Quincecare duty is flawed and based on a mistaken premise - Philipp v Barclays

Key takeaways

• The Quincecare duty does not apply where an individual customer directly authorises the transaction. Banks are not required to second guess their customer's motivations unless (unusually) they have expressly agreed to do so.
• The Quincecare duty only applies where the instruction to the bank involves a fraud on the customer: that is, there is some form of dishonesty by the customer's agent (which can include a director of a corporate customer).
• The Quincecare duty is not a 'special or idiosyncratic' rule of law. It is just part of a bank's general duty to 'interpret, ascertain and act' in compliance with instructions.
• The Quincecare duty is in fact no more and no less than the duty to make further inquiries which arises whenever a third party has reason to believe an agent may not have the authority of its principal.
• Where a bank is notified of an APP fraud by its customer after it has complied with its customer's instructions to make a payment, the extent of its liability for failing to swiftly recall payments remains to be decided.

The claim – at a glance

The background to the Supreme Court's decision in Philipp v Barclays Bank Plc is summarised in our earlier article here. In brief, Dr and Mrs Philipp were deceived by fraudsters into authorising the transfer of the bulk of their life savings to fraudsters in the UAE (known as authorised push payment or APP fraud). The deception was so deep that despite warnings and even personal visits from the police, Dr and Mrs Philipp believed the fraudsters. Some days after the final transfer, Dr and Mrs Philipp realised they had been defrauded and notified their bank. However, it took some months for the bank to attempt to recall the transactions. This delay (and the question of whether it caused any loss) is the one ground on which Mrs Philipp's appeal – in the form of an alternative claim – succeeded and which will be determined at trial.

At first instance the court summarily dismissed Mrs Philipp's claim on the ground that no Quincecare duty was owed in those circumstances. On appeal to the Court of Appeal, however, it was held that such a duty did arise as a matter of a law and that its application to the facts of the case should be decided at trial. That potential expansion of the Quincecare duty had caused significant concern. The Supreme Court's refinement of the scope of the duty will be welcomed by banks and other financial institutions.

Agency and authority

The central analysis by the Supreme Court relates to the scope of an agent's authority. Crucially, it held that an agent only has actual authority to act 'honestly in pursuit of the interests of its principal'. While conceding it might be possible for an agreement to expressly provide that an agent could bind a principal even when acting dishonestly with the aim of defrauding it, no 'sane person' would ever agree to that.

By contrast, under the doctrine of apparent authority (which exists to protect the expectations of third parties), an agent can bind a principal, even when acting dishonestly with the aim of defrauding the principal.

A third party's expectations are irrelevant to the existence or otherwise of actual authority. The third party has no idea what has been agreed between the agent and the principal and that is precisely why the doctrine of apparent authority exists.

Why is this relevant to Quincecare? Apparent authority is limited to where reliance by the third party is reasonable. A third party cannot rely on the doctrine where they have reason to believe that the agent is acting without authority, and fail to make reasonable inquiries to verify it.

Applying this analysis of agency law to the Quincecare cases preceding the Court of Appeal's decision in Philipp v Barclays, the Supreme Court held that the Quincecare duty is in fact no more than the duty to verify an agent's authority once on notice that the agent may not have it. If a bank, on notice of an agent's possible lack of authority, executes a payment instruction without making further inquiries, it will be acting in breach of its duty to exercise reasonable skill and care in executing its customer's payment instruction. Further, as the agent will not have the customer's actual authority if it is acting dishonestly, the payment instruction will not bind the customer in any event. That is the legal basis for the Quincecare duty.

No duty to discern true intention

While a bank must also make further inquiries when on notice that a customer lacks the mental capacity to operate their bank account, this does not extend to an obligation to make further inquiries where a customer's genuine instruction arises from another person's deceit. Fraud (including APP fraud) does not vitiate consent. Instead, it generally gives the victim of fraud the right to set aside the transaction as against the fraudster – not as against other innocent parties.

The scale of the deception operated in this case meant that all of the 'red flags' which it was argued should have put the bank on notice that the payment instruction given by Mrs Philipp was not genuine (in the sense that she did not realise at the time she was being defrauded), were all matters of which Mrs Philipp was plainly aware. While the Supreme Court expressed sympathy, it concluded it was simply not a problem that it could put right: '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.'

Breach of duty for failure to recall

Mrs Philipp finally notified Barclays that she believed she had been defrauded on 27 March 2018. Whilst Mrs Philipp did not assert in her claim that she had expressly instructed Barclays to try to recall the payments, the Supreme Court held that it was still clear that Mrs Philipp would have wanted Barclays (from that point onwards) to take 'any available steps' to try to recover her funds. In fact, no steps appeared to have been taken until 31 May 2018, some months later. The likelihood of that delay making any difference to her ability to recover her money 'seemed slim', according to the court. However, it held that the potential claim for loss of chance should not have been summarily dismissed. Accordingly, the question of whether there was any breach by Barclays of its duty to take reasonable skill and care in complying with its mandate after the point at which Mrs Philipp confirmed she had been defrauded, remains to be seen.

The future for Quincecare

The Supreme Court observed that the judgment in Quincecare¹ was little noticed at the time but has had 'a prominent afterlife'. While this judgment is likely to call a halt to any further development of the so-called Quincecare duty, questions remain about the scope of a bank's liability in its dealings with its customers. We now know that the duty to make further inquiries does not arise when an individual customer  authorises the transaction. However, the scope of the necessary further inquiries a bank needs to make – and how it knows it needs to make them – when its instructions come through an agent or a corporate customer remains unclear. Academic analysis on this question that 'the optimal default rule for a bank is that a bank should always follow the instructions of the customer’s authorised agent unless it actually knows and understands (or is wilfully blind to the fact) that the agent is acting dishonestly in relation to the principal²' was respectfully rejected. Instead, the court held that the principle of apparent authority should apply to banks in the same way that it does to all other commercial transactions: 'A bank that relies unreasonably on an agent’s authority despite notice of matters that would have caused a reasonable banker to make inquiries cannot legitimately expect (in the absence of express agreement) to be immune from liability.'