Many banks may have read with some horror the Supreme Court’s recent decision in Singularis v Daiwa (for those who are unaware, please see this briefing note which explains that important judgment and its significance for banks). A tempting reaction from any bank concerned about the Quincecare duty would be to amend its terms and conditions (T&Cs) in the hope that they can seek to exclude or restrict the extent of that duty. However, before falling into a trap of misplaced reliance on amended T&Cs, banks would do well to remember J.R.R. Tolkein’s warning that “false hopes are more dangerous than fears”.
In this briefing note, Jolyon Connell and Oliver Blundell consider the Court of Appeal’s judgment in JP Morgan Chase v The Federal Republic of Nigeria . That judgment, handed down three weeks before the Supreme Court decision in Singularis but with considerably less press attention, provides some helpful clarification about the extent to which a bank’s T&Cs might come to its rescue (or not).
The Quincecare duty
The Quincecare duty sets out that if a bank executes a payment order which purports to be from an authorised signatory but is in fact fraudulent, the bank will be liable to the customer to make good the losses of that fraud if it has been “put on inquiry” of a possible fraud. A bank is “put on inquiry” if a reasonable prudent banker would have had reasonable grounds (although no proof) for believing the instruction to be an attempt to misappropriate the funds.
The JP Morgan case
In JP Morgan, the bank paid out $875m on the instruction of the Finance Minister and the Accountant General of The Federal Republic of Nigeria (FRN), having also obtained authorisation from the Attorney General of Nigeria and clearance from the National Crime Agency. Despite that, FRN later alleged that the payment instructions were part of a fraud which reached the highest levels of the Nigerian state. FRN sued JP Morgan for $875m claiming breach of the Quincecare duty on the basis that JP Morgan ought in the circumstances to have been on notice of the possible fraud.
- The bank attempted to have the claim struck out because the bank’s T&Cs, to which FRN had agreed, provided (among other things) that:
the Quincecare duty would not apply;
- the bank would be under no duty to make enquiries or investigations into instructions which were ostensibly authorised;
- the bank’s liability for any losses incurred as a result of following instructions given by FRN’s authorised representatives were excluded or very significantly limited; and
- the bank was entitled to be indemnified for any costs or losses it incurred in following instructions given by FRN which ultimately turned out to be incorrect.
Notwithstanding the apparent strength of those T&Cs, the Court of Appeal rejected the bank’s arguments. In doing so, it provided the following guidance for other banks regarding the interplay between the Quincecare duty and a bank’s T&Cs. The Court confirmed that:
- The Quincecare duty can be excluded in T&Cs for commercial clients. Similarly, banks can rely on limitation of liability clauses and indemnity clauses in the T&Cs. However, any such exclusion/limitation/indemnity clause will need to be in very clear and prominent language within the T&Cs such that there can be no doubt that both parties understood the position and intended the bank to be able to avoid liability. Failing clear, prominent and express language, such clauses will not be valid. NB: the position would be far more difficult for a bank when dealing with a retail client, where consumer protection legislation will make any such exclusion/limitation/indemnity clauses significantly less likely to succeed (and likely to be in breach of regulatory principles in any event).
- A bank can rely on a clause which says that it has no obligation to make enquiries about its instructions from the customer, and make payments without making those enquiries, but only until the point at which it is on notice of a possible fraud. Once a bank is on notice (and subject to the above), it is under a duty not to make the payment.
- The duty of enquiry will normally “require something more from the bank than simply deciding not to comply with a payment instruction”. However, as to what additional steps a bank should take, each case will turn on its own facts. Indeed, the Court of Appeal appears to have been careful to avoid setting down definitive guidelines (perhaps to avoid prejudicing the full trial of the facts of this case in due course).
Lessons for banks
While the judgement in this case concerned a strike out application – and so there remain many issues about the Quincecare duty which are likely to become clearer as and when this case proceeds to a full trial – there are nonetheless lessons for banks and financial institutions to learn from it (and the Supreme Court’s decision in Singularis).
- If the Quincecare duty is to be excluded, then the agreement with the (commercial) customer must make that absolutely clear. It will not be enough for a bank to try to rely on an “entire agreement” clause or an exclusion/limitation clause buried somewhere deep within the T&Cs.
- Recognise that, as soon as the bank is on notice (or, rather, a reasonably prudent banker ought to be on notice in the circumstances), the game has changed fundamentally. From that point onwards, the bank cannot ignore an issue. It is duty bound at that stage not to execute a payment instruction without first having satisfied itself that the instruction is authorised.
- Once on notice, some further enquiry is very likely to be required. However, what constitutes adequate further enquiry remains a complex issue and one that is difficult to predict. Generally speaking, and without prejudice to competing duties (eg confidentiality), the more extensive the enquires made by the bank, the better its chances of defending a subsequent claim for breach of its Quincecare duty.
- Of equal importance to the client-facing anti-fraud procedures are the bank’s internal communications procedures. Once one part of the bank is on notice of a risk of fraud, it is essential that other parts of the bank – especially those dealing with payment processing, which may involve simplified approval processes carried out by relatively junior staff – are made aware that further payments are prohibited without additional scrutiny and approval from senior staff.
- These incidents are unlikely to be clear cut and will therefore involve judgment calls. In addition to having to consider what might constitute appropriate investigations, banks are also likely to have to decide whether to execute a payment instruction (and run the risk of breaching the Quincecare duty) or refuse to execute the instructions (and run the risk of a claim by the client for breach of mandate). In the absence of easy answers, banks should contact their solicitors for help in navigating these risky waters.
- Overall, banks and other financial institutions should not assume that the favourable clauses in their T&Cs will be sufficient to protect them from claims. Ultimately, your best defence is to exercise caution and consider very carefully any unusual payment instructions.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, January 2020