A Bank’s Duty of (Quince)care: Federal Republic of Nigeria v JP Morgan Chase

In what looks likely to be a long-running and high profile legal battle, with enormous sums of public money at stake, the Court of Appeal has upheld the decision of the Commercial Court allowing The Federal Republic of Nigeria (the “FRN”) to pursue its claim against  JP Morgan Chase N.A. (“JPM”). This means that the complex question of whether or not the bank breached its Quincecare duty will be heard at trial.

Background

The FRN brought a claim against JPM to recover the sum of US$875,740,000 which had been held in a depository account in the FRN's name with JPM. As instructed by FRN, JPM paid out the money (being public funds) held in the account in three transfers, which together comprised the whole of the deposited sum. The three transfers were made by JPM on the instruction of persons authorised to give those instructions under the terms governing the operation of the depository account. It subsequently transpired that those instructions were made fraudulently, and the payments were made to a shell company controlled by a corrupt former oil minister and to make other illegitimate payments.

The FRN claim that despite JPM being properly instructed to make the transfers, the payments were made in breach of the so-called Quincecare duty of care, which they say JPM owed to the FRN as its client. This duty is named after the case of Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363 in which this type of duty of care was first described. In short, a Quincecare duty of care may arise when a bank receives and processes a payment instruction in relation to a customer’s account, where that instruction was properly made by an authorised signatory of its customer, but where the instruction turns out to have been made fraudulently and to the detriment of the customer.  It is a duty of care imposed on the bank to refrain from executing the order if, and for as long as, the bank is “put on inquiry” that there are reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of its customer. This is an objective test, judged by the standard of an ordinary prudent banker.

The Quincecare duty

The FRN allege that the Quincecare duty arose when JPM was put on inquiry that the requested transfers were part of a corrupt scheme, with the FRN being defrauded when it irrevocably paid the three transfers. JPM had filed six suspicious activity reports in respect of the payment instructions with the National Crime Agency, and received consent from the NCA to make the payments. There is no allegation by the FRN that JPM knew about, or was somehow involved in, the alleged fraud, rather the FRN claims that JPM should have realised that it could not trust the senior Nigerian officials from whom it took instructions. As a result, FRN claim that JPM should not have accepted the instructions and made the payments and is liable to pay damages in the same sum as the payments that were made.

JPM applied for summary judgment on its defence, or the strike out of FRN’s claims, on the basis that no Quincecare duty of care arose, as any such duty of care was either inconsistent with or expressly excluded by the terms of FRN’s depositary account with JPM, and that therefore FRN’s claims had no prospects of success. Those applications failed before Professor Andrew Burrows QC sitting as a Deputy Judge of the High Court.

There are a number of significant points arising out of the Court of Appeal’s judgment which will interest banks and financial institutions, particularly in relation to their use of terms and conditions which seek to narrow their duties to their customers.

• First, in relation to the scope of a Quincecare duty of care, the Court of Appeal found that in most cases “something more” will be required from the bank than simply deciding not to comply with a payment instruction when put on enquiry that the instruction is (or may be) an attempt to misappropriate funds. A bank will usually be anxious to resolve its concerns in order to avoid any risk of liability for any losses incurred as a result of its decision not to comply with the instruction.What a bank should or should not do in each instance will vary according to each individual case, and a trial judge is best placed to determine that. The Court of Appeal did not however find it useful to describe some parts of the Quincecare duty as being core and some parts of it as being separate, subsidiary or additional.
• Second, the Court of Appeal agreed with the High Court’s decision that it is possible for a bank and its client to agree to exclude the Quincecare duty (subject to any statutory restrictions). However, any such exclusion would have to be sufficiently clear, and this was not the position on the facts of this case and the clause relied upon by JPM in the depositary agreement.The Court of Appeal stated that if a bank wanted to agree that any Quincecare duty would not arise, the clause must make clear “that the bank should be entitled to pay out on instruction of the authorised signatory even if it suspects the payment is in furtherance of a fraud which that signatory is seeking to perpetrate on its client.”
• Third, the Court of Appeal considered whether or not the express terms of the depositary agreement were inconsistent with a Quincecare duty, which either arises by operation of an implied term of the contract governing a customer’s account, or under the tort of negligence. JPM argued that there were certain express terms of the depositary agreement which meant that the Quincecare duty could not arise by operation of an implied term, as an implied term cannot be inconsistent with an express term, nor could it arise in tort, as such a tortious duty could be excluded by contractual terms. As the express terms directly conflicted with what the Quincecare duty would seek to impose, JPM claimed that the duty could not arise.Both the High Court and the Court of Appeal rejected JPM’s submissions and concluded that the clauses relied upon by JPM were not inconsistent with such a duty.

Commentary

The Court of Appeal made it clear that it made no findings in relation to whether or not JPM was subject to a Quincecare duty, or if it had breached any such duty as so alleged by FRN. It simply held that there was nothing in the terms of the depositary agreement which would entitle JPM to bring the claim to an early conclusion by way of summary judgment or strike out. 

Banks seeking to exclude the possibility of a Quincecare duty arising will need to spell out such an exclusion very clearly, As for guidance on how to avoid breaching the duty, banks will need to play close attention to any future decision following a trial.