In a judgment handed down on 14 June 2022 in The Federal Republic of Nigeria v JPMorgan Chase Bank, N.A [2022] EWHC 1447 (Comm) (FRN v JPMC) the court again considered the scope of the Quincecare duty and gross negligence. The decision is good news for Banks.

The case related to the payment of over $1 billion by JPMorgan Chase (JPMC) to accounts held by a Nigerian company called Malabu Oil and Gas Limited (Malabu). The Federal Republic of Nigeria (FRN), alleged that JPMC had breached its Quincecare duty as it was on notice that the payments were made to facilitate an alleged fraud on FRN. 

There is a complex factual background to the dispute which relates to the granting of an oil production licence to Malabu in 1998 and allegations of corruption in the granting of that licence by the then Minister of Petroleum Resources, Mr Etete, to Malabu, a company in which he has a substantial interest. The licence was subsequently revoked and granted to Shell Nigeria Exploration and Production Company Limited and Shell Nigeria Ultra-Deep Limited (Shell).

Disputes subsequently arose between Shell, Malabu and FRN, which were then settled in 2011. JPMC was engaged to provide an escrow account and it was payments out of this escrow account in 2011 (the 2011 payment) and 2013 (the 2013 payment) that FRN alleged were made in breach of JPMC’s Quincecare Duty.

Whilst Cockerill J did not find a fraud and, therefore, FRN’s case failed, her judgment went on to consider the Quincecare duty and gross negligence (on the assumption that a fraud had been committed) and provides useful guidance on both issues. 

Quincecare Duty

Banks have a duty to use reasonable skill and care in carrying out customers’ instructions which includes not complying with them if they have reasonable grounds for believing that there is an attempt to misappropriate funds. This duty (known as the Quincecare duty (after Barclays Bank PLC v Quincecare Limited) establishes that banks will be liable if they:

• execute an order knowing it to be dishonestly given;
• shut their eyes to the obvious fact of dishonesty; or
• act recklessly in failing to make the inquiries that a prudent banker would

Cockerill J considered the scope of this duty in light of recent case law, including the recent decision in Philipp v Barclays Bank UK Plc [2022] EWCA Civ 318 (for further details see our summary of the decision here), and at [153 - 154] she explained:

...“ i It is established (contrary to the submission made by JPMC in opening, before the Court of Appeal decision [in Philipp v Barclays] had been handed down) to be arguable that a duty can exist outside the internal fraud paradigm;

ii It is further said (obiter) by the Court of Appeal that the logic of the principles which establish the Quincecare duty indicate that it is applicable whenever a banker is on inquiry that the instruction is an attempt to misappropriate funds.

However, at the same time the authorities (including Philipp) do indicate that the duty is narrow and confined…”

In considering how this duty should be applied, Cockerill J focused on the importance of looking to the precise circumstances and in particular the payment instruction in question and whether the bank was ‘on inquiry’ in relation to that instruction, rather than focusing on more generalised concerns around a transaction.

At [158] Cockerill J states:

“Against this background – and perhaps particularly if at the same time the applicability of the duty is to extend beyond the original paradigm of internal fraud - it becomes of particular importance to focus on what is the content of the obligation. Here it seems to me that JPMC must be right to say that:

i. The duty arises in relation to the payment instruction;

ii. There needs to be a clear focus on the issue of what it is of which the bank in question must be on notice;

iii. 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;

It follows that the focus has to be on notice of the matter that has vitiated the instruction and not any different or wider potential concern.’’ [emphasis added]

As a result, it would not assist FRN to show that JPMC was on inquiry of something which is not to do with the payment instruction being an attempt to defraud FRN. 

In her consideration of the 2011 payment, Cockerill J highlighted that although the transaction had unattractive features and an association with past corruption, this cannot be enough to trigger a Quincecare duty in relation to a specific fraud in 2011 (see [347]). 

Cockerill J also stressed the distinction between high-risk features of a transaction which are relevant for AML procedures and financial crime and corruption generally, and the requirement to show that the JPMC was on inquiry in relation to the specific payments made in relation to its Quincecare duty. 

In light of this, Cockerill J found that JPMC was not ‘on notice’ of a fraud in relation to the 2011 payment. As for the 2013 payment, as new facts had come to light, JPMC were on notice, but the test for gross negligence was not met. 

Gross Negligence

It was common ground that, as a result of the applicable contractual terms, FRN had to show that JPMC was grossly negligent, raising the standard that FRN had to meet in order to establish a breach of the Quincecare duty. 

Cockerill J observed that gross negligence is a “notoriously slippery concept” and one which is necessarily fact sensitive. Gross negligence requires something more than just negligence, and in the circumstances at [334] Cokerill J concluded:

“…that even a serious lapse is not likely to be enough to engage the concept of gross negligence. One is moving beyond bad mistakes to mistakes which have a very serious and often a shocking or startling (cf. “jaw dropping”) quality to them. 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. That is why the Hellespont Ardent points one to actual appreciation of the risks involved or conduct which is in serious disregard of an obvious risk.’’

She went on to say at [335], upholding FRN’s submissions in part, that determining gross negligence:

“…involves a multi-faceted consideration of:

a) The likelihood of the risk (i.e. the extent to which signs of fraud were glaring and obvious);
b) The ease of mitigating that risk (by making practical enquiries; or applying back to Court);
c) The seriousness of the consequences for the customer if the risk eventuated (having regard to the enormous sums at stake)”

In the circumstances this boiled down to asking:

• Was there an obvious risk that FRN was being defrauded in 2011?
• Did JPMC’s conduct evidence serious disregard for that risk? (it was never suggested that JPMC was indifferent to the risk).

Whilst the question of gross negligence did not arise for the 2011 payment, in determining that JPMC were not grossly negligent in relation to the 2013 payment, Cockerill J explained:

“As at 2013 I do conclude that 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.

I also conclude that there was no serious disregard of the risk of the sort required by the authorities on gross negligence. In truth in this case, because of the financial magnitude of the risk and the relatively unburdensome nature of what could have been done, I would actually regard the two limbs as going hand in hand. Had there been an obvious risk, I consider that a failure to act would have been a serious disregard of the risk”.

Summary

Quincecare claims have become more prevalent in recent years and there are now a number of recent reported decisions on the scope of the duty. 

Despite some recent extensions to it (Philipp v Barclays), it remains clear that the duty is a narrow and constrained one and, as is evident from the judgment in FRN v JPMC, generalised concerns whilst relevant for AML and other financial crime considerations (the importance of which should not be understated), are unlikely to be sufficient to found a claim for breach of the Quincecare duty.

Whilst not explicitly addressed (as the point was agreed) FRN v JPMC also suggests that contractual limitations requiring gross negligence may provide further protection to banks by raising the bar for establishing a breach of the Quincecare duty.