What are Quincecare claims?

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“Quincecare claims”, in typical form, involve a claim by a customer against its bank for allowing funds to be withdrawn from an account by a dishonest signatory (“mandatary”) of the customer when it is asserted that the bank ought to have detected that dishonesty. In the United Kingdom, a case is currently before the Supreme Court seeking to extend the scope of Quincecare claims to banks that have failed to prevent frauds perpetrated on a customer by external parties, such as scammers: an appeal from Philipp v Barclays Bank [2022] EWCA Civ 318.

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Whether the Quincecare duty should exist at all, short of the bank having actual knowledge of the fraud, is a live issue. But in the meanwhile, the cases are sailing through rocky territory. The recent decision of the Hong Kong Court of Final Appeal in PT Asuransi Tugu Pratama Indonesia TBK v Citibank NA [2023] HKCFA 3 (“Tugu”) is an example of what, with respect, is unhelpful thinking.

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Does the dishonesty of the mandatary remove altogether the bank’s actual authority to follow the mandatary’s directions?

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The important issue of principle that arose in Tugu did so almost incidentally. Does the dishonesty of the mandatary remove the bank’s actual authority to follow the mandatary’s directions? An affirmative answer to that question not only would affirm the existence of the Quincecare duty but it would prima facie make the bank strictly liable for following the mandatary’s order. The bank would be thrown onto the back foot and would have to establish that, despite the lack of actual authority, the mandatary in the circumstances still had a sufficient appearance of authority such that it was reasonable for the bank to do what the mandatary said.

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Most surprisingly, a positive answer to the question was conceded by the bank in Tugu. That concession was then taken to be correct by Lord Sumption, who gave the judgment for the Court. The point was assumed to be not confined to banks, but to be a general principle of the law of agency.

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In fact, no principle of the law of agency, nor public policy, leads to a conclusion that an agent, A1, on whom the principal, P, has directly conferred actual authority, automatically loses that authority because of the dishonesty of another agent, A2, merely on the basis that A1 has been instructed by P to follow, and has followed, the directions of A2. It is true that in that situation A2 has no actual authority, but it does not follow that A1 has no actual authority. A1 derives its actual authority from P and does not lose it merely because the other agent has lost his or her actual authority by reason of dishonesty vis-à-vis P. The position is likely to be different where A1 is appointed by A2, and is therefore a true sub-agent of A2. 

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None of the grounds listed in Bowstead & Reynolds on Agency (22nd ed) Article 117 as to when actual authority is lost or terminated support the assumption in Tugu. Modern dicta even support the view that the supervening mental incapacity of the principal does not automatically terminate an agent’s actual authority: see Blankley v Central Manchester University Hospitals [2015] EWCA Civ 18, [2015] 1 WLR 4307 at [36]. If the principal’s own loss of capacity does not automatically remove an agent’s authority, then mere dishonesty in a senior agent should not automatically terminate the actual authority of a junior agent when that authority is directly conferred by the principal. 

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This leaves the possibility that A1’s mandate contains an implied term that its actual authority automatically falls with that of A2. It is submitted that such a term would be quite unreasonable, and to the extent that a contract exists between A1 and P would demonstrably fail the test for implied terms. Why would a bank, in particular, agree that its mandate should fall over merely because of the dishonesty of the mandatary, A2? It would throw the risk of A2’s dishonesty onto the bank, when the customer was the party that appointed A2 and had enough trust to let him or her operate its bank accounts. 

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What are the correct limits on the bank’s authority to follow the mandatary’s instructions?

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It does not follow that no restriction should be implied into the mandate between A1 and P as to when A1 should not follow A2’s directions. Plainly, A1 should not do so when it knows that A2 is being dishonest. A1 would itself normally be dishonest in such circumstances. A lower threshold for abstaining from following A2’s directions could be envisaged. Much will turn on the type of agent in question in that regard. 

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I have argued elsewhere that with a bank, the test should be actual knowledge or wilful blindness, given that banks are not expected, and indeed are generally not permitted, to exercise any discretion in whether to make the payments directed: see P Watts, “The Quincecare Duty: Misconceived an Misdelivered” [2020] JBL 402; P Watts, “Playing the Quincecare Card” (2022) 138 LQR 530. That might still leave room for something short of dishonesty, if, for example, some party in the bank knows all the facts but inexcusably (but honestly) fails to intervene to prevent the payments being made. 

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It is certainly arguable that in Tugu itself, the bank had actual knowledge that the company’s moneys were being misappropriated. It appears that the relevant mandataries made little attempt to disguise the fact that they were draining away the customer’s money into their private bank accounts. One can infer that the bank knew that that those mandataries did not own the customer. The customer was, in fact, the captive insurer of the Indonesian state-owned oil and gas company, PN Pertamina. The judge at first instance cleared the bank of dishonesty and there was no appeal from that finding, but the bank appears to have been possessed of the essential facts even if no bank personnel grasped their significance.

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A further possible implication is that A1, including a bank, should not follow A2’s direction when A1 is going to benefit substantially from the payment being made and a reasonable party in the position of A1 would realise that A2 is acting dishonestly. In such cases, A1 may be liable independently of its contract with P, in equity’s doctrine of knowing receipt. An example is Bank of New South Wales v Goulburn Valley Butter Co Proprietary Ltd [1902] AC 543 (PC), where a managing director transferred funds, by way of cheques, from the company’s bank account to his overdrawn private account at the same bank. In fact, the bank was found not liable because it was entitled to assume that the director was legitimately reimbursing himself in respect of debts owed him by the company and there was no one else of whom the bank could make inquiries. In the standard Quincecare case the bank will not have benefited from the payments.

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What does follow from the foregoing argumentation is that in the usual Quincecare case, the concept of apparent authority, including its sub-rule as to being put on inquiry, is not relevant to the bank’s position. Cases such as East Asia Co Ltd v PT Satria Tirtatama Energindo [2019] UKPC 30, [2020] 2 All ER 294 and Thanakharn Kasikorn Thai Chamkat v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479, relied upon by Lord Sumption in Tugu, are not pertinent to whether A1 should second-guess A2’s instructions. These cases cannot be deployed to rationalise the reasonableness test applied in Barclays Bank Plc v Quincecare Ltd [1992] 4 All ER 363 and those cases that have followed it. Questions of apparent authority arise only when one does not have existing rights against the principal of the sort one needs. That was the case in both PT Satria and Akai Holdings. It is not the position in the standard Quincecare situation, where the bank already has its contractual rights against its customer.

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It should be observed that an honest bank's contractual right to carry out the mandatary’s instructions is not determinative of the payee's right to keep any payment as against the customer (see Reckitt v Barnett, Pembroke and Slater Ltd [1929] AC 176 at 184-185). A bank's payment contains no representation of entitlement to it.