Banks are contractually bound to follow their clients’ instructions and are not obliged to concern themselves with the wisdom or risk of their payment decisions. The point was made in a Supreme Court decision of great importance to the financial services industry.
A woman and her husband fell victim to a so-called ‘authorised push payment’ fraud. They were deceived by criminals into instructing their bank to transfer £700,000 in two payments from the woman’s account to accounts in the United Arab Emirates. The bank carried out their instructions and the money was lost.
The woman subsequently sued the bank, asserting that it was responsible for her loss. Seeking reimbursement of the money, she contended that the bank had reasonable grounds for believing that she was being defrauded and therefore owed her a duty not to carry out her payment instructions.
Her claim was initially struck out by a judge on the basis that it had no real prospect of success. However, the Court of Appeal subsequently reinstated it after accepting that, in principle, a bank owes a duty to its clients of the kind that she alleged. The bank challenged the latter decision before the Supreme Court.
The standard terms of business on which the bank provides services to its clients did not contain any express term to the effect that it would decline their payment instructions if it had reasonable grounds for believing that they had been tricked into authorising a payment. However, the woman argued that, as a matter of principle, such a term should be implied into her contract with the bank.
Dismissing her appeal, however, the Court rejected that argument as inconsistent with the ordinary obligations owed by a bank to its clients. Banks act as agents for their clients when making authorised payments. Provided that a client’s account is in credit, banks owe a strict contractual duty, unless otherwise agreed, promptly to execute the client’s instructions. They are under no obligation to inquire as to the wisdom of, or risks involved in, the client’s payment decisions.
The Court noted that each of the two payments was made after the couple visited a branch of the bank and gave instructions to transfer the money in person. It was conceded that, on the first occasion, the husband told a cashier, falsely, that he had had previous dealings with the company to whom the money was being sent. On each occasion, a representative of the bank telephoned the woman seeking confirmation of the transfer request and that she wished to proceed with it.
She each time provided such confirmation and it was thus beyond dispute that she unequivocally authorised the payments and instructed the bank to make them. In those circumstances it was impossible to say that the bank owed her a duty not to comply with her instructions.
The Court noted that the Financial Services and Markets Act 2023 has, since the woman sustained her loss, provided for a mandatory reimbursement scheme in respect of certain types of bank fraud. It does not, however, extend to international payments and thus would not have assisted her. However, the Court left it open to her to pursue a claim that the bank breached its duty in not acting promptly to try to recall the payments after being notified of the fraud.