Is A Bank In Breach Of Its Duty To A Customer Who Suffered Fraud By Carrying Out Customer’s Payment Instructions?

The Supreme Court has recently ruled on a bank’s duty in relation to fraud suffered by a customer by authorising the bank to make payment to a fraudster’s bank accounts in the case of Philipp v Barclays Bank UK plc [2023] UKSC 25.

Philipp v Barclays Bank UK plc

Background

A couple fell victim to fraud. They were deceived by criminals into instructing Barclays Bank to transfer £700,000 from the wife’s bank account to various bank accounts in the United Arab Emirates. Barclays carried out the instruction and made the payment; the money was lost. The wife, therefore, claimed against Barclays for her loss, arguing that Barclays owed her a duty under her contract with the bank 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 fraud

The type of fraud involved in this case is generically named “authorised push payment” fraud. The victim is induced by the fraudster to authorise their bank to make a payment to a bank account controlled by the fraudster. This kind of fraud is contrasted with “pull payment” fraud, where payments are extracted from the victim’s bank account without the victim’s authority, such as through using a stolen debit card or unauthorised use of personal information.

In the case of the Philipps, the fraudster claimed that they were working for the Financial Conduct Authority and investigating a fraud. The fraudster led the Philipps to believe that they needed to move their money to “safe accounts”. As a result, Mr Philipp transferred a large sum of money to Mrs Philipp’s account with Barclays. Mrs Philipps in turn went to a Barclays branch and gave instructions in person to Barclays to transfer the £700,000 in two sums to bank accounts as directed by the fraudster.

Barclays was then informed by the police that Mrs Philipp may have fallen victim to large-scale fraud. Barclays froze the account. Barclays made numerous attempts to recall the payments but was unsuccessful. The Philipps, unfortunately, lost the bulk of their life savings.

A bank’s duty owed to customers

The Supreme Court ruled that absent express terms in the contract with a customer, a bank does not owe a duty to a customer to not comply with payment instructions.

The Supreme Court makes it clear that:

The main implied limit on the bank’s duty to carry out a customer’s payment instructions is that the bank cannot act unlawfully. Circumstances that would render payment instructions unlawful include payments made in breach of trust or transfer of funds that the bank suspects would amount to money-laundering.

Does the bank have a duty to make inquiries before allowing payment authorised by a customer?

Mrs Philipp relied on a well-established case of Barclays Bank Plc v Quincecare Ltd [1992] 2 All ER 363 to argue that the bank has a duty to exercise reasonable care and skill in executing a customer’s instructions, which requires the bank to refrain from complying with a customer’s instructions without making inquiries if it has reasonable grounds for believing that the customer is a victim of fraud.

However, the Supreme Court distinguished the Quincecare case with Mrs Philipp’s case. The Court found that the duty in the form argued by Mrs Philipp contradicts the long-established strict duty owed by a bank to a customer to execute valid instructions.

Furthermore, the facts in the Quincecare case involved instructions coming from the agent of the bank’s customer. The Supreme Court explained that a bank’s duty to exercise reasonable care and skill in the context of the Quincecare case is that, when an agent of a customer purports to give instructions on the customer’s behalf to the bank to make a payment and there are circumstances that would cause a reasonable banker to make inquiries to verify the agent’s authority, the bank will have the duty to ascertain whether those instructions are authorised by the customer. Failing to make reasonable inquiries will be a breach of duty. This duty does not conflict with the bank’s strict duty to carry out a customer’s instructions; an agent acting without authority means that the bank does not have the customer’s instructions to act and thus should not proceed with the agent’s “instructions”.

However, the instructions in the Philipp case came directly from Mrs Philipp; there was no issue similar to that in the Quincecare case. Therefore, the Supreme Court concluded that Barclays did not owe a duty to Mrs Philipp to investigate before carrying out her instructions to make payments to the UAE accounts.

Another part of Mrs Philipp’s case remains to be decided by the Court. Mrs Philipp alternatively argued that Barclays, when it became aware of the fraud, breached its duty in not taking adequate steps to try to recover the money transferred to the fraudster’s account, which led to the loss of the money. It is believed that the Court’s judgment on this part will also be significant in clarifying a bank’s duty to a customer in the age of growing threats of bank fraud.