The Quincecare Duty in Australian Law

WHAT DOES THE SEMINAR COVER?

A dishonest agent of a company causes a bank to transfer funds out of the company’s account and then absconds with the money. If the agent can be found, there may be personal claims against them. If traceable proceeds can be found, there may be proprietary claims in respect of them. But what about claims against the bank?

It has long been clear that banks are under a duty to refrain from executing a customer’s order if, and for so long as, the bank has reasonable grounds for believing that the order is an attempt to defraud the customer—sometimes referred to in English law as the “Quincecare duty”. But the basis for and scope of that duty have only recently been closely examined.

The Privy Council considered the duty in 2022 and the Hong Kong Court of Final Appeal considered it in 2023. But the most comprehensive examination—and reformulation—of the duty came with the decision of the United Kingdom Supreme Court earlier this year in Philipp v Barclays Bank UK Plc [2023] 3 WLR 284.

Despite all of this, there has been curiously little attention given to the Quincecare duty in Australian law. This seminar will cover:

- what the Quincecare duty is and when a claim for breach of the duty will be advantageous;
- the recent developments in the Privy Council, the Hong Kong Court of Final Appeal, and the United Kingdom Supreme Court; and
- the current state of Australian law on the Quincecare duty, what remains unclear, and what might change in light of the above developments.


WHO SHOULD LISTEN?

This session will interest all commercial advisory and litigation lawyers, in-house counsel, and their clients. He is a co-author of the publication, The Law of Tracing (Federation Press, 2021), and is a member of the author team for Civil Procedure Queensland. Jaamae


PRESENTER

Mohammud Jaamae Hafeez-Baig (Barrister, Level Twenty Seven Chambers)

Jaamae practises from Level Twenty Seven Chambers in Brisbane and from Brick Court Chambers in London. He has a broad practice that covers all areas of commercial and public law. His notable recent instructions include appearing in the High Court of Australia, the Privy Council, and the English Commercial Court. He has a particular interest in civil fraud and asset recovery and is a co-author of The Law of Tracing (Federation Press, 2021).


MATERIALS

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Website: www.level27chambers.com.au

Transcript

00:15

Mohammud Jaamae Hafeez-Baig (MH): All right. Thanks to you all very much for coming. This particular topic is one I think is a space to watch here in Australia. There has been consideration of this particular area of law at the highest level in both the United Kingdom and in Hong Kong very recently and more broadly over the last decade but very little, that I have been able to find, in Australian law. Secondly, it is, in any event, just a really interesting area. Hopefully, by the end of what I have to say, you will understanding why that is and possibly even agree with me. 

Tamara has asked me to say two things. One, is that the recording, I am told, will be up on Monday morning. Second, is that for those joining us online, if you have any questions, if you could pop them in the chat box and then Tamara will pass them on to me at the end. 

SEMINAR OUTLINE

[Slide 2] To give you a quick overview before I get into it. I will start off with what I call the key fact pattern which is the basic factual scenario that you find in all of these cases. There are a few preliminary points I need to clear away before I get into the meat of it. I am then going to talk about the Quincecare Duty before the United Kingdom Supreme Court's decision in Philipp from earlier this year which is the most important development in this area for quite some time. Then we are going to talk in detail about the decision in Philipp itself, its consequences. I am going to illustrate one of those consequences by reference to a decision called Tugu which a decision of the Hong Kong Court of Final Appeal also from earlier this year. Finally, I am going to have a look at what the position is as a matter of Australian law. Then there are a few final points and further thoughts I will leave with. 

THE ISSUE

[Slide 3] The issue, just to put it in a single sentence, from Lord Sumption, who was the judge of the judgment in Tugu. It is “…one of the oldest and most litigated questions in commercial law, namely the rights of a corporate customer against a banker who has paid money out of its account on the dishonest instructions of an authorised signatory.” 

KEY FACT PATTERN

[Slide 4] The example I am going to use is a corporate customer who has a bank account with a bank and a director of the company who is an authorised signatory on the account but who is dishonest, who is committing a fraud against his own company. I will come back to this at the end but it does not necessarily have to be a corporate customer. It can be a natural person or natural person agent. But for simplicity, and because most of the cases deal with this sort of scenario, I am going to talk about a corporate customer. 

[Slide 5] What happens is, the dishonest director who is a signatory on the account gives an instruction to the bank to pay money out of the corporate customer’s bank account, which is a fraud on the company. The bank then pays that money either to the director or for the director’s benefit and the director then typically absconds with the money. 

[Slide 6] In terms of what we can actually do about this, the most obvious claim will be against the director for breach of fiduciary duty or breach of duties under the Corporations Act [slide 7]. If you can find where the money went, you might have personal proprietary claims against third parties who received the money. [Slide 8] So, the extent that you can find someone who received the money, there might have been claims in knowing deceit if they had knowledge when they received it. To the extent they still have money, you might be able to assert equitable proprietary claims in relation to that money or in relation to the traceable proceeds. 

[Slide 9] If the claim is against the bank, and generally speaking, what the focus is on is the equitable claims like knowing assistance. There is no real consideration of the common law claims. Interestingly, two of the classic cases in this area are cases I will come to in a moment, are also classic cases on knowing assistance. [Slide 10] As far as I can tell, most of the consideration of those cases in the Australian cases subsequently have been on the knowing assistance part, there has not been much attention to this particular common law claim which I am going to talk about. 

THREE PRELIMINARY POINTS

[Slide 11] There are three preliminary points I would like to make before we can really get into the meat of it. The first is, and forgive me if you know this, the first is the bank-customer relationship is governed by contract. It has express terms or implied terms and the Quincecare Duty, which I will explain in a moment, is one of the terms implied by law in that relationship. It is also a duty that arises in tort that may have consequences for some purposes like limitation, which I will come back to, but for the most part it will not really matter which it is and in content that you use are the same. So, I am not going to distinguish between them unless I need to, just be aware that the duty arises in both ways. 

The second point is about the nature of the bank account. So as between the bank and the customer, the relationship is one of debtor and creditor. [Slide 12] The actual cash you deposit in your current account with the bank becomes the property of the bank and you, the creditor, have a debt claim against the bank for the balance of your account. One of the important points I will come back to is that that debt arises on you making the demand from the bank. It is not a debt which is payable in time, it is a debt which becomes payable once you ask the bank to pay out what is in your account. If they do not pay out, you can serve it up. 

Now, that is between the banker and the customer. As between the bank of the customer and third parties, the relationship is one of principal and agent. This is really where we get into the Quincecare Duty. [Slide 13] As regards the making of the payments to third parties, the bank operates as agent, the corporate customer operates as principal. The customer gives instructions to the bank as the customer’s agent to make a payment to a third party. Where the bank pays the money out on the instructions of the customer, on the authorised instruction of the customer, it can debit the account. It pays out its own cash obviously but debits the account with the customer in the bank’s records by the corresponding amount.  

If the bank pays out money that it does not have authority to pay out, it cannot debit the account, they will pay it on its own money and it will have its own remedies to try and get that back. Those points are important and you will see why in due course. 

Finally, the terms on which the bank is authorised to make payments on behalf of the principal being a corporate customer, are usually set out in what we call the mandate, the bank's mandate from the customer.

06:49

When a bank receives a contract instruction in accordance with the mandate, its contractual duty is to make the payment. The example I put earlier of the mandate will provide that the director is an authorised signatory and the bank is entitled to act on the instructions of that director.  

One final point, in my diagram earlier I had three parties. The principal here is the corporate customer, the bank is the agent. The dishonest director will also be an agent of the principal and the bank you will sometimes see described as the junior agent and the director will be the senior agent. The reason why we call them that is because the senior agent being the director has the power to give instructions to the bank. Therefore, the bank is the junior agent. That is all that means. 

CLASSIC QUINCECARE CASES

[Slide 14] There are four classic Quincecare cases. The first two, Selangor and Karak Rubber, I mentioned, are famous cases on knowing assistance, or dishonest assistance if you are in English law. They do not seem to really be discussed in context in Australia. The third is Barclays Bank v Quincecare which is where the duty takes its name from. Although it was not reported until 1992, that case was decided in 1988. Finally, Lipkin Gorman v Karpnale, some of you will know that decision went to the House of Lords on an unjust enrichment and restitution issue. There was a Quincecare Duty claim that failed in the Court of Appeal and was not pursued on appeal. So, this is a Court of Appeal decision. The only one of those I am going to talk about is Quincecare itself.  

[Slide 15] That was a decision of Mr. Justice Steyn, later Lord Steyn. The facts essentially were that sort of corporate customer Quincecare, the director was a fella called Mr. Stiller and the bank had approved a £400,000 loan to the corporate customer Quincecare. Mr. Stiller, the dishonest director, then caused the bank to pay £350,000 of that out to a firm of solicitors. He told the bank “Well, these are solicitors for the company Quincecare. In fact, the solicitors were acting for him and he had organised with them beforehand to receive a large sum of money which he then transfer away to the States and he went to the States and misappropriated the money.  

So, this was a fraud by the director, Mr Stiller, still of the company Quincecare. The bank inevitably sued on the loan and Quincecare counterclaimed for breach of the duty of care. Now, what they argued was the bank acted in breach of the implied duty of care in the customer-bank relationship because the circumstances of the transfer had been such that they would have raised questions in the mind of a reasonable banker as to whether the transaction was in fact truly authorised by the corporate customer and for the customer’s benefit because it was a fraud by the director, Mr. Stiller.  

[Slide 16] After explaining the nature, Mr. Justice Steyn explained, every agent for reward, owes an obligation to exercise due care and skill in carrying out the instruction. That principle applies to banks and so on the context of a banking relationship this means that a banker is under a duty to exercise reasonable care and skill in and about carrying out the instructions of the principal. The ordinary case where this happens is where there is some ambiguity in the order. The duty of care and skill require the bank to make inquiries to ascertain exactly what the order is, if this happened in ambiguity on the face of it, they have to make inquiries to work out what the order is. Another example is, if the order gives the bank multiple ways of effecting a payment, the bank has to exercise due care and skill in choosing which way to affect the payment. But this is a slightly different context because the suggestion here is that the bank has a duty to check the instruction which has been given to it by an agent if it is in fact an authorised instruction from the corporate customer.  

Justice Steyn tells us that what we have in these sorts of cases is a prima facie valid and binding instruction which the bank has to follow. If the bank does not follow up they will be liable for all sorts of consequential losses. But the way he conceives of this means that you have conflicting duties, you have a duty to exercise the instruction given to you by the agent,  i.e. to make the payment, and you have this apparent duty of care and skill which tells you do not execute until you have made sufficient inquiries. And so, the way he sees the world, these duties. He says, the duty of care and skill has to generally be subordinate to the [in audible] duties.  

[Slide 17] But the real question, he says, is how do we actually go about reconciling these duties? He says, if the bank knows there is a fraud, if the bank knows that the director is defrauding the company, then plainly the bank will be liable. But the interesting question is, what intermediate position do we have between that and no knowledge at all, where we can still make the bank liable? How do we reconcile these conflicting duties? He has resorted to what he considers policy considerations. He says, on the one hand we should not be imposing obligations on banks that are too burdensome but we should be encouraging actions against the facilitation of fraud and should be exacting a standard of reasonable care from banks.  

[Slide 18] He says, the sensible compromise, in his view, is to say that the bank 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, but not necessarily the proof, for believing that an order is an attempt to misappropriate the funds of the company. He gives us a bit of guidance on that. He says the standard is that of an ordinary prudent banker and there are a number of factors which will determine what a reasonable bank in that position will do, including obvious things like the standing of the customer, the amount involved, the presence of unusual features. Interestingly, the proposition that a bank will usually approach the suggestion that a director is defrauding their company with instinctive disbelief, the proposition is that commercial people deal with each other on a basis of that assumption. You can see on one end of the spectrum, a director showing up at the bank and telling the bank to empty the corporate bank account into the director's personal account, that I think would be a pretty clear red flag, a pretty clear case the bank has a duty to not pay until they have made reasonable inquiries to make clear that this is an authorised instruction. That sort of simple case, that might involve calling up other directors or getting in contact with other directors of the company and ensuring that this is an instruction authorised by the company. 

Justice Steyn then went back to the facts of the case and looked at whether or not the bank was put on inquiry in the sense he described. He concluded that there really was nothing in the history of the loan transaction which should have put the bank or inquiry as to Mr. Stiller’s honesty and so the claim failed. 

[Slide 19] Aside from the decision in Lipkin Gorman, the Quincecare Duty essentially laid dormant from this decision until about 2016 where Mrs. Justice Rose, as Her Honour then was, held in the Singularis Holdings case. Since then, there has been a real explosion in these cases in the English courts. I have given a couple of examples there. Singularis went all the way to the Supreme Court. Nigeria v JP Morgan Chase went to the Court of Appeal. The final case there is a decision of the Privy Council. I do not really have time to talk about it but I will give you this précis. It looked like standard Quincecare case, except the difference was that the corporate customer held the money on trust for a third party beneficiary. Because they were a third party beneficiary, they obviously were not party to the banking contract. So, they could not rely on the Quincecare Duty of the contract. They said, “Well, we're relevant third party, the duty of tort is owed to us.” There are some cases where the tortious duty can be broader than the contractual duty, cases of solicitors preparing wills can sometimes be tortious duty to the beneficiary. It is sort of a case like this, they rely on similar reasoning. Summary is, the Privy Council said no, this is a duty that is only owed to the customer, not to any third parties. You can have a look at that if you are interested.  

[Slide 20] Finally, before we get to Philipp, I just want to make reference to Stanford which is a more recent Supreme Court decision where, this was pre Philipp, this is for the understanding pre Philipp, where the duty falls. The duty on a bank to refuse to comply with a payment instruction given by the person mandated by the customer, to give such an instruction, when the bank is on notice that the instruction may be part of a fraud of the customer, unless and until the bank’s inquiry is satisfied with the instruction is valid. 

PHILIPP V BARCLAYS BANK UK PLC [2023] 3 WLR 284

THE FACTS

[Slide 21] That takes us very nicely to Philipp. The decision in Philipp was different in a crucial respect to the factual scenario in all the Quincecare cases that have come before. That was, it was not an agency case. The customer was the natural person, Mrs. Philipp, and there was no agent in the picture. What happened was a fraudster convinced Mrs. Philipp and her husband to transfer about £700,000 to accounts in the UAE [slide 22], to UAE fraudsters This is something called an APP fraud (authorised push payment fraud). Importantly, the instruction was given in person. Mrs. Philipp turned up at a Barclays Bank, she gave the instruction twice for two payments then the instruction was later confirmed over the phone with Mr Philipp. [Slide 23] The bank paid out the money to the fraudsters in the UAE and the money was lost. Mrs. Philipp sued Barclays Bank saying “You breached the Quincecare Duty. I'll have damages for the money I've lost, please.”

PHILIPP V BARCLAYS BANK UK PLC: REASONING

[Slide 24] Lord Leggett gave the judgment of the court. It is an extensive re-examination of this area of law and, importantly, a reformulation which I am going to explain. He starts out by telling us that the basic duty on a bank is to execute orders that it is given - that duty is strict. If the bank does not execute instructions it is given by customers it is liable for any loss and consequential loss that it causes. It has to do that without concerning itself with the wisdom of the customer’s choices or decision to invest money, etc, etc.  

The main limit on that duty it tells us is the bank cannot be forced to act unlawfully if the bank knows, for example the facts, which means it would be liable for knowing assistance if it made the payment, it is entitled to refuse. But, it has to show that it would be liable - it is not enough for it to be suspicious that it might. So, the starting position is a strict duty to always make the payment according to the instruction that it have been given.  

He then tells us that, as with any contract for the supply of services in the course of the business, there is a term implied by law in the contract between the bank and the customer, the bank will exercise reasonable care and skill in executing those services. That is a duty implied in England under statute and common law in Australia, certainly at common law.  

So far, that is all consistent with the Quincecare line of cases. But, he then diverges. He says the duty of care and skill only applies insofar as the contract actually gives you some latitude in how you perform. So, if the contract just specifies that you have got to do X, then all you have to do is X, care and skill is irrelevant. But if the contract says you have to achieve X or you have to get to point X and there are different ways in which you can get that, that is when the duty of care and skill has some part to play. It means you have to pick a method or pick a way of doing it that exercises reasonable skill and care. The classic example, as I said earlier, is where the payment instruction leaves the bank with a choice of how to go about executing the instruction. If there is some latitude about what the bank has been asked to do, the bank then has to act as a reasonably careful and skilful prudent bank would do.  

[Slide 25] Now, if we go back to Quincecare for a moment, you will recall that Justice Steyn saw that case as one where the bank had received a valid and proper order which it was prima facie bound to execute. This was the reason why he thought there was a conflict in duties because on the one hand you have what he said was a valid order which the contract requires you to pay, which Lord Leggett tells us is strict, but on the other hand you have a duty of reasonable care and skill which requires you to stop and not pay until you have made sufficient inquiries, absolutely made the inquiries, that a reasonable person would make.  

Lord Leggett tells us both those propositions are wrong. Looking at the first one [slide 26], the first proposition was the bank had received a valid and proper order which it was bound to execute promptly. Lord Leggett tells us that there was an assumption in Quincecare, which does not seem to have been argued, there was an assumption that the validity of the payment order given by the director Mr. Stiller was unaffected by the fact that he was acting dishonestly and defrauded the company. The suggestion, and the way it is described in Quincecare and in the books of the time, is that there was a misuse of authority. It was a breach of duty by Mr. Stiller to Quincecare and he was liable to Quincecare but he had authority, he was just misusing it. It was not an absence of authority. Lord Leggett goes through this in some detail. I won't inflict that detail on you but he comes to the ultimate conclusion that that is wrong as a matter of agency law. If you are acting in fraud of your principal you have no authority, there is an absence rather than a misuse of authority.  

What that does is that removes any actual authority. You might think that that is an obvious proposition but it stems from the idea that unless you have expressly agreed with your agent, it goes without saying that you do not have actual authority to defraud on your principal. But it does not deal with apparent authority. He tells us that you might still have apparent. The result is that in all the Quincecare cases, we now know that the agent does not have actual authority but they may have had apparent authority. That is important and I will come back to that.

21:09

[Slide 27] The second proposition which Mr. Justice Steyn put forward in Quincecare was that we were dealing with cases of conflicting duties. That proposition also falls away in light of what Lord Leggett tells us because he says the bank’s duty of care cannot conflict with its duty to execute the payment structure promptly. As a matter of coherence in the law, you cannot have two duties telling you to do different things at once. Even if you do have those conflicting duties, the way he reconciles it is by reference to policy considerations. But construing a contract, this is a contract between the bank and the customer, you cannot go looking for policy considerations and you cannot talk about fact that we should be encouraging banks to be on the lookout for fraud because that is irrelevant when construing the actual contract, that is a broader policy concern but it is not an appropriate way to construe contracts. He says the reason why there is no conflicting duty here is because the duty of care and skill only applies insofar as there is so much. So, the duty of care and skill cannot provide an independent basis for failing or refusing to execute a valid payment order. If there is no latitude, if there is no choice, if the instruction is authorised, the bank has to make the payment - duty of care does not come into it.  

With those two clarifications, Lord Leggett then talks about apparent authority. He reminds us, you will be aware of this, apparent authority protects the expectations of third parties who rely on representations by a principle that an agent has a particular authority. He points out, and this is key, that it only protects reliance by third parties, which is reasonable. It is only if the third party is reliant on the representations that the third party can assume that the agent has authority. If the reliance is reasonable, then what happens is the corporate customer, the principal, is estopped from denying the agent has authority. So as between the customer and the bank, the bank can assume that the agent, which is the director in my example, has authority so far as the bank is reasonably relying on the representation by the company that the director has authority. We usually assume representation by virtue of them holding that particular position, in this case the director.  

But, Lord Leggett is clear that this does not apply where the reliance by the third party is not reasonable. If the third party has reason to believe that the agent might not have authority and does not make inquiry as to check when they do have authority, then they will not have apparent authority and the third party will not be protected by that. 

PHILIPP: RE-EXPLANATION OF QUINCECARE CASES

[Slide 28] Pulling all those strands together leads into what in some respect is quite a neat way to a fresh explanation of what is happening in the Quincecare cases and what the Quincecare Duty is. What Lord Leggett tell us is while the authority conferred on it, the starting point is that the authority conferred by the customer on the agent to give payment instructions to the bank does not include authority to act dishonestly in fraud of the company. There is no actual authority to defraud the company in these sorts of cases. But the agent might have apparent authority.

24:26

The agent will not have power of authority however if the bank knows of circumstances which are suggestive of dishonesty on the part of the agent and cause a reasonable banker before paying to estopp and to make inquiries to verify whether the instruction is authorised. If the bank estopps, makes the inquiries and is determined there is authority and makes the payment, they are fine. They have made the payment on instructions which the agent has given with authority. But if they make the payment without making the inquiries and it later turns out that the agent was defrauding the company and did not have actual authority they now cannot rely on apparent authority because their actions were not reasonable. The bank then is liable in ways that I will come to.  

What happens when the bank has a case where there are circumstances which suggest to the bank that the agent might be defrauding the corporate customer? That is where Lord Leggett tells us the duty of skill and care comes in. When that happens, the duty of skill and care requires the bank to go off and make such inquiries as a reasonable prudent banker would make to ascertain whether or not the instruction is authorised. That might involve talking to other directors in the company, other agents of the company, etc, etc. Importantly, if the bank executes that instruction without making these inquiries, there are two consequences. These are not always distinguished carefully but it is very important to do so.  

The first is that the bank will be acting in breach of the duty of care and skill. This is really all the Quincecare Duty is, it is this particular manifestation of the duty of care and skill. The second consequence is that because the agent will not have actual ordered authority to bind the customer, the instruction would not bind the customer so the bank will have made a payment on instruction which was binding so the bank cannot debit the account - the bank will have paid out its own money, they will have to go and pursue its revenues against the third party to recover that money. 

[Slide 29] The crux of Lord Leggett’s judgments is this one. It is a long paragraph but he summarises the entire approach to Quincecare into this particular framework: 

“Properly understood it is simply an application of the general duty of care owed by a bank to interpret, ascertain and act in accordance with its customer’s instructions. Where a bank is “putting on inquiry” in the sense of having reasonable grounds for believing that a payment instruction given by an agent purportedly on behalf of the customer is an attempt to defraud the customer, this duty requires the bank to refrain from executing the instruction without first making inquiries to verify that the instruction has actually been authorised by the customer. If the bank executes instruction without making such inquiries, and the instruction proves to have been without the customer’s authority, the bank will be in breach of duty.” Which is the first consequence. “It will also in making the payment be acting outside of its own authority from the customer and will therefore be entitled to debit the payment to the customer's account.” 

How do you explain all this? Lord Leggett then goes back to the facts of the case. You will remember this was Mrs. Philipp, [slide 30] there was no agent, no corporate customer. You have probably jumped to this conclusion already, but he explains that there was no agent, the instruction came from Mrs. Phillipp herself, there was no doubt that it was an instruction from her. She was sitting in the chair in the bank giving instruction. So, there is no scope for any of these principles to operate because the instruction was given by the principal themselves so the Quincecare Duty had no application here and the claim was struck out. 

CONSEQUENCES OF THE JUDGMENT IN PHILIPP V BARCLAYS BANK PLC

[Slide 31] What are the consequences of this decision? Well, the first is that the Quincecare Duty is simply an application of ordinary agency law. It is not a particular duty, despite the way it is referred to in cases. I have a professor at Oxford who taught me restitution. He is very fond of saying that when common lawyers encounter a principle they do not really understand, they do one of three things: they will give it a name from Latin, a Latin tag – res ipsa loquitur; they will give it a name from old law French, like estoppel; or they will name it after a case - the Rule of Saunders v Vautier, of course Quincecare. I think this is exactly what has happened here. The Quincecare Duty is an example of the third option. Lord Leggett has explained quite persuasively that in fact, it is just an ordinary application of agency law to a particular context.  

So, what does that mean in terms of claims? Remember, I said there were two consequences of the bank acting when the agent did not have apparent authority. That leads, unsurprisingly, to two claims.  

The first is, there is a claim in debt. Because the bank is not entitled to debit the customer's account, the bank still owes the full amount and the customer can make a claim in debt for that.  

The second is that it will be a breach of the duty of care and skill which is implied in all contracts of this sort and the customer might be able to claim compensation. Most cases have been the second type, concerning claims for breaches of duty and for recovery of consequential loss. You can see in Philipp that Lord Leggett explains that a payment made without inquiry when the bank is on notice is not only a breach the bank’s duty of care but also outside the scope of its mandate, hence its [inaudible] to the customer’s account. 

DEBT CLAIM V BREACH OF DUTY CLAIM

[Slide 32] I want to talk about those two types of claim for a moment because they are different in a number of important ways. The first is there is an important difference between them with respect to limitation – we are going to look at this in detail a moment in the decision of Tugu. Very briefly, the duty of care and skill, insofar as it is contractual, the cause of action accrues when a contract is breached, insofar as it is tortious, cause of action accrues when loss is suffered.  

The debt claim, if you recall I told you earlier, only arises when you make a demand of the bank. That might be a different point in time and we will come back to that in a minute with Tugu.  

The second point is causation of loss. If you are suing for breach of the duty of care and skill you have to show that the duty was breached but also that it caused you loss so that if the bank had made inquiries, what eventually happened after that, you would have avoided some of the loss that you as the corporate customer suffered. You do not have to show that if you are suing in debt, it is the nature of a debt claim, you do not have to show causation or loss. So, the debt claim will be useful for that. But the breach of duty claim will be useful if you have suffered loss over and above the amount which was taken from the account. There have been cases where, as you can imagine, the corporate customer can say “Look, 100,000 was removed from the bank account but the wider fraud cost me $ 1 million. And if in making one of these transactions out of 100,000, you the bank had done your duty and called up one of the other directors and asked about all this, this fraud would have been unravelled and none of the $ 1 million would have been lost. So, you can actually recover far more than the amount misappropriated from the bank account but to do that you obviously have to show causation and loss.  

You can see, that might depend on what sort of client it is, what sort of director is. If it is a one-man company, there might not be anything the bank could have done which would have unravelled the fraud if at most they can only talk to one director giving them instructions. That might not be the case where you have other directors, non-executive directors, for example.  

The final important difference is contributory negligence. I will not go into this but contributory negligence, Tugu tells us, applies to the breach of duty claim, it does not apply to the debt claim. 

PT ASURANSI TUGU PRATAMA INDONESIA TBK V CITIBANK NA [2023] HKCFC 3: THE FACTS

[Slide 33] Right, now, Tugu. This was a decision of the Hong Kong Court of Final Appeal, Lord Sumption wrote the judgment. It was handed down before Philipp and it foreshadows a lot of the reasoning in Philipp and is consistent with it. It is a really good illustration of the debt claim and the difference in the limitation position.  

The corporate customer in this case was called Tugu and there were three dishonest directors. They opened an account with the bank and the mandate with the bank provided that any two of those customers could operate the account. They, over the course of four years, gave instructions to pay money from the account to their personal accounts. [Slide 34] So over the course, of 1994-98, Tugu would receive money from its operating subsidiaries, it would stay in the account for a little bit and then two of the directors authorised payments into their personal accounts. Something like USD 50 million was moved through in and out of Tugu in this way. You can see the account was opened in 1990, the fraud took place over those four years. In 1998, the directors gave the instruction to the bank, let me get this right…Yes, there was a final instruction in 1999 from the director to the bank to transfer all the funds in the account to another account and then to close the bank account which the bank proposed to do.

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All this came to light and the demand for repayment was made in 2006 which you will notice is more than six years after the bank account was closed and the proceedings were finally commenced in 2007. Tugu, the corporate customer, advanced the two claims we have been discussing. They advanced the debt claim, they said “Well, the transfer was brought by our clients and you the bank was not entitled to debit the account. Please pay us the full sum of the account as if those transfers never took place”. The second claim was the breach of duty claim. 

The lower courts, in terms of actual liability, the lower courts found the bank should have been on notice by the third payment. That was not an issue in the Final Court of Appeal and it was common ground in the Court of Final Appeal that the breach of duty claim was time barred. Whereas if it was contractual, the date of the breach, if it was negligence, if it was tortious debt loss, either way more than six years before 2007. So, the issue was, was the debt claim time barred?  

The Court of Appeal and the Court of First Instance held that the debt claim was time barred. The way they did that to say the debt arose when the account was closed in 1998 and you start proceedings more than six years after that. 

TUGU: JUDGMENT REASONING

Lord Sumption gives the judgment and after setting out the law and the way in which as I said foreshadows a lot of what was said in Philipp. He explains that the bank is the debtor of the customer, as I told you earlier, and the debt only arises on the making of the demand by the customer. [Slide 35] That means that the course of action accrues when the demand was made. Importantly, he says “This means that the running of time for limitation purposes may be indefinitely deferred by the customer, and that an account may be dormant without activity for many years without affecting customer’s right to eventually demand the balance.” To put that in concrete terms, the idea is that if I discover tomorrow that twenty years ago, an unauthorised debit was taken from my bank account that my bank that I still have, I can demand repayment of that tomorrow, the demand causes the debt to accrue and time starts running, even though that was twenty years ago – that is quite a powerful proposition.  

[Slide 36] The bank, however, said “Well, sorry…” [Slide 37] Just to explain that, Lord Sumption says “If a bank has debited an account without authority…[t]he customer is entitled to disregard that and require the account to be reconstituted…” What gets reconstituted, Lord Sumption says, is not the actual debt, it is just the bank's records.  In my twenty year example, if 100,000 was taken from my account twenty years ago, the bank has owed me that 100,000 ever since. What gets reconstituted is just the bank record which says that a debt was entered for 100,000 twenty years ago. That gets removed and I have a claim for 100,000. I can cause that extra to be accrued by making that demand.

[Slide 38] The bank however said “That might be the normal position but the difference here is that the account was closed and the account was closed for more than six years before you started proceedings.” They said “Well, once the account came to an end, the debt became paid. And you sued more than six years after that, so it's time barred.” Lord Sumption said, the ordinary position is it is terminated, that is right. The amount becomes due and payable and you would be out of time. The principle has no application in this case because the closure of account did not discharge the debt represented by the reconstituted balance. He gave two reasons for this.  

The first is, he says the closure was unauthorised. The closure was in fact the tail end of a large scale fraud and you could not neatly put the closure in one bucket and the fraud in the other bucket as the bank sought to do. By 1998, he says, the whole operation of the bank account was fraudulent so the closure instruction was also fraudulent which meant it was unauthorised and therefore a repudiation of banking contract and Tugu had not accepted that repudiation, so the relationship was ongoing. It did not actually come to an end.  

The second reason, he says, is in any event, although the banking contract can be terminated at any time on notice, there is no principle of law which allows you to unilaterally aggregate your duties. The bank cannot unilaterally abrogate its outstanding liabilities or its debt without payment it. To effectually terminate the relationship, Lord Sumption says, you have to actually pay the balance outstanding. Until you have paid, the banking relationship cannot properly be brought to an end.  

The result is then, the debt became payable in 2006 when they made the demand. They brought proceedings in 2017 so they were not time barred. What you have is the claim being brought in 2007 in respect of fraud which occurred between 1994 and 1998. The first thing is, how powerful this is in terms of limitation. It also illustrates a second point, which is the closing of the account does not affect that. In Tugu, the first reason was the closure was not authorised. Even if you have a case where the closure was authorised, so have you directors that come in by that point, and closure was authorised. The second reason still bites because as long as there is an undischarged debt which the bank has not paid on, they cannot effectually close the account. So, it is really very powerful. 

THE QUINCECARE DUTY IN AUSTRALIA

[Slide 39] That takes me to what the position is in Australia. The headline is that there are relatively few Australian cases. Those [on the slide] are the ones that I have been able to find. You can see that over the last forty years there have been about six or seven, only two at the appellate level and the discussion in them is not particularly extensive. You can contrast this with the last ten years in the English courts where there has been a real uptick in the amount of Quincecare Duty claims. 

BASIS OF THE QUINCECARE DUTY IN AUSTRALIA

There has not really been any discussion in those cases that I am able to find for a basis for the duty. We have not had a judge yet turn their mind to what the basis for the duty is. [Slide 40] The open question, I think, still remains to be decided. I should point out, these cases do seem to say that duty is good law. A number of these cases involve claims that succeeded, some failed, but they all accept by reference to the older Quincecare cases that this duty is good law in Australia. They do not explain why the duty exists or what its justification is but the duty itself is good law.  

So, what are the questions, that is watch this space questions? Well, what is the basis of the duty? When this comes up, I suspect it will come up in a case like Philipp where ordinary agency law does not get you home but a wider conception of the Quincecare Duty does get there. Don’t forget, I did mention this, but the Court of Appeal in Philipp refused to strike out the claim. They said the Quincecare Duty is an instance of a broader duty on banks to combat fraud. When you look at it that way, it does not really matter whether or not there is an agent involved. It is a broader duty and the bank breached that by acting on Mrs Philipp’s instructions to transfer the money to the UAE. You can see an argument like that being made in one of those APP cases. If the Australian courts go in the way of Philipp, then that sort of claim would fit. 

WHAT IS THE LEVEL OF KNOWLEDGE REQUIRED TO BE “PUT ON INQUIRY”?

The second open question, which I think is really interesting, is what the level of knowledge is that you need to have before you are put on inquiry. Just to remind you, what happens is your duty to make reasonable inquiries arises if you are put on inquiry. The way that is expressed in Philipp is it arises when there are circumstances suggestive of dishonesty apparent to the bank which will cause a reasonable banker before executing an instruction to make inquiries to verify the agent's authority, or alternatively reasonable grounds for believing that payment instruction given by an agent is an attempt to defraud the customer. There is an interesting question as to what the level of knowledge is in Australian law. I put on the slide there relevant paragraphs in Philipp and Tugu but also a decision of New South Wales Court of Appeal in Sansom. There is a discussion there of whether or not level of knowledge is higher or lower than the level of knowledge for knowing assistance under the second [in audible]. The result they ultimately come to is that the same level of knowledge is sufficient. You cannot get home on the common law claim with a lesser level of knowledge than knowing assistance. I am not entirely sure about that. For starters, Sansom is well before Farah v Sadie where the High Court settled the bar for knowing assistance.  

Secondly, there are definitely cases which suggest that knowing assistance requires some element of impropriety or want to probity on the part of the knowing assistant which is really something you can see in the Quincecare cases. The other point I want to make is, the question of the difference between these two I suspect is not one that will ever arise in English cases because knowing assistance there is now dishonest assistance and almost seems to be a higher bar than the bar for the Quincecare here. Whereas in Australia we still have knowing assistance. There is a real question as to whether you are required to do the same, that can be potentially quite important.

ADVANTAGES OF QUINCECARE CLAIMS

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[Slide 41] Finally, or ultimately, cases or instances where the Quincecare claim will be useful. I say Quincecare claim, I should not really be calling them Quincecare claims but for the sake of convenience I am going to do that. I am referring to the breach of duty claim and the debt claim. I spoke earlier about the advantages that the debt claim has for limitation, for causation, for contributory negligence, the advantages those claims have over claims like knowing assistance. For example, you do not have to show dishonest fraudulent design, you still have to show that the director did not have actual authority, which is generally because they are defrauding the company but that may not be as difficult to show dishonest fraudulent design. I said there might well be a low knowledge requirement for the Quincecare type claims.  

The big picture, zooming out, I hope you can see that the primary advantage of this sort of claim is that it shifts the loss. You have a company who has been defrauded by their own officers and that was then shifted onto the bank. It is essentially a wash shifting exercise which can be quite important if you cannot find the director or if they [inaudible] or if you cannot find the actual money that has been misappropriated.  

Some thoughts to leave you with [slide 42]. I have talked about corporate customers and dishonest intentions. The duty is by no means limited to that, it can apply to natural persons and their dishonest agents. As an example of a case in Australia where an agent modified a check in Varker, it is also referred to in Philipp. It can also apply to a joint account where under the mandate either one of the two account holders combined the other one and where one defrauds the other one and the bank is put an inquiry as to that the analysis will be the same. Sansom was an example of that, they were husband and wife who had joint accounts. 

WHERE MIGHT AN AGENT NOT BE REQUIRED TO EXECUTE AN ORDER

Finally, looking a little bit broader than Quincecare, similar sorts of reasoning applies in situations not involving a fraud on the corporate account holder. I gave the example earlier where the payment instruction is ambiguous, the duty of care and skill requires you to stop, clarify the order payment. Payment instructions which leave the bank to choose the method of payment. Again, the duty of care and skill will require you to exercise reasonable care and skill in choosing the method of payment. The same proposition seems to apply where the bank is on notice that the customer lacks mental capacity, there comes a point at which the bank again is required by this duty to not make the payment, to make the inquiries that a reasonable banker would make and then to only make the payment if they are convinced that the you cannot hold the account holder has capacity.  

Finally, there is the very interesting decision of Justice McGarvie in the Victoria Supreme Court in Ryan v Bank of New South Wales. He suggested that there might be other cases where the agent is not required to execute the order. He gave a couple of examples. He gave examples like a carrier carrying goods under contract who has been ordered to deposit them on a particular loading platform at a factory. If the carrier turns up at the factory and the factory is on fire, Mr Justice McGarvie says the agent would not be required to unload the goods at that particular platform. Equally, he says, if a security officer is ordered by his employer to deliver the employee's weekly pay checks to a paymaster, he would be acting unreasonably in complying with the order if he knew from the paymaster that he was going to steal it, if the paymaster had admitted to that for example. Or, finally, if a paymaster is ordered by his employer to take the employee’s weekly pay to the pay office. He would be acting unreasonably if he acted on that knowing that the pay office was occupied by a gang of armed robbers. These are the sorts of examples Mr Justice McGarvie uses.  

Essentially what he says in this case, the agent knows something the principal does not. It would have gone without saying that the principal could not have intended that the agent would carry out the order in this sort of scenario. Lord Leggett discusses this in Phillipp and there might be examples of this, he says for example where the bank has been told to do a particular transfer and the bank receives a phone call from the police informing them that the account holder ordered to make the transfer to the account of a known fraudster. That might be a scenario where bank knows something that the customer does not but the bank can be sure that, it goes without saying, the customer would not want them to execute that payment instruction. Lord Leggett does not need to decide this because it does not apply to the facts of this case because the key unifying feature of all these examples is the bank knows something the account holder does not. In Phillipp, the account holder, Mrs Phillipp knew everything that the bank knew, there was no disparity in knowledge there. That potentially extends the reasoning of quite a few cases. 

Q & A

[Slide 43] On that point I will open the floor up to any questions.

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Audience: I am stewing.

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MH: That is an excellent reaction Shane. I am pleased to hear that.

BANK’S DUTY TO PROTECT AGAINST FRUAD

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Audience: Sorry, I should start by saying thank you. Fascinating. In my ignorance, I was not aware of these cases. As usual, you are concise and set the whole thing out and the differences between the different causes action and have been very helpful. Thank you very much. 

I am stewing. The Mrs Phillipps case immediately attracted my thoughts about fraud being so prevalent and particularly against natural persons and what banks know and on instructions about amounts that get transferred. I had a case this year actually, I think we vaguely mentioned that where my client had a little over $ 1 million stolen in a series of authorised transfers. In circumstances where banks here talk about you have a duty or not…If I my account, the bank should know, hang on, Shane is sending all these in $20/$50 transfers to the Philippines, is he up to awful child sexual offences overseas? Banks should be on the lookout for those sorts of things. I do wonder whether where even somebody like Mrs Philipp where you think…Someone goes in and suddenly says “I want to send a million bucks to the UAE”. Why? What are you doing? It is a very substantial amount of your wealth. You can see what amount of money coming in and out. The bank has the ability with computer programs to monitor things like money laundering. I do not know the facts enough about Mrs Philipp, I do wonder whether there is going to be some scope to push, whether there is going to be some scope to say “Well, you told me to do this”. Maybe that is not enough.

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MH: Can I say, on the facts of Philipp, they are remarkable. They were certainly the most sophisticated fraudsters I have ever seen. They impersonated, I cannot remember who it was, maybe the National Crime Agency. They impersonated some authority figure and said “We need to move your money into a safe account because your existing account has been compromised.” Something like that but what was truly extraordinary is that they had a visit from a constable who had said “Look, we think you're the subject of a fraud being committed.” The scammers had impersonated the constable’s phone number and called them and obviously told them something to make them think it was all fine to go ahead with the transfer. Remarkably skilled scammers.  

There is certainly, as you said, there is definitely an argument that the bank’s duty should extend to protect against this sort of fraud. Someone got up in front of a Supreme Court made a perfectly respectable argument that that should be the case and the Court of Appeal bought that. I suppose for me the difficulty is it rather does conflict with this classic principle that banks should not really concern themselves with the wisdom of our transactions because you run the risk of going too far in the opposite direction of not being able to conduct business properly if the bank is there inquiring into the purpose of every single transaction you are making. Maybe the answer to that is, as you say, tied to money laundering regulation. Lord Leggett has a long spiel at the start of his judgment where he talks about APP fraud being a social problem and the fact that there are money laundering regulations, there are bills being proposed and passed in Parliament to deal with this. There are other ways of dealing with it. It is not a problem that we deal with through the private sector. Reasonable minds can take different views on that.  

The main problem I have is…One of the main problems with expanding the duty is that means you are bringing in these sorts of public policy considerations into a quintessentially bilateral private law duty. Insofar as we are concerned with the contractual duty, those public policy considerations are really irrelevant. There is more scope for them in the tortious side given that they are of equivalent content. There is not a whole lot of room for bringing in these sorts of pubic policy considerations.  

Final point, on the money laundering front, certainly in the UK, there are obligations on banks to launch things like suspicious activity reports when they see things that are suspicious on their accounts. That has an interesting interplay with this sort of duty. There is a question as to what the relationship is there. I think it is not the case that if you have to lodge these reports then you are automatically put on inquiry but it is certainly, I would have thought, good evidence if you are trying to show that the bank should have been put on inquiry of a possible fraud going on, that they were submitting all these suspicious activity reports. Whatever else to

the relevant authorities. Either way, I agree with that. It is a particularly serious social problem and we need some solution to it if there is not already a legislative solution.

SHOULD THE QUINCECARE DUTY BE CONFINED TO BANKS?

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Audience: Given the change in reasoning between the Quincecare case and Philipps, is there any reason why it needs to be confined to banks, or could it be…?  

Audience: Can you repeat the question, please?

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MH: The question was: given the change in reasoning in the Quincecare cases, is there any reason why it should be confined to banks? Excellent question. I think the answer is no. It will be, I think, limited to cases where someone holds some form of property on behalf of another, some form of money or money equivalent. Actually, Singularis which I mentioned, which was a 2016 case where the claim succeeded was not strictly speaking a bank. I think they were holding stocks or something like that. The instruction was to transfer them out to a series of other companies in the group, not to the company itself, and there were a number of red flags. I think, given that it is just ordinary aims and principles, it could in theory apply to any sort of case where an agent has authority to deal with your property on your instructions, or on instructions from a more senior agent. I think that is right. Singularis is certainly an example of that.

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[Slide 44] Thank you all again for coming. I think we will wrap it up there.

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