The recent case of Larsson v Revolut Ltd1 is one of a number of recent cases of claims by an APP fraud victim against a receiving bank. You can read our overview here.
Background
Mr Larsson, the claimant, believed he was going to purchase shares in an entity called “Starlink” but, in fact, was the victim of an APP fraud. Acting on the instructions of the fraudsters, he transferred c.466,000 Swiss Francs (around GBP400,000) in five payments from his account at UBS in Zurich to five separate accounts at Revolut (the defendant) which, he had been told, indicated him as the beneficiary (when, in truth, the accounts were not in his name). The claimant believed (falsely) that by transferring his money to these five accounts it remained in his control until such time he became a shareholder in Starlink (although the judge queried how he could have understood this to be the case, as he played no part in setting up the accounts). What actually happened was that, once in these accounts, the fraudsters quickly transferred the funds out again. As it happens, the claimant also had a (genuine) account with the defendant.
The claimant brought the following claims against the defendant:
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Breach of duty in contract and tort: the defendant failed to detect and/or to take adequate steps to mitigate and/or prevent the fraud.
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Dishonest assistance in breach of trust: the defendant rendered assistance to the fraudsters in circumstances where it had sufficient knowledge of facts which constituted a breach of trust, or sufficient doubts that a breach of trust was being committed, but turned a blind eye to it.
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Unjust enrichment: the defendant is liable to the claimant for unjust enrichment in respect of the sums paid into its accounts.
The defendant applied to strike out each claim.
The defendant is an electronic money institution but it accepted, for the purposes of the application, that it owed materially the same duties as a bank.
What duties does a bank owe?
The starting point is that a bank’s duties are principally owed to its customers. A paying bank’s primary duty is to act on its customer’s payment instructions with reasonable skill and care. Where that instruction is given by an agent of the customer and the paying bank has reasonable grounds for believing the customer is being defrauded, the bank can refrain from carrying out the instruction (the Quincecare Duty).
The Quincecare Duty is not owed to third parties; in other words, a paying bank is not obliged to refrain from carrying out a payment instruction from its customer where it has reasonable grounds for believing a third party is being defrauded. There is therefore no equivalent duty of care owed to a third party who is not a customer of the bank and with whom the bank has no contractual relationship, and this is the case even where the bank knows that the funds in its customer’s account are beneficially owned by that third party, as established by JP SPC 4 v Royal Bank of Scotland2.
In Abou-Rahmah v Abacha3 an argument that a receiving bank owes a duty to a third party payer to pay money only to the beneficiary identified in the payer’s instructions was rejected.
Contract claim
In this case, the claimant sought to use the fact that he was already a customer of the defendant, to raise a number of novel arguments. The claimant argued on this basis that the defendant provided the following services to him, which were subject to the implied duty to act with reasonable skill and care. These services were to:
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block attempts to open other accounts in the claimant’s name (by reason of a term in the defendant’s terms and conditions that the defendant could not provide the customer with more than one account).
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manage and, so far as possible, facilitate transfers to credit the claimant’s genuine account with the defendant. In other words, given the claimant only had (and could only contractually have) one account with the defendant, any attempt to transfer money to him using different account details should be investigated by the defendant, and the defendant should represent the claimant’s interests and say to the payer “the claimant does have an account with us but that is not the right one”. This is especially so when the incoming payment is from the claimant himself.
Mr Justice Zacaroli rejected both these arguments, and struck out this claim. He held:
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The contractual restriction on a customer to only have one account could not give rise to an obligation on the bank to police the customer’s compliance with this restriction. In any case, it was irrelevant on the facts as the “extra” accounts had not been opened by the claimant (but by the fraudsters).
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There was no contractual basis for a duty of care owed by the defendant to the claimant in relation to any payments made by him from an account with another bank, to an account with the defendant held by someone else.
Tort claim
The claimant accepted that a bank does not owe a duty of care to third party payers. But the claimant asserted that he was not a true third party as he also had an account with the defendant. He was therefore a customer of the defendant, and hence a duty in tort arose by reason of the defendant’s duty to take reasonable care towards him in the context of the banker-customer relationship.
The judge rejected this argument, and struck out this claim. Given it was established that no duty of care is owed by a bank to a third party payer, he said in his judgment that there was no principled reason for imposing a duty “simply because [the payer] also happens to be a customer of the bank” [para 49]. While it was open to the court to find new duties of care on the basis of an “incremental approach” [para 57], to impose a duty on a bank to take reasonable care to protect third parties who make payments to an account of one of its customers, where that customer is defrauding the third party payer, would be to cross the line between the proper role of the courts, and the role of the legislator and regulator. Ultimately, the duty contended for – which would require the receiving bank to review all SWIFT messages relating to incoming international payments, to see if the name of the payer matched the name of any of its (potentially millions) of customers, and then to check if the named beneficiary of the payment matched the destination account - would be an “increased burden” on banks and a “radical extension” of the duties owed by banks “with significant consequences for banking law” [para 58].
Dishonest assistance claim
This claim requires, in the first place, for there to be a trust. The judge recognised that the issue of whether misappropriated funds are held by a fraudster under a constructive trust is an area on which “there has been considerable academic debate” [para 69], and various cases were cited by each party for and against this proposition4. The judge said that he was not prepared to find that there is no sufficiently arguable case that a constructive trust arose over the funds transferred to the defendant and that much fuller argument would be required to resolve the question. He therefore declined to strike out this claim.
Unjust enrichment claim
At the hearing the parties agreed to pause the claim in unjust enrichment until the outcome in a similar case recently heard in court was published. This is the case of Terna Energy Trading Doo v Revolut Ltd5, another claim by an APP fraud victim against a receiving bank, which has since been heard, in which the judge has held that the unjust enrichment claim is arguable. You can read our article on Terna here.
Commentary
Although it is unsurprising that the judge struck out the claims in contract and tort, they nevertheless demonstrate the creative ways in which victims of APP fraud are attempting to recoup their losses from the receiving bank, ever since the Supreme Court held, in Philipp v Barclays Bank UK PLC6 that such victims could not pursue the paying bank for breach of the Quincecare Duty. We will be watching the progress of the claims in dishonest assistance and unjust enrichment with interest.
If you would like to discuss any of the issues raised in this article, please get in touch with any of the contacts listed.
Authored by Daniela Vella and Philip Parish.
References
1 [2024] EWHC 1287 (Ch)
2 [2022] HKPC 18
3 [2005] EWHC 2662 (QB)
4 Cases relied upon by the claimant to support his proposition that stolen funds are held by the thief under a constructive trust: Westdeutsche Landesbank Girozentrale v London Borough of Islington [1996] AC 668; Fetch A.I. v Persons Unknown [2021] EWHC 2254 (although this case has little weight as a precedent as it is in the context of a without notice application for an injunction, permission to serve out and third party disclosure, and the respondents were not represented). Cases relied upon by the defendant in support of the proposition that the law does not recognise a trust in such a situation: Shalson v Russo [2003] EWHC 1637 (Ch); Tecnimont Arabia Limited v National Westminster Bank plc [2022] EWHC 1172 (Comm)
5 [2024] EWHC 1419 (Comm)
6 [2023] UKSC 25