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A bank’s Quincecare duty of care

In a recent decision, the Commercial Court refused a bank’s application to strike out on the basis that the bank in question owed a Quincecare duty of care to its customer.

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In a recent decision, the Commercial Court refused a bank’s application to strike out on the basis that the bank in question owed a Quincecare duty of care to its customer. In The Federal Republic of Nigeria v JP Morgan Chase Bank, NA [2019] EWHC 347, JP Morgan brought the application in a claim issued by the Federal Republic of Nigeria (“FRN”) alleging that JP Morgan had enabled the misappropriation of $875 million of state funds.

Quincecare duty of care

Following the decision in Barclays Bank Plc v Quincecare Ltd [1992] 4 All ER 363, banks owe a duty of care to their customers not to comply with a payment instruction where the bank has reasonable grounds for believing that the payment instruction is an attempt to defraud its customer. Where there are reasonable grounds for such a belief, the bank is deemed to be put “on inquiry” and should not make the payment until it is “off inquiry”, or in other words until the grounds for believing that the instruction is an attempt to misappropriate the customer’s funds no longer exist.

In this case FRN had opened a depository account with JP Morgan in 2011. The account had been opened to hold monies due to be paid to FRN in relation to the settlement of a dispute concerning an oil field owned by Malabu Oil & Gas Nigeria Ltd (“Malabu”). In 2011 and 2013, JP Morgan made three payments out of the depository account, resulting in the entire balance of $875,740,000 being transferred to Malabu. FRN brought a claim against JP Morgan alleging that it had failed to take reasonable care when making the payments and that it was in breach of its Quincecare duty as there were reasonable grounds for believing that the payment instructions were an attempt to defraud FRN.

JP Morgan applied to strike out the claim on three grounds, which Mr Andrew Burrows QC, sitting as a Judge of the High Court set out as follows: (i) the “no Quincecare duty of care” issue; (ii) the “causation of loss” issue; and (iii) the “circularity” issue.

The “no Quincecare duty of care” issue

First, JP Morgan denied that it owed FRN a Quincecare duty. The account FRN had opened was a depository account, rather than a current account as had been the case in Barclays Bank plc v Quincecare Ltd. The depository account was a single purpose account opened solely for the purpose of holding and paying out the sums held under the settlement agreement. The depository agreement (the “contract”) contained detailed provisions dictating the form and mechanism of any instructions given to release the funds. It was therefore designed to exclude any duty of care behind the obligations specifically contained within the contract. In particular JP Morgan pointed to clauses contained within the contract which it argued were contradictory to the duty, for example, a clause providing that the bank’s only obligations were those expressed in the contract and an exemption clause which excluded the bank’s liability for complying with a payment instruction.

The “causation of loss” issue

Even if the Quincecare duty did apply, JP Morgan submitted that FRN would not be able to show that its breach of its duty had caused FRN’s loss. JP Morgan claimed that it had not been put on inquiry because the payout instructions had been confirmed by authorised signatories of FRN. Furthermore, JP Morgan claimed that even if it had been put on inquiry, reasonable investigation would not have uncovered the fraud and it would still ultimately have transferred the funds. In particular, the bank pointed to the fact that FRN itself claimed that the corruption which had allegedly resulted in the fraud, went all the way to the top of the Nigerian government at the time, including the President of Nigeria at that time.

The “circularity” issue

The final issue hinged on the fact that the depository agreement contained a clause wherein FRN indemnified JP Morgan against all claims brought against it in respect of its compliance with any instructions it received in relation to the depository account. Therefore, even if JP Morgan had breached its duty and had caused FRN’s loss, the claim was redundant because FRN would have to indemnify JP Morgan and repay to it any sums which JP Morgan was required to pay to FRN as a result the claim.

The decision

The Judge dismissed JP Morgan’s application. He declined to limit the application of the Quincecare duty to current accounts. The absence of a duty of care for other types of accounts would mean that a bank could reasonably believe that the instructions it had received were an attempt to defraud the customer and could still carry them out without incurring any liability to the customer. Likewise he also found that the contract did not exclude the duty. The Judge considered each of the clauses highlighted by JP Morgan but found that the Quincecare duty provided such a valuable right to a customer that it could only be excluded by including express words to that effect in the contract.

In rejecting JP Morgan’s argument in relation to the Quincecare duty, the Judge also clarified the nature of the duty itself. In essence, he considered that the duty was a negative one, to refrain from making a payment while on inquiry that the payment was possibly an attempt to defraud the customer. However, he also left the question open as to whether there might be a second positive element to the duty, that once on inquiry (but not before) a bank might be under an obligation to investigate the suspicious instruction.

The question of causation was predominantly a factual issue and therefore the Judge only had to determine whether FRN had a realistic prospect of success in arguing this point. On the facts, the Judge considered that FRN did have a realistic prospect and that the question was one to be determined at trial. Lastly, the Judge also rejected JP Morgan’s circularity argument. He determined that the indemnity only applied to JP Morgan’s liability to third parties, not to FRN itself, otherwise there would be no need for the limitation of liability clause which JP Morgan had relied on in relation to the “no Quincecare duty of care” issue. As with the exclusion of the Quincecare duty, the Judge found that express wording would have been required to exclude JP Morgan’s liability to FRN for negligence.

For the reasons given above, JP Morgan’s application was unsuccessful. The decision itself also demonstrates that the Court will not lightly find that a bank’s Quincecare duty, or its liability to a customer for negligence, has been excluded. Clear and express words are required given the evident value of such a duty to a defrauded customer.