Court of Appeal reinstates decision of no breach of Quincecare duty

A “derivative action” brought by victims of an Authorised Push Payment (APP) fraud in the name of the company set up to perpetrate the fraud failed, as the payment service provider (PSP) had not been put on enquiry of wrongdoing.
In Moorwand v Hamblin & ors the Court of Appeal considered an appeal by the PSP against a decision of a High Court judge to allow an appeal against a decision of the trial judge to strike out the claim. Ultimately this decision rested solely on the fact that the high bar to interfere with a trial judge’s decision had not been met, but the case raised various issues relevant to claims by victims of APP frauds against banks and PSPs.

The Quincecare duty

The action here relied upon the Quincecare duty which, following Philipp v Barclays Bank UK plc, requires banks and PSPs to act with reasonable skill and care when executing client instructions. This is a limited duty and will often not apply in an APP fraud context, because the payment instruction is made by the client and the bank or PSP is not usually put on notice of any fraud.

The difference in Moorwand was that the fraudster had incorporated a company, RND, for the purpose of the fraud and opened an account with Moorwand in its name. Identity theft was used to provide details of an innocent person as the director of the company and the fraudster purported to be that person when giving instructions and paying away the proceeds of the fraud, having persuaded the Hamblins and others to pay money into RND’s electronic wallet. Because the instructions were given by an agent purporting to act for RND rather than by RND’s own directing mind, the case engaged the limb of the Quincecare duty concerned with an agent lacking actual or apparent authority, rather than the limb (addressed in Philipp itself) under which no duty arises where a genuine customer gives their own instructions.

The derivative action

The victims of the fraud brought a derivative action in the name of RND, on the basis that the fraudster had no actual authority to direct payments out of RND and that the PSP was on notice of this, in part because its on-boarding procedures had identified suspicions around the corporate documents provided for RND some months earlier. The claim relied upon the monies in RND’s wallet being held on constructive trust for the victims who had provided them. The trial judge held that, despite the red flags in the corporate documents, the PSP was not sufficiently put on notice for the Quincecare duty to mean that it should have stopped the payments out of RND.

While the Court of Appeal held that the trial judge’s decision on this should not have been disturbed, it did not have to consider whether a derivative action could be used to invoke the Quincecare duty. It noted that this mechanism had advantages for the claimants, particularly as it would not require the PSP to be aware that the money was the subject of a constructive trust in favour of the claimants. Important questions, such as whether a director of a company set up for a fraudulent purpose can have actual authority to deal with the company’s assets, or whether any warranties given by the company account holder would provide a defence to the PSP, remain unanswered.

Electronic payments

The Court of Appeal also noted that this case did not appear to involve instructions being given to the PSP by the victims in person or over the telephone as in previous cases, the transfers most likely being made by electronic transfers without human intervention. Given the limited scope of the Court’s ultimate decision (that the trial judge’s decision was within the scope of those open to him), important questions as to the extent of the Quincecare duty where payments are made by electronic transfer also remain unaddressed.

What next for APP fraud?

The Supreme Court’s decision in Philipp v Barclays Bank UK plc undoubtedly limited the scope for claims against banks and PSPs by victims of APP fraud. Moorwand represented a possible route around some of those limitations, where the fraud was committed via a company.

The decision of the Court of Appeal re-affirms the high threshold for claims under the Quincecare duty, but leaves open the possibility of derivative claims by victims where there is stronger evidence that the bank or PSP was put on notice that a company is being used for the purposes of fraud.