English High Court Provides Important Clarification on Banks’ ‘Quincecare Duty’ | Shearman & Sterling LLP

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The said ‘Quincecare duty” has received increased attention in English courts in recent years. The obligation obliges a bank not to execute a customer’s payment instructions when, and for as long as, the bank has reasonable grounds to believe that the instructions constitute an attempt to misappropriate the customer’s funds.

The recent judgment of the High Court in Federal Republic of Nigeria v JPMorgan Chase Bank[1] provides important clarification of the scope of the obligation. By rejecting the claim of the Federal Republic of Nigeria (FRN), this decision confirms that the right is narrow. Even if a bank has serious property concerns about a customer or its agents historically or generally, for the obligation to apply, the bank must have reasonable grounds to believe that the relevant payment instruction may specifically be fraudulent.

While the case law supporting the Quincecare the duty is slim, there is no doubt that the duty is now firmly entrenched in English law as part of a bank’s wider duty of reasonable skill and care to its customer. However, banks will welcome the clarity provided by this decision and its cautious approach. It recognizes that the obligation must be limited so as to strike a balance with a bank’s primary obligation to act promptly on payment instructions. By not allowing the obligation to be triggered by knowledge or suspicion of a customer’s history and broader circumstances (even where these matters may be relevant to a bank’s broader anti-trust obligations) against money laundering), the decision also prevents – at least for now – the obligation becoming a potentially extremely onerous burden in the modern banking environment.

Facts

In 2001, an operating license originally granted to Malabu Oil and Gas Ltd (Malabu) was revoked and granted to a Nigerian subsidiary of an international oil company. This gave rise to a protracted dispute between FRN, Malabu, the oil company and others, which was eventually settled under a number of “resolution agreements” in 2011. These agreements provided for payments of over US$1 billion to be paid to Malabu by FRN.

FRN opened a deposit account with the defendant bank, where the funds were held until disbursed to Malabu in 2011 and 2013 on the instructions of authorized persons acting on FRN’s behalf. After being disbursed to Malabu, the funds were then allegedly misappropriated by a number of individuals, some of whom FRN said were directly linked to the settlement process and subsequent payments.

FRN brought an action for damages against the bank for violation of the Quincecare liability for embezzled funds. Although FRN admitted that the bank was not involved in the alleged fraud or had no knowledge of it, he alleged that the bank was investigating whether the instructions could be part of a scheme. fraudulent scheme aimed at embezzling funds and defrauding FRN, given that it was alleged that the bank knew or should have known the story of Malabu and the Nigerian officials who gave the payment instructions. On this basis, FRN argued that the bank should not have made the payments.

Did the duty of Quincecare appear and was it violated?

The Court accepted the bank’s arguments that:

  • the Quincecare obligation arises in connection with a payment instruction;
  • there needs to be a clear focus on what the bank needs to be informed about; and
  • unless the bank is advised that the instruction in question may be an attempt to embezzle funds, the obligation does not arise.

In short, the focus is on notice of the matter that allegedly vitiates the instruction and not on a different or broader concern. Therefore, FRN had to demonstrate that the 2011 and 2013 payments were part of a fraud and that the bank was aware of the possibility that the payments were part of this fraud. The Court held that FRN had not demonstrated that this was the case.

While the court accepted that there were sufficient grounds to conclude that the initial license had been obtained through bribery, FRN failed to establish that the subsequent settlement had been fraudulent in nature, or that Nigerian officials authorizing payments under this settlement had been party to such fraud. Since the court concluded that there was no relevant fraudulent scheme, the Quincecare duty could not arise.

In any case, even if fraud had been established, by virtue of an exclusion clause in the deposit contract between the parties, even assuming, for the record, that the bank had been warned of the fraud, its liability would only be incurred if it had been roughly negligent. This involved asking the questions of whether (i) there was a clear risk that the instructions were fraudulent, and (ii) the bank showed serious disregard for that risk (for which, the ease of mitigating the risk would be particularly relevant).

The Court took into account the potential “red flags” that FRN said had warned the bank about the 2011 and 2013 payments. Regarding the 2011 payments, FRN claimed examples of corrupt and fraudulent behavior with respect to the license more broadly and the historical and allegedly suspicious features of the 2011 payment in particular. However, while the bank reportedly filed several suspicious activity reports regarding some of this behavior for anti-money laundering purposes, the evidence on which FRN relies was not sufficient to warn a reasonable banker and honest that the payment could be fraudulent.

With regard to the 2013 payment, although the proliferation of press articles prior to this payment regarding similar allegations of fraud, as well as various investigations in Nigeria and abroad into the license and relevant Nigerian officials have warned the bank of a real possibility of fraud, it would not have led a reasonable and honest banker to conclude that there was a “clear risk” that the payment instructions were fraudulent.

Accordingly, the bank was not grossly negligent and did not breach any Quincecare duty, even if he had shown up.

Commentary and key takeaways

After recent cases have arguably widened the scope of the Quincecare duty in some respect[2], the Federal Republic of Nigeria confirms that the right is narrow and has clear limits. Especially:

  • The bank must be informed that the payment order in question may be tainted with fraud; past conduct or vague or generalized concerns are not enough.
  • Even serious concerns about potential fraudulent behavior on the part of a client or its agents who, for example, engage AML requirements may not be sufficient to give rise to a Quincecare obligation unless there are also specific reasons to suspect that the payment instructions in question were fraudulent.

The case also highlights the clear benefit in this context to banks limiting their liability to “gross negligence.” Although the distinction between gross negligence and ordinary negligence can sometimes be blurred and was not determinative in this case, a limitation of gross negligence will make it more difficult to establish a breach of the Quincecare obligation – the Court stated that where gross negligence is required, it may not be sufficient to demonstrate even that a bank has fallen “very seriously below” the standard which can be expected of a reasonable banker.

Finally, despite the recent proliferation of cases concerning the Quincecare duty, it should be noted that in only one English case (the facts of which were highly unusual)[3] whether the obligation was established and breached. Federal Republic of Nigeria confirms the narrowness of the obligation and, in doing so, also serves to further illustrate why claimants may often find it difficult to rely on it.

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