Posted: 15/03/2022
In a landmark decision that will be of particular interest to both banks and consumers, the Court of Appeal has upheld the appeal of the claimant/appellant, Mrs Philipp, in Fiona Lorraine Philipp v Barclays Bank UK PLC [2022] EWCA Civ 318. In doing so, their Lordships have recognised that a bank’s ‘Quincecare’ duty can apply to transactions authorised by an individual customer where that authorisation is induced by fraud. This means that a relevant duty of care could arise in the case of a customer instructing their bank to make a payment when that customer is the victim of Authorised Push Payment (APP) fraud.
The case arose after Mrs Philipp fell victim to a sophisticated APP fraud in March 2018.
APP fraud is where an individual or business is tricked into instructing their bank to transfer money from their account into an account controlled by a fraudster posing as a genuine recipient. The instruction to the bank appears on its face to be a genuine instruction of the customer, but has in fact been induced by fraud.
Mrs Philipp’s husband, Dr Philipp, had transferred £950,000 of savings into Mrs Philipp’s account with Barclays, the defendant/respondent. Mrs Philipp then instructed Barclays to transfer £700,000 of that money in two payments of £400,000 and £300,000 into separate bank accounts in the United Arab Emirates.
As a result of the fraudster’s carefully orchestrated deception, Mrs Philipp and Dr Philipp were convinced that their money was being moved into safe accounts to protect it from fraud. They were also convinced that they were assisting an investigation by the Financial Conduct Authority and the National Crime Agency, which included an investigation into HSBC. By the time the fraud was discovered, the money had gone.
The claimant brought an action against the defendant bank for breach of duty to exercise reasonable care and skill when executing her instructions. This duty was argued to be a species of the ‘Quincecare’ duty identified by the High Court in Barclays Bank v Quincecare [1992] 4 All ER 363.
The ‘Quincecare’ duty requires banks to ‘observe reasonable care and skill’ when executing a customer’s instruction. Under this duty, a bank must refrain from executing an order when they are ‘put on inquiry’, in the sense that it has reasonable grounds to believe that an instruction may be an attempt to misappropriate the customer’s funds.
It was pleaded on behalf of the claimant that the bank breached its alleged ‘Quincecare’ duty; the bank had an obligation to question the claimant about the payments and it ought to have had in place policies and procedures to detect and prevent potential APP fraud. Although the Contingent Reimbursement Model Code (CRM Code) was not in place at the time, there were other published documents that demonstrated that APP fraud was a recognised problem that banks were being asked by the regulator to consider how to address.
The defendant filed an application for the claimants claim to be struck out, which was granted. HHJ Russen QC entered summary judgment in favour of the bank, holding that ‘it would not be fair, just or reasonable’ to impose liability on the part of the bank. He held that the bank’s primary duty is to act on customer’s instructions. The Quincecare duty is ancillary to the primary duty and the bank can only deviate from the primary duty in very specific and limited circumstances. The law should not impose a duty that is so burdensome as to prevent banks from carrying out banking transactions effectively, and banks could not be expected to act as amateur detectives. The ‘Quincecare’ duty should not extend beyond the situation of attempted misappropriation of a customer’s funds by an agent of the customer. This decision was appealed by the claimant.
The appeal was heard on 8 and 9 February 2022 by the Chancellor of the High Court, Lord Justice Flaux, Lord Justice Coulson and Lord Justice Birss. The Consumers’ Association (Which?) intervened.
As summarised in the judgment, the appellant submitted that it is, at least, properly arguable that a duty of care does arise in the case of Mrs Philipp and that the matter ought to have gone to trial. The duty is a species of the duty arising under s.13 Supply of Goods and Services Act 1982 or at common law, and so its existence ought to be seen as a proper application of reasoning that supports the existence of the ‘Quincecare’ duty, or else it should be recognised as a legitimate incremental development of that line of authority.
The respondent argued that the ‘Quincecare’ duty is irrelevant in this case because it is only concerned with the proper ascertainment of instructions given by an agent, usually the agent of a company; if the bank is on inquiry that the agent’s instructions appear to be vitiated by fraud, then the bank has no proper instructions and that is why the duty arises. The bank also contended that to recognise a duty in this case would impose onerous and unworkable obligations on banks.
Which? intervened, submitting that the ‘Quincecare duty’ extends to individual customers, as it would be illogical to confine it to companies or agents. They also contended that such a duty of care would not be onerous or unworkable; at the time of the events in this case, ordinary banking practice in relation to APP fraud was more advanced than the judge at first instance had appreciated. To evidence this, Which? referred to the voluntary 2017 BSI Code of Practice and various Financial Ombudsman Service decisions.
Their Lordships set aside the decision at first instance, ruling that the ‘Quincecare’ duty of care applies regardless of whether the bank is instructed by an agent of the customer or the customer themselves. That previous authorities had considered the duty in the context of agents simply reflected the facts of those cases; what matters is the reasoning in those cases which ‘leads to the conclusion that despite the importance of the bank’s duty to execute orders promptly, nevertheless the bank does indeed have another duty which operates in tension with that primary duty, such that the bank may be required to refrain from executing an order if and for so long as the circumstances would put an ordinary prudent banker on inquiry’.
Properly identified, the relationship in cases such as these between the customer and the bank, is principal and agent; if the agent knew that the customer’s instructions were an attempt to misappropriate funds, the bank, as agent, would be liable if it nevertheless executed the customer’s instructions. In this context, knowledge is of the circumstances that would put an ordinary prudent banker on inquiry, and the duty is not to execute a customer order while on inquiry. The purpose of the duty is to protect the customer and it applies ‘with equal force to a case in which the instruction to the bank is given by a customer themselves who is the unwitting victim of APP fraud’ provided the ‘bank is on inquiry that executing the order would result in the customer’s funds being misappropriated’.
On the issue of whether the duty would impose an onerous and unworkable burden on banks, their Lordships held that the issue could not have been decided without a trial; there was ample evidence before the judge at first instance, and on appeal, supported by the new material filed by Which?, to make it ‘arguable that the duty of care contended for would be neither unworkable nor onerous in terms of banking practice in March 2018’.
There has been an unfortunate proliferation of APP frauds over recent years, resulting in an increase in the amounts that individuals are out of pocket. Whilst a voluntary system to reimburse victims of APP fraud was introduced in May 2019 (the CRM Code), it would have been of little assistance to Mrs Philipp as its protection does not extend to international payments.
The Court of Appeal’s decision marks a significant victory for consumers. As a matter of law, the duty of care identified in ‘Quincecare’ does not depend on a bank being instructed by an agent of the customer of the bank. A relevant duty of care can arise where an individual customer who is unknowingly the victim of APP fraud instructs their bank to make a payment.
If the bank is put on inquiry by the particular facts of the case and by applying the standards of an ordinary prudent banker, in the context of any relevant codes, policies and procedures in place at the time, that complying with the customer’s instructions could result in their funds being misappropriated, the bank will have a duty to refrain from making the payment until further inquiries are made. This opens an avenue by which banks could be liable to compensate individual customers who are victims of APP fraud.
Michael Brown, Laura Coleclough and Charlie Shillito commented: “This is an important decision in the fight against fraud and for consumers. It is an example of how the English judiciary ensures that the law evolves with the times in order to combat fraud.” Penningtons Manches Cooper’s specialist banking and financial services disputes team acted for the intervening party, Which?.
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