Bank duty of care to customer and the construction of exemptions, indemnities and entire agreement clauses (The Federal Republic of Nigeria v JP Morgan Chase Bank)

Bank duty of care to customer and the construction of exemptions, indemnities and entire agreement clauses (The Federal Republic of Nigeria v JP Morgan Chase Bank)

The decision of the High Court in the case of The Federal Republic of Nigeria v JP Morgan Chase Bank, NA although an application for summary judgment and clearly (given the enormous sums at stake) the opening salvos of what might turn into a protracted legal battle discusses some important points which banks and other financial institutions will need to consider where they use terms and conditions which seek to narrow duties to their customers. As the case progresses to a full trial it will be interesting to see how the Courts construe the bank’s exculpatory clauses and assess their interaction with the law relating to implied terms and tortious liability.

The Federal Republic of Nigeria v JP Morgan Chase Bank, NA [2019] EWHC 347 (Comm)

What are the practical implications of this case?

Two preliminary points should be borne in mind about this case.

Firstly, the judgment was on an application for reverse summary judgment by the bank against the claimant ie a strike out application where certain facts are assumed rather than proven.

Secondly, the facts of the case are unusual in that the bank’s customer was a state, the sums involved were over $875m and everyone agreed that corruption and fraud by some of the officers of the state was ultimately responsible for the loss to the Nigerian people.

Despite these two factors the case is likely to be of interest to anyone advising on the ability of a bank to limit its contractual and non-contractual duties to its customers through the use of some standard contractual clauses commonly found in the terms and conditions on which banks accept deposits.

In particular the case discusses:

  • a bank’s Quincecare duty of care when it made three transfers from an account at a time when the bank had (or was assumed to have) reasonable grounds for believing that the payments out of its customer's account were defrauding the customer (Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363);
  • the impact (if any) of a clause limiting the banks responsibilities to its customer to those expressly stated in the relevant deposit contract on the existence or scope of the Quincecare duty of care;
  • the scope of an indemnity against claims and liabilities incurred by the bank as a result of carrying out instructions under the deposit agreement and in particular whether this indemnity covered any damages awarded to the customer rather than third parties; and
  • whether an entire agreement clause affected or negated the bank’s Quincecare duty of care assuming it otherwise existed between the parties

It is the comments made by the Court on the express terms of the deposit contract in this context which may give advisors to banks and similar institutions pause for thought on whether they need to be much more specific when attempting to negate or limit duties or liabilities to customers.

While more detailed analysis will come at any later full trial of the issues between the parties—and some of Andrew Burrows QC’s (sitting as a Judge of the High Court) contractual analysis might be subject to further critique—the general remarks on contractual construction show that sometimes widely draw exemptions, indemnities and other contract clauses that seek to narrow a bank’s liability to its customer might have just the opposite of the intended effect.

What was the background?

The Nigerian government settled a dispute over oil concessions with a company called Malabu. Part of the settlement required the Nigerian government—the claimant—to set up a deposit account with the bank to hold monies which would eventually be paid to those entitled under the settlement agreement.

The bank on instructions by authorised signatories of the claimant made three transfers totalling some $875m to an account in the name of Malabu at Keystone Bank Ltd.

The claimant commenced proceedings against the bank, alleging that the bank would not have made those transfers had it been exercising reasonable care because the bank had reasonable grounds for believing that the payments out of its customer's account were defrauding the customer.

The bank argued on a strike out application that its terms and conditions precluded any so called Quincecare duty of care from arising, that the claimants loss was not caused by any breach of that duty if found to exist and that if causation was established it could in any event rely on certain indemnities given by the claimant to negate the liability.

It is the treatment by the Court of the contract terms relied upon by the bank in its defence that is the most interesting feature of the first round of this legal fight.

What did the court decide?

The Court decided that the bank had failed to establish its case to strike out the claim.

Broadly speaking, the Court considered the terms and conditions of the deposit agreement which the bank relied upon to limit the scope of any duty to the claimant came nowhere near affording it the protection it desired.

First to be considered was a provision that stated:

The duties and obligations of the [bank] in respect of the Depository Cash shall be determined solely by the express terms of this Agreement. (see para 45 of the judgment for the full text of the clause)

The bank argued that this provision—a version of an entire agreement clause—meant no other duty could be implied into the agreement between the parties and that consequently the Quincecare duty which arose by implication in contract or tort did not apply.

The judge thought these words were simply not clear enough to exclude the Quincecare duty which was a valuable customer right. The clause did not mention implied terms or the operation of the law of tort at all. It should have done so.

The Court could not see that this type of clause could possibly have been intended to rule out all other manifestations of a bank’s potential liability to customers whether through implied terms or equity including those that normally arise under the bank customer relationship such as confidentiality, knowing receipt or dishonest assistance. The Court concluded that these other non contractual liabilities had clearly been in the contemplation of the parties at the time they contracted because the standard form jurisdiction clause specifically stated any such obligations were also to be governed by English law. This was an interesting linkage of two boilerplate clauses to arrive at what the bank must have felt was a rather startling conclusion. Agents and Security Trustees under syndicated loans often seek to benefit from similar clauses—a similar judicial analysis of such clauses might cast doubt on the efficacy of the protection they offer such parties.

Second up was a clause which stated:

‘7.2 The [bank] shall be under no duty to enquire into or investigate the validity, accuracy or content of any instruction or other communication....

7.4 The [bank] need not act upon instructions which it reasonably believes to be contrary to law, regulation or market practice but is under no duty to investigate whether any instructions comply with any applicable law, regulation or market practice.(see para 46 of the judgment)’

In fact the bank had obtained a letter from the Attorney General of Nigeria confirming that the instruction to pay away the money was legitimate. Despite this the judge decided these provisions actually meant there was no duty of care to enquire or investigate on the part of the bank (acting as an ordinary prudent banker) only prior to the point at which the bank acquired some reasonable grounds for belief that there was an attempt to defraud the customer by making the payment. This is presumably not quite the protection which the bank was seeking when it put that clause into its deposit agreement.

Finally the judge considered whether the following indemnity clause offered the bank any protection:

‘10.1 The Depositor hereby irrevocably and unconditionally agrees on demand to indemnify, and to keep fully and effectively indemnified … the [bank], and its directors, officers, agents and employees (the "indemnitees") against all costs, claims, losses, liabilities, damages, expenses, fines, penalties, Tax and other matters ("Losses") which may be imposed on, incurred by or asserted against the indemnitees or any of them directly or indirectly in respect of: (a) the following of any instruction or other directions upon which the indemnitees is authorised to act or rely pursuant to the terms of this Agreement, or arising as a result of entering into this Agreement or their status as holder of the Depository Cash…’

The bank’s argument that if the claimant succeeded and recovered damages from the bank it would have a co-extensive liability to the bank under this indemnity thus cancelling out the bank’s liability was rejected. The Court thought the indemnity when read in the context of the deposit agreement as a whole—which had several other provisions dealing with the nature and scope of the liability of the bank to the customer—was clearly confined to cases that allowed the bank to recover any sums paid to third parties not to cancel out any liability to the customer.

Watch this space

This was just the first of what is likely to be numerous appearances before the English courts for this dispute. However, there is enough in this preliminary hearing to ensure it will be closely followed by banking lawyers seeking methods to limit liability as well as their customer counterparts seeking to counteract those moves.

As similar contract provisions are found in may different finance documents including syndicated loans the future legal arguments over these boilerplate provisions is likely to be followed with interest.

Case details

Court: High Court of Justice, Commercial Court (QBD)

Judge: Andrew Burrows QC (Sitting as a Judge of the High court)

Date of judgment: 21st February 2019

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About the author:

Miranda is a solicitor specialising in leveraged and acquisition finance. She trained at Hogan Lovells International LLP and qualified into the international banking and finance team. During her time at Hogan Lovells she worked on a variety of domestic and cross-border transactions, acting for both borrowers and lenders. She also experienced secondments to Barclays Bank PLC and Kaupthing Bank hf.