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Official Citation: 2023 SCMR 1457
Court / Jurisdiction: Supreme Court of United Kingdom
Year of Decision: 2023
Decision Date: 2023-07-12
Parties: Barclays Bank UK PLC vs Philipp
Ruling Summary: This decision was rendered by the Supreme Court of United Kingdom on 2023-07-12, officially reported as 2023 SCMR 1457. In this matter between Barclays Bank UK PLC and Philipp, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.
Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.
Case cited as 2023 SCMR 1457
Court Name: Supreme Court of United Kingdom Judge(s): Lord Reed, Lord Hodge, Lord Sales, Lord Hamblen, Lord Leggatt Title: Barclays Bank UK PLC vs Philipp Case No.: On appeal from: [2022] EWCA Civ 318 Date of Judgment:2023-07-12 Reported As: 2023 SCMR 1457 Result: Appeal allowed
JUDGMENT
JUDGMENT LORD LEGGATT (with whom Lord Reed, Lord Hodge, Lord Sales and Lord Hamblen agree): A. INTRODUCTION 1. In 2018 Mrs Fiona Philipp and her husband, Dr Robin Philipp, fell victim to a fraud. They were deceived by criminals into instructing Barclays Bank ("the Bank") to transfer 700,000 in two payments from Mrs Philipp's current account with the Bank to bank accounts in the United Arab Emirates ("UAE"). The payments were made and the money was lost. In these proceedings Mrs Philipp claims that the Bank is responsible for this loss. She contends that the Bank owed her a duty under its contract with her or at common law not to carry out her payment instructions if - as was allegedly the case here - the Bank had reasonable grounds for believing that she was being defrauded. 2. The Bank applied to have the claim summarily dismissed on the ground that as a matter of law it did not owe Mrs Philipp the alleged duty. Judge Russen QC, sitting as a judge of the High Court, agreed with this submission and granted summary judgment in favour of the Bank: [2021] EWHC 10 (Comm), [2021] Bus LR 451. But an appeal by Mrs Philipp to the Court of Appeal was allowed: [2022] EWCA Civ 318, [2022] QB 578. Birss LJ, in a judgment with which Sir Julian Flaux C and Coulson LJ agreed, accepted the claimant's argument that, in principle, a bank owes a contractual duty to its customer of the kind alleged: whether such a duty arose on the facts in this case is a question which can only be decided at a trial. 3. For the reasons explained in this judgment, the Court of Appeal was, in my opinion, wrong to reach this conclusion, which is inconsistent with first principles of banking law. It is a basic duty of a bank under its contract with a customer who has a current account in credit to make payments
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from the account in compliance with the customer's instructions. This duty is strict. Where the customer has authorised and instructed the bank to make a payment, the bank must carry out the instruction promptly. It is not for the bank to concern itself with the wisdom or risks of its customer's payment decisions. 4. It would be possible for a bank to agree as an express term of the contract that it will not comply with a payment instruction given by the customer if the bank believes, or if the bank has reasonable grounds for believing, that the customer has been tricked by a third party into authorising the payment. But it is not suggested that the contract between Mrs Philipp and the Bank contained any such express term. In the absence of an express term, no obligation of this kind can be implied or said to be inherent in the relationship between a bank and its customer. To the contrary, such an obligation would be inconsistent with the normal contractual basis on which banking transactions are conducted. 5. The Court of Appeal derived the alleged duty by extrapolating from the reasoning in the case of Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363. in this and other similar cases, courts have held that a bank has a duty not to execute a payment instruction given by an agent of its customer without making inquiries if the bank has reasonable grounds for believing that the agent is attempting to defraud the customer. However, as I will discuss later in this judgment, the reason why the bank owes a duty to its customer to make inquiries in such cases is to ensure that it does not make a payment which the customer has not authorised. This reasoning does not apply to cases of the present kind where the customer has unequivocally authorised and instructed the bank to make a payment. 6. The type of fraud which occurred here is a growing social problem and can undoubtedly cause great hardship to its victims, as the sad facts of this case make all too clear. Whether victims of such frauds should be left to bear the loss themselves or whether losses should be redistributed by requiring banks which have made or received the payments on behalf of customers to reimburse victims of such crimes is a question of social policy for regulators, government and ultimately for Parliament to consider. It is in fact, as I will mention in more detail shortly, the subject of new legislation. But it is not a question for the courts. It is not the role of the courts to formulate such policy, still less to impose on the parties to a contract an obligation to which they have not consented and cannot reasonably be presumed to have consented since it is inconsistent with the normal and established allocation of risk and responsibility under contracts of the relevant type. 7. In the following sections of this judgment I will first describe in further detail the type of fraud involved in this case, the relevant facts and the questions of regulatory policy which this type of fraud raises. I will then consider the relevant contractual duties owed by a bank to a customer who has a current account with the bank. Finally, I will examine the reasoning of the Court of Appeal and other arguments made by the claimant in this case. B. THE NATURE OF THE FRAUD APP fraud 8. The generic name for the type of fraud committed in this case is "authorised push payment" (APP) fraud - so called because the victim is induced by fraudulent means to authorise their bank to send a payment to a bank account controlled by the fraudster. (Fraud of this kind is contrasted with "pull" payment fraud, where payments are extracted from the victim's bank account or debited to a card by a criminal without the victim's authority.) 9. APP fraud can take a variety of forms. Half yearly reports published by UK Finance Ltd, the official trade body representing the banking and finance industry in the United Kingdom, describe eight different forms of such fraud, which are not exhaustive. One of these involves the criminal claiming to be a police officer or employee of the victim's bank. The scam often begins with a phone call or text message claiming that there has been fraud on the victim's account and that the victim needs to transfer the money to a "safe account" to protect their funds.
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The fraud in this case 10. The present case is a particularly egregious example of this type of scam. Dr Philipp was contacted in February 2018 by an individual (the fraudster) who claimed to be working for the Financial Conduct Authority in conjunction with the National Crime Agency and to be investigating a fraud within HSBC and an investment firm, Tilney, where Dr Philipp held substantial savings. In a series of telephone calls Dr and Mrs Philipp were led to believe that their money needed to be moved to "safe accounts". 11. It is unnecessary to relate the full history of events, as the main question raised on this appeal is one of law and (save in one limited respect) the factual details are not material. They can be found in the judgment of Judge Russen QC at paras 27-71. A striking feature of the facts is that Dr and Mrs Philipp were even persuaded by the fraudster not to cooperate with the police when they received a visit from a police officer, DC Claridge, warning them that she believed that a fraud was being perpetrated on them. The sophistication of the means employed is shown by the fact that telephone calls were made to Dr Philipp which appeared, from the number displayed on his mobile phone, to be coming on one occasion from the telephone number of the National Crime Agency and on another occasion from the mobile number of DC Claridge. 12. On 5 March 2018 (the same day as this visit from DC Claridge) Dr Philipp, at the instigation of the fraudster, caused 950,000 to be transferred from his investment account with Tilney to his wife's current account with the Bank. On 10 March, and again on 13 March, Mrs Philipp attended a branch of the Bank in person with her husband and gave instructions for an international payment to be made from her account to a bank account in the UAE. On the first occasion her instruction was to transfer 400,000 to an account in the name of Lambi Petroleum Ltd (a company with which Dr Philipp told the cashier, falsely, that he had had previous dealings), On the second occasion the instruction given was to transfer 300,000 to an account in the name of Bonito Systems Ltd. On each occasion Dr and Mrs Philipp were following directions given by the fraudster. On each occasion, before making the transfer, the Bank telephoned Mrs Philipp to seek her confirmation that she had made the transfer request and wished to proceed with it. On each occasion Mrs Philipp provided the required confirmation. The Bank therefore made the payments in accordance with her instructions. 13. On 15 March 2018 the Philipps received a second visit from DC Claridge, accompanied by another uniformed officer. She told them that more people had been affected by the suspected fraud. Again they said that they did not wish to have any involvement with the police. However, on the next day the police contacted the Bank's Police Liaison Officer, explained that they were undertaking a large-scale fraud investigation and said that they had received credible information that Mrs Philipp's current account had been compromised by fraudsters in the UAE. The Bank immediately froze the account. 14. On 19 March 2018 Mrs Philipp visited her local branch of the Bank once more and sought to make a third transfer. On this occasion her instructions were to pay 250,000 (the remaining balance of the funds received from her husband's account with Tilney) to the account in the UAE in the name of Bonito Systems Ltd. However, Mrs Philipp was told that her account had been blocked pending a review, and the transfer did not take place. Still acting at the request of the fraudster, she then called the Bank's fraud department. The transcript of the conversation records that in this call Mrs and Dr Philipp tried, unsuccessfully, to persuade the Bank's staff to lift the block on her account by claiming (falsely) that they needed to make an urgent payment under a contract which they would lose if the payment was not made on that day. 15. Following a third visit from DC Claridge on 26 March 2018, Dr and Mrs Philipp finally came to realise that they had been the victims of a fraud. Mrs Philipp notified the Bank of this on 27 March 2018. Some two months later, on and after 31 May 2018, the Bank made attempts to recall the funds
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which had been transferred to the UAE but these attempts were unsuccessful. Dr and Mrs Philipp have therefore lost 700,000. This money represented the bulk of their life savings. C. THE REGULATORY CONTEXT 16. Although the relationship between a bank and an account holder is one of contract, such contracts are made and performed in a heavily regulated legal environment. For example, where the customer who holds the account is a consumer, any term of the contract which is unfair to the customer is not binding on the customer: see section 62 of the Consumer Rights Act 2015. Banks are also subject to various regulatory duties imposed by or under legislation. The most significant legislation applicable to payments is the Payment Services Regulations 2017 (SI 2017/752). These Regulations, originally introduced to transpose the second EU Payment Services Directive 2015/2366 into national law, have been retained (with minor modifications) following the withdrawal of the United Kingdom from the European Union. They apply to a wide range of payment transactions. The Paym ent Services Regulations 17. Part 7 of the Payment Services Regulations establishes rights and obligations relating to the provision of payment services by banks and other "payment service providers". Among other things, these regulations define when a payment transaction is to be regarded as having been authorised by the payer (regulation 67); impose obligations on payment service providers to execute authorised payment transactions promptly (regulations 86 and 91); and require a payment service provider to refund to the payer the amount of an unauthorised payment (no later than the end of the business day following the day on which it becomes aware of the unauthorised transaction) (regulation 76(2)). 18. The relevant provisions of the Payment Services Regulations are largely concerned with establishing rights and obligations of payment service users and providers in relation to unauthorised payment transactions. They do not provide for reimbursement of any payments which the payer has authorised. They therefore do not offer any means of redress for a customer who is a victim of APP fraud. Indeed, they have been perceived as containing an obstacle to the imposition of a regulatory obligation on payment service providers to reimburse customers who are victims of APP fraud. Regulation 90(1) provides that, where a payment order is executed in accordance with the unique identifier (ie the essential information identifying the account of the payee), the payment order is deemed to have been correctly executed. Proposals for regulatory reform 19. The government agencies responsible for regulating the provision of banking services are the Financial Conduct Authority and, in relation to payments, the Payment Systems Regulator, established under section 40 of the Financial Services (Banking Reform) Act 2013. section 68(1) of that Act allows a designated representative body to make a complaint to the Payment Systems Regulator that "a feature, or a combination of features, of a market in the United Kingdom for services provided by payment systems is, or appears to be, significantly damaging the interests of those who use ... those services." In September 2016 the Consumers' Association, which is a designated representative body, made such a complaint to the Payment Systems Regulator about lack of protection for consumers against harm caused by APP fraud. The complaint argued that banks could take steps to reduce the risks of consumers authorising push payments to bank accounts controlled by fraudsters and that placing liability on banks (including the bank where the fraudster's account is held) to reimburse losses from such scams would incentivise banks to take such measures. 20. Since this complaint was made, there have been a number of reports, consultations and regulatory initiatives on this subject. The main initiative has been the introduction in 2019 of a voluntary code for payment service providers, called the "Contingent Reimbursement Model Code".
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This code covers measures aimed at reducing the incidence of APP fraud and also provides for the reimbursement of customers who are victims of such scams in certain cases (which do not include international payments). To date, however, the code has been adopted by only 10 payment service providers (who include Barclays). 21. The Financial Services and Markets Act 2023, which received Royal Assent on 29 June 2023, provides for a. mandatory reimbursement scheme. Section 72 of the Act amends regulation 90 of the Payment Services Regulations to enable liability to be imposed "where the payment order is executed subsequent to fraud or dishonesty". Section 72 requires the Payment Systems Regulator to impose a requirement for reimbursement by payment service providers in such "qualifying cases" of payment orders executed subsequent to fraud or dishonesty as the Regulator considers should be eligible for reimbursement. Such cases are, however, limited to payment orders executed over the Faster Payments Scheme. The proposed new scheme is also confined to consumers, charities and "micro-enterprises": larger businesses are not included. It provides (subject to potential adjustment through a dispute resolution process) for a 50-50 allocation of losses between the sending and receiving providers. It is not proposed that the regulatory obligations arising under the scheme will be directly enforceable by bank customers. The role of the courts 22. It should go without saying that it is not the role of courts to make rules of this kind. There are several reasons for this. A fundamental reason is that the nature of adjudication requires courts to identify legal rights and duties which it is fair to treat as applicable to the parties to the lawsuit when the events giving rise to the dispute between them occurred. That is a very different exercise, which requires different forms of reasoning, from formulating policy or fashioning rules designed to regulate future dealings between different classes of persons. 23. Legislators and regulators have the institutional competence to take an overall view of a perceived social problem and to consider the appropriate policy response as a whole and from a variety of angles. They also have the competence and capacities: (i) to bring together a variety of perspectives from individuals with experience and expertise in relevant fields of knowledge; (ii) to acquire and evaluate information about the relative costs and benefits of different possible measures, both for those directly affected and for society at large; (iii) to consult a range of different bodies (and the public more generally); (iv) to design a comprehensive regime containing qualifications, exceptions and safeguards; and (v) in designing such a regime to set temporal, financial or other limits on its scope or otherwise to draw distinctions which may not have a principled basis but are considered to promote the common good by achieving an appropriate trade-off or compromise between different policy goals. 24. Courts are in a very different constitutional and institutional position. In deciding the case before them, they are bound to apply the laws made by Parliament and to respect precedents created by past judicial decisions. While courts, particularly at appellate level, have a responsibility to seek to adapt and develop the common law to keep it up to date which may sometimes require overruling previous decisions, they proceed by reasoning from established principles and are under a duty to promote consistency and predictability in the law. Nor do courts have the institutional capacities of legislators and regulators that I have described above. The contractual nature of the claim 25. There is a further fundamental reason why questions about the appropriate policy response to APP fraud are outside the scope of these proceedings. This is that the claimant's case is based on a duty allegedly owed to her by the Bank under the contract between them governing the operation of her current account. The extent of the. Bank's responsibilities under this contract does not depend on an evaluation of whether it would be a good or a bad thing if banks were required,
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either generally or in some circumstances, to reimburse customers who are victims of APP fraud. It depends on an analysis of what the parties to the contract have agreed. 26. This requires the court to consider any relevant terms expressly agreed between the bank and the customer. A bank will invariably have standard terms on which it agrees to provide its services, and it will be necessary in due course to refer to the terms which, on the Bank's case, were incorporated into its contract with Mrs Philipp. As with other types of commonly recurring contractual relationship, however, the contract between a bank and a customer who holds a current account is one for which there is an established legal template consisting of certain basic terms and duties which have come to be recognised by the common law (and sometimes statute) as ordinary incidents of contracts of this type. These implied terms and duties apply automatically by default unless modified or excluded by express agreement. In the case of contracts between a bank and an account holder, they are the subject of a well developed body of case law. 27. The claimant's case in these proceedings is based on this body of case law. The key legal allegation made in the particulars of claim is that the Bank was under a duty "to refrain from executing an order from Mrs Philipp if and for as long as it was put on inquiry, by having reasonable grounds for believing that the order was an attempt to misappropriate funds from Mrs Philipp". This duty is said to be implied by the common law into the contract between Mrs Philipp and the Bank. The central issue in this appeal is whether such a duty is either already recognised by the common law, or can and should be recognised by a principled extension of the existing case law, as an ordinary incident of the contract between a bank and its customer. To decide this issue, it is necessary to start by identifying certain basic legal aspects of the contract between a bank and its customer which are well established. D. THE BANK'S BASIC DUTIES The contract between bank and customer 28. The starting point in understanding the contract between a bank and a customer who holds a current account with the bank is the decision of the House of Lords in Foley v Hill (1848) 2 HL Cas 28. This decision has been described as a historical breakthrough in the development of banking law-. see Sir Ross Cranston, Principles of Banking Law, 3rd ed (2018), p 190. It established conclusively that under ordinary circumstances a bank is not a trustee or fiduciary of money deposited by a customer, but simply a debtor. Money deposited with a bank becomes the bank's money, to lend or otherwise deal with (so far as the customer is concerned) as it thinks fit. The principal obligation owed by the bank is to discharge its debt to the customer when called upon to do so. Thus, the bank is obliged to repay to the customer on demand an equivalent sum to that deposited (plus any agreed interest and less any agreed charges) and also, so long as the account is in credit, to make payments in accordance with the customer's instructions .in reduction of its debt to the customer. Another basic principle that has long been established is that, in making such -payments, the bank acts as the customer's agent: see eg Westminster Bank Ltd v Hilton (1926) 43 TLR 124, 126 (Lord Atkinson). The bank's mandate 29. As in the case of every contractual agency, a bank is bound to act in accordance with the authority conferred upon it by its principal and to perform what it has agreed to do: see eg Bowstead & Reynolds on Agency, 22nd ed (2021), article 36. The terms on which a bank is authorised and undertakes to carry out its customer's instructions to make payments are generally referred to as the bank's mandate from the customer. 30. Unless otherwise agreed, the bank's duty to comply with its mandate is strict. Where the bank acts outside the mandate by making a payment which the customer has not authorised, it cannot debit the customer's account. Conversely, where the bank receives an instruction to make a payment given in accordance with the mandate, the ordinary duty of the bank is simply to carry
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out the instruction and to do so promptly. In Bodenham v Hoskins (1852) 21 Li Ch 864, 869, Kindersley V-C said that: "... the banker looks only to the customer, in respect of the account opened in that customer's name, and whatever cheques that customer chooses to draw, the banker is to honour. He is not to inquire for what purpose the customer opened the account; he is not to inquire what the monies are that are paid into that account, and he is not to inquire for what purpose monies are drawn out of that account: that is the plain general rule, as between banker and customer." The same point was made in Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340, 1356, where May LJ said that there is nothing in the contract between a bank and its customer which could require a banker to consider the commercial wisdom or otherwise of the particular transaction. The bank's right not to incur legal liability 31. The main implied limit on the bank's duty to carry out its customer's authorised payment instructions (where the customer's account is in credit) is that the bank cannot be obliged to act unlawfully. Thus, in Gray v Johnston (1868) LR 3 HL 1 the House of Lords held that, where a bank is instructed by a customer who is an executor or other fiduciary to make a payment which would be a breach of trust, the bank has no right to refuse to make the payment unless to do so would make the bank "in privity" (as Lord Cairns LC put it at p II) with the breach of trust which would thereby be committed. Under the modern law this exception is defined by the principle that a person who dishonestly assists in a breach of trust or fiduciary obligation is liable to the party to whom the obligation is owed: see…
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