Summary

In the highly significant decision of Philipp v Barclays Bank plc [2023] UKSC 25, the Supreme Court has overturned the Court of Appeal’s decision as to the scope of the so-called Quincecare duty. The decision provides certainty for financial institutions as to the extent of their obligations to investigate a customer’s payment instructions.

Lord Leggatt (with whom the rest of the Supreme Court Justices agreed) held that the so-called Quincecare duty is no more than an application of orthodox principles of the law of agency. In so doing, the Supreme Court endorsed the narrow view of the Quincecare duty adopted by the first instance Judge, His Honour Judge Russen QC, sitting as a Judge of the High Court.

Accordingly, where a bank is on notice that a customer’s agent (otherwise authorised to give instructions to the bank) is acting fraudulently in giving instructions, the bank cannot rely on the agent’s apparent authority. Where, as in the case of Mrs Philipp, the customer was herself giving the instruction to make a transfer (and there was no question of apparent authority), the bank was not generally under a common law or implied contractual duty to stop the transaction, even where the recipient turned out to be a fraudster.

Facts

This case involved an authorised push payment (“APP”) fraud: “authorised” in the sense that Mrs Philipp herself gave instructions to her bank; a “push payment” because the relevant instructions were to make transfers out of her account.

Mrs Philipp (and her husband, Dr Philipp) were deceived by a fraudster purporting to be “Jonathan Watts” (“JW”). JW pretended to be part of an investigation by the Financial Conduct Authority and the National Crime Agency into fraud in the banking sector. He eventually persuaded the Philipps to transfer most of their life savings out of Dr Philipp’s investment account into Mrs Philipp’s current account, and thence to various allegedly “safe” accounts that were in fact controlled by JW and his associates. The sad tale of this fraud, detailed by HHJ Russen QC at first instance (at [27]-[71]), makes for sobering reading.

The underlying claim concerned payments totalling £700,000 which Mrs Philipp made, on JW’s advice, to two bank accounts in the United Arab Emirates. By the time the fraud was discovered, this money had become irrecoverable. Mrs Philipp advanced her claim against Barclays Bank plc (the “Bank”) on two main grounds as follows:

(i) the Bank should have spotted the “red flags” about the transactions and refrained from executing her instructions; and

(ii) the Bank should have tried to recover the money as soon as it was on notice that there had been a fraud.

Course of the proceedings

The Bank applied for summary judgment dismissing the claim, which was granted by HHJ Russen QC, sitting as a Judge of the High Court, in January 2021 ([2021] EWHC 10 (Comm), [2021] Bus. LR 451).

He accepted the Bank’s submission that the cases in which a Quincecare duty had been found were all of a type: a bank had been on notice that an agent for a customer of the bank (otherwise authorised to give instructions) was acting fraudulently in giving an instruction. Since Mrs Philipp was a customer giving genuine instructions (albeit procured through fraud) rather than an agent, the duty didn’t apply.

The High Court decision was reversed by the Court of Appeal in March 2022 ([2022] EWCA Civ 318, [2022] QB 578). The Court of Appeal disagreed. Lord Justice Birss accepted that the existing Quincecare cases fitted one factual pattern, but thought they rested on an underlying rationale of protecting bank customers from fraud (at [27]-[29]). He reasoned that (a) if the Bank knew that the transaction was an attempt to misappropriate funds, it would be liable under the “Quincecare duty” and that therefore (b) the issue in the case was really what level of knowledge would suffice (at [28]). That was an issue that could only be resolved after trial, not on summary judgment.

The case before the Supreme Court

Relying on a body of caselaw, including Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, Mrs Philipp’s case was that the Bank was under a duty “to refrain from executing an order from Mrs Philipp if and for as long as it was put on inquiry, by having reasonable grounds for believing that the order was an attempt to misappropriate funds from Mrs Philipp”. This duty was said to be implied by the common law into the contract between Mrs Philipp and the Bank.

The central issue before the Supreme Court was whether this alleged duty was either already recognised by the common law, or could and should be recognised by a principled extension of the existing case law, as an ordinary incident of the contract between a bank and its customer.

The Supreme Court’s decision

The Supreme Court unanimously overturned the Court of Appeal and (subject to one aspect of the claim) restored the Order of HHJ Russen QC. Lord Leggatt JSC gave judgment, with which Lords Reed, Hodge, Sales and Hamblen JJSC all agreed.

Central to the decision was the Supreme Court’s conclusion that the so-called Quincecare duty was no more than the orthodox application of the law on the apparent authority of agents (see [5], [90]-[91]) and the Bank’s “general duty of care…to interpret, ascertain and act in accordance with its customer’s instructions” (at [97]).

Where a bank had reason to doubt the authority of its customer’s agent, it could not rely on that agent’s apparent authority to give instructions to the bank. A dishonest agent was not acting within his actual authority such that the question then arose whether the bank had made all reasonable inquiries as to his authority in the circumstances. However, so far as Mrs Philipp was concerned, these principles were irrelevant: she had herself given a genuine instruction to the Bank who had carried out its duty of following her instructions (at [100]).

Mrs Philipp and the Court of Appeal had heavily relied on dicta from the judgment of Steyn J in Quincecare, which (it was said) suggested a broader basis for the duty than simply the law of agency. Lord Leggatt JSC strongly criticised the judgment in Quincecare. He observed that that case was merely one of a longer line of cases, the rest of which were correctly rooted in agency principles, and (while reaching the right end-point on its own facts) “went down a wrong track because it proceeded from a false premise” (at [68]).

According to the Supreme Court, there were two fundamental flaws in the Quincecare decision. First, the judgment characterised the duty incorrectly. The duty is “to observe reasonable skill and care in and about executing a customer’s order”, from which it is “impossible” to construe “a duty not to execute the customer’s order” in certain circumstances (at [68]). The “duty” (as properly expressed) is “subordinate” to the bank’s main duty to follow its customer’s instructions.

The second flaw in the Quincecare judgment was in its method. Steyn J had set up a false conflict of duties between a duty to follow instructions and a duty not to execute an order in some circumstances and resolved this apparent conflict by resorting to “policy considerations”. The Supreme Court considered that this was “not an appropriate method for identifying what duty is owed by a party pursuant to a contract” (at [67]). Questions of social policy were “for legislators and other policy-makers”, not the courts in construing a contract. Significantly, Lord Leggatt JSC noted that the Financial Services and Markets Act 2023 (which received Royal Assent on 29 June 2023) provides for a mandatory reimbursement scheme to be imposed by the Payment Systems Regulator (at [21]). He added that courts lack the “institutional competence” and “constitutional…position” to make decisions of that kind (at [22]-[24]).

The judgment is not, however, the end of the road for Mrs Philipp’s claim. Her claim that the Bank was under a duty to attempt to recover the funds once the fraud was discovered continues. The Supreme Court did not think that issue could be determined on a summary judgment basis.

Potential for other claims?

The Supreme Court did, however, leave open the door for claims formulated on different basis in (at least some) cases of APP fraud. At [106]-[110], Lord Leggatt JSC cited the Australian case of Ryan v Bank of New South Wales [1978] VR 555, in which McGarvie J observed that, just as there might be a breach of contract by a carrier who (following his express instructions to the letter, regardless of circumstances) delivered goods into a burning building, a banker might incur a liability “if a reasonable banker properly applying his mind to the situation would know that the [account holders] would not desire their orders to be carried out if they were aware of the circumstances known to the bank” (at [108], underline added).

Thus, where the bank has (for example) received a tip-off that a transaction has been procured by fraud, the Supreme Court concluded that “it may be right for the bank to refrain from executing the instruction without first alerting the customer to this information” (at [109]). In the circumstances of Mrs Philipp’s case, however, all the “red flags” were circumstances known to Mrs Philipp and thus the Bank “had no reason to doubt whether, if its customer was aware of these circumstances, she would desire the Bank to make the payments”.

Furthermore, in some APP fraud cases where money is paid out of a joint account by one account holder, without the knowledge of the other, it may be possible to formulate a Quincecare claim. At [98], Lord Leggatt JSC stated that the orthodox principles he had identified applied in some such cases. However, any such claim would have to show: (a) that the instructions given by the account holder were outside their actual authority; and (b) that the bank had been “put on inquiry” as to the instructing account-holder’s apparent authority. In a typical APP fraud case, the first of those may prove difficult.

Finally, the Supreme Court has confirmed (at [89]) its view on the law of apparent authority, as formulated by the Privy Council in East Asia Co Ltd v PT Satria Tirtatama Energindo [2019] UKPC 30 such that: “a third party cannot rely on the apparent authority of an agent if it failed to make the inquiries that a reasonable person would have made in all the circumstances to verify that the agent had that authority.”

Concluding Comment

The Supreme Court judgment in Philipp v Barclays Bank plc will likely ease the concerns of banks and other financial institutions as to the potential broader scope of claims predicated upon the Quincecare duty following the Court of Appeal’s decision.

On the other hand, the Supreme Court clarified what a claimant in a true Quincecare claim must prove. Since the “duty” was merely an aspect of the bank’s mandate to carry out the customer’s instructions with reasonable care, a payment made in circumstances where the bank could not rely on the agent’s apparent authority “is not only a breach of the bank’s duty of care but is also outside the scope of its mandate” (at [96]). Therefore, where the claim is restricted to the sum transferred, “it is unnecessary for the customer…to prove that, if reasonable inquiries had been made, the agent’s dishonesty would have been revealed and the loss avoided” (ibid.).

More broadly, the judgment highlights the Supreme Court’s understandable reluctance to impose sector-wide regulation via the common law. Lord Leggatt JSC particularly highlighted (at [19]-[21]) the recent developments in financial services regulation to deal with APP and other types of fraud, including the voluntary “Contingent Reimbursement Model Code” (2019) and the new powers of the Payment Systems Regulator in the FSMA 2023. His judgment also expressly excluded such policy-based questions from judicial consideration. This approach may well have broader implications beyond banking and financial services claims.