The Supreme Court in Philipp v Barclays has found that the Quincecare duty does not apply to cases of authorised push payment (APP) fraud. The Supreme Court overturned the judgment of the Court of Appeal, which had sought to expand the duty to include cases of APP fraud. In confining the duty, the Supreme Court judgment brings welcome clarity, confirming that a bank only owes a duty of care to its customer where it has reasonable grounds to believe that an agent of its customer is attempting to misappropriate the customer's funds. Where the bank has that suspicion, it cannot rely on the apparent authority of the agent, and must make inquiries to verify that the instructions received are genuinely authorised by its customer. If a bank fails to do so, and the instruction from the agent was not authorised by the customer, the bank will be in breach of that duty. The judgment closes off a potential route for APP fraud victims to pursue their banks through the Courts. But the upcoming introduction of mandatory reimbursement by the Payment Systems Regulator is nonetheless likely to have a significant impact on the payments landscape within the UK.
Quincecare defined & confined – Philipp v Barclays
On 12 July 2023, the Supreme Court handed down its much awaited judgment in the Philipp v Barclays case. In doing so:
- It unanimously upheld Barclays' appeal and found that the Quincecare duty does not apply to cases of authorised push payment (APP) fraud. Because Ms Philipp had authorised the payments herself, the Bank owed no duty not to pay, and the claim for breach of duty had no legally recognisable basis.
- The Supreme Court criticised the original Quincecare judgment (and subsequent cases in which it has been applied) for reaching the right conclusion but for the wrong reasons. The Supreme Court judgment instead recharacterises what was known as the Quincecare duty as the application of traditional agency principles – where a bank has reasonable grounds to suspect that an agent of its customer is attempting to defraud the customer, the bank cannot rely on the apparent authority of that agent and should not act on the agent's instructions.
- The duty, therefore, remains one that is owed only in circumstances where the bank has reasonable grounds to believe that an agent of the customer is attempting to defraud the customer. If it does have reasonable grounds to suspect, "it must make inquiries to verify that the instruction has actually been authorised by the customer." If it fails to do so, and the instruction was given without the customer's authority, the bank will be in breach of duty.
- The Supreme Court emphasised that questions of policy regarding a bank's liability to compensate victims of APP fraud is a "question of social policy." It noted in particular the steps being taken by the Payment Systems Regulator to introduce mandatory reimbursement for APP fraud victims (although that proposed scheme would not have assisted Ms Philipp in this case, the scheme being limited to Faster Payments only).
The Supreme Court accordingly restored the High Court's judgment decision to grant summary judgment in Barclays' favour. However, it allowed Ms Philipp to maintain her alternative claim against Barclays in relation to the question of whether the bank owed a duty to Ms Philipp to act promptly to recover the payments after the fraud was discovered. That question, and the question of whether the bank breached that duty if owed, will now have to be determined at trial.
Ms Philipp and her husband fell victim to a sophisticated scam. As a result of that scam, Ms Philipp transferred close to £700,000 of their savings from her Barclays account to fraudsters posing as law enforcement officers.
Ms Philipp brought a claim against Barclays, alleging that it had breached the Quincecare duty – the so-called duty on banks not to pay once they are "put on inquiry" that the payment instruction is an attempt to misappropriate the funds of the customer.
The nature and scope of the Quincecare duty has been considered in a number of high-profile cases in recent years and has traditionally been limited to cases involving a breach of duty by the customer's agent. Typically, that involves a rogue director defrauding a bank's corporate customer and stealing the company's funds. In those scenarios, the director's payment instruction to the bank is unauthorised, because they are made without the authorisation of the corporate customer. If the bank then acts on those instructions in circumstances where it is on inquiry of potential fraud, it has breached the Quincecare duty and will be liable to the customer. In Ms Philipp's case, she gave and authorised the payment instructions, albeit in the mistaken belief that she was assisting the FCA.
At first instance, the High Court applied the traditional interpretation of the duty, finding that it could not apply to an authorised payment and was limited to situations where the customer's agent gave an unauthorised instruction. It granted the bank summary judgment. It held that Quincecare had no application in an authorised push payment (APP) fraud context (i.e., in a situation where an individual customer is scammed by, and operates under the spell of, a third-party fraudster).
The Court of Appeal overturned that decision. In particular, the Court of Appeal found that there was no principled reason why the Quincecare duty should not apply to authorised payment instructions. The Court of Appeal said that if a bank were on inquiry of an attempt to misappropriate its customer's funds, it did not matter whether the person seeking to misappropriate the funds was the customer's agent or some third-party fraudster – the bank was at least arguably under a duty not to pay in either case.
The Court of Appeal's judgment had the potential to significantly expand the scope of the Quincecare duty and opened up a new route of recovery for APP fraud victims to claim directly against their banks. Given the current prevalence of APP fraud, this raised the prospect of a raft of new claims against banks.
This Supreme Court judgment has, in effect, re-confined the Quincecare duty back to its traditional application to cases involving the attempted misappropriation of a customer's funds by an agent of the customer. The duty has no application where the payment instruction is authorised by the customer. Unless expressly agreed by the bank and a customer, the bank's duty remains to execute its customer's authorised instructions, and any failure or refusal to do so will amount to a breach of duty.
Financial institutions will likely breathe a sigh of relief following the Supreme Court's judgment, which has brought welcome clarification to the nature of the obligations owed by a bank when executing a customer's payment instructions. But, while APP fraud victims will no longer be able to pursue their banks for breach of duty through the Courts, the PSR's upcoming introduction of mandatory reimbursement is likely to have a dramatic impact on the payments landscape within the UK. How banks seek to implement mandatory reimbursement, how it works in practice, and the effect it has on how financial institutions process payments, all remain to be seen.
Banks will also continue to watch the Philipp trial closely – the question of whether a bank owes a duty to recover funds and the scope of that duty if owed is one that is likely to be hotly contested.
Please do not hesitate to contact the Addleshaw Goddard Finance Disputes team for any questions about the judgment, its effect, and the implications for financial institutions (including the interaction with the mandatory reimbursement scheme).
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