The High Court dismisses a USD1.5 billion Quincecare duty claim and provides guidance on the scope of duty
Issue 8 of the Energy and Natural Resources Case Law Update
In The Federal Republic of Nigeria v JP Morgan Chase Bank NA,1 the High Court considered the concept of gross negligence when executing payment instructions and the scope of the Quincecare duty. This is the duty on banks to take reasonable care in executing payment instructions and includes a requirement not to comply with an instruction purporting to be from a customer if there are reasonable grounds for believing that there is an attempt to misappropriate funds.
Key takeaways
Whilst the Quincecare duty remains narrowly confined, banks and financial institutions should be careful to ensure that they have discharged their duty to take reasonable care when executing payment instructions where there is a possibility that the instructions may be fraudulent.
General concerns as to wider fraud in respect of a company, whilst relevant for anti-money laundering and financial crime purposes, are unlikely to be specific enough to render a bank liable for breach of its Quincecare duty.
Careful attention should also be paid to the terms of banking depositary agreements which may contain provisions intended to exclude or limit liability for breach of this duty.
Facts
The claim arose in connection with the large-scale settlement of a dispute concerning the ownership of an oil prospecting licence for a Nigerian oil field (OPL 245). In 1998, the Federal Republic of Nigeria (FRN) granted this licence to Malabu Oil and Gas Ltd (Malabu), before revoking it several years later and granting it to Shell Nigeria Exploration and Production Company Limited (Shell). In 2010, the Nigerian government revoked the licence granted to Shell and subsequently awarded it back to Malabu. These repeated changes left a trail of litigation which the parties agreed to settle in 2011 via a large-scale tripartite settlement agreement.
As part of the 2011 settlement, the parties signed two resolution agreements which provided that the licence would finally be granted to Shell and that Malabu would renege any claims in relation to OPL 245. In return, Shell would pay USD1.3 billion to the Nigerian government, which would in turn pay USD1.1 billion to Malabu.
These payments were made by the FRN to Malabu in 2011 and 2013 and were facilitated by JP Morgan, the government of Nigeria’s banking provider. The FRN held a depositary account with JP Morgan which was governed by a depositary agreement. Crucially, this agreement contained a clause which excluded JP Morgan’s liability to FRN relating to the agreement, unless caused by “fraud, gross negligence or wilful misconduct.”
Several years later, following a change of government in Nigeria, the new government sought to challenge the legitimacy of these payments. It was alleged that the award of the OPL 245 licence and the settlement agreement were part of a fraudulent and corrupt scheme against the FRN by individuals within the Nigerian government. The FRN argued that JP Morgan was in breach of its Quincecare duty by actioning payment instructions where it had grounds to believe2 that there was a real possibility that the FRN was being defrauded.
The High Court’s decision
The FRN’s claim failed. The principal reason was that the FRN could not establish fraud specifically in relation to the resolution agreements. The court held that, on the balance of probabilities, it could not be proved that the payments made under the agreements were themselves part of a coordinated fraudulent and corrupt scheme by individuals within the Nigerian government. The court determined that without establishing fraud of which JP Morgan could have been on notice, there could be no breach of duty in actioning the payments.
Notwithstanding that the FRN’s claim fell at the first hurdle, the court went on to consider whether, if fraud had been established in relation to the resolution agreements, JP Morgan would have been in breach of its Quincecare duty. This required the court to consider not only whether JP Morgan breached its duty, but – due to the terms of the depository agreement – whether it was “grossly negligent” in effecting the payment instructions.
The court held that in the circumstances, while JP Morgan was on notice of a risk of fraud by 2013, there was no serious disregard of such an “obvious risk” of the sort required to establish gross negligence. However, the Judge indicated that the outcome in this respect may have been different had the standard of “gross negligence” not been specified in the depositary agreement. Had a less onerous standard been specified, the outcome may have been different on the facts.
Comment
This judgment will be welcomed by banks and financial institutions as another Quincecare duty case that has been found in favour of the paying bank.
Particularly helpful was the finding that it is a particular fraud, rather than more general concerns of fraud for anti-money laundering purposes, of which a bank must be on notice in order for the Quincecare duty to be engaged. The court, in considering a breach of this duty, set aside the broader circumstances of a party’s behaviour and focussed strictly on whether the specific payment instructions were themselves fraudulent. This finding reconfirmed the “narrow and confined” nature of the Quincecare duty.
The Judge did acknowledge that the facts of this case were unusual, particularly as the question of whether a relevant transaction is in fact fraudulent is rarely an issue in cases of this kind. Further, the high bar which the court found would have to be met in order for the FRN’s claims to succeed was in large part due to the need to establish that JP Morgan’s actions had been “grossly negligent” in accordance with the terms of the depositary agreement. In most cases, a lower standard of “ordinary” negligence will usually be all that is required. This will be of particular interest to banks, who will likely be eager to reduce their exposure by the inclusion of similar provisions in agreements of this kind.
1[2022] EWHC 1447 (Comm).
2These grounds included the fact that Malabu was a shell company with no assets or operations, that payment instructions received by the government were sometimes suspicious – changing often, coming from individuals not named as agents in the depositary agreement and requesting transfers in excess of the balance in the account. On occasion, payments made out of the account had been by the recipient banks. The FRN also pointed to a number of press reports associating Malabu with former corrupt Nigerian oil ministers and entities (including one article published in the Economist in 2013 alleging corruption in relation to OPL 245). JP Morgan had also made several Suspicious Activity Reports (SARs) to the Serious Organised Crime Agency (SOCA) and performed its own internal investigations in respect of Malabu, but nonetheless made the payments in question.
