29/04/2022·3 mins to read

English courts taking an increasingly tough approach to banks acting on fraudulent instructions

Last month, the English Court of Appeal added a further decision to a series of recent cases that have increased the scope of the Quincecare duty - a duty that requires banks to refuse to act on instructions from an authorised signatory of a customer where the bank is ‘on notice’ that the instruction may be an attempt to defraud the customer.

By recognising that a bank may be liable in such circumstances, the English courts have shown the risks that arise from having insufficient safeguards through payment processes. They have also provided insolvency practitioners with a potentially powerful tool to recover losses from the banks themselves.

But could the New Zealand courts adopt a similar approach? 

Key takeaways

  1. The Quincecare duty is well established in English law, and recent cases have strengthened this.

  2. The duty presents difficulties for banks, and for insolvency practitioners. In particular for banks, if they execute potentially fraudulent instructions too quickly, they may be deemed to have failed to look after their customers. However, if they execute instructions too slowly, then they may not properly discharge their mandate obligations.

  3. In New Zealand, the courts have so far opted to place more emphasis on mandates than their English counterparts. Importantly though, the risk of the Quincecare duty being enforced in New Zealand remains very real.

The Quincecare duty and the recent English decisions

The Quincecare duty first arose in English law in the early 1990s. It forms part of an implied contractual term between a bank and its customer that the bank must use reasonable skill and care when executing instructions. Specifically, it provides that a bank will be liable to its customer where it carries out an instruction in circumstances where it knows or should have known that the instruction was dishonest. This is an objective standard, which is assessed against what a reasonable and prudent banker would have done.

Since 2019, the English courts have issued a series of decisions that confirm and expand the scope of the Quincecare duty. Most notably:

  1. In October 2019, the English Court of Appeal in JPMorgan Chase Bank, N.A. v The Federal Republic of Nigeria rejected an application by JPMorgan to strike out a Quincecare claim that had been brought against it by the Government of Nigeria. JPMorgan had held US$1 billion on behalf of the Government following settlement of a long-running dispute about an offshore oil field. Acting on instructions from authorised signatories of the relevant account (who were senior government officials - the Nigerian Minister of Finance and the Accountant General), the bank paid out substantial amounts from the account. The Government subsequently claimed these signatories were corrupt and that the payments were fraudulent. The Government did not allege that the bank knew about the fraud, but argued it should have realised that the instructions could not be trusted. The Court refused the bank’s application to strike out the claim, holding that the express terms of the bank’s agreement with the Government, as its customer, did not exclude the Quincecare duty.

  2. Also in October 2019, the United Kingdom Supreme Court in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd upheld a successful claim for breach of the Quincecare duty that had been brought by liquidators acting through an insolvent company. The company had effectively been a ‘one-man-band’ with one director, Mr Al Sanea, acting as sole shareholder, chairperson, president and treasurer. Mr Al Sanea had signing powers over the company’s accounts and so the bank acted on his payment instructions despite “many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company”. The liquidators subsequently stepped into the company’s shoes and sought US$204 million from the bank in an effort to repay its creditors. The bank unsuccessfully sought to argue that Mr Al Sanea’s fraudulent state of mind should be attributed to the company, meaning that allowing the claim would permit the company to benefit from its own fraud. The Court rejected this, and thereby provided some remedy to the company’s creditors.

  3. In March 2022, the English Court of Appeal in Philipp v Barclays Bank UK plc overturned a previous High Court decision striking out a claim for breach of the Quincecare duty. The claim had been brought by an individual who was duped by fraudsters into paying £700,000 from her account with Barclays Bank in the belief that she was assisting authorities with a criminal investigation. The customer claimed the bank owed a duty to protect her from such types of fraud and sought damages accordingly. Importantly, by allowing the claim to continue, the Court of Appeal has held that the Quincecare duty is not limited to circumstances where an instruction has been given by the authorised signatory of a company, but instead also extends to protecting individuals from instructions they themselves have given.

Why is the Quincecare duty important?

The Quincecare duty presents several difficulties for banks. In addition to requiring effective safeguards through the payment instruction process, those safeguards have to be balanced against the conflicting duty that banks owe to execute instructions promptly and in a way that avoids financial loss for their customers. As discussed below, banks can be caught between a rock and a hard place - if they execute instructions too quickly they may fail to discharge their duties under Quincecare, but if they are too cautious then they breach their duty to act swiftly on instructions.

Conversely, the Quincecare duty presents opportunities for insolvency practitioners by allowing them (in the name of an insolvent company or individual) to take action against a bank for failing to stop fraudulent transactions. This may be a powerful tool where there are little or no assets remaining, and is particularly noteworthy in that it does not seem to matter that the instructions came from a seemingly legitimate place within the company (as in Singularis) or from the customer themselves (as in Philipp).

The current approach in New Zealand

In New Zealand, there is an implied duty for banks to make inquiries where a reasonable and honest banker would have believed that the instruction given by an authorised signatory raises a serious or real possibility that its customer will be defrauded. Importantly however, the bank is only entitled to decline the payment instruction if these inquiries show actual dishonesty or fraud. This is different from the English law approach where a bank “must refrain from executing an 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 funds”. Unlike the English cases, where a New Zealand bank’s inquiries lead only to continued suspicion, the bank is not merely permitted to carry out the instruction - it is required to do so.

The difference in approach seems to be that the New Zealand courts have given far greater weight to a bank’s duty to follow the mandates established by its customer. Most notably, the New Zealand Supreme Court in Westpac New Zealand v MAP and Associates Ltd held that the bank in that case was required to follow its customer’s mandate unless it had actual proof that doing so would lead to the customer committing a breach of trust against its beneficiary. Unlike the English approach to the Quincecare duty, mere suspicion was not enough.

Could the approach in New Zealand change?

While the Quincecare duty has in the past gained less traction in New Zealand than what it has gained in England, the fact remains that the New Zealand courts are very alert to decisions from the senior English courts.

What is noteworthy about the English cases, is that they are driven in large part by public policy considerations. At one level, the Quincecare duty could be seen as being out-of-date on the basis that banking and financial services have become significantly more complex since the duty was first developed in the early 1990s. But the English courts have not taken that view. Rather, they have emphasised the increasing reliance that customers and society places on banks to recognise and reduce instances of financial crime. They also appear willing to give liquidators and creditors the tools to pursue banks where they have been left severely short-changed by fraudulent activity.

While they haven’t been acted on to date (at least to the same extent), the same policy considerations could be held to exist in a New Zealand context. Indeed, if the Quincecare-trend continues to develop in England, then it may well be an area that the New Zealand courts are prepared to revisit.

What is particularly troublesome is that there are grounds for drawing seemingly fine distinctions. Most notably, in Westpac the defrauded party was not the bank’s direct customer, but an underlying beneficiary. Given that the Quincecare duty arises directly from the implied contractual duty that a bank owes to its customer, it may be open to a future New Zealand court to hold that banks are under a higher duty to prevent fraud against their own customers than what Westpac suggests. Such distinctions show the difficulties that exist between the ‘rock’ of being required to act on clear mandates, and the ‘hard place’ of protecting customers from fraud.

This is not to say that banks are powerless against finding themselves caught between the rock and the hard place. Rather, these types of issues show the need for mandates to be carefully drafted by (for example) expressly permitting the bank to refuse to act on an instruction where it suspects fraud may be at play. Considerations like this help to ensure that banks are not left ‘holding the bag’ when others might have done wrong.

Special thanks to Hugh Morrison for his assistance in writing this article.