Keeping up with Jones
26 October 2009
7 March 2014
14 October 2013
4 April 2014
22 January 2014
Tantular v AG: Royal Court in Jersey provides clarification as to the impact of saisies judiciaires on discretionary trusts
9 July 2014
A recent court decision has muddied the waters as to who is liable for payments made in error. By Tony Anderson
The recent case of Jones v Churcher and Abbey National plc (2009) has brought into focus the systems and policies that banks currently utilise to deal with payments made in error. With the introduction of the Payment Services Directive (PSD) it is an area of banking law that will continue to receive scrutiny.
This article will cover broad point current practices between remitting and beneficiary banks where payments are made in error, how the above case has impacted on these practices and how the scenario will be affected by the PSD.
Much has been written already about the Jones case, but with the Payment Services Regulations (PSR) due to come into operation on 1 November, it is timely to revisit this case and to consider its potential effect on current bank protocols surrounding the processing of payments made in error.
The case is of interest as it appears to question current and established practices between financial institutions regarding payment processing. It is also of relevance due to the volume of payments between financial institutions locally and globally. Statistically, this means there is a large number of erroneous payments being made regularly that would be subject to the findings of this case.
There are various ways that a payment may be erroneous, including:
- where the payment is made to the wrong account with the correct institution (account number error);
- where the payment is made to the correct account but to the wrong institution (sort code error); and
- where multiple payments of the same amount are made to the correct account.
A common convention governing the allocation of payments is account number primacy, whereby the sort code and account number take precedence over any other details concerning the destination of the payment, such as the name of the account holder.
An existing practice between banks whereby funds have been paid into a customer’s account by mistake is for the bank receiving the payment (beneficiary bank) to obtain a debit authority from its customer to enable the account to be debited and the money returned to the bank that sent the payment (remitting bank) and ultimately to the party sending the payment. Only after the remitting bank has notified the beneficiary bank that the payment had been made by mistake will the beneficiary bank act to obtain the debit authority from its customer. Up until this point the beneficiary bank will have no knowledge that the processing of the payment was an error, unless its customer advises the beneficiary bank that they should not have received the payment to their account.
In the meantime, if the beneficiary bank’s customer has paid away the money knowing it was an error before the beneficiary bank receives notification, there is little the beneficiary bank can do to prevent this from happening.
An exception would be where there is obviously suspicious or fraudulent activity occurring on the account, at which point the beneficiary bank may freeze the operation of the account in accordance with its fraud prevention policies. With this type of scenario there may be a claim for unjust enrichment against the customer - however, the beneficiary bank would not be liable.
Even where the beneficiary bank has sent a debit authority to its customer for signing, should the customer still choose to deal with the funds there is little that the beneficiary bank can do to prevent this occurring (in the absence of suspicious or fraudulent activity) if the bank does not have a mandate in place with its customer authorising it to so act. An exception would be where the beneficiary bank was certain that the monies had been paid erroneously. However, if a beneficiary bank’s customer advises the beneficiary bank that it was entitled to the payment that the remitting bank says was erroneous, who should the beneficiary bank believe?
While a beneficiary bank may rely on its fraud prevention policies to freeze accounts being operated suspiciously, it will not be alerted to withdrawals from the account that appear to be made in the ordinary course. In difficult economic times the instances of people dealing dishonestly with funds that have come to their accounts by mistake rather than returning them to their rightful owners are likely to increase.
It would be of concern to a bank to freeze funds or to reverse a credit to an account of one its customers without good reason.
In the Jones case His Honour Judge Havelock-Allan QC suggested that there was nothing in Abbey’s current account terms and conditions stating expressly that the bank will not reverse a credit after funds have been cleared and no other document was produced to substantiate the mandate.
This appears to be an unusual position to reach. It suggests that a bank should ordinarily have the right to reverse a credit made to an account without the consent of its customer. It is envisaged that such a position would leave a bank open to claims from its customers regarding the appropriation of funds in the customers’ accounts. A bank acting in such a way would need to be in no doubt as to the true owner of the funds in question. Issues concerning the FSA’s ‘Treating Customers Fairly’ initiative would also become relevant.
Judge Havelock-Allan also stated in response to Abbey’s assertion that it would require an indemnity from the remitting bank before freezing its customer’s money that “it is a worrying feature of the evidence that there appears to be no convention protocol between banks for requesting or volunteering an indemnity”. Judge Havelock-Allan also suggested that a remitting bank should be used to asking for a counter-indemnity from payers when they report having remitted funds mistakenly.
Playing it safe
So what is the practicality of obtaining indemnities between remitting and beneficiary banks and counter-indemnities between payers and remitting banks? Will these be given readily?
It is conceivable that a remitting bank may also seek collateral from the payer to support any counter-indemnity, depending on the size of the payment to be processed. Assuming this would all need to be in place prior to the processing of a payment, such transactions would become significantly more complex to execute.
While Jones was limited to its fact, it still raises serious questions regarding current conventions between banks for erroneous payments. With the PSR introducing time limits by which payments need to be processed, as well as the responsibility and/or liability of payment service providers where payments are made defectively or in error, there will be a renewed emphasis placed on this area of banking practice.
A curious detail of the case was that Stephen Jones, a car dealer, intended to send the funds to a third party, a Mr Sharkey, but erroneously paid them to Kelly Churcher instead. Sharkey was an agent who was to forward the funds to a car supplier to enable cars to be delivered to Jones.
Churcher, who knew Sharkey, then paid the funds on to him at his insistence. Sharkey subsequently absconded with the funds without completing the transaction. It was only at this point that Jones sought to pursue Churcher and ultimately Abbey. Had Jones not made an error in his payment instructions and paid Sharkey directly he would have suffered the same loss without the ability to chase either Churcher or Abbey.
It is interesting that Abbey chose not to appeal this decision considering the significance of the case on current practices. It will be interesting to ascertain whether other banks faced with successful claims based on this decision will look to appeal them to clarify the position.
Tony Anderson is a banking partner at Pinsent Masons