In Federal Republic of Nigeria v JPMorgan Chase Bank [2022], the High Court dismissed the US$1.7bn claim brought by the Federal Republic of Nigeria (FRN) against JPMorgan Chase Bank (the Bank), finding that the Bank did not breach its "Quincecare" duty. The case comes hot off the heels of a series of other high-profile Quincecare judgments, perhaps most notably the case of Philipp v Barclays Bank UK PLC [2022] where the Court of Appeal provided clarification on the scope of the duty, finding it is broader than many had previously understood.
So, what's next? The substantive trial in Philipp v Barclays is awaited (the point heard by the Court of Appeal having concerned a preliminary determination of a point of principle only), and with the possibility that FRN v JPMorgan Chase could be appealed, we should expect to see further instalments in the Quincecare saga over the coming months. Banks, fintechs and others providing payment services should be on high alert and ensure that they have robust procedures in place in relation to their payment instructions, as despite the Bank's success in the latest case, Quincecare continues to provide fertile ground for claimants. Parties on both sides should be watching the trial of Philipp v Barclays very closely.
Recap of Quincecare
The duty derives from Barclays Bank plc v Quincecare Ltd [1992] where it was held that:
"a banker must refrain from executing an order if and for so long as the banker is 'put on inquiry' in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company".
This could be in circumstances where:
- the bank knows that the order has been given dishonestly
- the bank shuts its eyes to obvious dishonesty, or
- the bank acts recklessly in failing to make inquiries that an honest and reasonable man should make.
It forms part of a bank's implied duty to exercise reasonable skill and care when processing payment instructions from customers and the standard to be applied is that of an ordinary prudent banker.
There have been few cases relying on the duty, with the Supreme Court in 2020 confirming for the first time that a bank had breached its Quincecare duty to a customer (in Singularis v Daiwa [2020]). Since then, there has been a steady stream of high-profile cases which have led to clarification and the potential extension of the scope of the duty.
Federal Republic of Nigeria v JPMorgan Chase Bank [2022]
The facts
The key issue in dispute was an allegation that the Bank had breached its Quincecare duty to its customer, the FRN, by transferring sums out of a "depository account" to a Nigerian company, in circumstances where the Bank should have realised that the instructions were being given by officials who were seeking to misappropriate the funds.
Underlying the case was a long running dispute about a highly valuable oil production licence in respect of an oil block in Nigeria known as Block 245 ("OPL245"). In 1998 OPL45 had been granted to a Nigerian company named Malabu Oil and Gas Limited (Malabu). OPL245 subsequently became the subject of a dispute between Malabu, a Nigerian subsidiary of Shell (Shell Nigeria) and the FRN (amongst others), following allegations of corruption which led to the Nigerian government revoking Malabu's grant of OPL245 and awarding it to Shell Nigeria. The corruption allegations focused on the government official responsible for granting OPL245 – Mr Etete, the Minister of Petroleum Resources - who was alleged to be a shareholder of Malabu.
A string of proceedings ensued, which were resolved pursuant to a settlement agreement in 2006 (in respect of which it was alleged that the then Attorney General Ojo had received a bribe to procure it) and resolution agreements in 2011. The resolution agreements were concluded with the involvement and scrutiny of a large number of ministers, officials and state agencies (including many individuals not alleged to have been complicit in the scheme) and provided for Malabu to surrender its claims to OPL245 in return for a payment of $1,092,040,000 with the FRN granting OPL 245 to Shell Nigeria and a number of other entities. The $1,092,040,000 was held by the Bank, initially in an escrow account and then a depository account.
Between 2011 and 2013, the Bank received various payment instructions in relation to the funds in the depository account. In that time there were numerous changes to the FRN cabinet and the authorised signatories to the account. Some of the funds within the account were also the subject of separate disputes and freezing orders. In August 2011 over $800m of the funds in the account were transferred to two accounts in the name of Malabu (the 2011 Payment Instruction), with the Bank having received correspondence from the then Attorney General Adoke confirming that the payments were legitimate and flowed from the 2006 settlement agreement. The Bank also sought and was granted consent to make the payments by the Serious Organised Crime Agency (SOCA). The transfers were subject to numerous investigations and press reports, which widely reported allegations of corruption in relation to OPL245 and the payments to Malabu (with subsequent payments out of Malabu's accounts having been made to various connected companies), and to Mr Etete and Mr Adoke having had an "unusually active" role in "helping the [Block 245] deal along".
Around $75m remained in the account and was frozen pending a separate claim against Malabu. When that claim was resolved, Malabu wrote to Attorney General Adoke requesting the release of the funds remaining in the account which led to the Bank paying funds out to Malabu in 2013 (the 2013 Payment Instruction). Again, the payment was made following consent from SOCA.
The Claim
The FRN claimed that it was the victim of an internal fraud - that Mr Etete had effectively awarded an oil licence to himself, that the subsequent settlement and resolution agreements were corrupt, and that Mr Adoke was a party to the fraud as the individual who caused the payment instructions to be given to the Bank by the (innocent) authorised signatories. It was claimed that the Bank was liable to pay damages to the FRN on the basis that it had breached its Quincecare duty, having been “put on inquiry” that it may facilitate a fraud on the FRN, and had been grossly negligent in making those payments ("gross" negligence rather than ordinary negligence had to be proved because of the applicable contractual terms).
The nature and scope of the Quincecare duty was therefore at the core of the case and whether, if that duty was engaged, the Bank was grossly negligent in relation to the 2011 and 2013 Payment Instructions. Other issues were considered, including whether the FRN had standing to bring the claim and whether it had suffered loss and contributory negligence, but these issues are not covered in this article.
Was Quincecare engaged?
The Quincecare duty requires a careful balancing between the duty of a bank to promptly comply with authorised customer payment instructions and a (narrow) duty not to pay when “put on inquiry”.
Much of the case concerned evidence about the allegations of corruption in relation to the underlying dispute. However, Mrs Justice Cockerill emphasised that the Quincecare duty arises in relation to the payment instruction in question and is determined by whether the bank is on notice of a matter that has vitiated the payment instruction and not any different or wider potential concern. Cockerill J noted that "…unattractive features and an association with past corruption cannot be enough to trigger the Quincecare duty in the context of a case about a specific fraud in 2011". The FRN therefore, had to prove that the 2011 and 2013 Payment Instructions were part of a contemporaneous fraud on it and that the Bank was on notice (to the relevant standard) of the specific fraud in respect of the 2011 resolution agreements which was said to vitiate the payment instructions. The court was accordingly asked to determine whether there was a "fraudulent and corrupt scheme" in respect of OPL245 and the settlement / resolution agreements.
The key question was whether there was a serious and obvious risk that the resolution agreements were fraudulent, but this was not made out on the facts. The Bank had identified the commercial rationale for the transaction, so absent something else to move the dial there would be no reason why it would be wrong (let alone “grossly” negligent) not to inquire into the use of the contractual structure adopted. Some of the key points considered and Cockerill J’s findings were as follows:
- On the balance of probabilities, Cockerill J held that the original grant of the OPL 245 to Malabu was corrupt, but she was not satisfied that there was a fraud in relation to the settlement or resolution agreements. The latter was the critical issue of fact as the FRN’s claim could not succeed unless it could prove fraud in relation to those agreements. It followed that the FRN’s claim failed.
- The starting point in relation to the payments was knowledge and whether, assuming (contrary to Cockerill J’s findings) there was a fraud, the risk of it was obvious.
- The parties largely agreed what the Bank knew at the time of the 2011 and 2013 Payment Instructions, including that the transaction was in a high-risk jurisdiction and sector for corruption risk, that it was likely that Malabu was owned or substantially owned by Mr Etete, that Mr Etete had been convicted of money laundering and there were a number of press reports in relation to corruption about the OPL245 transaction, but there was a disjunction as to what that knowledge imported.
- In respect of the 2011 Payment Instruction, the FRN relied on a number of circumstances which it said “moved the dial”, including the rejection of funds by other banks, use of private email addresses and the split payment structure which saw the payments going into more than one account. However, Cockerill J held that none of those points individually provided the extra weight needed. The red flags for money laundering and past financial crime might well be said to be “many, glaring and obvious” but there was not a serious or real possibility that in relation to this transaction that the FRN might be being defrauded. The Bank may have fallen below best practice standards or even below the standards of the prudent banker as regards money laundering risks but that does not trigger breach of a Quincecare duty. In that regard, Cockerill J emphasised that there is a distinction between anti-money laundering compliance / financial crime prevention best practice, and knowledge sufficient to trigger breach of the Quincecare duty.
- In respect of the 2013 Payment Instruction, the FRN relied upon widespread reporting regarding corruption in respect of OPL245 and Malabu, and investigations by the Nigerian House of Representatives and the Metropolitan Police Proceeds of Corruption Unit. The Bank appeared to have also begun its own investigation into Malabu in around mid-2013. As at 2013, Cockerill J concluded that the Bank was on notice of a risk (possibly amounting to a real possibility) of the relevant fraud and that it failed to act, but the “gross” negligence test required in this case was not met (with gross negligence requiring a very high degree of "jaw-dropping" negligence). While there was a risk, she held that, on the evidence, it was “no more than a possibility based on a slim foundation. There was insufficient connection between what was known and the fraud whose risk would need to be obvious.”
The result might have been different had the FRN not been required to prove “gross” negligence due to the applicable contractual terms, but it demonstrates that a Quincecare claim requires a careful, case by case analysis of the facts and requisite knowledge of the bank or financial institution concerned. This serves as a reminder that it is critical for financial institutions to have suitable procedures and controls in place to detect fraud – both for the protection of their customers from fraud and themselves from claims.
Other key cases
The judgment provides a useful reminder of the other recent Quincecare cases, and the principles they clarified, which we recap below as well as looking at some other relevant case law:
Singularis Holdings Ltd (in Official Liquidation) v Daiwa Capital Markets Europe Ltd [2020]
The first case to find a bank liable pursuant to the Quincecare duty concerned payment instructions issued on behalf of Singularis by Maan Al-Sanea, who was the chairman, sole shareholder, president, treasurer, and one of six directors of Singularis, and who had sole signing powers over Singularis' bank accounts. Daiwa sought to argue that this dominating influence meant Singularis was a "one-man" company, and that his fraudulent state of mind should be attributed to the company, such that the bank could rely on the defence of illegality. Three key principles in relation to the Quincecare duty arose from the case (which was ultimately heard by the Supreme Court):
- The duty will not be defeated when the instructions given to the bank were provided by an individual with a dominating influence over the customer. Mr Al-Sanea and Singularis were to be treated as separate legal personalities, due to there being no doctrine stating that a director's fraudulent conduct should be attributed to a company where it is a one-man company.
- The duty is meant to protect a company from the wrongful exercise of powers by its officers. The public policy interest of protecting a company from being the victim of the wrongful exercise of power by its officers would not be enhanced by refusing to assist Singularis, and the correct response to any wrongdoing on Singularis' part was to make a deduction for contributory negligence rather than deny the existence of the bank's duty; and
- The duty is owed to the bank's customer alone and does not extend to the customer's creditors (a key point from the earlier Court of Appeal judgment), and this applied despite the fact that the fraudulent payments were made while Singularis was on the verge of insolvency, leaving it unable to meet its creditors' demands.
Stanford International Bank v HSBC Bank plc [2021]
The Court of Appeal struck out claims for breach of the Quincecare duty (and dishonest assistance) in circumstances where it was alleged that HSBC had wrongly actioned a payment instruction to discharge the claimant's debt to a third party, in circumstances where the claimant company was being used as a vehicle for a Ponzi scheme and the bank was alleged to be on inquiry in relation to the fraud.The claimant entered insolvent liquidation shortly after those payments. The claim was struck out because the claimant had suffered no loss (the payments in question having discharged valid contractual debts of the company (echoing the finding in Singularis)) and because the necessary knowledge was not made out.The case emphasised that the Quincecare duty is owed to a bank's customers, not the customer's creditors.
Philipp v Barclays Bank UK PLC [2022]
The case concerned an 'authorised push payment' ("APP") fraud, which occurs where an individual is deceived into 'authorising' payment from their account to one controlled by a fraudster. Mrs Philipp instructed her bank to transfer savings of £700,000 to accounts in the UAE operated by the fraudster, with the fraudster having duped Mrs Philipp into believing she was sending funds to a safe account at the recommendation of the FCA and National Crime Agency. At first instance, the High Court granted summary judgment in favour of Barclays, limiting the Quincecare duty to circumstances where the bank received payment instructions from a customer's agent acting duplicitously, as opposed to being instructed by the customer directly. However, the Court of Appeal overturned that decision, holding that the Quincecare duty may apply to instructions issued by a customer in their personal capacity and factors which may put a bank on inquiry could possibly include the size of the payment, the nature of the payee and the customer’s account history. The case provided confirmation from the Court of Appeal that the Quincecare duty "does not depend on the fact that the bank is instructed by an agent of the customer of the bank" (i.e. an 'internal' fraud) but can extend, at least in principle, to circumstances where the customer themselves provides the payment instruction having been influenced by an 'external' fraud. However, whether the Quincecare duty applies to the particular circumstances in this case will be a matter for trial. The judgment also clarified that an individual and not just corporate customers can invoke the Quincecare duty, as the duty can apply in any case where the bank is on inquiry in relation to a payment instruction.
Royal Bank of Scotland International Ltd (Respondent) v JP SPC 4 and another (Appellants) [2022]
This privy council decision, which has persuasive authority in England and Wales, upheld the Isle of Man Court of Appeal’s decision to summarily dispose of JP SPC’s claim, a Cayman Island-based investment fund, concluding that the Quincecare duty does not extend to the beneficiary sitting behind the bank’s customer.The fund had established a scheme by which investors loaned monies to solicitors in England and Wales to finance their pursuit of high-volume, low-value litigation. The loans were to be advanced and repaid through an Isle of Man company, Synergy (Isle of Man) Ltd, which held two bank accounts with the bank. The fund claimed that it was the beneficial owner of the money held in those accounts and that individuals behind the company were parties to a fraud by which money beneficially belonging to the fund was paid out for the benefit of those individuals.The issue was whether a bank owed a duty of care to the beneficial owner of monies held in a customer of the bank's account when the beneficial owner had been defrauded by the customer.It was concluded that on the present state of the authorities, there is nothing in Quincecare itself or in the cases subsequently applying it “to support the argument that the Quincecare tortious duty of care extends beyond being a duty owed to the bank’s customer which arises as an aspect of the bank’s implied contractual duty of care and co-extensive tortious duty of care".
Tulip Trading Ltd v Bitcoin Association for BSV [2022]
This was a decision in relation to an application challenging the English court’s jurisdiction in which it was necessary to consider whether there was a serious issue to be tried. Tulip’s claim related to a substantial amount of digital currency assets that it claimed to own but was unable to control or use following an alleged hack which resulted in the “private keys” allowing dealing in the assets being removed. It claimed that the Bitcoin Association owed it fiduciary and/or tortious duties to assist it in regaining control of its assets and relied in its submissions on the Quincecare duty, claiming that the networks could be equated with financial institutions, and the absence of a contractual relationship should not make a difference. Mrs Justice Falk held no such duties were owed and that she was not persuaded by any analogy with Quincecare.The starting point for that duty is the contractual relationship between the bank and its customer, and the fact that a banker acts as agent of the customer in executing payment instructions.It is owed only to the bank’s customer, and not to a wider class, noting later in the judgment that by definition the potential class here is unknown and potentially unlimited.
Conclusion
The common theme that runs through the recent cases is that the Quincecare duty must be carefully calibrated to avoid too onerous a standard of care on banks. Critically, the question of whether a bank is "put on inquiry" is focused on the payment instruction itself, and not upon any wider concerns about the client or the account – i.e. the question is whether the bank is on notice that the instruction in question is an attempt to misappropriate the customer's funds. In determining whether the bank is on notice, an assessment is made of what the bank had reasonable grounds to believe, assessed according to the standards of an ordinary, prudent banker. Some of the other key take-aways from the recent case law are:
- Whether the duty arises will depend on the facts of each case and contractual terms may be relevant to the duty owed (as can be seen in the latest FRN v JPMorgan Chase case, and from an earlier decision where the Court of Appeal held that, although not impossible to exclude the Quincecare duty, clear wording would be required and here it “was nowhere near” clear enough (FRN v JPMorgan Chase [2019])).
- It is not sufficient to show that a transaction is high-risk or that there have been AML compliance failings.
- The duty is owed to the customer and not to third parties (such as creditors or beneficial owners).
- The duty is not limited to cases where an agent issues the payment instruction on behalf of the customer and can, at least in principle, arise in authorised push payment frauds, where a customer issues the payment instruction directly having been influenced by an external fraud.
The forthcoming trial of Philipp v Barclays, which will determine whether, on the facts of that case, the bank's Quincecare duty was engaged and breached, could result in the proverbial floodgates opening, with victims of APP fraud seeking to pursue their banks directly to recover their losses if there is no other form of redress available. As the Court of Appeal highlighted in Philipp V Barclays, there are other means of redress for claimants making domestic payments, through the Contingent Reimbursement Model Code which was introduced in May 2019 setting out consumer protection standards to detect, prevent and respond to APP fraud. Other upcoming developments include the expansion of the 'Confirmation of Payee' scheme and a new consumer duty being explored by the FCA. In some instances, Claimants are hedging their bets and coupling their Quincecare claims with other causes of action such as unjust enrichment, breach of mandate and dishonest assistance.
With fraud being an ever-growing industry, it is essential for financial institutions and customers alike to be on alert. Financial institutions should ensure that their systems and controls are sufficient to detect red flags in relation to payment instructions, which is likely to be a substantial challenge for those providing payment services, especially if the claimant in Philipp v Barclays succeeds at trial.
