High Court Dismisses Quincecare Duty Claim Giving Guidance On The Scope And Nature Of The Duty

• Published date: 24 June 2022
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Criminal Law, Financial Services, Professional Negligence, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Herbert Smith Freehills
• Author: Mr Chris Bushell, Ceri Morgan and Nihar Lovell

In good news for financial institutions processing client payments, a multinational bank has successfully defended a US$1.7bn claim brought by the Federal Republic of Nigeria (FRN), with the court finding that the bank did not breach its so-called Quincecare duty: Federal Republic of Nigeria v JPMorgan Chase Bank [2022] EWHC 1447 (Comm).

As a reminder, the Quincecare duty is one aspect of a bank's overall duty to exercise reasonable skill and care in processing customer payment instructions. It applies by way of derogation from the bank's primary duty to comply promptly with authorised payment instructions from its customer; and requires the bank to refrain from paying out in circumstances where (allegedly) there were "red flags" to suggest that the order was an attempt to misappropriate the funds of the customer (see our previous blog posts considering the Quincecare duty here).

In the present case, the FRN alleged that the bank breached its Quincecare duty by transferring sums out of the FRN's depository account to a Nigerian company, when the bank should have realised that it could not trust the senior Nigerian officials from whom it took instructions. The court dismissed the case on a primary finding of fact, holding that the FRN was not the victim of a fraudulent and corrupt scheme in respect of the payments and the recipient of the funds had a legitimate entitlement to them.

The court proceeded to consider the detailed Quincecare arguments (on an obiter and non-binding basis) and the judgment is significant because it engages with questions about the ambit of this controversial duty. In particular, the decision highlights the following points which are likely to be of broader interest to financial institutions:

• Notice requirements. The judgment confirms a key point on the scope of the Quincecare duty, namely what the bank must be on notice of in order to trigger the duty. The court said that the bank must be on notice that the payment instruction itself may be vitiated by fraud. This means that a red flag in relation to historic corruption or past financial crime is not sufficient to trigger the Quincecare duty, the red flag must involve present-day dissipation of funds. This may have the effect of narrowing the application of the duty.
• Red flags. The court gave some guidance as to what might amount to a red flag in order to trigger the Quincecare duty. The red flags considered in the judgment are necessarily specific to the factual circumstances of the case, but some general principles are identified around past financial crime, press articles and criminal/regulatory investigations. These are considered in the more detailed analysis below.
• Terms & Conditions. The judgment underlines the importance of exclusion clauses in the T&Cs governing a customer's account. In this case, the terms of the depository agreement modified the Quincecare duty, so that the FRN had to prove gross negligence on the part of the bank in processing the payment requests in order to succeed in its claim rather than the ordinary standard of negligence (which is lower) usually applicable to the Quincecare duty.

As a result of the decision in this case, there is still only one case to date in this jurisdiction in which the court has found that the Quincecare duty was owed and breached: Singularis Holdings v Daiwa Capital Markets [2019] UKSC 50 (see our blog post).

We consider the decision in more detail below.

Background

The proceedings arose out of a long-running dispute, principally between the FRN, Malabu Oil and Gas Ltd (Malabu) and a subsidiary of the oil company Shell, over the rights to exploit an oilfield off the Nigerian coast. These disputes were settled pursuant to various agreements, under which Malabu surrendered its claims in exchange for US$1.1 billion to be paid via the FRN.

To facilitate this payment, the FRN opened a depository account in its name with JPMorgan Chase Bank, N.A. (the Bank). The Bank subsequently paid out the whole of the deposited sum in tranches in 2011 and 2013 on the instructions of authorised signatories of the FRN.

Following a change of government in Nigeria, the FRN brought proceedings against the Bank, asserting that the settlement agreements and these transfers were part of a corrupt scheme by which the FRN was defrauded. The FRN said that the Bank was on notice that Malabu's past was "extremely murky" (Malabu's name had been closely associated with a former oil minister who was convicted in France in 2007 of money laundering in an unrelated transaction) and that Malabu and certain members of the...