Introduction
In our previous article “A Modern Answer to An Age-Old Problem: A Bank’s liability for acting on an authorised signatory’s wrongful payment instructions”, we discussed the Court of Final Appeal’s judgment in PT Asuransi Tugu v Citibank NA [2023] HKCFA 3 (“Tugu”), where the Court considered the issue of whether the bank in question was entitled to rely on the authority of the “Delinquent Officers” of the corporate Plaintiff.
In that case, while the Plaintiff was able to persuade the trial judge that the bank acted in breach of its “Quincecare” duty, it was held that such a claim had become time barred. Accordingly, in the Court of Final Appeal, the Plaintiff relied on an alternative argument (which had been pleaded all along as its primary cause of action), namely: that the bank was indebted to it, and that a banker cannot discharge his debt by acting on an impugned payment order “if and for so long as the banker is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company …”[1]. The consequence contended for was that the payment made by the bank was unauthorised.
As explained in our previous article, the Plaintiff was successful. We concluded by suggesting that Tugu shows that there is a more attractive way of formulating a claim, in that knowledge of facts suggesting impropriety would be likely to impact on the banks’ authority to debit its customer’s account. The primary claim of a customer should therefore be in debt.
Phillip v Barclays Bank
A similar analysis has now been adopted by the UK Supreme Court in Philipp v Barclays Bank UK PLC [2023] UKSC 25.
In that case, the Claimants, Mr. and Mrs. Philipp, fell victim to an “authorised push payment” fraud, and were induced to transfer £700,000 from Mrs. Philipp’s Barclays accounts to a fraudster. Philipp commenced an action against Barclays, alleging that Barclays owed her the “Quincecare” duty not to carry out her payment instructions if the bank had reasonable grounds for believing that she was being defrauded.
The “Quincecare” duty took its name from the case of Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, which concerned the duties of a bank dealing with corporate customers where there were reasonable grounds for believing that the human agent of the corporate customer, when giving purported instructions to the bank, was attempting to misappropriate the customer’s funds.
Philipp alleged that, by extension, Barclays owed her the “Quincecare” duty not to carry out her payment instructions if the bank had reasonable grounds for believing that she was being defrauded.
The UK Supreme Court rejected her argument and dismissed her claim on this aspect summarily. In so doing, the UK Supreme Court helpfully clarified the nature of what had hitherto come to be known as the “Quincecare” duty:-
(a) First, the Court emphasized that the claim made by Mrs Philipp was based on her contract with the bank. There is however no express or implied term imposing the alleged duty on the bank.
“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. The duty is strict. Where the customer has authorized 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.” (at [3])
(b) As with any contract for the supply of services in the course of a business, there is a term implied by law in the contract between a bank and its customer that the bank must carry out the services with reasonable care and skill. (In Hong Kong this arises both at common law and by statute under s.5 of the Supply of Services (Implied Terms) Ordinance (Cap.457).) However,
“The bank’s obligation to carry out payment instructions in accordance with its mandate from the customer leaves the bank with very little latitude in performing the obligation. But where the contract does not completely specify what the bank must do, it must act in the way that a reasonably skilful and careful banker would.” (at [35])
(c) The reasoning in Quincecare was flawed because it treated the bank’s duty of care as potentially conflicting with its duty to execute its customer’s payment instruction. Steyn J. had proceeded on the basis that he was considering ex hypothesi “a valid and proper order”.
“On a proper understanding of the bank’s duties, there cannot be such a conflict. … the duty to exercise reasonable skill and care only arises where the validity or content of the customer’s instruction is unclear or leaves the bank with a choice about how to carry out the instructions …” (at [63])
“It is impossible to derive from a duty to observe reasonable skill and care in and about a customer’s order a duty not to execute the customer’s order. Indeed as Lord Sumption NPJ recently observed in PT Asuransi Tugu Pratama Indonesia TBK v Citibank NA [2023] HKCFA 3, para 14:
“The law cannot coherently treat compliance with an authorized instruction as a breach of duty …” (at [64]).
(d) The Supreme Court then identified a second flaw in the analysis in the Quincecare case:
“It lies in the method used to escape from the predicament of having to reconcile conflicting contractual duties. Having perceived a conflict which does not in reality exist, Steyn J had no principled way in which to resolve it. In these circumstances he resorted to reliance on policy considerations.” (at [66])
“The problem with this approach is that it is not an appropriate method for identifying what duty is owed by a party pursuant to a contract. What rule would represent a “sensible compromise” or “fair balance” between broad policy goals is a matter for legislators and other policy-makers to consider. … In deciding whether a party to a contract can be regarded as having undertaken an obligation to the other party without having done so expressly, the aim of the courts is the more modest one of seeking to give effect to the presumed common intention of the contracting parties. A duty to combat fraud or to protect customers (let alone innocent third parties) against fraud is not an ordinary incident of the contractual relationship between a bank and its customer. Nor is any wider public interest in promoting those goals a proper basis on which to identify an implied term of the contract.” (at [67])
(c) Rather, the true basis for the bank’s duty is the agency law principle that “Authority to act as agent includes only authority to act honestly in pursuit of the interests of the principal” (at [72]). Therefore, if one applies conventional agency principles (including limitations on apparent authority) in the context of instructions given to banks by human agents of corporate customers, these conclusions follow:
“When these principles of agency law are applied to the factual circumstances of the Quincecare line of cases, the justification for the legal conclusion reached in those cases becomes clear. The authority conferred on an agent by a customer of a bank to sign cheques or give other payment instructions on behalf of the customer does not include authority to act dishonestly in pursuit of the agent’s own interests and in fraud of the customer. An agent acting in this way will therefore lack actual authority to give the instruction on behalf of the customer. The agent will still in general have apparent authority to do so by virtue of the customer’s representation to the bank that the agent is authorised to give payment instructions on its behalf. But not if there are circumstances suggestive of dishonesty apparent to the bank which would cause a reasonable banker before executing an instruction to make inquiries to verify the agent’s authority. In such circumstances the bank’s duty to exercise reasonable skill and care in and about executing the customer’s instructions requires the bank to make inquiries to ascertain whether the instruction given is one actually authorised by the customer. If the bank executes the payment instruction without making such inquiries, the bank will therefore be acting in breach of duty. Furthermore, the instruction will not bind the customer, as the dishonest agent will lack apparent as well as actual authority to give it on behalf of the customer.” (at [90])
“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.” (at [91])
“The logical consequence … is that a payment made without inquiry when the bank is on notice that the payment is being made for the signatories’ own purposes is not only a breach of the bank’s duty of care but is also outside the scope of its mandate. Hence the bank is not entitled to debit the amount to the customer’s account.” (at [96])
Implications of the Supreme Court’s analysis
The Supreme Court has upheld the duty found to exist in Quincecare, but has given it a more solid juridical foundation.
“In summary, the duty of a bank which has come to be referred as the “Quincecare duty” is not, as that epithet might suggest, some special or idiosyncratic rule of law. Properly understood, it is simply an application of the general duty of care owed by a bank to interpret, ascertain and act in accordance with its customer’s instructions. Where a bank is “put on inquiry” in the sense of having reasonable grounds for believing that a payment instruction given by an agent purportedly on behalf of the customer is an attempt to defraud the customer, this duty requires the bank to refrain from executing the instruction without first making inquiries to verify that the instruction has actually been authorised by the customer. If the bank executes the instruction without making such inquiries and the instruction proves to have been given without the customer’s authority, the bank will be in breach of duty. It will also in making the payment be acting outside the scope of its authority from the customer and will therefore not be entitled to debit the payment to the customer’s account.” (at [97])
A number of conclusions follow from the Supreme Court’s analysis of this duty:-
(a) The principles “apply wherever one person is given authority to sign cheques or give other payment instructions to a bank on behalf of another. They apply, for example, where under the mandate for a joint account either account holder has power to bind the other” (at [98]).
(b) However, the principles would not apply on the facts of Philipp where it was the human customer herself (i.e. the principal) who gave the payment instructions.
(c) It is also clear from the UK Supreme Court’s judgment that a breach of the general duty of care sounds in damages, whereas a payment made without authority (whilst being in breach of the general duty of care) will not affect the state of indebtedness between the bank and its customer, because the bank will not be entitled to debit its customer’s account.
(d) Therefore, a customer whose account has been debited in consequence of the fraudulent activity of a formerly trusted agent, in circumstances where the bank ought to have been “put on inquiry”, has a claim in debt to recover the amount which should be standing to his credit with the bank. As is clear from Tugu, such a claim cannot be abated by contributory negligence, and limitation will only run from the time that the customer demands repayment. The claim in debt has this further significance identified by the UK Supreme Court:
“… unless the customer is claiming damages for consequential losses over and above the amount of the payment, it is unnecessary for the customer in order to succeed to prove that, if reasonable inquiries had been made, the agent’s dishonesty would have been revealed and the loss avoided.” (at [96])
(e) It will only be necessary to claim damages for breach of the general duty of care if the customer is claiming consequential losses in addition to the claim in debt. Breach of the general duty of care may also be relevant to the defence of a claim by a bank to recover unauthorised payments made against an overdraft facility (which was what happened in Quincecare itself). It follows that the claimants in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2020] AC 1189 might have avoided the abatement of their claim by 25% for contributory negligence, if they had pleaded their claim in debt, rather than in damages for breach of what was then conceived as the “Quincecare” duty.
The analysis by the UK Supreme Court therefore reinforces the reasoning in Tugu, and is to be welcomed.
[1] A quotation from the judgment of Steyn J in Quincecare at 376.
Charles Sussex SC and Tom Ng, who both acted for Tugu, authored this article.
