Processing a Payment Instruction: Could it Cost You US$ 875 million?

Background

The Federal Republic of Nigeria (“FRN”) opened a depository account with JP Morgan (the “Bank”) in 2011.  The purpose of the account was to hold monies due to be disbursed in relation to the settlement of a long-running dispute.  The dispute concerned an oil field and involved FRN and Malabu Oil & Gas Nigeria Ltd (“Malabu”), a company owned by Chief Daniel Etete, the then Minister of Petroleum (who was convicted in France in 2007 of money-laundering offences relating to bribery offences committed in Nigeria).  

In 2011 and 2013, the Bank made three payments out of the depository account, resulting in the entire balance of US$ 875,740,000 being transferred to Malabu.  FRN brought a claim against the Bank, alleging that it had failed to exercise reasonable care when making the payments and in particular that the Bank was in breach of its Quincecare duty of care, as the Bank had reasonable grounds for believing that the payment instructions were an attempt to defraud FRN.  FRN argued that the Bank was obliged to refuse to make the instructed payments and to make further enquiries as to their legitimacy.  In return, the Bank applied to the court for reverse summary judgment and/or for the court to strike out FRN’s statement of claim.  The Bank’s application is what is addressed in this judgment of the English High Court.

The Issues

The court considered three principal issues that were disputed between the parties.  One important procedural point to note is that, given the summary nature of the Bank’s application, the court was obliged to assume that the facts alleged by FRN would be proved.  In particular, this meant that the court assumed that:  “…the claimant [FRN] was defrauded by way of a fraudulent and corrupt scheme; that the defendant bank was on ‘inquiry’ (ie it had reasonable grounds for believing) that the payment instructions it received were part of an attempt to defraud the claimant; and that, despite that, the defendant bank went ahead and made the payments to Malabu…”.

The ‘no Quincecare duty of care’ Issue

First, the court considered the Bank’s assertion that it did not owe a Quincecare duty of care to FRN in relation to the account.  In deciding this issue, the court considered a number of points:

The “causation of loss” Issue

The Bank submitted that even if the Quincecare duty did apply, FRN would not be able to demonstrate that a breach on the Bank’s part had caused FRN’s loss.  The court held that this issue was clearly one which needed to be heard at a full plenary trial, where the court would have the benefit of all of the evidence.  The court did not agree that FRN would not be able to establish causation; if the Bank had not complied with the payment instruction (on the basis of its Quinceare duty) the money would not have been paid out to a third party and lost to FRN in a fraudulent scheme.  Given the need for a full plenary hearing, the court made no ruling on this issue other than that the Bank had not established that FRN had no reasonable prospect of proving causation of loss. 

The “circularity” Issue

The final issue arose by way of an indemnity clause contained in the depository agreement.  The clause provided for FRN to indemnify the Bank against all claims brought against it in respect of its compliance with any instructions it received in relation to the depository account.  The Bank argued that this created a circularity problem in that the Bank would be entitled to be reimbursed for any money it paid to FRN even if the Bank was found to be liable.  Applying principles of contractual interpretation (including a narrow construction of clauses that might otherwise be read as excluding negligence), the court determined that the indemnity applied only to the Bank’s liability to third parties, not to FRN itself.  To construe the indemnity as applying to FRN would be inconsistent with other provisions of the contract (as the Bank would always have the indemnity as a backstop for any liability that it might incur) and that more specific and express language would be required to demonstrate that this represented the intention of the parties. 

Comment

While this is not yet a final judgment, it is an important one for banks and any other person who processes payments (eg stockbrokers).  The court has reemphasised that the Quincecare duty is both a valuable implied right of a customer and that it is implied for good policy reasons; as such, the court will not lightly find that the duty has been excluded.  Despite what would appear at first reading to be quite robust contractual protections and reasonable diligence (including obtaining a letter confirming the authority of the instructions from the Attorney General of FRN), the Bank remains open to the possibility of a very large award being made against it for breach of the Quincecare duty.  Banks and others involved in processing payments would be well advised to consider the scope of the protections included in their account agreements and will, no doubt, watch the outcome of this case closely.