By Jacque Lethbridge and Michael Mabbett - 3 Apr 2024
On 29 February 2024, the Minister of Commerce and Consumer
Affairs published an 'open
letter' to the New Zealand banking industry, in response to
"an increase in the prevalence and sophistication of online
scams and fraud".
- The letter expressed the Minister's view that banks are well
placed to address banking scams and online fraud. The letter also
set out a number of the Minister's expectations of the industry.
Some of these "expectations" are already being considered,
including a 'confirmation of payee' system (which matches account
names and numbers before payment is made).
- The letter also proposes a voluntary reimbursement scheme for
victims of 'authorised push payment' (APP) fraud. APP fraud occurs
when a bank customer is fraudulently persuaded into authorising a
transfer to a third party (as opposed to a fraudster obtaining
unauthorised access to a bank account). The UK will soon be
implementing a reimbursement scheme for victims of APP fraud.
Legislative reform and/or voluntary banking industry regulation
is likely to assist in this difficult area, but civil remedies may
also be available. In this article, we analyse two such remedies,
highlighted in recent High Court judgments (one of the New Zealand
High Court and one of the English High Court). Both decisions
highlight possible and actual avenues for recovery, in cases where
online banking or cyber-related fraud has caused or contributed to
loss:
- Habitat Hotels & Apartments v BNZ (4 March 2024)
[i] was a 'mistaken payment' case (not involving fraud). The
New Zealand High Court confirmed that ancillary disclosure
orders (in support of prospective freezing orders) may be available
where an innocent recipient of a mistaken transfer refuses to
return the funds. These orders assist to identify where money
is currently located, so that freezing orders (which prevent
dissipation of assets), and an eventual judgment, can be directed
at the right party and assets.
- CPP Graduate School v NatWest Bank (14 March 2024)
involved APP fraud. The English High Court provided further
detail about a possible 'recovery' duty on banks whose accounts are
used to transfer funds sourced from APP fraud. If recognised,
this duty might allow a person to sue their bank (and other banks
into which money is transferred), if those banks do not take
adequate and timely steps to recover the funds.
Habitat Hotels & Apartments v
BNZ: Disclosure orders where mistaken payment
not returned
Habitat Hotels
& Apartments v BNZ [2024] NZHC 429 was not a fraud
case. It was a case of a significant mistaken payment,
which was not fully returned until after Court orders were
obtained. In that case, the Court made ancillary orders (in
support of prospective freezing orders), which required disclosure
of the recipient's bank statements. This in turn enabled the
applicant to ascertain the location of its funds for the purpose of
a potential freezing order.
Ancillary disclosure orders are commonly made in conjunction
with freezing orders, but they are rarely made in advance in
respect of prospective freezing orders. The same standard has
to be met for ancillary orders as prospective freezing orders,
namely: (i) a good arguable case (where a payment is mistaken, but
not fraudulent, the legal claim is 'money had and received'); (ii)
assets to which the orders can apply; and (iii) a risk that the
defendant will dissipate its assets. [ii] An example of an
unsuccessful application for ancillary orders (without a freezing
order) is IAG New Zealand Ltd v H Construction Ltd [2018]
NZHC 620, where there was insufficient evidence of dissipation
risk, and the Court considered that the applicant was in truth
attempting to obtain a form of security.
These orders are also available to victims of APP fraud (or any
kind of fraud)[iii] who can identify a defendant with
assets. In fraud cases, evidence of dissipation can normally
be inferred (although identifying a defendant with assets is not
always possible - especially in APP fraud, where criminal gangs
often transfer the funds away from common law
jurisdictions). Alternatively, Bankers Trust
[iv] orders may be available if the specific criteria are
not met for ancillary/freezing orders. These orders are
similar, in that they provide for disclosure in support of an
equitable tracing claim.
The biggest problem for victims of fraud (or improper retention
of funds) remains the cost/benefit exercise required to decide
whether to throw 'good money after bad' by initiating civil
proceedings. Habitat Hotels & Apartments v BNZ
is a useful illustration of an available remedy (assuming the high
standard can be met) and ultimately successful outcome.
CPP Graduate School v NatWest
Bank: Banks' (arguable) 'recovery'
duty
CPP
Graduate School v NatWest Bank plc [2024] EWHC
581 concerned APP fraud. This decision of the English
High Court is the first case to consider the existence of potential
'duty of recovery', which was left open after Philipp v Barclays
Bank PLC.
To recap, in Philipp, the UK Supreme Court held
that:
- A bank does not owe a general 'duty of care' when executing
their customer's instructions, for example to enquire whether the
customer might be acting under the influence of fraud. A
previous decision of the English Court of Appeal (Barclays Bank
v Quincecare) was sometimes thought to require banks
not to execute a transaction (without making inquiries) if
the bank had reasonable grounds to believe its customer was being
defrauded. In Philipp, the Supreme Court held that
no such general duty exists: the bank's primary obligation arises
pursuant to the customer's contractual mandate, which generally
requires execution of the customer's instructions.
- However, the Supreme Court left open the possibility that a
bank could be sued for not taking adequate steps to
recover a customer's funds (i.e., the 'recovery
duty').
In CPP Graduate School v NatWest Bank the claimant had
paid, in several transactions from its NatWest account, the total
sum of £415,909.67 into an account at Santander. The
Santander account was then emptied by the fraudsters.
Unfortunately, like Philipp, this decision was a
defendant's application for summary judgment and strike out,
meaning there is no final judgment. However, one of the
pleaded claims was based on the recovery duty. The duty was
pleaded both against the claimant's bank (NatWest), and the bank
controlled by the fraudsters (the Santander account).
The Court held that the recovery duty was arguable, including
against Santander (which was not the customer's bank):[v]
- The Court reviewed evidence of the payment retrieval system
between banks, which involves a series of indemnities given by
banks when attempting to recover their customers' funds. It
stated in respect of NatWest (the customer's bank) that (at 54):
"it appears that perhaps the most obvious step, if not the
principal step, that could be taken by a bank which is on notice of
a fraudulent scheme such as the one alleged here, is to offer an
indemnity to the bank receiving payment. Such an indemnity, I am
told by counsel, is against liability which the receiving bank
might incur to its customer (and, possibly, others) when preventing
any further payment out and as I understand it, allows the account
to be effectively frozen." The Court accepted that, to
effect recovery, this indemnity must be passed along promptly from
the first recipient bank (the 'first generation bank') to second
and subsequent 'generation' banks.
- The Court acknowledged (at [85]) that various issues will arise
about banks' potential exposure if a recovery duty was
recognised. However, because a recovery and indemnity system
already exists, the Court considered it may well be fair and
reasonable to impose a duty (ultimately, a matter for trial and
full argument).
- It was also relevant that Lloyds Bank (which was not a party)
managed to recover £14,000 of the claimant's funds. That is
because a Lloyds fraud investigator noted the unusual account
activity of the criminal gang and froze the relevant accounts.
[vi]
The precise scope of any recovery duty remains to be seen.
If found to exist, it may provide an avenue of recovery for victims
of fraud (and a headache for banks). It is also unclear how
the scope of the possible common law duty will develop alongside
the UK's reimbursement scheme (and New Zealand's possible future
scheme).
[i] Martelli McKegg (Jacque Lethbridge and Michael Mabbett)
acted for the applicant in that case.
[ii] HCR 32.2. Where orders are sought 'without notice'
(as in this case), further requirements apply.
[ii] In fact, fraud is not necessary for freezing orders - but
they are commonly obtained in cases of fraud, given the obvious
dissipation risk.
[iv] Bankers Trust Co v Shapira [1980] 3 All ER 353 (which is
rarely cited in New Zealand, but is referred to in relevant
commentary and ought to apply here).
[v] The claim against NatWest was time barred (the claimant
waited 6 years since the payments were made to commence
proceedings). However, the claim against Santander was
arguable, since it could be shown that there were still funds in
the Santander account within the relevant time period (which could
have been recovered).
[vi] This might concern non-traditional banks, which don't
always have the same infrastructure as traditional banks, but can
therefore often provide a more efficient (i.e. cheaper)
service.