Relief for banks following Supreme Court's decision in Barclays v Philipp

In Philipp v Barclays Bank UK PLC [2023] UKSC 25 the UK Supreme Court provided a decision that carries significant implications for the extent of banks' obligations to protect customers from fraudulent activities.

Unanimously overturning the decision of the Court of Appeal, the decision is now the leading authority on the duties owed by banks to their customers regarding fund transfers. The ruling reaffirms that a bank's primary duty is to honour its customers' instructions to transfer funds credited to their account.

The case involved Mrs Philipp and her husband, Dr Philipp, prompted by the fraudster's design, instructing Barclays Bank to transfer £700,000 to bank accounts in the UAE to "protect their funds", often referred to as "authorised push payment" ('APP') fraud. When the police informed Barclays of the fraud investigation, Barclays froze Mrs Philipp's account but was unable to recover the transferred funds. Mrs Philipp argued that Barclays was responsible for the loss and had a duty not to carry out her payment instructions if they had reasonable grounds to believe that Mrs Philipp was being defrauded.

While the High Court initially ruled in favour of Barclays, the Court of Appeal allowed Mrs Philipp's appeal and acknowledged that banks have a duty to make inquiries when there are reasonable grounds to suspect fraud. The Court of Appeal based its reasoning on the precedent set by Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, which established that banks have a duty not to execute payment instructions from agents if there are reasonable grounds to believe the agent is attempting to defraud the customer.

However, the Supreme Court found that the Court of Appeal erred in concluding that there was a conflicting duty for banks not to comply with a customer's payment instruction in the context of APP fraud. In turn, the Supreme Court declined to extend the so-called Quincecare duty to a case where the customer had unequivocally authorised and instructed the bank to make payment, and emphasised that the distinguishing characteristic of the duty was that the payment instruction was given by an authorised signatory acting in fraud of the customer.

Judgment

In its unanimous judgment, the UK Supreme Court stated that to extend the Quincecare duty to cases of APP fraud against its customers would be "inconsistent with first principles of banking law". Where the customer has authorised 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, unless the bank is on notice that the customer lacks mental capacity to make such decisions.

The Supreme Court's decision returns the Quincecare duty to its narrow and limited focus, rejecting the Court of Appeal's expanded ambit. Essentially, the Supreme Court held that the Quincecare duty is not a "special or idiosyncratic" rule of law, but merely an application of the general duty of care owed by a bank to interpret and act in accordance with its customer's instructions. Where a bank is put on inquiry for believing that payment instruction given by an agent or mandatary of the customer is an attempt to defraud the customer, this duty requires the bank to refrain from executing the instruction without first making enquiries as to whether it has been genuinely authorised by the customer.

Comment

The Supreme Court's ruling is  broadly in keeping with recent case law concerning the Quincecare duty, notably Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC [2022] UKSC 34, Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) (Isle of Man) [2022] UKPC 18 and Federal Republic of Nigeria v JPMorgan Chase Bank NA [2022] EWHC 1447 (Comm). Those cases did not seek to widen the ambit of the Quincecare duty, but maintained its relatively narrow scope.

This will be a welcome decision for the financial institutions, one that certainly provides clarity on an issue of public importance given the increasing volume of APP fraud. Had the Supreme Court upheld the Court of Appeal's decision, banks' potential liability to their customers would have exponentially expanded. The decision effectively reverts the onus on customers to ensure that payment instructions are bona fide, and closes a significant risk of what might have been a flood of litigation against the nation's banks brought by customers who have been victims of APP fraud.

However, the ruling does leave a lacuna in terms of consumer protection. Whilst the new Payment Services Regulations will impose a requirement for reimbursement by payment services providers in 'qualifying cases' of payment orders executed by way of fraud or dishonesty, these are limited to domestic payment orders executed over Faster Payments and international payments are excluded. The Supreme Court acknowledged that it was not the role of the courts to make rules of this kind.

Victims of APP fraud where payments are made outside of Faster Payments still have recourse to recovery. The first is through civil action and the wide-ranging powers of the court to trace and recover stolen monies. The second is the possibility, as acknowledged in the Supreme Court's judgment, that having been made aware of a fraud, the bank does not act swiftly enough to recall the payment (which is an element of Mrs Philipp's claim that will be the subject of a first instance trial). Thirdly, corporate bodies are able to protect themselves from APP fraud through insurance, and insurers may begin to offer similar policies to consumers (although such policies would likely only pay out in very limited circumstances).