Supreme Court resets the Quincecare duty and scope of the bank customer relationship

In this eagerly awaited decision, the Supreme Court in Philipp v Barclays Bank UK plc [2023] UKSC 25 has rejected a claim against a bank for breach of an extended Quincecare duty and reset the entire basis of that duty.  Banks should analyse their bank-customer agreements in light of the guidance in the judgment.

The Quincecare duty states that a bank must not execute a payment instruction given by an agent of its customer without making inquiries if the bank has reasonable grounds for believing that the agent is attempting to defraud the customer.  The Supreme Court rejected an argument that this duty should be extended to instructions given directly by the customer.

Background

The claimant made a payment via her account at the defendant bank to an account in the UAE.  She had been induced to do so by fraud (an ‘APP’, authorised push payment, fraud).  The claimant argued that the bank owed a duty of care not to carry out her instructions when it had reasonable grounds to believe that she was being defrauded.

In the Supreme Court, the claimant was supported by the Consumers’ Association and the bank by UK Finance Ltd.

No Quincecare duty between a bank and customer

Lord Leggatt, giving the judgment of the Court, held that there was no Quincecare duty between a bank and its customer:

“It is a basic duty of a bank under its contract with a customer who has a current account in credit to make payments from the account in compliance with the customer’s instructions. This duty is strict. Where the customer has authorised and instructed the bank to make a payment, the bank must carry out the instruction promptly. It is not for the bank to concern itself with the wisdom or risks of its customer’s payment decisions.” (para. 3)

The Court of Appeal’s extension of the Quincecare duty (covered in a previous blog post here) from a situation where the instruction is given by an agent of the account holder to the account holder themselves was therefore incorrect.  In the absence of an express duty, there was no implied duty and no duty inherent in the banker-customer relationship.

APP fraud losses a matter for legislation and regulation

Lord Leggatt stated that allocation of losses for this sort of fraud was a question of social policy and a matter for legislation and regulation, not for the Courts.  And in fact there was now a mandatory reimbursement scheme which applied in some but not all circumstances – for instance, it applies only to payments under the Faster Payment Scheme and excludes large corporations. The scheme was created by the Financial Services and Markets Act 2023.

Restatement of Quincecare duty – no conflict with bank’s mandate

Lord Leggatt went on to restate the basis of the Quincecare duty.  The conflict envisaged by the Court of Appeal between the duty to follow a valid instruction and the duty to take reasonable care did not exist, because the actual authority of the agent did not include instructions given dishonestly and so such an instruction was not valid.  A dishonest instruction can only be binding on the principal via apparent authority and “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” (para. 89).  Accordingly, the Quincecare duty was actually a duty on the bank to make reasonable inquiries in certain circumstances to verify that an instruction is valid – that is, not given dishonestly – before carrying it out.  And, where the duty arises, there will be no apparent authority, so the bank will have no basis for withdrawing money from the customer’s account.

Phrased in this way, it is clear that the Quincecare duty is part of the law of agency and has no application where the instruction comes directly from the customer.  It will be relevant, not only in corporate situations, but whenever one person has a mandate over an account of another person, including each holder of a joint account.

The Court did allow an alternative argument that the bank should have sought to reclaim the money once it became aware that there may have been a fraud to proceed to trial.

Key takeaways and wider implications

Overall, this is a clear exposition of the law that definitively ends any argument that the Quincecare duty might apply to an instruction given by the customer and not their agent.  An instruction given by the customer must be followed (subject to regulatory duties on the bank).  An instruction given by an agent of the customer must also be followed, but if it is given dishonestly, it is not a valid instruction at all, and the bank is not in breach of any duty in undertaking further enquiries before executing it.

This unimpeachable theoretical distinction may be of little comfort to banks.  In practice, they will receive a purportedly valid instruction from an agent of the customer and have to decide whether to follow it.  And, of course, they will not know whether it is valid or not until after they complete any enquiries.  The problem for a bank occurs when they conduct enquiries on the basis of a reasonable suspicion but it turns out that the instruction was valid after all.  In this situation, banks will still need to rely on express or implied terms in bank-customer agreements or relevant regulations to avoid liability.

Lord Leggatt’s summary illustrates the issue:

“There is no conflict between the bank’s duty of care to verify the agent’s authority and its duty to execute a valid order to transfer money promptly. The duty of care requires the bank, if put on inquiry, not to act without checking that the order is indeed a valid order of the customer to transfer money … If … the bank without taking steps to clarify the customer’s intention executes the order, the bank will be acting in breach of its duty of care and will also be acting outside the scope of its mandate.” (para. 91)

Except that, if the instruction was in fact not fraudulent, executing it will not be outside the scope of the bank’s mandate (barring express exceptions in the bank-customer agreement).  It is apparent from Lord Leggatt’s analysis that such an instruction will be valid as within the agent’s actual authority.

It continues to be vital, then, that banks deal with this situation expressly in their bank-customer agreements.

The judgment may also have implications in other areas:

• The discussion of the duties of banks in relation to their customers will be relevant to crypto exchanges – in particular, Lord Leggatt considered the origin of the rule that banks do not owe fiduciary duties to their customers but are only debtors in respect of client deposits.The same conclusion has been reached recently in relation to holdings of cryptocurrency by exchanges, but the exact nature of the relationship is still developing.
• Where a term is implied into a contract, Lord Leggatt makes it clear that this is a question of inferring the presumed common intention of the parties rather than applying explicit policy considerations.Policy is a matter for parliament and the regulators.This guidance will be relevant in many disputes concerning contractual interpretation.
• Exposition of the law relating to agency may be relevant to other situations involving dishonest agents, such as cases of bribery.

This judgment will settle the scope of the Quincecare duty.  Dealing with the consequences of APP fraud will continue to be a major concern for banks and regulators.