The much-anticipated judgment in Philipp v. Barclays Bank UK PLC was handed down in the U.K. Supreme Court on July 12.
The court confirmed that the Quincecare duty, established by the High Court of Justice of England and Wales' 1992 ruling in Barclays Bank PLC v. Quincecare Ltd., does not extend to an individual customer who has given a bank a valid payment instruction even if it is the result of a fraud.
In 2018, Fiona Philipp and her husband fell victim to a fraudster who posed as an operative working for the Financial Conduct Authority in conjunction with the National Crime Agency.
The fraudster caused Philipp to instruct Barclays to transfer £700,000 ($785,452) from her current account to various accounts in the United Arab Emirates. This type of fraud is commonly referred to as "authorized push payment" fraud.
After realizing that she had fallen victim to fraud, she asked Barclays to recall the funds that had been transferred. Unfortunately, its attempts were unsuccessful.
Philipp brought a claim against Barclays alleging that it owed her a duty to exercise reasonable care and skill when executing her instructions.
She relied on the Quincecare duty in alleging that Barclays had a duty to refrain from carrying out her instructions to transfer the funds if and for so long as it had reasonable grounds for believing the instructions were an attempt to misappropriate funds belonging to Philipp.
Philipp alleged that Barclays acted in breach of that duty by making the payments from her account.
She also pursued an alternative claim that the bank was in breach of duty by not acting promptly to recall the payments after it had been notified that they were fraudulent.
Barclays applied to strike out Philipp's case, seeking summary dismissal. Its application was granted at first instance.
Philipp appealed to the Court of Appeal of England and Wales, which unanimously allowed her appeal. Barclays, in turn, appealed to the Supreme Court.
Whether a victim of such fraud should bear the loss or whether the bank who made or received the payment should reimburse a victim has, for some time, been a question of social policy for regulators, government and ultimately Parliament.
The Financial Services and Markets Act 2023, which received royal assent on June 29, made provision for a mandatory reimbursement scheme. However, the scheme does not apply to international payments and so would not have been of assistance to Philipp.
Philipp's claim was based on her contract with Barclays. The nature of the contracts between banks and their customers holding current accounts is well established. Certain obligations have, over time, been recognized by common law, and sometimes statute, as obligations implied by law in contracts that can be added to or altered by express agreement.
The contract could have provided that Barclays would not carry out a payment instruction received from a customer if it believed, or had reasonable grounds to believe, that the customer had fallen victim to fraud, but no such term was included.
Philipp argued that no express term is required as such a duty is either already recognized by common law, or can and should be recognized by a principled extension of existing law as an implied term of the contract.
The Supreme Court found that the ordinary duty of a bank when instructed to make a payment from a customer's account is to carry out such instruction, provided a customer's account is in credit.
In carrying out the instruction, the bank acts as an agent of its customer. Unless otherwise agreed, the bank must execute the instruction and do so promptly. It is not for the bank to concern itself with the wisdom or risks of its customers' payment instructions.
The court rejected Philipp's reliance on the Quincecare duty. The Quincecare duty established by the courts provides that where a bank receives an instruction from an agent of the customer to make a payment, the bank owes a duty to its customer not to carry out the instruction if the bank has reasonable grounds for believing that the agent is defrauding the customer.
In such cases, the authority of an agent to sign checks or give other payment instructions on the customer's behalf does not extend to authority to defraud the customer.
If the bank were to carry out the instruction it would therefore be making a payment that the customer has not actually authorized the bank to make.
If the agent is acting fraudulently and does not therefore have authority to give the instruction on behalf of the customer, the bank would still generally be entitled to rely on the agent as having apparent authority to give the instruction unless it has reasonable grounds for believing that the instruction given by the agent is an attempt to defraud the customer and is therefore given without the customer's authority.
In such cases, if the bank executes the instruction without first making inquiries to verify that the payment has actually been authorized by the customer and the instruction proves to have been given without the customer's authority, the bank will be in breach of duty.
On the facts of Philipp's case, there was no agent involved, and she gave a payment instruction to the bank herself with the result that the validity of the instruction was not in doubt.
Provided the instruction is clear, no inquiries are needed to clarify or verify what the bank is authorized and required to do. Unless otherwise expressly agreed, the bank's duty is to execute the customer's instruction and any refusal or failure to do so will be a breach by the bank of its obligations to its customers.
As a result, the Supreme Court unanimously allowed the appeal, holding that Barclays did not act in breach of duty to Philipp by making the payments. The judgment was given by Justice George Leggatt, with whom Justice Robert Reed, Justice Patrick Hodge, Justice Philip Sales and Justice Nicholas Hamblen agreed.
However, the Supreme Court rejected Barclays' application for summary judgment insofar as it related to Philipp's alternative claim based on the bank's alleged failure to act promptly when she asked it to recall the funds once the fraud had been discovered. That alternative claim is therefore likely to proceed to trial in the normal way.
Banks operating in this and other common law jurisdictions will breathe a sigh of relief upon learning of this decision.
The Supreme Court's decision resolves the conflict that would otherwise arise between the duty of the bank to follow customers' instructions and not "concern itself with the wisdom or risks of the customer's payment decisions" with the asserted duty to make reasonable inquiries if they have reasonable grounds to believe that the customer's instructions are the result of fraud or may result in the misappropriation of funds.
However, banks and victims of fraud will await with considerable interest the resolution of the question of the extent to which banks can be in breach of duty by not acting sufficiently promptly to recall the payments made after being notified of the fraud and whether Barclays was in breach of any such duty on the facts of the case.
For any questions in relation to the topics raised in this article, contact Oliver Cain, Kerri Wilson or a member of our team. This article was first published in Law360.