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 Nigerian government giving the payment instructions (including the then-Attorney General, Mr Adoke) transferred these sums for their own benefit and for the benefit of other corrupt officials.
The FRN brought a claim against the Bank on the basis that the payments were made in breach of the Quincecare duty of care, named after the case of Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363 in which this duty of care was first described. There was no allegation that the Bank knew about or was in any way involved in the alleged fraud, but it was said that the Bank should have realised that it could not trust the senior Nigerian officials from whom it took instructions. The FRN claimed that the Bank should not have made the payments it was instructed to make; that in making the payment the Bank was grossly negligent; and was therefore liable to pay damages to the FRN in the same sum as the transfers out plus interest.
Decision
The High Court found in favour of the Bank and dismissed the claim. The key issues which may be of broader interest to financial institutions are examined below.
The nature and scope of the Quincecare duty
The court recognised that the law on the Quincecare duty is found in a relatively limited number of authorities, and cited the original formulation by Mr Justice Steyn in Quincecare itself, as follows:
“a banker must refrain from executing an order if and for so long as the banker is ‘put on inquiry’ in the sense that [they have] reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company.”
The court then considered each of the subsequent authorities considering the duty, highlighting in particular the following themes:
- Purpose of the duty. The court noted the observation of Baroness Hale PSC in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd (Rev 1) [2019] UKSC 50, that the purpose of the Quincecare duty is to protect a bank’s customer from the harm caused by the people for whom the customer is, one way or another, responsible. She said that the purpose was to protect a company against the misappropriation of funds which, by definition, is done by a trusted agent of a company who is authorised to withdraw its money from the account.
- Internal or external fraud? There was some discussion in the judgment as to whether the Quincecare duty is limited to “internal fraud” cases described in the bullet point above, i.e. to protect a corporate customer from its trusted agent who is perpetrating a fraud on the bank’s customer. However, the court noted the decision in Philipp v Barclays Bank UK plc [2022] EWCA Civ 318, which said that the Quincecare duty may apply where the instruction comes from someone other than the agent of the customer, i.e. outside the internal fraud paradigm.
- Narrow and confined duty. Despite the extension of the duty beyond the original paradigm of internal fraud, the court pointed to a number of authorities which emphasise that the Quincecare duty is narrow and confined (including Quincecare and Philipp).
- When will the duty arise? The court also highlighted obiter commentary from Philipp, suggesting that the duty is applicable whenever a banker is on inquiry that the instruction is an attempt to misappropriate funds (based on the logic of the principles which establish the duty).
- What will put the bank on notice? Against this backdrop, the court said if the Quincecare duty to is to extend beyond the original paradigm of internal fraud, it becomes particularly important to focus on what is the content of that obligation. In the court’s view, it would be right to say that: (a) the duty arises in relation to the payment instruction; (b) there needs to be a clear focus on the issue of what it is of which the bank in question must be on notice; and (c) unless the bank is on notice that the instruction in question may be vitiated by fraud – that the payment instruction is an attempt to misappropriate the customer’s funds – the duty does not arise.
The court concluded that the FRN had to prove that the 2011 and 2013 payments were part of a contemporaneous fraud on it, and the Bank was on notice of the possibility of that fraud. In other words, FRN had to establish that the Bank was on notice (to the relevant standard) of the specific fraud in 2011/2013 which was said to vitiate the payment instruction.
Was there a fraudulent and corrupt scheme?
The court underlined that it was critical to the FRN’s Quincecare case that there was a fraudulent and corrupt scheme involving the agreement under which sums were said to be due from FRN to Malabu (i.e. that Malabu had no legitimate entitlement to the funds). The court found that the FRN’s case that it was the victim of a fraudulent and corrupt scheme failed on this primary finding of fact. We consider the court’s analysis on this aspect of the case briefly below, before turning to the court’s obiter commentary on the alleged breach of duty.
Foreign act of state doctrine
The court had to consider an antecedent question, namely whether the foreign act of state of doctrine prevented it from deciding whether there was a fraudulent and corrupt scheme.
The court found that the foreign act of state doctrine did not apply in this case.
The court noted that, as per “Maduro Board” of the Central Bank of Venezuela v “Guaidó Board” of the Central Bank of Venezuela [2021] UKSC 57, there is a rule that courts in this jurisdiction will not adjudicate or sit in judgment on the lawfulness or validity of an executive act of a foreign state under its own law, performed within the territory of that state. This is founded on the respect due to the sovereignty and independence of foreign states and is intended to promote comity in inter-state relations. However, it said this rationale could not apply where the English court is giving effect to a decision of a foreign court that the relevant executive act was unlawful and a nullity.
Further to its analysis in this case, the court concluded that the doctrine does not apply where a state requests that the English court adjudicate on its own acts as the FRN did. The court added for completeness that if the doctrine did in principle apply to the acts in question, the present case would fall within the exception that the doctrine will not apply to foreign acts of state that are contrary to English public policy.
Fraudulent and corrupt scheme
The court cited Braganza v BP Shipping Ltd [2015] UKSC 17, Portland Stone Firms Ltd v Barclays Bank plc [2018] EWHC 2341 (QB), Three Rivers DC v Bank of England [2001] UKHL 16 and JSC Bank of Moscow v Kekhman [2015] EWHC 3073 (Comm) for the standard of proof it should apply to the allegations of a fraudulent and corrupt scheme, summarising the position as follows:
- The standard of proof for these allegations was the ordinary civil standard of the balance of probabilities.
- It was not the case that the FRN had to establish that there was no other explanation which fit the facts.
- What one was looking for was the presence of facts which (against all the relevant background) tilted the balance in favour of a finding of fraud.
- If the facts were equally consistent with honesty and dishonesty, a conclusion of fraud could not result.
The court was not persuaded that there was a fraudulent and corrupt scheme perpetrated on the FRN. In its view, there was no fact which tilted the balance when one looked at the whole picture so as to justify an inference of dishonesty.
Was the Bank in breach of its Quincecare duty?
The court went on to find that the Bank was not grossly negligent and had not breached its Quincecare duty in any event (see below as to why the standard of duty applied was gross negligence). Given its primary finding of fact, all of the court’s observations on the Quincecare duty in this case were made on an obiter and non-binding basis.
Test for gross negligence
Historically, cases considering the Quincecare duty have applied the ordinary standard of negligence, because it is the duty imposed on the bank to refrain from executing the order if it has reasonable grounds for believing the payment instruction is an attempt to defraud the customer. This was confirmed in Quincecare itself to be an objective test, judged by the standard of an ordinary prudent banker.
However, in this case, the FRN accepted that it would have to allege and prove gross negligence in processing the payment requests in order to succeed in its claim. This was because the terms of the depository agreement modified the Quincecare duty, by including a clause excluding the Bank from liability to the customer for action pursuant to the agreement unless caused by “fraud, gross negligence or wilful misconduct”.
Both sides agreed that the leading authority on what is required to prove gross negligence is The Hellespont Arden [1997] 2 Lloyd’s Rep 547, in which the court summarised the standard as follows:
“‘Gross’ negligence is clearly intended to represent something more fundamental than failure to exercise proper skill and/or care constituting negligence. But, as a matter of ordinary language and general impression, the concept of gross negligence seems to me capable of embracing not only conduct undertaken with actual appreciation of the risks involved, but also serious disregard of or indifference to an obvious risk.”
The court highlighted that the concept of gross negligence is fact sensitive and a “notoriously slippery concept”, which requires something more than negligence but does not require dishonesty or bad faith and does not have any subjective mental element of appreciation of risk. The court underlined that even a serious lapse is not likely to be enough to engage the concept of gross negligence. The target is mistakes or defaults which are so serious that the word reckless may often come to mind, even if the test for recklessness is not met.
The court concluded that to establish gross negligence in this case, it would need to consider two questions:
- Was there an obvious risk that FRN was being defrauded in 2011 and 2013?
- Did the Bank’s conduct evidence serious disregard for that risk?
For each of the 2011 and 2013 payments, the court assumed that there was a fraud (contrary to its primary conclusion of fact on this point) and considered whether the risk of that fraud was obvious to the Bank at the relevant time. This analysis is considered below in respect of each tranche of payment transfer.
2011 payment
The court found that (assuming that there was a fraud, contrary to its primary finding of fact) there was no obvious risk of that fraud in 2011.
The parties agreed what was known by the Bank at the time of the payment transfer in 2011, but there was a massive disjunction as to what that knowledge imported. On the FRN’s case, the Bank knew of sufficient facts which a reasonable and honest banker would have considered to give rise to a serious or real possibility that the FRN was being defrauded. The Bank maintained that the same facts did not put it on enquiry.
The court considered the list of facts or “red flags” said to put the Bank on notice for the purpose of its Quincecare duty, alongside expert evidence from both sides as to the standards of a reasonable and prudent banker.
In respect of the 2011 payment, the list of red flags relied by the FRN related to money laundering and past financial crime. The court said that while red flags of that type might well be said to be “many, glaring and obvious” in this case, there was no serious or real possibility that the Bank might have thought that the FRN was being defrauded in relation to the 2011 transaction. In reaching this conclusion, the court made the following general observations:
- It was not enough to ask about fraud in broad terms, because that did not engage the particular fraud which needed to be proved. This was a transaction which had unattractive features, but these and an association with past corruption could not be enough to trigger a Quincecare duty in the context of a case about a specific fraud in 2011.
- It was necessary to ask whether there was a serious and obvious risk that the agreements pursuant to which the 2011 payment was made were themselves fraudulent (that Mr Adoke was acting in fraud of the FRN in bringing them and the machinery of payment under them into existence).
- There were plainly high-risk features for the purposes of AML and financial crime and corruption generally, but those were “plainly not enough”. The court recognised that the Bank filed multiple suspicious activity reports in relation to the payments, but ultimately determined that AML best practice was not a relevant consideration in the context of the Quincecare duty.
- The court also took account of the Bank’s understanding of the commercial rationale for the 2011 transaction, which formed the backdrop to the Bank’s actions. In circumstances where the Bank had identified the commercial rationale for the transaction – absent something else to move the dial – there would be no reason why the Bank would be wrong, let alone grossly negligent, not to inquire why the parties had used the contractual structure that they had. However, the court did note that what would move the dial would be a suite of circumstances.
Accordingly, the FRN’s case on the 2011 payment failed, even if there had been a fraud.
2013 payment
The court was satisfied that the FRN’s case on the 2013 payment would also fail, even if there had been a fraud.
There was again common ground as to what the Bank knew in 2013, but disagreement as to whether these matters put the Bank on notice so that it was grossly negligent in making the 2013 payment without raising an inquiry with the FRN.
The court said that there was also common ground (in essence) that there was an apparent risk throughout this transaction of past corruption, but the question was (as per the 2011 payment), whether the Bank was on notice of a serious possibility of current fraud/corruption in respect of the 2013 transaction.
In its assessment, the court considered certain press articles published at the time about a Nigerian corruption scheme. The court noted that these moved the Bank closer to being on inquiry but alone, given the vagueness of the allegations and the tension with the comprehended commercial rationale, they did not move the dial. The court also considered a cluster of investigations undertaken between 2012 and 2013 and agreed that the fact of an investigation would not have suggested to a reasonable and honest banker in the Bank’s position that the bona fides of the FGN’s authorised officers had specifically been called into question. The court also accepted that the fact the authorities (such as SOCA) gave their consent to the payments – after carrying out an investigation – would have been a source of considerable comfort to a reasonable and honest banker. However, the court emphasised that the investigations added to the effect of the press reports. It was not merely bad press; it was the antennae of multiple authorities twitching.
The court concluded that as at 2013 (emphasis added):
“JPMC were on notice of a risk (possibly amounting to a real possibility) of the relevant fraud and that it failed to act. However, the gross negligence test is not met. I do not consider that the evidence reaches the level of establishing an obvious risk. There was a risk – but it was, on the evidence, no more than a possibility based on a slim foundation. There was insufficient connection between what was known and the fraud whose risk would need to be obvious.”
The court also found that there was no serious disregard of the risk of the sort required by the authorities on gross negligence (although the court regarded the two limbs as going hand in hand, so that if there had been an obvious risk, a failure to act would have been a serious disregard of the risk).
Loss and contributory negligence
The court made various further obiter findings on loss and contributory negligence, which are beyond the scope of this blog post as they did not impact the outcome and are fact specific.
Accordingly, the claim against the Bank failed.
For further information, please contact:
Chris Bushell, Partner, Herbert Smith Freehills
chris.bushell@hsf.com
