Quincecare claims garnered renewed attention last year after the Supreme Court decision in Philipp v Barclays Bank UK plc [2023] UKSC 25 (“Philipp v Barclays Bank”), which considered the scope of the Quincecare duty. As a result, Insolvency Practitioners may already be familiar with Quincecare claims as a recovery tool in company insolvencies.
However, the judgment provides valuable guidance in respect of an alternative type of claim which can considerably aid commercial entities in asset recovery: the breach of mandate claim. This alternative approach offers extensive benefits for companies and Insolvency Practitioners alike seeking to recover misappropriated funds from banks.
In this article we examine the Supreme Court’s judgment and consider how breach of mandate claims are applied.
Background: What is a Quincecare claim?
A Quincecare claim is a type of negligence claim against a bank. It arises when a bank fails to protect its account holder from fraud in cases where a company’s authorised agent (usually a director) misappropriates the company’s funds. To trigger this duty, certain “red flags” must exist that should put the bank on notice. Once on notice, the bank has a duty to pause the transaction and investigate, in order to satisfy itself that the transaction is genuine and properly authorised. If the bank fails in this duty, it can be held liable for negligence.
In Philipp v Barclays Bank, the Supreme Court ruled that the Quincecare duty applies only when an agent, not an individual account holder, issues the payment instruction.
What is a breach of mandate claim and how does it arise?
Funds held in a company’s bank account are a debt owed by the bank to the company, payable on demand. Therefore, a cause of action concerning this debt only arises when a demand is made by the company.
When a company or principal opens a bank account, it grants the bank authority (as its agent) to act on its payment instructions—this is known as a banking mandate. The bank is required to follow the mandate instructions strictly, albeit not absolutely. In the circumstances, when the bank has reasonable grounds to believe that a payment instruction may be an attempt to misappropriate the company’s funds, the bank will be deemed ‘on notice’ and therefore must not comply with the payment instruction without making certain enquiries.
If the bank allows a payment to be made that was not authorised by the company, for example where it has reasons to suspect fraud but fails to investigate, the bank will be acting in breach of mandate.
Authorised agents: Actual and apparent authority
In Philipp v Barclays Bank the Supreme Court examined the concept of authority, applying Midland Bank Ltd v Reckitt [1933] AC 1 (“Midland Bank v Reckitt”), relevant to breach of mandate claims in which instructions are typically given by an agent on behalf of a principal. Agents may act under actual authority or apparent authority.
In Midland Bank v Reckitt, Sir Reckitt had given a power of attorney to his solicitor Lord Terrington which included authority to draw cheques on Sir Reckitt’s bank account to apply the money for Sir Reckitt’s purposes. Lord Terrington fraudulently drew cheques on the account and paid them into his own personal account with Midland Bank, using the funds for his own benefit, which he had no actual authority to do. The bank had notice that the funds were being 1) drawn by Lord Terrington as Sir Reckitt’s attorney (agent), and 2) applied to Lord Terrington’s own personal account. The bank failed to make any inquiry into Lord Terrington’s actual authority to do this and was held to be negligent. The bank had also sought to rely upon the existence of the power of attorney as giving Lord Terrington apparent authority, in its defence. However, the court found that a third party, such as a bank, cannot rely upon apparent authority when it has notice the agent has no actual authority – and an agent cannot be assumed to have actual authority to pay his own debts with a principal’s money.
In Philipp v Barclays Bank, the Supreme Court applying Midland Bank v Reckitt, confirmed that an agent’s actual authority cannot extend to fraudulent acts against the company or principal. Therefore, if an agent gives a fraudulent payment instruction, they will lack any actual authority, making the instruction unauthorised. A bank may be able to rely on an agent’s apparent authority as a defence to any claim, but only provided there are no red flags to suggest the agent may be acting fraudulently.
When is a payment “unauthorised” by the company?
A payment is also considered unauthorised by the company if it is not in the company’s commercial interests or there is a clear lack of benefit to the company. For instance, a director transferring company funds to a personal bank account is unlikely to be acting in the company’s interests, notwithstanding a concurrent breach of their director duties.
Red flags that should put the bank “on notice”
For successful breach of mandate claims, as with Quincecare claims, the requirement for the bank to have been “on notice” of the potential unauthorised payment is key. Given that banks process millions of payment instructions each day, this must be set in a commercial context and the duty to investigate only arises with good reason.
Circumstances which might put a bank on notice and prompt it to investigate include, for example, the agent giving the instruction having a conflict of interest, or the transaction lacking any apparent benefit to the company. An obvious red flag might be a transaction, or series of transactions, that suggests to a reasonable banker some dishonesty on the part of the agent giving the instruction. Applying the same example above, an instruction given by a director to transfer company funds to their own personal bank account could be a fraud on the company. That would place a burden on the bank to pause and investigate the payment instruction, to ensure it is properly authorised, before the payment is made.
Tugu v Citibank [2023] – The Hong Kong Court of Final Appeal
A breach of mandate claim was considered by the Hong Kong Court of Final Appeal in PT Asuransi Tugu Pratama Indonesia TBK v Citibank N.A. [2023] HKCFA 3 (“Tugu v Citibank”). In Tugu v Citibank, payments over US$51 million dating back 18 years were challenged as unauthorised by the company. The Court held that 24 out of 26 transactions, transferred to the directors’ personal bank accounts, were unauthorised by the company. It ordered the bank to pay Tugu the aggregate amount of the 24 unauthorised debits plus interest, demonstrating that vast sums may be recoverable from banks in similar circumstances, even after many years of delay and even after the (also unauthorised) closure of the bank account. Additionally, Citibank could not rely on the defence of contributory negligence since the claim was an action in debt and not a claim for damages for breach of the bank’s duty of care.
The analysis given by Lord Sumption (a former Justice of the UK Supreme Court) in the Tugu judgment (also considered by the Supreme Court in Philipp v Barclays Bank) was based on applying English law principles; as such the judgment is highly persuasive and provides clear guidance to be applied in all common law jurisdictions.
There is no exhaustive list of red flags and what is likely to be sufficient to put a bank on inquiry may well be different in each case. It is therefore important to consult a legal expert to assess the existence of red flags and viability of the potential claim.
Why breach of mandate claims may be useful and how they differ from Quincecare claims
- No Time Limit Issues: Unlike Quincecare claims which are subject to a limitation period, in breach of mandate claims the limitation period does not start running until a formal demand for repayment is made. This allows claims to be pursued even after there has been a significant delay since the unauthorised payments occurred.
- No Contributory Negligence: In Quincecare claims, damages can be reduced by 15–30% due to the company’s own negligence. In contrast, the breach of mandate claim is action in debt and therefore not subject to a contributory negligence defence, thus allowing a full recovery of the unauthorised payments.
- Direct Debt Recovery: As breach of mandate claims are based in debt, if successful, the bank must reconstitute the account balance and repay the unauthorised payments in full. The restored balance is a debt owed to the company, payable on demand.
- Additional recovery of reasonably foreseeable losses: If unauthorised transactions led to the bank balance being stated incorrectly thereby causing the company a loss which was reasonably foreseeable, it may also be possible to recover those consequential losses.
Why this matters
For companies, especially those in insolvency, a breach of mandate claim may offer a valuable route for recovering funds lost through unauthorised transactions. This straightforward tool is likely to be easily accessible to most companies and be particularly useful to liquidators/administrators dealing with cases of director misfeasance, as it can enable companies to hold banks accountable for failing to prevent fraud on suspicious transactions.
How we can help
Catherine Hammerson-Jones is the UK’s leading expert in banking and Quincecare claims. For more detail about Quincecare claims read her article Philipp v Barclays Bank UK plc – a step too far! The Supreme Court reinforces the prevailing scope of the Quincecare duty.
Rosenblatt has a wealth of dispute resolution experience and is well-placed to support and advise companies, insolvency practitioners and individuals. For further information about breach of mandate claims or to discuss the merits of a claim you may have, please contact authors Catherine Hammerson-Jones, Partner, and Helen Ripley, Senior Associate.
