High Court Applies "Scope Of Duty" Principle To Limit Damages Claimed For Breach Of So-called Quincecare Duty

The High Court has determined a number of applications for summary judgment/strike out in two claims for breach of mandate and the so-called Quincecare duty in the context of an alleged large-scale fraud: Arena Television Limited (in liquidation) & Anor v Bank of Scotland plc & Anor  and Sentinel Broadcast Limited (in administration) v Lloyds Bank plc [2025] EWHC 3036 (Comm). 

The claims were brought against the defendant banks, which operated the current accounts through which payments relating to the fraud were made. The court considered various strike out/summary judgment applications made by both sides. It refused one of the banks' strike out applications, which argued that the directors of the claimants had actual authority to make the payment instructions because (the banks submitted) the fraud was a fraud by the company, rather than a fraud on  the company. However, in an important development of the law in this area, the court struck out a claim for alleged losses resulting from the continuation of the fraud over many years, which it was claimed would have been prevented if the banks had made inquiries into whether the relevant payment instructions were authorised. 

In a novel decision, the court applied the "scope of duty" principle from Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 (see our blog post) to the Quincecare-type claim. This principle provides that the scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty (judged on an objective basis). Referring to the Supreme Court's seminal decision in Philipp v Barclays Bank UK plc [2023] UKSC 25 (see our blog post), the court said that the "purpose" of the so-called Quincecare  duty is to avoid making unauthorised payments and it does not extend more broadly. In the court's view, this meant that breach of the duty will give rise to potential liability for the amount of any unauthorised payments only. Accordingly, it struck out the claim for losses allegedly arising from the continuation of the fraud.

By clarifying that the scope of the so-called Quincecare duty is limited to avoiding making unauthorised payments, the court has narrowed the losses recoverable from payment service providers who have unwittingly operated accounts used for fraudulent schemes. This decision should reduce the risk for firms facing claims for consequential losses stemming from the continuation of a fraud. It should also provide greater certainty when assessing risk profile and potential liability in cases involving complex frauds perpetrated by company insiders. 

We consider the decision in more detail below.

Background

The claims arise out of an alleged asset-backed lending fraud (the ABL Fraud). Under this scheme, companies in the Arena group (the Arena Claimants) and Sentinel Broadcast Limited (Sentinel) purportedly sold TV and production equipment under hire-purchase agreements. The alleged fraud operated in a manner akin to a Ponzi scheme. New lending was used to service existing repayment obligations and give a false impression of the Arena Claimants' turnover. It was alleged that the vast majority of the equipment never existed and the sums obtained were misappropriated for the benefit of the Arena Claimants' directors. 

The Arena Claimants and Sentinel maintained current accounts with the defendant banks (the Banks). Over £1.2 billion was raised against thousands of fictitious assets, with the majority of funds flowing through the Arena and Sentinel accounts with the Banks.

After certain lenders discovered the alleged fraud, the Arena Claimants and Sentinel went into liquidation/administration. The liquidators commenced proceedings against the former directors of the Arena companies, who have since absconded. Separately, the liquidators/administrators brought the present claims against the Banks, including that:

• The Banks breached their banking mandates with the claimants by processing payment instructions given by the directors without authority. The Banks also breached their respective duties by failing to make inquiries as to whether the directors were in fact authorised and by failing to refrain from processing payment instructions (ie the so-called Quincecare duty). Accordingly, the Banks were liable to reconstitute the relevant accounts.
• Further or alternatively, the Banks were liable for losses arising from the continuation of the ABL Fraud. But for the Banks' alleged breach of duty, inquiries would have been made, during which time no further payments would have been made from the claimants' accounts, and the result of which would have revealed that the directors were acting dishonestly to further their own interests. The directors would therefore not have been able to continue the ABL Fraud and the claimants would not have incurred further liabilities to third parties. The claimants claimed losses for the additional liabilities incurred to lenders until the date of administration. 

The Banks sought strike out or summary judgment of these claims. The claimants cross-applied for strike out or summary judgment in respect of certain aspects of the Banks' Defence and Counterclaim in the Arena proceedings.

Decision

Actual authority – application by the Banks

The Banks applied for strike out/summary judgment of the claims for reconstitution of the relevant accounts and breach of duty, on the ground that the directors had actual authority to make the payment instructions (except in respect of some instructions where the directors extracted money for their direct personal benefit).

The Banks' case was that instructions to make the payments in question were given with the claimant companies' actual authority. The Banks argued that the ABL Fraud was a fraud by the company, rather than a fraud on  the company, and that it is only in the latter case that an agent (in this case the directors) would lack actual authority to make a payment instruction. According to the Banks, there would be actual authority in cases in which the agent was acting, albeit dishonestly, vis-à-vis third parties in pursuance of the company's (fraudulent) business. 

The court refused the applications. It held that it was arguable, with a real prospect of success, that an agent only has actual authority to act honestly in pursuit of the interest of its principal (in this case, the claimants). In reaching this conclusion, the court referred to Article 23 of Bowstead & Reynolds on Agency (23rd edition), which sets out this proposition, and which was endorsed by Lord Leggatt in Philipp. In the court's view, there was clearly a triable issue as to whether the directors were acting honestly in pursuit of the interests of their principal(s), or were exercising powers against the interests of their principal(s).

The court also considered it reasonably arguable that there was no realistic or workable distinction between frauds on and by the principal in this case. The alleged ABL Fraud involved not only misrepresentations to lenders (which would be a fraud by the claimants as principal) but also committed the claimants to liabilities which would ultimately render them insolvent (which could be said to be a fraud on the claimants as principal). 

While the court expressly noted that there were a number of serious arguments tending in the Banks' favour, it did not consider that the test for strike out/summary judgment – that the claims stood no realistic prospect of success – had been met. Instead, the issue of the extent of the directors' actual authority should be resolved on the basis of established facts at trial. 

Actual authority – application by the Arena Claimants 

This was an application by the Arena Claimants for strike out or summary judgment in respect of certain allegations in the Banks' Defence. These were that the directors had actual authority to give payment instructions on behalf of the claimants by reason of: (i) their control of the Arena Claimants, and (ii) certain terms contained in the mandates and T&Cs agreed between the Arena Claimants and the Banks.

As for (i), the Banks' argument was that the fact that there were no innocent directors was relevant to establishing that the transactions in question were part of the business of the companies which the directors were authorised to conduct. The court refused the application for strike out/summary judgment of this plea. It did not consider that there was a clear-cut and discrete point of law which it was appropriate to determine at this stage. Instead, the significance or otherwise of the directors' "control" of the companies should be part of the investigation of actual authority at trial.

As for (ii), the court considered that the terms in question did not confer on the directors actual authority to conduct transactions which were fraudulent provided that they did not involve frauds on the Arena Claimants themselves. The court referred, as an example, to a term which stated that the Bank was authorised to act upon any instruction without enquiring about its purpose. In the court's view, this dealt only with the authority of the Bank to act on instructions without inquiry and did not confer actual authority on the directors to engage in fraudulent activities. The court therefore allowed this aspect of the cross-application.

Damages - application by the Banks

This application related to the claim for losses allegedly caused by the Banks' failure to make inquiries as to whether the payments were authorised, which (the claimants alleged) enabled the ABL Fraud to continue for many years because the accounts had not been suspended in the meantime or the fraud revealed. 

The Banks sought strike out or summary judgment of this claim on the ground that such loss was outside of the scope of the duty of care which they owed to the Arena Claimants. The duty alleged in this case (and admitted by the Banks) was described as the "basic or standard" duty of a bank which provides and operates a bank account on behalf of a customer. This duty was to make payments from the account only when instructed by a duly authorised agent of the customer; and to act with reasonable skill and care when carrying out that mandate (ie the so-called Quincecare duty). 

The court agreed that it was necessary to consider the "scope of duty question" and that its application was not limited to cases involving a professional providing information or advice, and has application in other cases where a duty of care is owed (per Khan v Meadows  [2021] UKSC 21). The court cited Manchester Building Society as to how this question should be addressed, as follows:

The court considered that it was clear from the Supreme Court's judgment in Philipp  that the "purpose" of the so-called Quincecare  duty is to avoid making unauthorised payments. In the court's view, the scope of the duty owed by a bank to a customer with a current account:

• Is a limited duty to protect the customer from unauthorised payments (unless the contract or their relationship takes the case out of the norm).
• Covers potential liability for the amount of such unauthorised payments (and might extend to losses consequential on the making of those payments such as interest, overdraft fees or currency losses).
• Does not extend to protecting the customer against payments out of the account which were authorised - even if those payments would not have been made had the bank ceased to permit the operation of the account pending the completion of inquiries as to a suspectedly unauthorised payment.
• Does not extend to the consequences of transactions which the customer would not have been able to enter into if the bank had ceased to permit the operation of the account. 

Accordingly, the court granted strike out/summary judgment of the claim for losses allegedly arising from the continuation of the ABL Fraud. 

Deceit and unlawful means conspiracy - application by the Arena Claimants

This application concerned the Banks' counterclaims that, if they were liable to pay any sums to the Arena Claimants, then the Arena Claimants were liable to them for the same sums in deceit and unlawful means conspiracy. This was on the basis that payments were made of out the Arena Claimants' accounts in reliance on fraudulent misrepresentations made by the directors, which were attributable to the Arena Claimants or for which they were vicariously liable.

The court dismissed the application. It accepted that the counterclaims would have been susceptible to being struck out if the only representations the Banks were relying on were exactly the same as those which the Arena Claimants relied on for their claim that the Banks breached their duty of care. However, the counterclaims relied on a number of further alleged representations, for example that the equipment that was the subject of ABL existed and was required for the purpose of Arena's legitimate business. Whether such representations were made and were distinct from the payment instructions, and whether they were relied on, were matters which would have to be resolved at trial. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.