Philipp v Barclays Bank UK plc – a step too far! The Supreme Court reinforces the prevailing scope of the Quincecare duty

The landmark case of Philipp v Barclays Bank UK plc [2023] UKSC 25 sought to extend the existing scope of the Quincecare duty to apply to personal bank accounts when individuals themselves are deceived to transfer their personal funds to accounts controlled by fraudsters in foreign jurisdictions.

The Supreme Court has given unanimous judgment against Mrs Philipp, refusing to extend the scope of the Quincecare duty to individuals acting for themselves and thus reinforced the existing scope of the bank’s duty, which will continue to apply to the companies with a separate legal identity or where there is an agent appointed to act on behalf of another individual.

The purpose of the Quincecare duty is to protect the account holder from dishonest directors and other authorised agents seeking to perpetrate a fraud on the company or a principal. In these circumstances, the banks will continue to owe account holders a duty not to carry out a payment instruction if the bank is put on inquiry and has reasonable grounds to believe that the customer is being defrauded but the bar remains high.

Background

Mrs Philipp was a victim of an Authorised Push Payment (“APP”) fraud when she and her husband were deceived by a fraudster posing as an agent of the Financial Conduct Authority working in conjunction with the National Crime Agency who persuaded them to transfer £700,000 of their life savings from Barclays to a bank account in the United Arab Emirates.

Despite numerous red flags before the transfer was made, the bank did not stop the payment and instead followed Mrs Philipp’s instruction to make the suspicious transfer. Inevitably, money was lost and Mrs Philipp resorted to the courts to reclaim her losses from Barclays for their alleged failure to protect her from the fraud.

Mrs Philipp claimed that the bank owed her a duty of care under its contract and pursuant to common law not to execute the payment instruction if the bank was indeed on notice and had reasonable grounds to believe that she was being defrauded.

The Supreme Court didn’t agree with Mrs Philipp’s reasoning and refused to extend the Quincecare duty to cases where the customers themselves give payment instructions on their own behalf as opposed to an authorised agent making payments on behalf of a third party.

The scope of the Quincecare duty

The Supreme Court judgment clarified the scope of the Quincecare duty by stating that it is not some special duty or rule of law aiming to balance the competing contractual duties (whether to make or not to make the payment) to the customer – but it is rather an ordinary duty of care and skill, concerning the underlying authority to act in accordance with the customer’s instructions.

It confirmed that the authority of the agent to give payment instructions on the customer’s behalf does not include authority to defraud the customer. An agent acting in this way will lack actual authority to give the instruction on behalf of the customer.

Consequently, an authorised agent acting dishonestly to defraud its principal will not have the authority to give a payment instruction. Conversely, if there is no actual authority, a bank may rely on the agent’s apparent authority, albeit only if there are no red flags or other suspicious circumstances suggesting dishonesty.

Should suspicious circumstances exist, the bank’s contractual duty to exercise reasonable care and skill when executing the customer’s instructions will put the bank on inquiry and will require the bank to take certain steps to satisfy itself that the payment instruction is properly authorised and lawful and that the agent is not acting dishonestly in pursuit of its own interests and in fraud. If the bank fails to make these enquiries, the bank will be in breach of its contractual and Quincecare duty, and therefore liable for the principal’s losses.

This clarification places a firm emphasis on the contractual relationship of the agency and a valid authority for the agent to act for the benefit of the principal. The only limiting factor will be the agent’s apparent authority, which will be binding and can be relied on by the bank even in the circumstances when the instruction turns out to be fraudulent – yet, no liability will arise when no red flags exist. However, in the circumstances when the agent is evidently using the company’s or the principal’s funds for their own purposes, then he is likely to be acting outside of his apparent and actual authority, which will place the bank on notice to investigate accordingly. Should the bank fail to take the appropriate steps to investigate, the bank will be in in breach of its duty.

Conclusion

In relevant fraud cases where the agency exists, the judgment highlights the underlying importance of understanding red flags and other suspicious circumstances that would put the bank on inquiry and therefore, trigger the bank’s duty. It is only in these circumstances that the account holder might have a valid Quincecare claim against the bank.

For those concerned about the relative narrow application of the Quincecare duty, the Hong Kong Court of Final Appeal has recently handed down the decision in PT Asuransi Tugu Pratama Indonesia TBK v Citibank N.A where the claimant framed its claim in debt, rather than as a Quincecare claim, citing the bank’s breach of authority in making the fraudulent payments out of the account and requiring the bank to reconstitute the account. While of persuasive value only, the Tugu judgment opens up potential alternative claims in debt.

Despite the Supreme Court’s decision, victims of APP fraud can still claim the due compensation from the bank pursuant to the Financial Services and Markets Act 2023 (which received Royal Assent on 29 June 2023 and will come into effect in 2024), which provides for mandatory reimbursement, albeit the scheme only applies to the domestic faster payments and is restricted to consumers, charities and micro-enterprises.

Ultimately, the Philipps judgment should reassure companies, insolvency practitioners and other parties seeking to recover the funds in fraud cases with sufficient red flags where the banks failed to investigate the suspicious circumstances while the agents misapplied their authority and misappropriated the company’s funds.