English Court Confirms Narrow Scope for Banks’ Fraud Prevention Duty

January 21, 2021, Covington Alert

A series of recent high-profile English cases have considered the scope of what is called the Quincecare duty. That duty, owed concurrently in contract and in tort, obligates banks to refrain from executing customers’ orders where they are on inquiry that an order may be an attempt to misappropriate a customer’s funds. This alert discusses an important new judgment on this topic, and considers what this means for companies in the financial sector.

Overview

The Quincecare duty takes its name from Barclays Bank plc v Quincecare[1], decided as long ago as 1988, but seeing a recent surge of popularity in the English Courts following a number of claimant-friendly decisions, including the notable 2019 Supreme Court decision Singularis v Daiwa[2]. The attractions of a Quincecare claim to claimants are obvious; unlike most fraudsters, banks will usually possess the funds to satisfy any judgment, and they will often be capable of being sued in the jurisdiction. However, the range of cases in which the Quincecare duty will properly apply has now been significantly narrowed following Monday’s decision in Fiona Philipp v Barclays Bank UK plc[3].

The Facts of the Case

Mrs Philipp was the victim of a sophisticated and devastating ‘authorised push payment’ fraud, in which she and her husband were persuaded by fraudsters that rogue actors within the banking community were attempting to misappropriate customer funds, including from their accounts. As a result, they agreed to authorise the movement of £700,000 to accounts in the UAE that were controlled by the fraudsters. In his communications with the victims, the principal fraudster claimed that he was working within the UK’s Financial Conduct Authority, and warned that any disclosure of the information relayed by him could imperil ongoing investigations into the (fictitious) rogue actors. As a result, and on the instructions of the fraudsters, the Philipps did not share with Barclays why they wished to move their funds to the UAE. By the time the fraud was revealed, the money could not be recovered.

Mrs Philipp argued that Barclays’ Quincecare duty required it to have implemented suitable policies and procedures to detect and prevent APP fraud, and that if the bank had done so it would have blocked the transfers to the UAE, or at the least would have been in a better position to investigate and recover the funds following transfer. Barclays argued that it had no duty to protect Mrs Philipp from the consequences of her valid instructions, even where those instructions were induced by fraud, and applied for summary judgment in advance of trial. The Court found in favour of the bank, holding that Mrs Philipp had no realistic prospect of success on her claims.

Analysis

The Court’s reasoning was founded on a notably narrow interpretation of the scope of the Quincecare duty. The Court emphasised that the Quincecare duty should be understood as ancillary to the primary obligation on banks to act in accordance with their customers’ instructions. It therefore found that it would be wrong to extend its application to transactions which have been properly authorised by those customers. While that argument had been considered open for debate following previous cases on the Quincecare duty, the Court’s finding was unambiguous. The court found that the Quincecare duty should be confined to cases where there is an attempted misappropriation by an agent of the customer, and so was of no relevance to a claim by an individual customer in relation to a transaction which that customer had themselves authorised. More generally, the Court concluded that “There is… no proper basis for imposing liability upon a bank in respect of alleged omissions which…really relate to testing the genuineness of the recipient of the monies rather than the genuineness of the instruction to pay the monies”. 

The Court did accept that a different conclusion might be warranted if there was a clearly recognised banking code defining the circumstances in which the bank’s duty to question its customers’ instructions would be triggered. However, no such code yet exists. While the UK finance industry does operate an APP Contingent Reimbursement Model Code, the focus of this code is the compensation of victims, not the prevention of fraud. 

In the meantime, recent decisions on the Quincecare duty had left banks asked to implement transactions with unusual features in a Catch-22 position, facing legal risk both for failing to carry out their customers’ instructions promptly, but also for failing to investigate and block potentially fraudulent transactions. Philipp v Barclays will therefore be welcomed as helpful guidance in this difficult area, and as an important safeguard against opportunistic claimants looking to recoup losses caused by fraud, when the relevant transfers were authorised by them at the time.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Litigation practice.

* * *