July 05, 2022

English High Court provides important clarification of Banks’ ‘Quincecare Duty’

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ENGLISH HIGH COURT PROVIDES IMPORTANT CLARIFICATION OF BANKS’ ‘QUINCECARE DUTY’

The so-called ‘Quincecare duty’ has received heightened attention in the English courts in recent years. The duty requires a bank not to execute a customer’s payment instructions where, and for so long as, the bank has reasonable grounds for believing that the instructions are an attempt to misappropriate the customer’s funds.

The High Court’s recent judgment in Federal Republic of Nigeria v JPMorgan Chase Bank[1] provides important clarification of the scope of the duty. In dismissing the claim by the Federal Republic of Nigeria (FRN), this decision confirms that the duty is a narrow one. Even if a bank has serious concerns as to the propriety of a customer or its agents historically or generally, for the duty to apply, the bank must have reasonable grounds for believing that the relevant payment instruction specifically may be fraudulent.

While the caselaw supporting the Quincecare duty is slim, there is no doubt the duty is now firmly entrenched in English law as part of a bank’s broader duty of reasonable skill and care owed to its customer. However, banks will welcome the clarity provided by this decision and its cautious approach. It recognises that the duty must be limited so as to strike a balance with a bank’s primary obligation to act on payment instructions promptly. By not allowing the duty to be triggered by knowledge or suspicions of a customer’s history and wider circumstances (even where those matters may be relevant to a bank's wider anti-money laundering (AML) obligations), the decision also forestalls—at least for now—the duty becoming a potentially extremely onerous burden in the modern-day banking context.

Facts

In 2001, an operating licence originally granted to Malabu Oil and Gas Ltd (Malabu) was revoked and granted to a Nigerian subsidiary of an international oil company. This gave rise to a protracted dispute between FRN, Malabu, the oil company and others, which was eventually settled under a number of ‘Resolution Agreements’ in 2011. These agreements provided for payments in excess of U.S. $1 billion to be made to Malabu by FRN.

FRN opened a deposit account with the defendant bank, where the funds were held until they were paid to Malabu in 2011 and 2013 on instructions from authorised persons acting on behalf of FRN. After being paid to Malabu, the monies were subsequently allegedly misappropriated by a number of individuals, some of whom FRN alleged were directly connected with the settlement process and subsequent payments.

FRN brought a claim for damages against the bank for breach of the Quincecare duty in respect of the misappropriated funds. While FRN accepted that the bank was not involved in or aware of the alleged fraud, it alleged that the bank was on inquiry that the instructions might be part of a fraudulent scheme to misappropriate funds and defraud FRN, given what it was alleged the bank knew or ought to have known about the histories of Malabu and the Nigerian officials who gave the payment instructions. On that basis, FRN argued that the bank should not have made the payments.

Did the Quincecare Duty Arise and Was it Breached?

The Court accepted the bank’s submissions that:

  • the Quincecare duty arises in relation to a payment instruction;
  • there needs to be a clear focus on what it is the bank must be on notice of; and
  • unless the bank is on notice that the instruction in question may be an attempt to misappropriate funds, the duty does not arise.

In short, the focus is on notice of the matter that allegedly vitiates the instruction and not any different or wider concern. Therefore, FRN had to show that the payments in 2011 and 2013 formed part of a fraud, and that the bank was on notice of the possibility that the payments were part of that fraud. The Court found that FRN had not shown that this was the case.

While the court accepted that there were sufficient grounds to conclude that the original licence had been obtained through corruption, FRN failed to establish that the subsequent settlement had been fraudulent in nature, or that the Nigerian officials authorising payments under the terms of that settlement had been party to any such fraud. As the court found that there was no relevant fraudulent scheme, the Quincecare duty could not arise.

In any event, even if a fraud had been established, under an exclusion clause in the deposit agreement between the parties, even assuming for argument’s sake that the bank had been on notice of the fraud, it would only be liable if it had been grossly negligent. That involved asking the questions whether (i) there was an obvious risk that the instructions were fraudulent, and (ii) the bank demonstrated serious disregard for such risk (as to which, the ease of mitigating the risk would be of particular relevance).

The Court considered the potential “red flags” that FRN alleged put the bank on notice in respect of the 2011 and 2013 payments. As to the 2011 payments, FRN claimed examples of corrupt and fraudulent behaviour in respect of the license more widely and historically and allegedly suspicious features of the 2011 payment in particular. However, while the bank assertedly had filed several suspicious activity reports in respect of some of that behaviour for AML purposes, the evidence relied on by FRN was not enough to put a reasonable and honest banker on notice that the payment might be fraudulent.

As to the 2013 payment, while the proliferation of news articles prior to that payment regarding similar allegations of fraud, in addition to various investigations within Nigeria and internationally into the license and the Nigerian officials concerned did put the bank on notice of a real possibility of a fraud, it would not have led a reasonable and honest banker to conclude there was an “obvious risk” that the payment instructions were fraudulent.

Accordingly, the bank had not been grossly negligent and did not breach any Quincecare duty, even if it had arisen.

Comment and Key Takeaways

After recent cases arguably expanded the scope of the Quincecare duty in certain respects[2], Federal Republic of Nigeria confirms that the duty is narrow and has clear limits. In particular:

  • The bank must be on notice that the payment instruction in question may be affected by fraud; past conduct or vague or generalised concerns are not enough.
  • Even serious concerns as to potential fraudulent behaviour on the part of a customer or its agents that, e.g., engage AML requirements may not be sufficient to give rise to a Quincecare duty if there are not also specific reasons for suspecting that the particular payment instructions were fraudulent.

The case also highlights the clear benefit in this context for banks limiting their liability to “gross negligence.” While the distinction between gross and ordinary negligence may sometimes be elusive and was not determinative in this case, a gross negligence limitation will make it more difficult to establish a breach of the Quincecare duty - the Court stated that where gross negligence is required it may not be sufficient to show even that a bank had fallen "very seriously below" the standard to be expected of the reasonable banker.

Finally, despite the recent proliferation of cases concerning the Quincecare duty, it is notable that in only one English case (the facts of which were highly unusual)[3] has the duty been established and breached. Federal Republic of Nigeria confirms the narrowness of the duty, and in so doing, also serves to further exemplify why claimants may often face difficulties relying on it.

脚注

[1] [2022] EWHC 1447.
[2] For example, to include “external” frauds perpetrated by someone outside the customer and not acting on its behalf: e.g. Philipp v Barclay [2021] Bus LR 451.
[3] Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50.

著者等

Jonathan Swil

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+44 20 7655 5725

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Chris Collins

アソシエイト

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+44 20 7655 5688

+44 20 7655 5688

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