COURT OF APPEAL JUDGMENT ON SCOPE AND EXCLUSION OF 'QUINCECARE' DUTY OF CARE

The Court of Appeal has recently handed down an important judgment considering the so-called Quincecare duty of care: JPMorgan Chase Bank, N.A. v The Federal Republic of Nigeria [2019] EWCA Civ 1641.

The Quincecare duty arises in the context of a deposit holding financial institution receiving and processing a payment mandate in relation to a customer's account, where that mandate was made by an authorised signatory of its customer, but where the instructions turn out to have been made fraudulently and to the detriment of the customer. It is the duty imposed on the bank to refrain from executing the order if (and for as long as) it is "put on inquiry" in the sense that it has 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.

In the present case, the Court of Appeal refused an application made by the defendant bank for reverse summary judgment/strike out on the basis that there was no Quincecare duty of care applicable on the facts because such a duty was inconsistent with, or was excluded by, the express terms governing the claimant's depository account with the bank. In doing so, the Court of Appeal upheld the decision of the High Court (given by the now Lord Burrows, who recently received a leapfrog promotion to the Supreme Court): The Federal Republic of Nigeria v JPMorgan Chase Bank, N.A. [2019] EWHC 347 (Comm).

There are three significant points arising from the Court of Appeal's judgment:

1. Scope of the Quincecare duty of care:

The Court of Appeal has arguably expanded the scope of the Quincecare duty of care. The judgment states that, in most cases, the Quincecare duty will require "something more" from the bank than simply pausing and refusing to pay out on the mandate when put on enquiry that the order is an attempt to misappropriate funds. It commented that the question of what a bank should do will vary according to the particular facts of the case. In the present case, the Court of Appeal said that the trial judge will be in a better position to determine what the bank should have done if it had decided not to execute the instructions it was given to transfer funds.

The effect is that the Quincecare duty comprises both:

• • A negative duty to refrain from making payment; and
  • A positive duty on the bank to proactively do "something more".

In the Court of Appeal's view, these negative and positive duties carry equal weight, and neither is separate or subsidiary or additional to the other. In the High Court, the judge inclined to the view that the positive duty was a duty of enquiry. However, the Court of Appeal's formulation of the positive duty is not limited to one of enquiry or investigation and for that reason it has arguably expanded the scope of the Quincecare duty.

Further, the Court of Appeal consciously avoided identifying factors which might be relevant to assessing what the "something more" is or might consist of, thus offering banks little practical guidance; it will depend on the facts of the case in question.

2. Exclusion of the Quincecare duty is possible

The Court of Appeal endorsed the High Court's view that it is possible for a bank and its client to agree to exclude the Quincecare duty (subject to any statutory restrictions, such as the clause being reasonable under the Unfair Contract Terms Act 1977). However, both the High Court and Court of Appeal emphasised that such an exclusion would have to be sufficiently clear (which was not the position on the facts of the present case). While an exclusion in such clear terms is therefore possible, it may be commercially unpalatable.

3. Whether the Quincecare duty was inconsistent with express terms of the depository agreement

The Quincecare duty either arises by operation of an implied term of the contract governing the customer's account, or under the tort of negligence. In the present case, the bank argued that there were certain express terms of the contract which meant that the Quincecare duty could not arise by operation of an implied term (because an implied term cannot be inconsistent with an express term), nor could it arise in tort (because the tortious duty is shaped, and can be excluded by, contractual terms). The bank argued that the express terms directly conflicted with what the Quincecare duty would seek to impose, and therefore the duty did not arise.

However, both the High Court and the Court of Appeal read references in express terms to there being no duty to "enquire" or "investigate" as meaning that there was no duty of care to enquire or investigate prior to the point at which the bank had the relevant reasonable grounds for belief. It therefore held such clauses were consistent with the Quincecare duty, even if it imposes an additional positive duty to enquire/investigate along with the negative duty not to pay.

There have been a number of recent cases shining a spotlight on the Quincecare duty of care. We previously considered the Court of Appeal's decision in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2018] EWCA Civ 84, in which the court rejected a bank's attempt to defeat a Quincecare duty claim with a defence of illegality (see our banking litigation blog post). Earlier this year, the Supreme Court heard the bank's appeal in that case and judgment is currently awaited.

The Singularis case remains the first and only case in which a bank has been found liable for breach of its Quincecare duty of care. However, the number of cases in which the duty is being argued highlights this as a risk area for financial institutions handling client payments. In particular given the potential expansion of what is encompassed within the Quincecare duty, it may be prudent for financial instructions to review safeguards governing payment processing, and also review the protocol in place for what steps must be taken in the event that a red flag is raised, not limited to refraining from making the payment, but extending to positive steps of investigation and the record-keeping of those steps. Financial institutions may also wish to consider reviewing the standard form wording of client account agreements.

Background

In 2011, the Federal Republic of Nigeria (the "FRN”) opened a depository account in its name with JPMorgan Chase Bank, N.A. (the "Bank”). The account was opened following a long-running dispute about the rights to exploit an offshore Nigerian oilfield, in which there were competing ownership claims from a company called Malabu Oil and Gas Nigeria Ltd and a subsidiary of the oil company Shell. These disputes were settled pursuant to various settlement agreements. Under the terms of settlement, Shell was required to pay US$ 1 billion into a depository account in the name of the FRN, which would then be used by the FRN to pay Malabu.

The Bank subsequently paid out the whole of the deposited sum on the instruction of authorised signatories of the FRN under the terms governing the operation of the depository account. However, the FRN asserts that these requested transfers were part of a corrupt scheme by which the FRN was defrauded, and the money transferred out of the depository account was used to pay off corrupt former and contemporary Nigerian government officials and/or their proxies and used to make other illegitimate payments.

Claim

The FRN brought a claim against the Bank to recover the sums held in the depository account on the basis that the payments were made in breach of the Quincecare duty of care, named after the case of Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363 in which this duty of care was first described.

It was alleged by the FRN that the fraudulent and corrupt scheme of which these payments were part reached the very highest levels in the Nigerian state. There was no allegation that the Bank knew about or was in any way involved in the alleged fraud, but it was said that the Bank should have realised that it could not trust the senior Nigerian officials from whom it took instructions. The FRN claimed that the Bank should not have made the payments it was instructed to make and is therefore liable to pay damages to the FRN in the same sum as the payments that were made.

The Bank applied for reverse summary judgment and/or strike out on various grounds, including that there was no Quincecare duty of care applicable on the facts because such a duty was inconsistent with, or was excluded by, the express terms of the depository agreement. The judgments considered below relate to that application.

High Court decision

The High Court held that the express terms of the depository agreement between the Bank and the FRN did not exclude, and were not inconsistent with, the imposition of the Quincecare duty. The High Court also refused the application on various further ancillary grounds which are beyond the scope of this blog post.

The High Court summarised the relevant law on the Quincecare duty before considering the interpretation of certain clauses of the depository agreement.

Scope of the Quincecare duty

The High Court noted that the Quincecare duty of care was very carefully formulated and explained in Barclays v Quincecare as a duty on a bank to refrain from executing a customer's order if, and for so long as, the bank is "put on inquiry" in the sense that the bank has reasonable grounds for believing – assessed according to the standards of an ordinary prudent banker – that the order is an attempt to defraud the customer. In the present case, the High Court said it is an aspect of the bank's duty of reasonable skill and care in or about executing the customer's orders and therefore arises by reason of an implied term of the contract or under a coextensive duty of care in the tort of negligence. Although Quincecare considered the duty in the context of a current account, in the High Court's view, there was no good reason of principle or policy why a Quincecare duty of care should be confined to current accounts and not apply to depository accounts.

In terms of the scope of the duty, the High Court held that the core of the Quincecare duty was the negative duty on a bank to refrain from making a payment (despite an instruction on behalf of its customer to do so) where it has reasonable grounds for believing that that payment is part of a scheme to defraud the customer. The High Court inclined to the view that, in addition to this core negative duty, there was a positive duty on the bank to make reasonable enquiries so as to ascertain whether or not there is substance to those reasonable grounds.

The High Court said that this would not be an "unduly onerous" duty, because it would always be limited by what an ordinary prudent banker would regard as reasonable enquiries in a situation where there are reasonable grounds for believing that the customer is being defrauded. There was no discussion of what these enquiries might be on the facts of the case or more generally, although the word "enquiry" was used interchangeably with "investigation”.

The High Court noted that it did not need to decide finally the point on whether the scope of the Quincecare duty included an additional positive duty, because of its conclusions on the interpretation of the depository agreement (below), and therefore these comments were made on an obiter basis.

Express clauses of the depository agreement

The High Court applied the now well-established principles of contractual interpretation to consider the terms of the depository agreement, finding that none of the clauses expressly excluded the Quincecare duty of care, either under the entire agreement clause or exemption clauses in the depository agreement. In particular, the High Court noted that clear words were required to exclude a valuable right such as the Quincecare duty, and there were no such clear words on the facts of this case.

The Bank also argued that certain clauses of the depository agreement were inconsistent with a Quincecare duty of care. The High Court said that it is trite common law that an implied term cannot be inconsistent with an express term, and similarly a duty of care in tort may be shaped by, and can be excluded by, contractual terms. Given that the Quincecare duty arises by way of either an implied contractual term or concurrent tortious duty, the High Court proceeded to consider whether the clauses identified by the Bank were inconsistent with the Quincecare duty (in which case it would have supported the Bank's argument that no Quincecare duty arose).

The most important express terms which the Bank relied on as being inconsistent with the duty were clauses 7.2 and 7.4:

"7.2 The Depository shall be under no duty to enquire into or investigate the validity, accuracy or content of any instruction or other communication...

7.4 The Depository need not act upon instructions which it reasonably believes to be contrary to law, regulation or market practice but is under no duty to investigate whether any instructions comply with any applicable law, regulation or market practice."

The High Court held that these clauses were consistent with (at least) the core of the Quincecare duty of care (i.e. the negative duty to refrain from making payment where it has reasonable grounds for believing that the payment is part of a scheme to defraud the customer).

It held that the correct interpretation of clauses 7.2 and 7.4 was that – apart from the opening part of clause 7.4 (which it said was plainly consistent with a Quincecare duty of care) – they did not apply at all where the Bank had reasonable grounds for believing that the customer was being defrauded. In other words, the references to there being no duty to enquire or investigate were making clear that there was no duty of care to enquire or investigate prior to the point at which the Bank had the relevant reasonable grounds for belief. It therefore found that clauses 7.2 and 7.4 were consistent with the Quincecare duty even if it imposes an additional positive duty to enquire/investigate along with the core negative duty not to pay.

Although this was an interlocutory application, the High Court heard full legal argument and decided this issue finally (and not on the basis of whether the claimant had a realistic prospect of success). It was common ground between the parties that the High Court should "grasp the nettle" and decide this point on the application rather than at trial, because the issue was concerned with questions of law as to the contractual interpretation of the depository agreement and the nature of a Quincecare duty of care.

The Bank appealed.

Court of Appeal decision

The Court of Appeal upheld the High Court's decision. There are three particularly significant points arising from the judgment, discussed below.

1. Scope of Quincecare duty

As to the scope of the Quincecare duty, the Court of Appeal said that, in most cases, the duty will require "something more" from the bank than simply pausing and refusing to pay out on the mandate when put on enquiry that the order is an attempt to misappropriate funds. It commented that the question of what a bank should do will vary according to the particular facts of the case. In the present case, the Court of Appeal said that the trial judge will be in a better position to determine what the Bank should have done if it had decided not to execute the instructions it was given to transfer funds. It did not think it would be helpful to give an indication as to what factors are likely to be relevant to the trial judge's overall assessment of what the Bank should have done.

In contrast to the High Court, the Court of Appeal did not find it useful to describe some parts of the Quincecare duty as being core and some parts of it as being separate of subsidiary or additional.

It is worth noting that the Court of Appeal's comments on the scope of the Quincecare duty were obiter, because it held that this was an issue for the trial judge, and arose on an issue which both the High Court and Court of Appeal found did need to be resolved in order for to dispose of the application.

2. Exclusion of the Quincecare duty is possible

The Court of Appeal endorsed the High Court's view that it is possible for a bank and its client to agree to exclude the Quincecare duty (subject to any statutory restrictions, such as the clause being reasonable under Unfair Contract Terms Act 1977). However, both the High Court and Court of Appeal emphasised that such an exclusion would have to be sufficiently clear (which was not the position on the facts of the present case). In the Court of Appeal's words, 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."

3. Whether the Quincecare duty was inconsistent with express terms of the depository agreement

The Court of Appeal found that, as a matter of contractual interpretation, clauses 7.2 and 7.4 were not inconsistent with the existence of the Quincecare duty, agreeing with the reasons given by the High Court.

The Court of Appeal therefore found that the High Court was right to dismiss the summary judgment application and refused the Bank's appeal.