Summary
In the long-awaited decision in Philipp v Barclays Bank UK PLC [2023] the Supreme Court has unanimously rejected the argument that the duty placed on banks in Barclays Bank Plc v Quincecare Ltd [1992] (the "Quincecare Duty") is capable of applying to cases where the relevant payment instruction is given by the customer themselves (rather than an agent of the customer). In a unanimous decision, the Supreme Court held that such argument would be "inconsistent with the first principles of banking law".
In reaching this conclusion the Supreme Court has reframed the legal principles underpinning the Quincecare Duty. Rather than treating it as a matter of balancing competing duties to the customer, the Supreme Court approached the issues as one of authority. It held that where an agent seeks to instruct the bank to act to the agent's benefit rather than to the benefit of its principal, it has stepped outside of their actual authority as agent.
In most cases the bank will be shielded from liability to the customer for following an agent's instructions because the agent will have apparent authority to give the instructions. Accordingly, the Supreme Court held that the Quincecare Duty in fact applies to situations where on the facts a bank has been "put on inquiry" as to whether the agent does indeed have actual authority, thereby undermining the agent's apparent authority. In these circumstances the bank is under a duty to refrain from executing the agent's instructions without first making inquiries to verify that the instruction has actually been authorised by the customer (as the principal). Conversely, if the instructions are given by the customer directly then no such issues arise, and absent other issues (e.g., clarity of instruction) the bank is under no duty to make further inquiries before acting on the instructions.
The Supreme Court therefore restored the High Court's summary judgment in favour of Barclays Bank (the "Bank") in this respect, with the effect that Mrs Philipp's claim, that the Bank owed her a duty not to execute her payment instructions on the grounds that it was on notice she was likely the victim of an Authorised Push Payment (APP) fraud, is dismissed.
However, the Supreme Court refused to restore the High Court's judgment in relation to Mrs Philipp's alternative case that the bank was in breach of its duty by not taking adequate steps to attempt to recover the defrauded funds it transferred overseas, and this issue will need to be determined at trial.
Background
What is APP fraud?
APP fraud arises when fraudsters deceive individuals into voluntarily sending payments to bank accounts under the fraudsters' control.
APP fraud is one of the fastest growing scams in the UK, with fraudsters subjecting their victims to increasingly sophisticated ruses to trick them into making payments out of their accounts. These can include impersonating bank staff, law enforcement and even court officers.
What is the Quincecare Duty?
A bank will generally owe its customer a duty to act with reasonable care and skill when executing its customer's orders. Arising out of this duty is a duty, most famously articulated in Barclays Bank Plc v Quincecare Ltd [1992], that "a banker must refrain from executing an order if and for so long as the banker is 'put on inquiry'…that the order is an attempt to misappropriate funds".
In most of the cases following Barclays Bank v Quincecare dealing with Quincecare Duty, including the only case in which such a claim has succeeded in the 30 years since Quincecare was decided, i.e. Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2017] the instructions received by the bank came from an agent who was authorised to act on behalf of the corporate customer, but was seeking to misappropriate the customer's monies by fraudulently misusing their position as agent.
Philipp v Barclays
In Philipp v Barclays, Mrs Philipp argued before the High Court and the Court of Appeal that the Quincecare Duty extended to include instructions given by the customers themselves who had fallen victim to APP fraud. In other words, Mrs Philipp argued that the Bank was under a duty to protect its customers by refraining from executing its customer's instructions if the Bank was on notice that its customer may be the victim of fraud.
At first instance the High Court held that there was no credible basis for this argument and granted summary judgment in favour of the Bank. However, the Court of Appeal disagreed, overturning the High Court's summary judgment on the grounds that Mrs Philipp's claim was sufficiently arguable to require that it be heard in full at trial.
The Supreme Court has now determined that the Quincecare Duty does not apply where a customer is a victim of APP fraud and has themselves given the bank the instruction to pay away funds to the fraudsters, as in the case of Philipp v Barclays, as the validity of the instruction is not in doubt.
Impact of the Supreme Court Judgment
Defined limits to the Quincecare Duty
APP fraud can have a devastating impact on its victims and defrauded bank customers will undoubtedly be extremely disappointed by the Supreme Court's decision.
Financial institutions, on the other hand, have previously voiced concerns that the widening of the scope of the Quincecare Duty to cases of APP Fraud would put a commercially unrealistic burden on them, and the industry will be relieved by this decision. The banks have argued that an extension of the type sought in Philipp v Barclays would put the banks in the position of 'second guessing' the instructions of their customers, which would potentially leave them open to claims for damages flowing from breaches of their mandate in instances of delayed or non-payment.
When is a bank not required to carry out a customer's authorised payment instructions?
The Supreme Court judgment by Lord Leggatt, with whom the other four justices agreed, has also provided some clarity on when a bank is not required to carry out a customer's authorised payment instructions:
- The main implied limit on the bank's duty to carry out its customer's authorised payment instructions is that it cannot be obliged to act unlawfully. A genuine or reasonable concern on the part of the bank that it might incur a legal liability by carrying out the instruction is not enough; the concern must actually be valid.
- If a bank receives reliable information from a source, such as the police, indicating that a customer's payment instruction has (unknown to the customer) been procured by fraud, it may be right for the bank to refrain from executing the instruction without first alerting the customer to this information and verifying whether the customer wishes to proceed with the transaction.
- A further consideration is that a bank will be entitled to refuse to carry out an authorised payment instruction if the bank considers an instruction received from a customer contravenes its terms and conditions. For example, when: (i) a bank has received incomplete or unclear instructions; (ii) a customer has insufficient money to cover the payment; (iii) in carrying out the instructions, a bank may break a law, regulation, code or other duty; or (iv) a bank reasonably believes that a payment in or out of an account is connected to fraud or any other criminal activity, including where the funds are being obtained through deception. However, Lord Leggatt made it clear that the bank's right to decline to carry out the instructions of a customer is not the same as being under a duty.
A duty to take adequate steps to recover money?
The Supreme Court did, however, leave one strand of hope for Mrs Philipp. In her alternative case, Mrs Philipp argued that the Bank had breached the duty of care that it owed to her because, after the APP fraud had been discovered, it did not take adequate steps to recover the money. Lord Leggatt held that this was not an issue that should have been dismissed by the High Court, and Mrs Philipp may take this argument to trial.
Customers and banks alike will be interested to see whether the courts are willing to extend customers' rights to permit recovery from banks that do not act swiftly enough to reclaim funds lost through APP frauds in the event Mrs Philipp chooses to pursue this surviving aspect of her claim.
Regulatory reform
While the Supreme Court acknowledged that APP fraud is a growing social problem that can be devastating to its victims, the judgment is clear that the question of whether the losses caused by such fraud should be borne by its victims, or redistributed by requiring banks to reimburse them, is not for the courts but for government and the legislature.
There has already been some progress in this regard. A voluntary code for financial institutions was introduced in 2019, with measures aimed at reducing the incidences of APP fraud and to provide customers who are victims of such scams with a mechanism for reimbursement. However, the code is limited by the fact that: (i) it is voluntary and, to date, only 10 payment services providers have signed up to the code; and (ii) it only applies in certain circumstances, for example, it does not apply to international payments (often used by fraudsters to cover their tracks) and therefore would not have applied in the case of Philipp v Barclays Bank.
A measure likely to have more impact is the mandatory reimbursement scheme implemented by the Financial Services and Markets Act 2023 (FSMA 2023), which received Royal Assent on 29 June 2023 and will come into effect in 2024. Under FSMA 2023 Liability for defrauded funds will be imposed on banks and payment firms “where the payment order is executed subsequent to fraud or dishonesty”. The funds for reimbursement will be taken equally from the sending and receiving firms party to the transaction, subject to any dispute over the appropriate contributions.
However, the rules will only apply to payment orders executed over the 'Faster Payments' scheme and made by consumers, charities and “micro-enterprises”, while larger businesses are excluded. We will only see the true impact of these new rules in time.