Introduction

In the case of SEKERS FABRICS LTD Against CLYDESDALE BANK PLC ([2021] CSOH 89), the Scottish Court of Session addressed pivotal issues surrounding the duty of care that banks owe to their business customers, particularly in the context of Authorised Push Payment (APP) fraud. The dispute arose when SEKERS FABRICS LTD alleged that CLYDESDALE BANK failed to exercise reasonable skill and care, leading to significant financial losses due to fraudulent transactions orchestrated by an external fraudster. The core of the case centered on whether the bank's obligations under the Quincecare duty extended to such fraud scenarios, thereby setting a significant precedent in banking law.

Summary of the Judgment

The Court examined whether CLYDESDALE BANK breached its implied duty of care towards SEKERS FABRICS LTD by not preventing the fraudulent transfer of funds amounting to £566,000. The bank acknowledged an implied term to exercise reasonable skill and care but contended that the claims fell outside this duty's scope. The Court delved into the applicability of the Quincecare duty, established in Barclays Bank plc v Quincecare Ltd, which imposes a limited duty on banks to refrain from executing payments that appear fraudulent. However, the Court concluded that in this particular case, the Quincecare duty did not extend to APP fraud involving external fraudsters. Nonetheless, the Court did not entirely dismiss the possibility of a general duty of care being implicated in pre-authorisation communications, indicating that a full inquiry was necessary to determine any breach.

Analysis

Precedents Cited

The judgment extensively referenced several key cases to frame the legal context:

• Barclays Bank plc v Quincecare Ltd [1992]: Established the Quincecare duty, limiting banks' obligations to refrain from executing transactions when there is a suspicion of fraud.
• Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd [2019]: Affirmed the scope of the Quincecare duty in cases of internal fraud.
• JP Morgan Chase Bank, N.A. v The Federal Republic of Nigeria [2019]: Reinforced the nature and limits of the Quincecare duty, particularly in international contexts.
• Philipp v Barclays Bank UK Plc [2021]: Addressed the applicability of the Quincecare duty in scenarios involving external fraud, although the case was under appeal at the time.
• Hilton v Westminster Bank Ltd (1926) and Selangor United Rubber Estates Ltd v Cradock (No.3) [1968]: Supported the broader interpretation of the bank's duty to exercise reasonable skill and care.
• Karak Rubber Co Ltd v Burden (No.2) [1972] and Royal Products Ltd v Midland Bank Ltd [1981]: Cited for reinforcing the general duty of care beyond the Quincecare framework.

Legal Reasoning

The Court's legal reasoning hinged on distinguishing between the Quincecare duty and the general duty of care. While the Quincecare duty imposes a limited obligation on banks to prevent fraud in specific circumstances, it does not extend to all forms of fraud, particularly APP fraud involving external perpetrators. The Court acknowledged that while the Quincecare duty was appropriately applied in cases of internal fraud, its extension to external fraud lacked authoritative support. However, the Court did not categorically exclude the general duty of care, especially concerning pre-authorisation communications, thus leaving room for potential obligations beyond the Quincecare framework.

Impact

This judgment has significant implications for banking law and APP fraud:

• Clarification of the Quincecare Duty: The decision delineates the boundaries of the Quincecare duty, affirming that it does not inherently cover APP fraud involving external fraudsters.
• General Duty of Care: By not entirely dismissing the general duty of care, the judgment opens avenues for future claims where banks may be held liable for breaches in their overall duty, especially in the context of pre-authorisation communications.
• Regulatory Considerations: Banks may need to reassess their fraud prevention mechanisms and customer communication protocols to mitigate potential liabilities arising from general duty of care obligations.
• Precedential Value: Future cases involving APP fraud will likely reference this judgment to determine the extent of a bank’s duty, especially distinguishing between internal and external fraud scenarios.

Complex Concepts Simplified

Quincecare Duty

The Quincecare duty is a legal obligation that requires banks to refrain from executing payment orders if they have reasonable grounds to suspect that the instruction is fraudulent. Originating from the 1992 case Barclays Bank plc v Quincecare Ltd, this duty is limited in scope, primarily addressing situations of internal fraud where an authorized individual within the customer’s organization may be misappropriating funds.

Authorised Push Payment (APP) Fraud

APP fraud occurs when individuals are deceived into making unauthorized payments to fraudsters who present themselves as legitimate parties. Unlike internal fraud, APP fraud typically involves external perpetrators who manipulate the victim into transferring funds under false pretenses, while the payment itself is authorized by the victim.

Duty of Care

The duty of care in banking refers to the responsibility of banks to act with reasonable skill and care in managing their customer's accounts and executing transactions. This broader duty encompasses various aspects of banking operations, beyond the specific limitations of the Quincecare duty.

Conclusion

The judgment in SEKERS FABRICS LTD v CLYDESDALE BANK PLC underscores the nuanced boundaries of banking responsibilities in fraud prevention. By affirming that the Quincecare duty does not extend to APP fraud involving external fraudsters, the Court delineates clear limits to banks' obligations under this specific duty. However, the acknowledgment of a potential general duty of care in pre-authorisation communications necessitates a cautious and proactive approach by financial institutions in safeguarding their customers against diverse fraud schemes. This decision not only clarifies existing legal principles but also sets the stage for evolving interpretations of banks' duties in an increasingly complex financial landscape.