The Supreme Court has handed down its seminal judgment in Philipp v Barclays Bank UK plc [2023] UKSC 25, considering the application of the so-called Quincecare duty to the victim of an “authorised push payment” (APP) fraud. In an APP fraud, the victim is induced by fraudulent means to deliberately authorise their bank to send a payment to a bank account controlled by the fraudster.

The claimant in the present case alleged that the bank owed her a duty under contract or at common law not to carry out her payment instructions, if the bank had reasonable grounds for believing that she was being defrauded. The Supreme Court unanimously allowed the appeal and granted summary judgment in favour of the bank, holding that it was not arguable that the bank owed the duty alleged to the claimant (although it granted permission for the claimant to maintain an alternative claim, based on the bank’s alleged failure to take adequate steps after it was alerted to the fraud).

The implications of the Supreme Court’s decision will extend much further than the APP fraud scenario. It provides much-needed clarity in respect of the so-called Quincecare duty, which will be relevant to all firms executing customer payments, and which has caused a significant degree of controversy and confusion in recent years. The key takeaways from the judgment are as follows:

• Duty of reasonable skill and care. A bank owes a general duty to act with reasonable skill and care when processing customer payments, but this is limited and applies only to “interpreting, ascertaining, and acting in accordance with the instructions” of the customer.
• Scope of the so-called Quincecare duty. The so-called Quincecare duty is simply an application of the general duty above and arises specifically where an agent of the customer purports to give a payment instruction. Where a bank has reasonable grounds for believing that a payment instruction given by an agent of the customer is an attempt to defraud the customer, the so-called Quincecare duty requires the bank to make inquiries to verify that the instruction has actually been authorised and to refrain from executing the payment in the meantime.
• No conflict with mandate. The so-called Quincecare duty does not conflict with the bank’s strict duty to comply with its mandate, ie to carry out payment instructions promptly. This is because the duty of reasonable skill and care (and therefore the so-called Quincecare duty) will only arise where there are questions about the validity of the payment mandate. As such, the duty cannot arise in an APP fraud context, because by definition the mandate is validly made by the victim of the fraud.
• Not limited to corporate customers. The so-called Quincecare duty is not limited to corporate customers and will apply wherever one person is given authority to give payment instructions to a bank on behalf of another (eg in the context of a joint account), but only where the payment request is not valid.
• Breach of duty gives rise to a debt claim. If a bank has debited an account in breach of duty and therefore without authority, then the customer is entitled to disregard the debit and require the account to be reconstituted. This could have practical consequences for any future litigation.

We consider the decision in more detail below.

Background

The background to this decision is more fully set out in our blog post on the Court of Appeal’s decision.

In summary, the claimant was the victim of an APP fraud. As part of an elaborate deception by a third-party fraudster, the claimant transferred £700,000 in two separate tranches from her account with the defendant bank (the Bank) to international bank accounts, in the belief that the money would be safe and that she was assisting an investigation by the Financial Conduct Authority and the National Crime Agency.

The claimant brought a claim against the Bank to recover the loss she suffered by making the two payments, alleging that the Bank owed and breached a Quincecare duty of care to protect her from the consequences of the payments.

The Bank denied the claim and brought an application for strike out / reverse summary judgment, arguing that it did not owe a legal duty of the kind alleged by the claimant and that (even if such a duty was owed and breached) the claimant’s case on causation was fanciful.

High Court decision

In summary, the High Court struck out the claim, finding that the Bank did not owe the Quincecare duty in respect of the APP fraud perpetrated upon the claimant. The High Court’s reasoning is discussed in our previous blog post.

In the view of the High Court, the existing authorities limited the Quincecare duty to protecting corporate customers or unincorporated associations such as partnerships (ie where the instruction to the bank has been given by a trusted agent of the customer). The High Court confirmed that the Quincecare duty did not extend to individual customers, and it was not persuaded to extend the Quincecare duty to protect an individual customer in the context of an APP fraud, as to do so would be contrary to the principles underpinning the duty.

The High Court granted the claimant permission to appeal to the Court of Appeal.

Court of Appeal decision

The Court of Appeal allowed the claimant’s appeal, finding that summary judgment in favour of the Bank was wrongly entered and should be set aside. The Court of Appeal’s reasoning is discussed in our previous blog post.

In summary, the Court of Appeal found, as a point of law, that the Quincecare duty is not limited to the situation where instructions have been given by an agent/authorised signatory on behalf of the customer of the bank. The Court of Appeal accepted that the factual circumstances of the major cases in which the Quincecare duty has been considered to date, all involved instructions from a fraudulent agent acting for a company or firm. However, in the Court of Appeal’s view, statements about the purpose of the duty should be seen in the context of the cases in which they were made, and what mattered was the reasoning behind the duty given in those cases.

Crucially, the Court of Appeal found that the line of reasoning in the authorities: (a) did not depend on whether the instruction was being given by an agent of the customer; (b) was not limited to the factual circumstances of those cases; and (c) could properly be applied on a wider basis. Accordingly, as a matter of law, the Court of Appeal held that the Quincecare duty did not depend on the fact that the bank was instructed by an agent of the customer. It said this was the only legal conclusion necessary to resolve the appeal.

Given its findings on the scope of the Quincecare duty, the Court of Appeal held that it was at least possible (in principle) that a relevant duty of care could arise in the case of a customer instructing their bank to make a payment when that customer is the victim of APP fraud. In the Court of Appeal’s view, the right occasion on which to decide whether such a duty in fact arose in this case was at trial. It noted that whether this case would succeed at trial or not would depend on the evidence and findings of fact about ordinary banking practice, both in terms of what would put an ordinary prudent banker on inquiry, and, if they were, what such a banker would then have done about it.

The Supreme Court granted the Bank’s application for permission to appeal.

Grounds of Appeal

The Bank’s grounds of appeal were as follows:

1. Does the Quincecare duty have any application in a case where the relevant payment instruction was not issued to the bank by an agent of the bank’s customer?
2. If not, should either: (i) the Quincecare duty be extended so as to include the obligations contended for by the claimant in relation to APP fraud, or (ii) the law recognise or impose such obligations on a paying bank as incidents of its duty to exercise reasonable skill and care in and about executing an instruction?
3. Should the court determine issues 1 and/or 2 above on a summary judgment and/or strike-out application?

Supreme Court decision

The Supreme Court allowed the Bank’s appeal and restored the High Court’s order granting summary judgment in favour of the Bank. However, the Supreme Court varied that order to permit the claimant to maintain an alternative claim, not addressed by the Court of Appeal, based on the Bank’s alleged failure to act promptly to try to recall the payments after the fraud was discovered (although the Supreme Court noted that the likelihood of such recovery “seems slim”).

We consider below the key elements of the judgment which are likely to be of broader relevance for banks and other payment service providers.

First principles of banking law

In the Supreme Court’s judgment, the Court of Appeal was wrong to accept the claimant’s argument that (in principle), a bank owes an implied contractual duty to its customer of the kind alleged. It held that this conclusion was inconsistent with first principles of banking law.

In particular, the Supreme Court highlighted that a bank’s duty to comply with its mandate is strict (unless otherwise agreed). Where a customer has authorised and instructed its bank to make a payment, the bank must carry out the instruction promptly. It is not for the bank to concern itself with the wisdom or risks of its customer’s payment decisions (see Bodenham v Hoskins (1852) 21 LJ Ch 864).

The reasoning in Quincecare

In the view of the Supreme Court, the reasoning in Quincecare (and followed by the Court of Appeal) did not withstand scrutiny and was flawed. It identified two key stages to the reasoning in Steyn J’s analysis of the bank’s duty in Quincecare itself, which are considered in turn below.

1. Conflicting contractual duties

Steyn J depicted the bank as owing two conflicting contractual duties to its customer:

• the bank’s duty to execute a valid order to transfer money promptly; and
• the bank’s duty to exercise reasonable care in and about executing a customer’s order to transfer money.

The Supreme Court held that there could not be a conflict between the contractual duty to execute a valid order on the one hand, and the duty to exercise reasonable skill and care in and about executing that order on the other.

The Supreme Court referred to Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, decided prior to Quincecare. In Selangor, the High Court concluded that the bank’s duty to use reasonable skill and care “applies to interpreting, ascertaining, and acting in accordance with the instructions of a customer”.

On this basis, the duty to exercise reasonable skill and care arises only where the validity or content of the customer’s instruction is unclear or leaves the bank with a choice about how to carry out the instruction. If the payment order is valid, the duty to exercise reasonable skill and care will not apply and so there can be no conflict.

2. Balancing these competing considerations

The Supreme Court noted that Steyn J’s attempt to reconcile these (apparently) conflicting duties, by striking a balance between the countervailing policy considerations behind them, was a second flaw in the analysis. Steyn J had no principled way in which to reconcile the conflicting contractual duties, because that conflict did not in reality exist.

Proper scope of the so-called Quincecare duty

In the view of the Supreme Court, the “Quincecare duty” is not some “special or idiosyncratic” rule of law. Rather, it 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.

The judgment provides some helpful guidance on the scope of the duty in this context:

• The general duty of skill and care “applies to interpreting, ascertaining, and acting in accordance with the instructions” of the customer. This means that the general duty only arises where the validity or content of the customer’s instruction is unclear or leaves the bank with a choice about how to carry out the instruction. Where the bank receives a valid payment order which is clear and leaves no room for interpretation or choice about what is required in order to carry out the order, the bank’s duty is simply to execute the order by making the requisite payment. The duty of care does not apply.
• The so-called Quincecare duty sits under the umbrella of the general duty of care and arises specifically where an agent of the customer purports to give a payment instruction. Where a bank has reasonable grounds for believing that a payment instruction given by an agent of the customer is an attempt to defraud the customer, the so-called Quincecare duty requires the bank to make inquiries to verify that the instruction has actually been authorised and to refrain from executing the payment in the meantime. This aligns with agency law principles, which provide that an agent’s apparent authority will protect a third party only where that third party’s reliance on the representation of apparent authority is reasonable.
• The so-called Quincecare duty is not limited to corporate customers and will apply wherever one person is given authority to sign cheques or give other payment instructions to a bank on behalf of another (eg a joint account where one account holder has power to bind the other).
• Similar reasoning will apply where a bank is on notice, in the sense of having reasonable grounds for believing, that the customer lacks mental capacity to operate a bank account or manage their financial affairs (as illustrated by the decision of the Singapore Court of Appeal in Hsu Ann Mei v Oversea-Chinese Banking Corp Ltd [2011] SGCA 3).
• Where a payment is made outside the scope of a bank’s mandate, the bank is not entitled to debit the amount to the customer’s account and so the claim will be in debt. This may have practical consequences for future litigation.
• The duty of a bank to carry out its customer’s valid payment instructions is not without limit (for example, it is an implied condition of the mandate that the bank cannot be required to carry out an unlawful act and there is an implied condition that a bank will act honestly towards its customer). The Supreme Court considered the possibility of a further implied limitation, following the Australian case of Ryan v Bank of New South Wales [1978] VR 555, 579, but it was not necessary for the purpose of deciding the present appeal to express any concluded view on this point.

Applying the principles of these duties to the present case

The Supreme Court held that the general duty of care owed by a bank to interpret, ascertain and act in accordance with its customer’s instructions has no application where a customer is a victim of APP fraud, because the validity of the instruction is not in doubt.

Provided the instruction is clear and is given by the customer personally or by an agent acting with apparent authority, no inquiries are needed to clarify or verify what the bank must do. The bank’s duty is to execute the instruction and any refusal or failure to do so will prima facie be a breach of duty by the bank.

Accordingly, on the facts of the present case, the Supreme Court allowed the Bank’s appeal.

However, it refused summary judgment in relation to the claimant’s alternative loss of a chance claim, based on the Bank’s alleged breach of duty, after the fraud had been discovered, in not taking adequate steps to recover the money which had been transferred to the United Arab Emirates (although the Supreme Court noted that the likelihood of such recovery “seems slim”).

The Board of the Privy Council has handed down its advice in the case of Sagicor Bank Jamaica Ltd v YP Seaton [2022] UKPC 48, providing some helpful analysis of the types of claims and remedies available where a bank has made an unauthorised transfer out of its client’s account.

The Board held that, where a bank had frozen and debited accounts without authority, the correct remedy was to reconstitute the accounts. It said an accounting exercise was to be performed that should disregard any debits which the bank had no contractual right to make and should include interest on the sums in the reconstituted accounts at the contractual rates which applied or should have applied on those accounts. Such claims were in substance claims in debt. However, the further claims for loss of use of the withdrawn and frozen funds failed, as a claimant must plead and prove the relevant loss for which they claim damages and the claimant had not done so in this case.

Earlier this year, we reported on the Hong Kong Court of Final Appeal (CFA) case of PT Asuransi Tugu Pratama Indonesia TBK (formerly known as PT Tugu Pratama Indonesia) v Citibank N.A. [2023] HKCFA 3. As mentioned in our blog post, the leading judgment in that case was delivered by Lord Sumption (a former Justice of the UK Supreme Court who was sitting as a Non-Permanent Judge of the CFA) who made some important observations relating to the scope of the so-called Quincecare duty. Lord Sumption’s judgment in the Citibank case made express reference to the advice of the Privy Council in the present case.

The question linking these two cases is the correct characterisation of a claim where the bank has made an unauthorised transfer out of its client’s account. Both cases agree that if a bank has debited an account without authority, the customer is entitled to disregard the debit and require the account to be reconstituted as it should have been. In this event, what is reconstituted is simply the bank’s records (i.e. the bank’s liability to the customer remains unaffected by the unauthorised debits). The customer will have a claim in debt for the full reconstituted balance of the account, which is payable on demand. This analysis has important implications for Quincecare claims in terms of the availability of a contributory negligence argument, as ordinarily a party cannot claim contributory negligence in response to a debt claim.

While we await the Supreme Court’s judgment in Philipp v Barclays Bank, the present case provides an interesting addition to the Quincecare landscape. Decisions of the Privy Council are not binding on English courts, although they are regarded as having great weight and persuasive value (unless inconsistent with a decision that would otherwise be binding on the lower court). It will be interesting to see whether the Supreme Court in Philipp takes the opportunity to clarify this characterisation issue, which could have a significant impact on future claims of this type.

We examine the key aspects of the judgment in Sagicor v Seaton below.

Background and issues under appeal

The background to this case has a long history. In short, a dispute arose between Sagicor Bank Jamaica Ltd and its predecessor (together the Bank) and Mr Seaton (a businessman in Jamaica) as to whether the Bank was entitled to freeze foreign currency accounts held in his name and to debit accounts of Mr Seaton and of two of his companies. There was a complex trial where the court held that the Bank was not entitled to debit the accounts, and that ruling was not challenged before the Privy Council. In the same proceedings Mr Seaton sought a remedy for the Bank’s breach of contract.

The issue on appeal to the Privy Council (considered under English law), was to identify the remedy to which Mr Seaton was entitled in order to restore him to the position he would have been in, if the Bank had not acted in breach of contract by freezing and debiting the bank accounts.

Mr Seaton claimed he was entitled to be compensated for breach of contract under four separate categories:

1. the money which the Bank wrongfully withdrew from the accounts;
2. compound interest at the contractual rates on the withdrawn money until the date when the Bank had repaid the money;
3. a claim for the loss of use of the withdrawn funds; and
4. a claim for the loss of use of the money in the foreign currency accounts in the period in which they were wrongfully frozen.

Mr Seaton submitted that claims (i) and (ii) involved the reconstitution of the accounts as if there had been no breach of contract. He submitted that claims (iii) and (iv) should be quantified by awarding compound interest on the relevant sums (with a necessary reduction to avoid double recovery of interest with category (ii)).

In relation to claims (i) and (ii), the Bank acknowledged that (as a general rule) the appropriate remedy was to reconstitute the account.

In support of claims (iii) and (iv), Mr Seaton relied on the judgment of the House of Lords in Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commissioners [2007] UKHL 34, which confirms that a claimant who has suffered loss through a breach of contract may in certain circumstances claim interest as damages if they plead and prove that they have suffered such loss. The Bank submitted that Mr Seaton had not pleaded or proved a sufficient case to entitle him to such interest as damages for breach of contract.

Decision

The Board of the Privy Council allowed the appeal in part in respect of the reconstitution of the relevant accounts (ie claims (i) and (ii)), which was to be ascertained by way of an accounting exercise set out by the Board in its advice. However, the appeal failed in respect of the claims for loss of use (ie claims (iii) and (iv)).

Claims to reconstitute the relevant accounts

The Board noted that although Mr Seaton’s pleaded claim was for breach of contract, claims (i) and (ii) were in substance claims in debt.

The Board commented that no question of remoteness arose in relation to Mr Seaton’s claim for the return of the principal sums withdrawn from the accounts and the contractual interest thereon because they were debt claims. It noted that such questions could potentially arise in relation to his claim for interest as damages (albeit the Board did not go on to consider the issue in this case because of the outcome of claims (iii) and (iv), as discussed below).

In considering the previous case law (in particular, Limpgrange Ltd v Bank of Credit and Commerce International SA [1986] FLR 36 and National Bank of Commerce v National Westminster Bank plc [1990] 2 Lloyd’s Rep 514), the Board considered that the correct approach was to reconstitute Mr Seaton’s accounts as follows:

“…by adding back as at the date or dates of the withdrawal the sums which the Bank withdrew without authority and by calculating the interest which would have been due on the accounts in accordance with the contracts between the Bank and Mr Seaton if the sums withdrawn by the Bank had remained in those accounts until they were withdrawn by or paid to Mr Seaton.”

The difficulty with this approach in the present case, was that there was a lack of available evidence as to the appropriate rates of contractual interest. The Board therefore gave guidance in its advice as to how to address this issue. As such, Mr Seaton was entitled to interest at the contractual rates on the funds for the periods in which they remained or should have remained in the accounts.

Claims for loss of use

Mr Seaton’s claims (iii) and (iv) for damages for loss of use were noted by the Board to be “more problematic”. The Board said Mr Seaton’s evidence at trial was very limited and nothing was pleaded about his entitlement to interest as damages for having been kept out of his money.

In support of his claims before the Privy Council, Mr Seaton relied on the decision in Sempra Metals. The Board carried out a detailed analysis of the law in this area and commented that it was “clear” from Sempra Metals that, “to claim compound interest as damages for a breach of contract which has deprived the plaintiff of money it is necessary to plead and prove that the plaintiff has suffered the relevant loss.” The Board gave examples of what a claimant may plead and prove in support of such a claim, such as: (a) it had to borrow money on which it has incurred interest charges as a borrower; or (b) it lost the opportunity to invest the money; or (c) in being deprived of its money, it had to use funds that otherwise would have earned interest.

Given the limited evidence in this regard, Mr Seaton sought to rely on the High Court’s decision in Equitas Ltd v Walsham Bros & Co Ltd [2013] EWHC 3263 (Comm), where the court stated it was open to the court to infer a loss of income at the rate the claimant could have borrowed money, and award that sum as damages for breach of contract. The Board agreed that in order to make such an inference, no detailed examination of the claimant’s financial affairs was required and this would depend upon the circumstances of the case. However, the Board did not agree with the High Court’s conclusion in Equitas that the common law has gone so far as to recognise, as a general rule, that a claimant kept out of its money in a commercial context is entitled to receive – as damages for breach of contract – interest on the withheld sums that is calculated by reference to the cost of borrowing such sums at a conventional rate, without evidence from which such a loss can be inferred.

Accordingly, the Privy Council held that interest, including compound interest, may be awarded as damages for breach of contract. However, a claimant seeking interest as damages where the defendant has withheld money in breach of contract, must plead and prove its loss. If a claimant pleads that it has incurred loss by having to borrow replacement funds, then it must prove the circumstances from which a court may properly infer on the balance of probabilities that it has borrowed funds to replace those which have been withheld from it.

The Board therefore held that Mr Seaton’s (iii) and (iv) category claims for loss of use of the withdrawn and of the frozen funds failed, because Mr Seaton had failed to plead and prove the relevant loss for which he claimed damages.

A judgment handed down by the Hong Kong Court of Final Appeal (CFA) provides some important analysis of the so-called Quincecare duty of care: PT Asuransi Tugu Pratama Indonesia TBK (formerly known as PT Tugu Pratama Indonesia) v Citibank N.A. [2023] HKCFA 3. While not binding on the courts of England and Wales, the leading judgment was delivered by Lord Sumption (a former Justice of the UK Supreme Court who was sitting as a Non-Permanent Judge of the CFA) and is likely to have influence within this jurisdiction.

The most important observations in the judgment relate to the scope of the Quincecare duty, the question of limitation in claims of this type and the availability of a claim for contributory negligence to reduce the sum payable by a bank, where it has been found liable.

1. Scope of the Quincecare duty. Lord Sumption cast the Quincecare duty as one side of a coin, suggesting that there are two juridical sources for a bank’s duty in making payments out of its customer’s account. The first side of the coin is the classic Quincecare duty, where the bank owes all the ordinary duties to be expected from an agent of its customer, including the duty to exercise reasonable skill and care when performing its obligations. The second side of the coin involves the bank’s duty only to make payments out of its customer’s account when authorised to do (i.e. when the authorised signatory, as the customer’s agent, is acting within the parameters of their actual or apparent/ostensible authority). In a novel approach to this area of the law, Lord Sumption suggested that the source of the duty was not critical and that the standard of duty under both is the same. Regardless of whether one looks at: (a) the law relating to the bank’s duty of care to exercise reasonable skill and care (i.e. the Quincecare duty); or (b) whether the bank can rely upon the ostensible authority of the authorised signatories on an account; the critical question is what constitutes notice so as to require a bank to make inquiries before paying out in accordance with the mandate. Framing Quincecare in this way strongly suggests that the duty will be limited to where instructions to a bank have been given by an agent of its customer. It will be interesting to see if the Supreme Court agrees with this proposition in the appeal of Philipp v Barclays Bank UK plc [2022] EWCA Civ 318, given that this agency requirement was rejected by the Court of Appeal.
2. Limitation. Lord Sumption suggested that, if a bank has debited an account without authority, the customer is entitled to disregard the debit and require the account to be reconstituted as it should have been. In that case, what is reconstituted is simply the bank’s records (i.e. the bank’s liability to the customer remains unaffected by the unauthorised debits). The customer will have a claim in debt for the full reconstituted balance of the account, which is payable on demand. In Lord Sumption’s view, the clock will not start to tick for the purpose of the limitation period until the customer demands payment from the bank for the reconstituted balance. The potential effect is that Quincecare-type claims could be deferred indefinitely by the customer until the time of making a demand.
3. Contributory negligence. Lord Sumption’s analysis of Quincecare-type claims as an action in debt (rather than a claim for damages for breach of a duty of care), has important implications for the availability of a contributory negligence argument, as ordinarily a party cannot claim contributory negligence in response to a debt claim. Interestingly, Lord Sumption rejected the suggestion that a claim of this type should be viewed as based on negligence, since the debt arises only because of the bank’s failure to make the inquiries that a reasonable and prudent banker would have made, commenting that this did not convert a debt claim into a claim for “damage”.

We consider the decision in more detail below.

Background

In 1990, three officers of the appellant (Tugu) opened an account with the Hong Kong branch of the respondent bank (Bank). The banking mandate authorised any two of the three officers who opened the account to operate it. From June 1994 to July 1998, funds received into the account were paid out to four individual Tugu officers in 26 transfers totalling US$51.64 million. Each transfer was instructed by two of the Tugu officers authorised to operate the account. After all funds in the account were paid out, the Bank took steps to close the account on 30 July 1998 on the instructions of two of the Tugu officers, given on 16 July 1998.

Tugu wrote to the Bank on 6 October 2006, alleging that all 26 of the transfers were dishonestly authorised and demanded payment of the sums transferred out of the account in full.

Subsequently, Tugu commenced proceedings on 2 February 2007, claiming (among other things):

1. The disputed debit entries resulting from the Tugu officers’ instructions to pay out funds and to close the account, on the basis that they were all unauthorised and of no effect, such that the account remained in existence and fell to be reconstituted by reversing the disputed debit entries.
2. Damages for breach of its Quincecare duty of care owed by the Bank either in contract or in tort not to carry out payment instructions in circumstances where the Bank knew of facts which would lead a reasonable and honest banker to consider that “there was a serious or real possibility that…[Tugu] might be being defrauded…by the giving of that payment instruction.”

Decision of the Hong Kong Court of First Instance (CFI)

The CFI held that the transfers were fraudulent and that a reasonable and prudent banker would have been put on inquiry by the time the two Tugu officers instructed the third transaction. The Bank breached its Quincecare duty of care on the basis that it did not make any inquiries (which the CFI said was common ground). However, the CFI held that for limitation purposes, Tugu’s cause of action arose upon the purported closure of the account on 30 July 1998, because the closure instruction was authorised. It followed that Tugu’s claim commenced in 2007 was out of time under the relevant statutory provisions governing limitation periods in Hong Kong (the Limitation Ordnance (Cap. 347)), being more than six years from the termination of the contractual relationship with the Bank.

Decision of the Hong Kong Court of Appeal (CA)

Tugu’s appeal against the first instance decision was dismissed by the CA for similar, but not identical, reasons. The CA upheld the CFI’s finding that the Bank had been put on inquiry. Contrary to the CFI, it found that some inquiries had been made, but that the Bank had contacted only the Tugu signatories, when it should have contacted directors independent of the operators and beneficiaries of the fraud, and so the “necessary inquiries” were not made.

In contrast to the CFI, the CA held that the closure of the account was unauthorised and repudiatory, but it was nevertheless effective to bring the relationship of banker and customer to an end. Considering the limitation point, the CA noted that a cause of action in debt ordinarily arises when a customer demands from the bank the balance in its account. However, the CA held that the unauthorised closure/repudiation by the Bank operated as a waiver of the need for a demand and it was irrelevant that the repudiation was not accepted by the customer. Therefore, Tugu’s cause of action for the wrongful payments by the Bank accrued in 1998 and the claims were time-barred by 2007.

While the issue did not arise due to Tugu’s claims having been brought out of time, both the CFI and the CA held that the Bank would have been entitled to rely on the defence of contributory negligence.

Decision of the Hong Kong Court of Final Appeal

Lord Sumption (sitting as a Non-Permanent Judge of the CFA), gave the leading judgment, with which the rest of the CFA panel agreed. In summary, the CFA allowed Tugu’s appeal and found that it was entitled to the aggregate amount of the unauthorised debits (apart from the first two payments).

The key elements of the judgment, which are likely to be of interest to financial institutions, are considered below.

Two sources of duty

In Lord Sumption’s view, there are two juridical sources for a bank’s duty in making payments out of its customer’s account:

1. Authorised signatory as the customer’s agent. A bank has a duty to make payments out of an account when authorised to do so by the customer. However, the duty to pay in accordance with the mandate of a customer is not absolute. A mandatory (the authorised signatory) acts as agent of the customer, and its authority extends only to those acts which are in the interest of the customer. If the acts of the mandatory are outside of the parameters of its actual authority, a bank may still be able to rely on the mandatory’s apparent (or ostensible) authority, by virtue of their position as signatory and/or officer of the company, provided the bank has no notice of the want of actual authority.
2. Bank as the customer’s agent. A bank owes all the ordinary duties to be expected from an agent, including the duty to exercise reasonable skill and care when performing its obligations. This is known as the so-called Quincecare duty of care, which arises in both tort and contract.

Lord Sumption noted that the differences between these two duties may affect the remedies available, limitation and the issue of contributory negligence.

However, in his view, the source of the duty was not critical. Regardless of whether one looks at the law relating to ostensible authority (source (1) above) or the bank’s duty of care to exercise reasonable skill and care (source (2) above, i.e. the Quincecare duty), the critical question is what constitutes notice so as to require a bank to make inquiries before paying out in accordance with the mandate. Lord Sumption confirmed that the standard of duty under both (1) and (2) is the same.

What constitutes notice and when is there a duty to inquire

Lord Sumption articulated the following general propositions as to what constitutes notice and when there is a duty to make inquires in a commercial context (see Bowstead & Reynolds on Agency, as endorsed by the Privy Council in East Asia Co Ltd v PT Satria Tirtatama Energindo [2020] 2 All ER 294):

• Notice. If a third party has notice that the agent may be exceeding its authority, the agent’s acts will not be binding on the principal. What constitutes notice and when there is a duty to inquire in commercial transactions is different to constructive notice.
• Duty to inquire. The court may infer from the circumstances that a person must have known of the facts (or at least ought to have been suspicious) to the extent that further inquiries would have been appropriate in the context.
• Objective test. In commercial cases, the proper approach is to apply an objective interpretation to the words/conduct used.
• Apparent authority. Whether a third party can rely on the apparent authority of an agent may differ according to the commercial context and the exigencies of business. In some cases the test of “irrationality” may apply, and in others, the test of “unreasonableness” may be more apt (although in practice there may be little difference between them) (see Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No. 2) (2010) 13 HKCFAR 479).
• Examples. In terms of what will be sufficient to put a third party on inquiry as to an agent’s authority, a common example is the third party’s knowledge that the agent has a substantial conflict of interest in respect of a transaction. However, other examples include a lack of benefit for the principal; or lack of commercial purpose on the face of the transaction; or unusual aspects of the transaction.

Lord Sumption summarised these propositions as follows:

“The starting point is what is actually known to the third party without inquiry (or would actually be known to [them] if [they] appreciated the meaning of the information in [their] hands). The question is whether the information which [they] actually have calls for inquiry. If, even without inquiry, the transaction is not apparently improper, then there is no justification for requiring the third party to make inquiries. But if there are features of the transaction apparent to a bank that indicate wrongdoing unless there is some special explanation, then an explanation must be sought before it can be assumed that all is well. In other words, if a bank actually knows of facts which to their face indicate a want of actual authority, it is not entitled to proceed regardless without inquiry.”

In Lord Sumption’s view, this was supported by the classic statement of a bank’s duty of skill and care in executing its customer’s instructions by Mr Justice Steyn in Quincecare itself and in the subsequent authorities considering the duty.

The present case

As noted above, Tugu argued that all 26 transfers out of the account were unauthorised; and that the instruction of 16 July 1998 to close the account was also unauthorised.

Unauthorised transfers out of the account

In the present case, the two Tugu officers could not have had any actual authority, as between themselves and Tugu, to direct the payment of the company’s funds to themselves and their colleagues personally. The Bank accepted that, by the time of the third payment instruction, it knew enough to prevent it from relying on the ostensible authority of the signatories to direct the transfers. However, it argued that the claim in respect of the unauthorised transfers was statute-barred, given that the last one was completed in 1998 (see discussion below on Limitation).

Accordingly, the Bank’s case on authority focused on the closure instruction given on 16 July 1998.

Unauthorised closure of the account

In contrast to the earlier transfers, the Bank argued that the closure of the account on 30 July 1998 was authorised and so it effectually put an end to the relationship of banker and customer.

In the view of Lord Sumption, the instruction to close the account was “a pure question of authority”, which was no more within the apparent authority of the two Tugu officers than the 26 unauthorised transfers.

Applying the propositions set out above, Lord Sumption held that it was open to the CA to find that – on the face of the information in the Bank’s hands by 1998 – the whole operation of the account was unauthorised, including its closure. Further, the impropriety of the transfers meant that the account could not properly be closed without an accounting exercise to restore the balance to what it should have been.

Limitation

The Bank sought to present Tugu’s claim as a claim for damages for breach of duty, which it said was statute-barred, given the date on which the unauthorised transfers and account closure took place.

This characterisation was rejected by Lord Sumption, who found that Tugu’s claim was for a debt. He said that it is well settled that a customer has no proprietary interest in funds deposited with a banker, and that the obligation of a banker is to pay out on the customer’s demand. It follows that a cause of action in debt arises when that demand is made, and not before (N. Joachimson (a firm) v Swiss Bank Corporation [1921] 3 KB 110).

In Lord Sumption’s view, if a bank has debited an account without authority, the customer is entitled to disregard the debit and require the account to be reconstituted as it should have been. In that case, what is reconstituted is simply the bank’s records. It is not the bank’s liability, which has always been for the balance undiminished by the unauthorised debits. The customer will then have a claim in debt for the reconstituted balance of the account, which is likewise payable on demand.

Lord Sumption rejected the Bank’s argument that no demand could be made by Tugu after the account was closed in 1998. Following the decision in Joachimson, the Bank argued that a balance on a bank account is payable by the bank on the termination of the relationship with or without a demand. However, Lord Sumption said that this principle had no application to the present case, because the closure of the account did not discharge the debt represented by the reconstituted balance, and for as long as that debt remained outstanding, the relationship of banker and customer subsisted.

Accordingly, the debt was not diminished by the unauthorised withdrawals, and it still subsisted in 2006 when it was demanded. For the purpose of the limitation period, time did not begin to run until the debt was demanded, and given that these proceedings were brought the following year, they were not statute-barred.

Contributory negligence

Lord Sumption also confirmed that the Bank could not rely on the defence of contributory negligence, having established that Tugu was entitled to succeed in its action in debt and was not advancing a claim for damages for breach of the Bank’s duty of care in the making of payments to third parties.

He referred to provisions of Hong Kong law which are identical to the English Law Reform (Contributory Negligence) Act 1945, confirming that a party can make a claim for contributory negligence only where the defendant’s liability in contract is the same as their liability in the tort of negligence independently of the existence of any contract (Forsikringsaktieselskapet Vesta v Butcher [1986] 2 All ER 488). Lord Sumption stated that this was not the case for a claim in debt.

Lord Sumption also rejected the Bank’s suggestion that the claim should be regarded as a claim based on negligence, since the debt arises only because of the Bank’s failure to make the inquiries that a reasonable and prudent banker would have made, commenting that this did not convert a debt claim into a claim for “damage”.

Accordingly, the CFA held that Tugu’s appeal should be allowed.

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