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Singapore – Is Banking Practice Relevant To Construing The Customer’s Mandate?

1 September, 2014

 


The advent of electronic funds transfer services has made it convenient for customers to make payments from one bank account to another on the same day. The customer’s need for rapid payment, however, means that banks may have to adopt commercially sensible practices in processing the customer’s instructions. Should the bank’s commercial practices, which the customer may not be aware of, form part of the contract between the customer and the bank? 


This issue was considered recently by the English Court of Appeal in Tidal Energy Limited v Bank of Scotland plc [2014] EWCA Civ 1107, which involved an established banking practice where the receiving bank in an electronic funds transfer transaction did not check the beneficiary’s name for correspondence with the other identifiers given in the customer’s payment instructions (“the Banking Practice”). By a 2:1 majority, the Court held that the Banking Practice was relevant in construing the customer’s mandate to the bank. 


Facts 


The customer, Tidal Energy Limited (“Tidal”), instructed its bank, Bank of Scotland plc (“the Remitting Bank”) to pay one of its suppliers, Design Craft Limited (“the Beneficiary”), the sum of £217,781.57 (“the Funds”) using the clearing houses automated payment system (“CHAPS”). CHAPS is an electronic bank to bank same day payment scheme for payments made within the United Kingdom in sterling. 


On 31 January 2012, Tidal completed the Remitting Bank’s CHAPS transfer form (“the transfer form”). In section 1 of the transfer form, four identifiers were required. Besides the name of the intended recipient of the Funds (i.e. the Beneficiary), Tidal filled in three other identifiers – sort code, account number and bank name – with banking information supplied to it, purportedly by the Beneficiary. The Beneficiary’s bank was identified as Barclays Bank (“the Receiving Bank”).

 

 

Section 2 of the transfer form contained the following statement:

 

“You are hereby authorised to effect these instructions, either by
transmission through the Clearing House Automated Payments System or
by such other method as you may in your sole discretion decide.


I/We agree that no responsibility is to attach to you for any loss caused by
delays, interruptions or errors in transmission of payment, which are not
directly due to the negligence or default of your own officers or servants.


Please debit the payment from my/our account number detailed in Section
1. …”


Upon receiving Tidal’s instructions in the transfer form on the same day, the Remitting Bank initiated the transfer through CHAPS by sending the funds from its account to the account of the Receiving Bank. Although there was an account corresponding to the account number and sort code (provided purportedly by the Beneficiary) at the Receiving Bank, it was in the name of, and belonged to, a third party that was not connected with Tidal or the Beneficiary (“the Third Party’s Account”). Following the Banking Practice, the Receiving Bank did not check the name on the Third Party’s Account to confirm that it corresponded to the name of the Beneficiary. 


Later the same day, the Receiving Bank credited the Funds to the Third Party’s Account, while the Remitting Bank debited the same on Tidal’s account. 


Six days later, Tidal informed the Remitting Bank that it had been induced by fraud to provide the account details in the transfer form, which in turn conveyed this information to the Receiving Bank. However, the Funds were subsequently withdrawn from the Third Party’s Account. 


Tidal sued the Remitting Bank for wrongly debiting its account and applied for summary judgment. Tidal’s application was dismissed at first instance and summary judgment was in fact entered for the bank on the bank’s cross-application. Tidal appealed to the English Court of Appeal. 


Decision 


Lord Dyson MR in the majority held that on a proper construction of the transfer form, the Remitting Bank was authorised to debit Tidal’s account when the payment was made to an account matching only the three identifiers of sort code, account number and bank name. He accepted the evidence of a manager of the Remitting Bank that the Banking Practice entailed processing CHAPS payments on a “straight-through” basis without manual checks, as otherwise it would be “economically impossible” to meet the rapid payment timelines of CHAPS, which required a maximum inwards payment transmission time of 1.5 hours. Accordingly, he held that a customer who uses CHAPS would, subject to any contrary express terms, be taken to contract on the basis of the Banking Practice that governed CHAPS transactions. In addition, he emphasized that the contents of the Banking Practice would have been reasonably available to Tidal and any other customer who wished to use CHAPS.


The other majority judge, Tomlinson LJ, took a slightly different view as he was less convinced that it would be easy for a customer to ascertain the existence of the Banking Practice. He reasoned that Tidal, by executing the transfer form, authorised the Remitting Bank to execute the transfer in accordance with the Banking Practice.

 

In particular, he pointed to the customer’s confirmation in section 2 of the transfer form “You are hereby authorised to effect these instructions … by transmission through the Clearing House Automated Payments System” as a clear instruction to the Remitting Bank that the payment transfer was to be made in accordance with the Banking Practice. 


Tomlinson LJ also rejected the view of the dissenting judge, Floyd LJ, that a CHAPS payment could only be made where there was correspondence with all four identifiers. Such a construction would cause practical difficulties as subjective judgment would have to be exercised in determining whether any discrepancy in an identifier was sufficiently significant to negate payment. Hence, sort code and account number would be sufficient identifiers of the intended destination of the payment, which required only mechanical checking. 


Comment 


This case appears to have reinforced the principle stated in an old English case: “A man who employs a banker is bound by the usages of bankers”. The majority judge Lord Dyson MR observed that a banking practice may be used to decide whether a bank had complied with its contractual duty, as well as the meaning of the contract between the customer and the bank. 


On the other hand, the dissenting judge Floyd LJ opined that banking practice, if unknown or not reasonably available to both customer and bank, could not be relevant to deciding the meaning and scope of the authority granted to the bank. Even the other majority judge Tomlinson LJ was not inclined to base his decision on whether or not the nature of the Banking Practice was reasonably available to Tidal and any other customer. 


Therefore, this case may not be the final word on whether any banking practice can be used to construe the customer’s mandate. Meanwhile, banks operating electronic funds transfer services such as CHAPS may wish to consider the suggestion by Floyd LJ (which Lord Dyson MR endorsed) that the Remitting Bank in this case could make it clear on the transfer form that a “payment” in accordance with the customer’s instruction will be made if the sort code, bank and account number (but not the name) coincide with those on the form.

 

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For further information, please contact:

 

Kaylee Kwok, Partner, RHTLaw Taylor Wessing

kaylee.kwok@rhtlawtaylorwessing.com

 

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