Head of Fraud | Dispute Resolution
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Yesterday, the Supreme Court handed down its highly anticipated judgment in the case of Philipp v Barclays Bank UK PLC. Allowing Barclays' appeal, the Supreme Court has confirmed that the scope of the Quincecare duty is limited to circumstances where an agent is acting on a customer's behalf. The judgment also provides clarity in relation to the limits of a payment service provider's ("PSP") duty to exercise reasonable care and skill when executing payment instructions.
Philipp v Barclays Bank UK PLC concerns an "Authorised Push Payment" fraud. APP fraud occurs when a customer of a bank is deceived into instructing their bank to transfer money into an account controlled by a fraudster. Further background of the case is considered here.
At first instance, it was found that Barclays was not liable to reimburse the funds to Mrs Philipp pursuant to the Quincecare duty. As a reminder, the Quincecare duty provides that where a bank has reasonable grounds to believe that an instruction is an attempt to misappropriate a customer's funds, it has a duty to refrain from executing that instruction. The High Court dismissed Mrs Philipp's claim that the Quincecare duty applied to this case, as the payment instructions were executed by Mrs Philipp herself as opposed to by an agent. The High Court's interpretation was that this meant Mrs Philipp, despite having been influenced by a third party, intended for the payments to be made (as has been the historic approach to the Quincecare duty). See here for further consideration of the High Court's decision.
The Court of Appeal, however, overturned the summary judgment on the basis that Mrs Philipp's claim was properly arguable where the standards of ordinary banking practice in such matters needed consideration. It was further noted in its judgment that the Quincecare duty did not depend on whether the instruction was carried out by the customer or by an agent of the customer. See here for further consideration of the Court of Appeal's decision.
The Supreme Court has now reversed the Court of Appeal's decision, stating that it was wrong to conclude that Barclays owed Mrs Philipp a duty under contract or at common law to not carry out her instruction. Restoring the order of the High Court giving summary judgment in favour of Barclays (see the judgment here), the Supreme Court has found that Mrs Philipp unequivocally authorised and instructed Barclays to make the payments, and it is therefore not possible to say, absent an express term to the contrary, that any such duty is implied.
Whilst the bank does have a duty to exercise reasonable care and skill in executing a payment instruction (arising from section 13 of the Supply of Goods and Services Act 1982 and section 49 of the Consumer Rights Act 2015), this only applies insofar as the contract gives a bank any latitude in how the service it provides is to be carried out. A bank’s obligation to carry out payment instructions in accordance with its mandate from the customer leaves the bank with little wriggle room in how it is to perform its obligation.
The judgment goes further to state that it was not for the Bank to concern itself with the wisdom or risks associated with Mrs Philipp's own decisions, reflecting the arguments advanced by Barclays at the March hearing (which we considered here).
In relation to the question of who should bear the loss for APP fraud, the Supreme Court has found that this is a matter of social policy. Rules or policy designed to regulate future dealings between different classes of person should not be decided by the Court, but by regulators, government, and Parliament (who have institutional competence to consider an appropriate policy response).
The Supreme Court has also found that there is no conflict between a bank's duty of care to verify an agent's authority, and its duty to promptly execute a payment instruction. Where there is apparent as opposed to actual authority, however, any circumstances which are suggestive of dishonesty should put a bank on inquiry. If put on inquiry, the Bank should not act without checking that the order is indeed a valid order of the customer to transfer money. If it were to proceed with making the instruction without taking these steps, the bank would be acting in breach of its duty of care and outside the scope of its mandate.
Summary judgment in relation to Mrs Philipp's alternative case that Barclays breached its duties in not taking adequate steps to attempt to recover the funds has, however, been refused. This means that consideration of this issue may return to the High Court for a hearing to take place, following which a determination may be made.
As we suggested here, the judgment is not the end of the story for arguments about the extent of the Quincecare duty or what systems and controls a bank (or PSP) should employ to stop fraudulent/fraudulently induced payment instructions. Despite the unanimous decision in favour of Barclays, questions remain.
If Mrs Philipp were a director of a company, and making payment instructions on that company's behalf, might it be possible to argue that the Quincecare duty would apply? In this scenario Mrs Philipp would indeed be acting as an agent in making the instructions.
In Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd  EWHC 257 (Ch), it was held that a bank had acted in breach of duty when it executed a payment instruction on behalf of a company, where that instruction had been provided by the company's sole shareholder. In that case, however, the shareholder of the company fraudulently transferred funds from the company to other companies he controlled. This differs from the present case, where Mrs Philipp had no intention of the funds being misappropriated when making the instruction.
The Supreme Court's judgment provides that a customer's instruction to execute a payment, where that customer is being tricked or influenced by a fraudster, is not in itself an attempt to misappropriate funds (it is instead a consequence of the instruction being executed that the funds may later be misappropriated).
The Supreme Court concludes that the Quincecare duty is an application of the general duty of care owed by a bank to interpret, ascertain and act in accordance with its customer’s instructions. Where a bank has reasonable grounds for believing that a payment instruction given by an agent purportedly on behalf of the customer is an attempt to defraud the customer, the bank must refrain from executing the instruction without first making inquiries to verify that the instruction has actually been authorised by the customer. Provided that authority is established in these circumstances, a bank would not be in breach of duty.
If a bank has knowledge of the fraud type that the victim's instruction is aligned to, might it be possible to say that circumstances suggestive of dishonesty are present, therefore putting the bank on inquiry as to the authority of the person making the instruction? It is noted that the Supreme Court's judgment does not go as far as to particularise the circumstances that it considers to be suggestive of dishonesty.
Further, what if a bank is aware of certain circumstances which the customer is not aware of (for example, as a result of having been provided information by the police)? In this case Mrs Philipp argued that Barclays should have been put on inquiry due to the large and unprecedented sum of money received in her account, the size of the payments, the fact that the payments were to bank accounts in the UAE, and the fact that the payees were companies with which she had no previous history of dealing. The Supreme Court, however, found that whilst Barclays were aware of these circumstances, to its knowledge, Mrs Philipp was also aware.
Section 67 of the Payment Services Regulations 2017 ("PSR") provides that a payment transaction is to be considered authorised if the payer has given its consent to its execution. Where a payer has not given its consent, a push payment is therefore considered to be unauthorised.
If a customer has not consented to a payment transaction, it follows that the person making the instruction did not have authority to do so. But can it be argued that a bank has a duty to carry out checks on authority in these circumstances? If fraudulent transactions are attempted as a result of a customer's bank card being stolen, there may be indicators of a potential fraud (for example, a sudden change in spending pattern, or use of the card in an unusual location). This might not always be the case, however.
Regulation 76 of the PSR does currently provide victims of unauthorised push payment fraud some recourse. This provides that where an executed payment transaction was not authorised in accordance with regulation 67, a bank or PSP must refund the amount of the unauthorised payment instruction to the payer and restore the debited account to the state it would have been in had the unauthorised transaction not taken place. A refund in these circumstances may be refused, however, if the customer themselves acted fraudulently, or deliberately or with gross negligence failed to protect their security details.
Last month the Payment Systems Regulator ("PSR") confirmed new mandatory requirements for banks to reimburse customers who have fallen victim to APP fraud in certain cases. This follows the launch of the voluntary Contingent Reimbursement Model Code launched in 2019, which sets out good industry practice for preventing and responding to APP scams.
The PSR requirements, due to be introduced next year, will apply to APP fraud within the faster payments system only, and will not extend to transfers made across other payment systems, international payments, civil disputes, or payments made for unlawful purposes. Whilst Mrs Philipp's case would have therefore fallen outside of the scope of the new PSR requirements (due to the international dimension), it is clear that the APP fraud reimbursement regime is expanding.
If you would like to discuss the Supreme Court's judgment or its impact in more detail please do get in touch with a member of the team on the contact details below.