Key lessons for New Zealand banks from the UK Supreme Court

What are the key lessons for New Zealand banks (and other payment service providers) to take from the UK Supreme Court’s recent Philipp v Barclays¹ judgment?

1. Check your standard terms and conditions on payment instructions: how do the terms deal with instructions received from a customer’s agent? And on what grounds can you refuse to make a payment?


2. Consider how you’ll respond if there are red flags: time could be tight, so prepare in advance how you will investigate and respond to challenging payment circumstances or requests to recover lost funds.


3. Prepare for the next wave of innovative claims from defrauded customers or investors: customers and third parties will keep trying to recover lost funds through banks (whether via a breach of duty claim, dishonest assistance, knowing receipt, or a legislative solution such as the UK’s incoming compulsory reimbursement model).

We go into further detail on each of these points below.

 

Philipp v Barclays

Mrs Philipp was a victim of “authorised push payment” (APP) fraud and had authorised Barclays to send two payments totalling GBP700,000 from her account to the fraudster’s bank accounts in the United Arab Emirates. On realising her error, Mrs Philipp alleged the bank owed her a duty not to carry out her instructions, if the bank had reasonable grounds for believing that she was being defrauded.

 

Key principles from the UK Supreme Court

1. Unless the bank’s terms say otherwise, a bank must follow a customer’s payment instructions promptly and without question, if the account has sufficient funds available.


2. The bank’s duty to act with reasonable skill and care when processing payments only applies to “interpreting, ascertaining, and acting in accordance with the instructions” of the customer. For example, the bank should not transfer funds if the payment instructions are unclear or incomplete.


3. Where a bank has reasonable grounds for believing that a payment instruction given by an agent of the customer is an attempt by the agent to defraud the customer, a bank must make inquiries to verify that the instruction has been properly authorised and to refrain from making the payment until it does so (the Quincecare duty).²


4. That duty applies in any situation where any person has authority to give payment instructions to a bank on behalf of another, such as a joint account (and is not just for corporate customers).


5. Where a duty is breached, the customer’s resulting claim for the lost funds is a debt claim requiring the bank to restore the account. Therefore, the bank won’t be able to claim a contribution in reduction of the loss if the customer was negligent in relation to the payment instructions.

Rather than an independent duty, Lord Leggatt considered that the Quincecare duty is just a consequence of the law of agency. Banks are relying on the apparent authority, rather than actual authority, of the customer’s agent when accepting instructions from that agent. This reasoning has already been challenged by arguably the world’s leading agency law expert, Professor Watts KC.

Professor Watts considers the approach “wrong” and that it leaves the door open for further claims around how the bank-customer contract deals with agent’s instructions.

You can find more detail on the judgment in our UK publication.

 

The challenge for New Zealand banks

In the leading New Zealand case, the bank was found liable for refusing to follow a payment instruction when it had concerns about the validity of the instructions.³ The customer instructed the bank to distribute almost USD50 million in funds resulting from the sale of shares in a Bolivian bank to a Venezuelan bank. On receiving the instructions, the bank had been concerned that over half of the funds was going to consultants and third parties rather than the vendors so it asked questions, but did not receive satisfactory answers, and refused to pay.

The New Zealand Supreme Court held that it was not a sufficient basis to refuse the payment instructions that the bank had a reasonable apprehension or suspicion of wrongdoing. Instead, the bank could have only refused the instructions if making the payment would have made it liable for dishonest assistance. That higher threshold is a mixed subjective and objective test involving (1) the actual state of the bank’s knowledge of the facts; and (2) whether the bank’s conduct with that knowledge is dishonest by standards of ordinary decent people.

The challenge for banks is determining, often under time pressure, whether this test is met. If circumstances are unclear, do you follow the instruction, risking liability if the customer is being defrauded? Or pause, investigate, and risk that a failure to follow a valid instruction causes loss?

Because of this unenviable position, New Zealand banks now have varying clauses in their general terms and conditions allowing them to refuse a payment instruction if they have reasonable concerns that to honour the instruction would expose them to liability or a claim. These clauses provide some protection against a claim of breach of mandate⁴ but may also import a customer expectation that the bank will investigate in cases where it is on notice of potential wrongdoing. Banks also face the practical reality of determining how they are to investigate any potential concerns, especially in circumstances of closely-held companies where the customer’s agent may be a director and/or major shareholder.⁵

 

Where next?

A legislative solution?

The UK has decided to require banks to reimburse qualifying victims of APP fraud. The Financial Services and Markets Act 2023 requires the Payment Systems Regulator to publish a draft requirement for payment service providers to reimburse qualifying victims of APP fraud carried out using the UK’s Faster Payments Scheme (a real-time domestic payments system for amounts under GBP1 million).

The Payment Systems Regulator is currently consulting on those regulatory requirements.

In New Zealand, real-time payments similar to the UK’s are not expected until around 2030. In the meantime there is greater scope for recovery of customers’ funds through the payment system here. Any legislative or regulatory changes regarding preventing fraud, and dealing with its harms, will need to be given considered thought for the New Zealand context.

Customer claims

While the UK Supreme Court limited the Quincecare duty in English law, Mrs Philipp’s alternative claim that Barclays failed to act promptly in trying to recall the payments after the fraud was discovered will be allowed to go to trial. Barclays took almost two months to attempt any recovery. That trial will consider whether (1) Barclays owed a duty to promptly recall the payments and (2) there was any realistic chance the funds could have been recovered had Barclays acted sooner (which the Court considered unlikely but not impossible).

The Court also left open the possibility of claims, relying on Australian authority,⁶ that banks owe a duty to refuse to follow instructions where the bank knows facts, unknown to the customer, which would make it obvious that the instruction should not be processed.

Defrauded customers have also pursued a fraudster’s bank that has received the funds. A receiving bank which is on notice of a possible fraud by its customer may be directly liable in tort for dishonestly assisting in that fraud on the payor, or knowingly receiving the benefits of it. Claims against receiving banks will realistically need to allege some sort of blind eye knowledge or similar ‘dishonesty’.⁷

Third party claims

Third parties such as investors and creditors in failed companies have also sought recovery from banks. These claims have often been unsuccessful offshore,⁸ but there is still ground to be tested in New Zealand.

In the recent Ross Asset Management (RAM) litigation, the High Court here was unwilling to strike out the RAM investors’ claim that they were owed a duty of care by the bank in relation to the funds held on their behalf by RAM. The Court considered the duty question unresolved and left open the possibility of a lower knowledge threshold for knowing receipt in New Zealand law.⁹ The case settled before a substantive hearing so both these questions remain open.

If you want to discuss bankers’ duties or potential regulatory changes in this space, get in touch. We’d be happy to talk.

---

¹Philipp v Barclays Bank UP PLC (2023) UKSC 25.
²The “Quincecare” duty: Barclays Bank v Quincecare (1992) 4 All ER 363.
³Westpac New Zealand Ltd v MAP and Associates Ltd (2011) NZSC 89.
⁴Targa Capital Limited v Westpac New Zealand Limited (2023) NZHC 230. Westpac relied on its terms to withdraw banking services to a customer connected with an individual sanctioned in Australia. Those terms provided that Westpac could withdraw any services if Westpac “believes it has reasonable grounds for doing so” if it has given notice.
⁵For instance, Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd (2019) UKSC 50.
⁶Ryan v Bank of New South Wales (1978) VR 555.
⁷See, for instance, Technimont Arabia Ltd v National Westminser Bank plc (2022) EWHC 1172 (Comm).
⁸A bank doesn’t owe a duty to the beneficial owner of account monies (Bank of Scotland International v JP SPC4 (2022) UKPC 18) nor to creditors of a corporate customer (Stanford International Bank Ltd (In Liquidation) v HSBC Bank PLC (2022) UKSC 34).
⁹Scott & Ors v ANZ Bank New Zealand Limited (2020) NZHC 906.