The Quincecare duty – FAQs
Headlines in this article
Related news and insights
Blog Post: 21 September 2023
News: 15 September 2023
Blog Post: 12 September 2023
Blog Post: 04 September 2023
What is the duty?
It is part of a bank’s duty to exercise reasonable care and skill in the services it provides. It relates to executing a customer’s payment orders and requires 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 [customer]”.
How does the duty arise?
Although its exact basis is unlikely to be important in practice, the duty arises as an implied term of the customer/bank contract, either at common law or under s 13 of the Supply of Goods and Services Act 1982, or under a coextensive duty of care in negligence.
Why does the duty exist?
The duty exists for policy reasons and is designed to encourage banks to assist in combatting fraud: “In the fight to combat fraud, banks with the relevant reasonable grounds for belief should not sit back and do nothing”.
How does the duty fit with a bank’s contractual duty to comply promptly with authorised payment instructions from its customer?
It is an exception to this duty, and runs counter to it. While generally a bank has a duty to execute a customer’s payment orders promptly, so as to avoid loss to the customer, the bank should not execute an order while it is on inquiry that there are reasonable grounds to believe that the order is an attempt to misappropriate funds. If there is no reason to believe this is the case, the bank should make the payment as instructed.
What guidance have the courts given as to when a bank is “put on inquiry”?
The following passages from the case that first established the duty put it best:
- “When judging whether a bank has been put on inquiry, it is the external standard of the likely perception of an ordinary prudent banker that is the governing one.”
- “Everything will … depend on the particular facts of each case. Factors such as the standing of the corporate customer, the bank’s knowledge of the signatory, the amount involved, the need for a prompt transfer, the presence of unusual features, and the scope and means for making reasonable inquiries may be relevant.”
- “[I]n the absence of telling indications to the contrary, a banker will usually approach a suggestion that a director of a corporate customer is trying to defraud the company with an initial reaction of instinctive disbelief…. [I]t is right to say that trust, not distrust, is also the basis of a bank’s dealings with its customers. And full weight must be given to this consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company.”
Have the courts sought to limit the duty?
Yes, in recent cases the courts have indicated that the duty is narrow and confined. The focus of the duty is on the bank’s belief about the specific payment instruction, as contrasted with its knowledge of broader issues relating to the customer and its operations, such as money laundering and financial crime concerns. Unless the bank is on notice that the payment instruction in question may be vitiated by fraud – that the payment instruction itself is an attempt to misappropriate the customer’s funds – the duty does not arise.
Who has to prove that there was fraud/misappropriation?
Establishing that funds have been misappropriated is the first and critical step in a case that a bank has breached its Quincecare duty, and the burden of proof sits with the customer alleging the breach of duty. This may be reasonably straightforward in authorised push payment fraud cases, i.e. where the customer is deceived by a fraudster into authorising a payment, but could be a significant hurdle in more complex commercial cases.
Is the duty limited to retail customers?
No, the duty is owed to all bank customers. Only high value payments are likely to end up justifying the costs and risks of litigation, and so most of the appellate decisions relate to extremely high value payments. Many lower value claims tend to be handled by the Financial Ombudsman Service; over the last decade, the service has determined over 230 cases that alleged a breach of the Quincecare duty.
Does it apply only to current accounts?
No. In addition to current accounts, the duty has been applied to a brokerage account and a depositary account.
Does it apply only to banks?
Although the majority of cases alleging a breach of the Quincecare duty have been brought against banks, the court has held it to be arguable that a payment service provider owed the duty, and future claims could be brought against electronic and payment institutions.
Does it apply only to corporate customers (where an agent instructs the relevant payment)?
While most of the cases have involved corporate customers, in the context of a summary judgment application, the Court of Appeal has held that the duty does not depend on the fact that the bank is instructed by an agent of the customer. Accordingly, in principle it can apply to authorised push payment fraud cases (i.e. where the customer is deceived by a fraudster into authorising a payment). The Supreme Court heard the appeal of this decision on 1 and 2 February 2023 and it is hoped the judgment will further clarify the law.
Can the beneficial owners of an account bring a claim?
No. The duty is owed to the account holder only and does not extend to a third party who is not the customer of the bank.
In claims by corporate customers, is it a defence that the director or officer authorising the payment was acting dishonestly?
No. The court has held that allowing this illegality defence would deprive the duty of any value in cases where it was most needed, where the instructions to pay out money to a third party were given by the person who had been entrusted by the company as a signatory to the bank account.
Can a claimant be held contributorily negligent?
Yes. A damages award can be reduced under the Law Reform (Contributory Negligence) Act 1945 to reflect contributory negligence by the claimant.
Can you exclude liability for breach of the Quincecare duty in commercial contracts?
In principle, yes.
- The courts have held it is possible for a bank and its customer to agree expressly that the Quincecare duty will not arise, and that the bank is entitled to pay out on instructions of the authorised signatory even if it suspected the payment was in furtherance of a fraud which that signatory was seeking to perpetrate on its customer. However, as with any exclusion clause, clear wording is required if the clause is to be construed as removing this protection. The courts have recognised that a party is unlikely to have agreed to give up a valuable right that it would otherwise have had without clear words.
- Indeed, more general words have been held not to exclude the Quincecare duty. The words “[the Bank] shall be under no duty to enquire into or investigate the validity, accuracy or content of any instruction or communication” were held to be consistent with the duty, rather than exclude it, as the clause read in context was not concerned with circumstances where a genuine (albeit fraudulent) instruction was given by an individual authorised by the customer.
- The courts have also accepted that it is possible to raise the standard of care for the Quincecare duty from ordinary negligence to the higher standard of gross negligence.
- Likewise, a bank could in principle agree an indemnity from its customer covering a breach of the Quincecare duty, although it would require “very clear words” to establish that was the intended effect of the indemnity given the duty is specifically aimed at protecting the customer from fraud.
- In addition to the clarity of any exclusion clause, other considerations will apply when an institution seeks to exclude liability for breach of this duty, in particular from its dealings with less sophisticated customers. Consideration will need to be given as to whether any clause is contrary to the statutory and regulatory protection afforded to customers, in particular the provisions of the Unfair Contract Terms Act 1977, the Consumer Rights Act 2015 and the Payment Service Regulations, as well as the FCA’s conduct rules and its new consumer duty.
How many cases have found the bank liable in England?
One. It was only in 2019 that a bank was found liable for the first time.
Are any appeals due to provide further guidance on the duty?
Yes. The Supreme Court will consider the scope of the duty in a judgment to be published in the coming months.