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Guest blog: Supreme Court clarifies the obligations of a paying bank in APP transactions that may have been induced by fraud

Guest blog by TLT, BSA Associate Member

The Supreme Court has handed down a landmark judgment in Philipp v Barclays clarifying the limited obligations of a bank on receipt of a payment instruction from a customer induced by fraud.

Facts

Mrs Philipp was the victim of a sophisticated impersonation fraud. In 2018 a fraudster pretending to be from the FCA/NCA persuaded her to transfer £700,000 to “safe accounts” in the UAE.

Although the police warned her that she might be victim to a fraud, Mrs Philipp nevertheless attended two Barclays’ branches to provide instructions. She confirmed those instructions over the telephone.

The scale of the fraud only became apparent two weeks later. After forceful intervention by friends, Mrs Philipp and her husband eventually engaged with the police and thereafter complained to Barclays seeking to recover their lost funds.

Background to the claim

In 2020, Mrs Philipp sued Barclays. Relying on the so-called Quincecare duty, she alleged Barclays had a positive duty to ask her additional questions and prevent her making the payments. Barclays sought to strike out the claim on the basis that the Quincecare duty was limited to the scenario where a bank suspects an internal fraud by an agent of the customer and did not extend to a customer giving a direct instruction to their own bank. 

The High Court struck out Mrs Philipp’s claim finding that Barclays did not owe her a duty of care to second guess her instructions or ask further questions to prevent her making payments. However, following intervention by The Consumers’ Association, Which?, the Court of Appeal reversed the decision which it said did not reflect the realities of the situation facing APP fraud victims or banking industry standards and practice. It found the Quincecare duty applied to all customers and entailed a positive duty on a bank, when it has reasonable grounds for believing an order was an attempt to misappropriate funds, to make further inquiries and refrain from making payment while it did so. 

The Court of Appeal said a bank has a primary duty to execute a payment instruction and a secondary duty to use reasonable skill and care in execution of that instruction, which operates in tension with the primary duty. That tension provides the opportunity for a bank to refrain from executing an instruction, even when it was properly authorised, if circumstances would put a reasonable banker on inquiry that the instruction was an attempt to misappropriate the customer’s funds. How that tension would be resolved was dependent on the particular facts and evidence about banking practice. 

The Supreme Court judgment

Barclays, supported by UK Finance, obtained permission to appeal to the Supreme Court. Which? continued to support Mrs Philipp. Given its significance for the banking industry, the appeal was expedited. 

The key parts of the Supreme Court’s unanimous decision are as follows:

  • The strict contractual duty of a bank is to comply with its customer’s instructions promptly, not to concern itself with the wisdom or risks of its customer’s payment decisions.
  • Although APP fraud is a growing problem, reimbursement by banks is a question of social policy for regulators, government and Parliament, but not the court, which must focus on the extent of a bank’s responsibilities under its contract with a customer. 
  • The Court of Appeal was misled by flawed reasoning in the original Quincecare judgment, including the suggestion that there could be conflict between a bank’s primary duty to act in accordance with the mandate and its secondary duty to take reasonable skill and care in processing the instruction. The subordinate duty only arises where the validity or content of the customer’s instruction is unclear. Where the instruction is clear and unequivocal, a bank’s duty is simply to pay.
  • The original Quincecare decision could be justified through agency principles. If an authorised agent of a customer acts dishonestly, he lacks actual authority. Where there are circumstances to suggest to a reasonable banker that an agent is acting dishonestly, then the bank owes the customer a duty to make inquiries to verify the agent’s actual authority and check the payment is authorised. There is no conflict between the duty to verify the agent’s authority and the duty to execute a valid payment instruction. 
  • This principle has no application to victims of APP fraud, where the validity of the instruction is not in doubt. Where the instruction is clear and given by the customer personally or by an agent acting with apparent authority, no inquiries are needed.
  • The customer's intention is irrelevant. Fraud does not invalidate the instruction or give rise to any claim against a bank.

The consequences of the decision

This is a welcome decision for the banking industry, providing both clarity and certainty as to the obligations of a bank when it receives an authorised payment instruction from its customer. 

Victims of APP fraud will now be almost entirely reliant on the legislative framework for recovery of any funds lost as a result of a scam, with such a framework being the responsibility of Parliament and regulators, not the courts. 

For further information, please contact Clare.Stothard@tlt.com or Rupal.Nathwani@tlt.com