Quincecare duty claim fails as fraud was not proven

Overview

The judgment in Federal Republic of Nigeria v JPMorgan Chase Bank NA [2022] EWHC 1447 (Comm) has provided some clarity on the scope of the Quincecare duty owed by banks to their customers. The Quincecare duty requires a bank to refrain from executing a customer’s order if, and for so long as, the bank is put on inquiry that the order is an attempt to defraud the customer. The current case confirms that these grounds for belief must be specific and identifiable as a risk to that customer, rather than just general red flags or concerns.

Background

The background to this case is centred on the grant of an oil prospecting licence (the License) for an offshore Nigerian oilfield, out of which certain disputes alleging corruption emerged. As a result, the legal status of the License was unclear. A Settlement Agreement in 2006 and Resolution Agreements in 2011 were entered into between the government of Nigeria at the time and those companies which had competing claims to the Licence.

As part of these arrangements, US$1.1 billion was to be transferred from the companies acquiring the Licence, into an account held by the Nigerian government with JPMorgan Chase (JPMC). The Nigerian government’s authorised officers then directed JPMC to pay out the majority of those funds to the company relinquishing its claim to the licence, in two instalments paid in 2011 and 2013.

Following a change of government, the Federal Republic of Nigeria (the FRN) brought proceedings against JPMC to recover the funds. The FRN alleged that the Resolution Agreements had been procured by corruption and that by processing the payments to a company closely associated with a disgraced former oil minister JPMC was in breach of the Quincecare duty because it should have realised that the payment instructions were fraudulently given.

Decision

On the facts, the Court did not consider that the FRN’s case sufficiently made out the alleged fraud and so the case was dismissed. Cockerill J did, however, continue to consider (on an obiter basis) whether JPMC’s conduct would have constituted a breach of the Quincecare duty if fraud had been proven.

Scope of Quincecare duty

Cockerill J acknowledged the principles from existing case law that the Quincecare duty is narrow and confined and that it must be carefully calibrated due to the inherent conflict between it and the general duty of a bank to honour a valid payment instruction. To reconcile these conflicting elements, Cockerill J emphasised the need to identify the specific fraud through which the bank is ‘put on inquiry’ and stressed the highly fact-specific nature of this analysis. Cockerill J stated:

“it is not enough to ask about fraud in broad terms, because that does not engage the particular fraud which needs to be proved... it is a question of maintaining a distinction between the fraud which is critical and the many frauds which are not.”

Cockerill J stated that general AML red flags or any shortcomings in JPMC’s AML systems are not relevant for the purposes of the Quincecare duty:

“It may be the case that JPMC fell below best practice standards or even in some respects below the standards of the reasonable and honest banker as regards money-laundering risk, having regard to the number and magnitude of the red flags; but that does not trigger a Quincecare duty… The red flags for money laundering and past financial crime might well be said to be many, glaring and obvious. What there was not, however, was a serious or real possibility that in relation to this transaction FRN might be being defrauded.”

This commentary is helpful given the Quincecare claims are often founded on allegations of general AML red flags and shortcomings in a bank’s AML systems.

In this case, despite the existence of several factors that might give rise to general suspicions of fraud (including the transactions occurring in a high-risk jurisdiction, the involvement of opaque intermediaries, and that there were allegations at the time of historic, but related fraud), Cockerill J stated that even if there had been a fraud JPMC would not have been on inquiry of it. In other words, there was no obvious risk of fraud. Cockerill J did find that JPMC were on notice of some risk of fraud in relation to the 2013 payment however the evidence did not reach the level of establishing an obvious risk and so the gross negligence test was not met.

Commentary

Financial institutions will welcome this clarity on the scope of what is to be deemed as being ‘put on inquiry’, particularly with the emphasis that Cockerill J placed on the specificity of this requirement.

However, exactly what steps a bank needs to take in order to fulfil its Quincecare duty obligations if it is deemed to be on inquiry of fraud remains unclear (particularly as Cockerill J appeared to distinguish general anti-money laundering checks and best practice). The Court in the earlier instance of this dispute (JPMorgan Chase Bank, N.A. v The Federal Republic of Nigeria [2019] EWCA Civ 1641), reinforced by Cockerill J’s comments in this most recent judgement, held that this will be fact dependent.

For financial instructions, this case also highlights the importance of including exclusionary clauses in their terms and conditions. In this case, it was held (at first instance) that JPMC’s terms and conditions did not go as far as to exclude liability for the Quincecare duty however the terms and conditions did operate to modify the Quincecare duty such that the FRN had to prove that JPMC was grossly negligent rather than just negligent.

Simmons & Simmons LLP has a team that is experienced in working on Quincecare duty cases, made up of dispute resolution specialists in the financial institutions sector. If you would like to know more, please contact one of the authors of this article.