and multiple transfers out of its account.

The Court of Appeal dismissed Daiwa's appeal. In the Supreme Court, Daiwa's main objection was that Mr Al Sanea was the controlling mind of Singularis and that his fraud could be attributed to the company. It was argued that this: (i) engaged the illegality doctrine; (ii) broke the chain of causation; and/or (iii) gave Daiwa a counterclaim in deceit. The Supreme Court rejected this argument, holding that the purpose of this duty is "to protect the company against just the sort of misappropriation of its funds as took place here" (see [35]; emphasis added). The Quincecare duty is therefore capable of arising in cases of fraud on a company by its sole shareholder or director, acknowledging the separate legal personality of the company as a customer of the bank.

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".

JP Morgan: contractual exclusion of the Quincecare duty

FRN brought a claim against JP Morgan alleging that it had breached the Quincecare duty by executing payment instructions to pay out US$875.74 million from a depository account in FRN's name on the instructions of authorised signatories (the Minister of Finance and the Accountant General of the FRN). It was alleged that JP Morgan had been put on inquiry that the requested transfers were part of a corrupt scheme and that the bank should have realised it could not trust the senior Nigerian officials from whom it took instructions. JP Morgan sought reverse summary judgment on the basis that the Quincecare duty had been contractually excluded. The Court of Appeal upheld the first instance decision refusing summary judgment. It held that clear wording is required to exclude the Quincecare duty and that the relevant contractual provisions were insufficiently clear.

JP Morgan is of interest not only in relation to exclusion of duty, but also because the Court of Appeal threw into doubt the standard of care required to comply with the Quincecare duty. Following Quincecare, it had been understood that the duty was essentially negative in nature, meaning that the bank had a duty not to make payment. However, in JP Morgan the Court of Appeal expressed a view that in most cases "something more" than mere refusal to pay will be required, although the question of what is required of a bank once it is put on inquiry "will vary according to the particular facts of the case".

Stanford: the Quincecare duty in the context of insolvency

In Stanford the claimant had been used as the vehicle for a substantial Ponzi scheme, collapsing into liquidation in April 2009 owing in excess of US$5bn. Its liquidators brought a claim against HSBC, the company's bankers, for dishonest assistance and breach of the Quincecare duty. They claimed £116.1 million paid out of Stanford's accounts between August 2008 (when the liquidators considered the bank was put on inquiry and should have frozen the company's accounts) and February 2009 (when the bank in fact froze them). At first instance the Judge struck out the dishonest assistance claim but refused HSBC's application to strike out the Quincecare claim.

The Court of Appeal allowed HSBC's appeal and struck out the Quincecare claim. It found that Stanford had no loss as a result of the payments that HSBC failed to stop. Of the payments made, £36m was paid to Stanford's own accounts. The Court of Appeal considered it obvious that the transfer of those funds could not be said to amount to a loss. The remaining funds were paid over to the company's creditors. The liquidators contended that this represented a loss to Stanford in the form of the additional cash that would have been available to pay creditors once it entered liquidation had HSBC frozen the accounts earlier. The Court of Appeal held that the Quincecare duty is owed by the bank to the customer alone and not to the customer's creditors. The loss of funds which would otherwise have been distributed to creditors in Stanford's liquidation did not represent a loss to the company.

Philipp: the Quincecare duty in the context of authorised push payment fraud

This case is of interest because, unlike previous cases in which the Quincecare duty has been applied, in Philipp the claimant validly authorised the transactions in question. Mrs Philipp was persuaded by a fraudster to make what are known as authorised push payments ("APPs") totalling £700,000 from her account with Barclays to accounts in the UAE. APP fraud arises where the customer has validly consented to a payment being made, but has been tricked into giving such consent – allegedly the second biggest type of fraud in the UK.

In this case, Mrs Philipp believed that by making the payments she was assisting an investigation by the Financial Conduct Authority and National Crime Agency. By the time the fraud was discovered, the sums could not be recovered. Mrs Philipp brought a claim against Barclays, alleging that in order to discharge its duty to exercise her instructions with reasonable care and skill the bank ought to have had in place policies and procedures for the purpose of detecting and preventing APP fraud.

HHJ Russen QC (sitting as a High Court Judge) granted Barclays' application for summary judgment. The Court held that requiring the bank to take the preventative measures contended for by the claimant would elevate the Quincecare duty to a point where too much doubt would be cast over the effectiveness of a customer's instructions. It would impose unduly onerous and commercially unrealistic policing obligations, with the Judge reiterating the finding in Quincecare that "speculation and amateur detective work on the part of the bank have no place in fixing a bank, objectively, with knowledge or belief sufficient to put a payment instruction on hold". Importantly, the Judge was satisfied that the Quincecare duty should be confined to cases where the suspicion raised is one of attempted misappropriation of the customer's funds by an agent of the customer. Where the customer is an individual, their authority to give instruction to the bank is apparent and must be taken by the bank to be real and genuine. As between the individual and the bank the payment instruction is no less real and genuine due to the fact that it has been induced by deceit by a third party. The purpose of the Quincecare duty is not to protect a customer from her own intentional decisions. The effect of this decision is to preclude the Quincecare duty from being engaged in cases of APP fraud where the instruction to pay is in fact given by the customer rather than the fraudster.

Comment:

The following key practical points arise from these decisions:

• The threshold for the bank being put on inquiry and thereby coming under the Quincecare duty not to act in accordance with the customer's instructions is high. It is likely to require a stark factual scenario such as that which arose in Singularis for the Court to find that the bank's primary duty to act in accordance with its customer's mandate has been displaced.
• As Philipp makes clear, the standard expected of banks is to be judged based on market practice at the time of the relevant transactions and will, in any event, not directly correspond with every stricture of best practice.
• What is required by a bank in order to comply with the Quincecare duty where it arises remains unclear. Judicial clarification is required in relation to what the "something more" referred to in JP Morgan might be, particularly where any inquiries the bank could have made would likely have been addressed to those perpetrating the fraud.
• The Quincecare duty is owed to the customer alone and it is necessary for the customer to show that it (and not, for example, its creditors) has sustained loss as a result of a breach, in addition to proof of causation.
• In the case of a corporate customer, the fact that the fraudulent or unauthorised instructions are given by an authorised signatory will not preclude the Quincecare duty from arising, even where the instructions are given by the director/shareholder of a one-man company. Singularis is clear on this point.
• Where, however, the customer is an individual the Quincecare duty will only arise where the instructions are not given by the customer. The most common application of this is likely to be where a fraudster gains control of the customer's account and gives instructions to the bank without the customer's knowledge. Victims of APP fraud will need to look to other causes of action and potential equitable claims, although Stanford and Singularis make clear that dishonest assistance is a difficult alternative to pursue against a bank because of the problems in establishing corporate dishonesty. Claimants should bear in mind that the Financial Ombudsman takes a more generous approach than the Courts to the scope of banks' Quincecare duty in the context of APP fraud and has upheld a number of complaints of this nature.
• The extent to which banks are able to successfully exclude the Quincecare duty following JP Morgan remains to be seen. Any exclusion clause which seeks to exclude liability for negligence and/or is contained in the bank's written standard terms of business will be subject to a strict contra proferentem construction and the requirement of reasonableness pursuant to sections 2(2) and 3 UCTA 1977, which may prove to be a difficult hurdle for banks to overcome.