Out-Law News | 15 Oct 2019 | 1:47 pm | 2 min. read
The Court of Appeal (CoA) of England and Wales has found that JP Morgan Chase was in breach of its 'Quincecare' duty when it transferred millions of dollars out of an account set up by its client, the Republic of Nigeria.
The case is a rare example referencing a bank's Quincecare duty, which says that a bank must reimburse a client if it fails to exercise care in making a payment in circumstances where it has cause to think there could be fraud.
The Republic of Nigeria set up an account with JP Morgan Chase to hold over $875 million due to be paid as settlement in a claim over oil concessions. The bank paid out the whole of the sum over three transfers, on the instruction of authorised people.
Nigeria claimed that JP Morgan Chase should have been aware that the transfers were part of a fraudulent scheme, and so was in breach of its Quincecare duty.
It is notable how few reported cases there are on the Quincecare duty. This is only the third significant case since 1992, which is remarkable given that the Quincecare duty was considered to be a major increase in bank risk at the time of the original decision.
The Court of Appeal upheld an earlier finding of the High Court in favour of Nigeria, refusing to strike out the claim. It did not rule on the facts of the case, but said these would be important for a trial judge considering the scope of the bank's Quincecare duty.
The Court also threw out the bank's argument that the terms of the contract with Nigeria limited the scope of its duties to exclude the Quincecare duty. While the Court did say that it would be possible for parties to exclude the Quincecare duty through contractual terms, this was not clear in the contract between Morgan Chase and Nigeria.
Financial services litigation expert Mike Hawthorne of Pinsent Masons, the law firm behind Out-Law, said the case was unusual. "It is notable how few reported cases there are on the Quincecare duty. This is only the third significant case since 1992, which is remarkable given that the Quincecare duty was considered to be a major increase in bank risk at the time of the original decision," Hawthorne said.
"This is probably because human oversight of bank payments has continually declined since the 1990s, so there are ever fewer cases where banks actually understand the reasons for payments before they are made. That may change in the future, however, because banks are doing a lot of work with big data and AI to find automated ways to detect and prevent fraud," Hawthorne said.
"The next chapter in the Quincecare story is likely to be around the limits of banks' duties to understand and act on the huge amount of data that is now available to them. I can easily foresee a defrauded party making the argument that a pattern of trading was sufficiently suspicious that it should have been detected, even if no human eyes at the bank ever oversaw the relevant payments," Hawthorne said.
Civil fraud expert Alan Sheeley of Pinsent Masons said: "The Quincecare duty is just one piece in the jigsaw of banks' exposures in relation to fraud perpetrated through the banking system. Since May this year many of the major banks have been signed up to a voluntary code under which they must compensate individual, charity and micro-enterprise customers who fall victim to 'authorised push payment' (APP) frauds, where they are tricked into paying money to a fraudster."
"There is significant consumer and industry pressure for other banks to be held to the same standards, and it seems only a matter of time before businesses call for the same protection," he said. "Given APP fraud is currently a £354 million problem and growing, the potential exposure for banks is very large indeed. This is yet another reason why the banking industry must do all it can to use the data available to it to detect and stop fraud."