TOPIC 5: INTERNATIONAL MONEY TRANSFERS AND ELECTRONIC TRANSFERS

Ellinger et al, Modern Banking Law (2006) pgs 537-577

Cranston, Principles of Banking Law (2002) pgs 37-45
SWIFT: Lingl, “Risk Allocation” (1981) 22 Harv Int’l L.J. 67
Geva, B., The Law of Electronic Fund Transfers,1999 looseleaf. Chs 1-3
UNCITRAL Model Law on International Credit Transfers

A. BASIC STRUCTURE OF FUNDS TRANSFER TRANSACTION

International fund transfer.

- Various ways in which money can be transferred across boundaries; focus on electronic fund transfers
- Fund transfer communication systems
o International transfers
 Swift
 A system owed by the banks themselves. A communication system. Note that it’s the chain of
direction, and not money that goes through the system.
 Preferred communication system – many banks use it even for domestic transactions sometimes
 Telegraphic transfer (old method)
o Domestic telecommunications systems – each country will have their own
 CHIPS and fedwire in US, Chaps in UL, MEPS in Singapore etc
 Note case where telex run out of paper
- Electronic funds transfer: Instantaneous, electronic means
- Terminology and structure of funds transfer
o Payment order: Sender, receiving bank, beneficiary
o Funds transfer: Originator, originator’s bank, intermediary bank, beneficiary’s bank, beneficiary
o Types of fund transfers
 In-house, Inter-bank, Correspondent or complex transfer
o Clearing and settlement process
 Settlement process not covered in this course. Between the O’s bank and the B’s bank, there would be a
process of clearing and settlement such that one bank would be paying the other. In a domestic transfer,
the clearing and settlement is through the domestic system.
o Correspondence banks have accounts that represent the positions
 Vostro and nostro accounts to reflect the positions of the accounts.

CHAPS System [Note: This part of notes is particularly relevant for Tayeb v HSBC bank, below]
- CHAPS stands for “Clearing House Automated Payment System”
- In 1996 CHAPS Sterling converted to a real time gross settlement system. This means that payments clear during the day on
which they are made, within a short period after the payer's bank issues the payment instruction, rather than by netting off
against all other relevant payments at the end of the day.
- The immediate clearing of such payments is an extremely important advantage of CHAPS because it enables transactions
involving the transfer of property, including foreign exchange and securities, to be completed on the same day.
- There is, as between a transferee bank and its transferee account holder, normally a crediting of the customer's account
immediately following electronic acknowledgement of receipt of the transfer.
- It is important to note that payments under the system were required to be: “an irrevocable guaranteed unconditional
sterling payment for settlement in real time across Members' settlement accounts at the Bank of England.”

How CHAPS works

- CHAPS settlement members are provided with special computer software known as gateways. The gateways handle all
communications between participating banks and security.
- A critical feature of CHAPS is that every payment is settled across the payer's bank's and the payee's bank's accounts at the
Bank of England before any payment notification is sent to the payee's bank. The sequence of events is as follows:
- The payer's bank initiates a payment instruction on its computer system.
- The payer's bank's computer system causes a settlement request to be sent to the Bank of England. This includes details of
the payee's bank and account number.
- If there are sufficient funds in the payer's bank's account at the Bank of England, the payment is settled by the Bank of
England by debiting the payer's bank's account and crediting the payee's bank's account.
- The Bank of England sends a confirmation of settlement to the payer's bank.
 - On receipt of confirmation from the Bank of England, the payer's bank's gateway automatically sends a payment message to
the payee's bank.
- On receipt of the payment message the payee's bank immediately transmits a logical acknowledgement ('LAK') to the
payer's bank. This follows authentication, but at some banks that did not occur automatically if the amount transferred was
over £50,000.
- Mechanisms exist to ensure that inter-bank settlement can take place even where there is a temporary shortage of liquidity.
However, in every case such settlement occurs before the payee's bank receives any notification of the payment.

Sources of law
- Domestic rules relating to ETF
o Singapore, UK: No special rules, general common law  e.g. tort law, restitution law
o US: Art 4S Uniform Commercial Code
- International rules
o E.g. UNCITRAL model law on International credit transfers 1992
 Doesn’t have a very great effect but helps to understand how rights of parties are balanced in the system.
 One way of trying to balance interest but prof doesn’t think it’s a very good balance interest
- Rules of the particular fund transfer communication system (contract)
o Under the fund transfer system  once one release the FTS, cannot retract. Even if the beneficiary hasn’t get the
money, the rules may be be that the originator cannot retract. Depends on the rules though

Legal nature of funds transfer

- Not a negotiable instrument
- Not an Assignment
o R v Preddy [1996] AC 815 – thief case
o Issue: Is a fund transfer an assignment from originator to beneficiary?
o Held: No, not a passing on of property that belonged to the originator. The liability of the originator’s bank to the O
will cease and the will incur another liability to the beneficiary.
- Authority and instruction
o Best way to categorize this. Chain of authority and instructions if there are multiple banks involved.
- Mistakes of sending to wrong account etc  Need to know who makes mistakes

B. POSITION OF TRANSFERING BANK

1. Transferring/Originator bank relationship with Customer: Agency

- In the majority of cases, it is employed by a customer who orders the transfer of a given amount of money.
- Some duties of an agent
o Fiduciary duty towards principal
o Obey the mandate of the principal
 It has been argued that the main duty of the originator’s bank is to adhere strictly to the instruction
given to it (Per Devlin J in Midland Bank v Seymour) , but this doctrine has been mitigated to a
certain extent in Royal Products v Midland Bank
o The originator’s bank, as agent, is obliged to carry out the instruction given to it with reasonable care and skill.
 An agent could rely on the ambiguity to justify the construction given by him to the mandate only if
the ambiguity is not patent:
 Midland Bank v Seymour [1955] 2 Lloyd's Rep. 147
 European Asian Bank v. Punjab & Sind Bank (No 2) [1983] 1 W.L.R. 642
 Note they are LOC cases
- Execute payment order properly
 Maintain proper equipment
 Duty not to facilitate fraud
 Engage a reliable correspondent
 Cases of ambiguity – what banks should do but note these are letters of credit cases

Duty to Act Promptly and With Skill

- The originator’s bank’s duty of care and skill imposes on it 3 specific obligations.
- First, the amount has to be transferred on time;
o If a specific time for transfer is expressly specified in the order, the bank has to comply with the deadline
 prescribed if it accepts the instruction to transfer.
o If the customer orders money to be transmitted by telex, the transaction should be carried out the same day.
o The same applies for a transfer by use of SWIFT.
- Second, the bank is under a duty to engage a reliable correspondent in the beneficiary’s country;
- Third, its obligation is owed only to an originator or transferor who is a customer
- The duty to act promptly and with skill applies not only to the execution of the originator’s payment instruction but also to
the handling of a stop order (countermand): Mellon Bank v Securities Settlement Corp
o M Bank did not act with ordinary care in executing the countermanding order, and therefore M bank was not
allowed to claim reimbursement of the money paid to.
- When the transfer is effected over the telephone, the bank is expected to take reasonable steps to verify whether the caller
was one of the account holders. The failure to make a positive identification may be considered a breach of deposit
agreement [Kashanchi v. Texas Commerce Medical Bank (1983) 703 F. 2d]

Duty to engage a Reliable Correspondent

 The originator bank has a duty to engage a reliable correspondent in the beneficiary’s country.
 At common law, the originator’s bank is vicariously liable for the negligence or default of its correspondent: [Equitable Trust
of New York v Dawson Partners]
 The principle is applicable also to the engagement of a correspondent by a bank charged by its customer with the collection of a
bill of exchange drawn on a merchant overseas: [Mackersy v Ramsays]
 In modern practice, banks engaged in transactions requiring the assistance of an intermediary stipulate in their contract with
the customer that the correspondent is employed at the customer’s expense and risks.
 Such exemption clauses are frequently included in giro transfer contracts, and have been upheld in the past.
 But today, such a term will be open to scrutiny under the Unfair Contract Terms Acts.
o Where the originator is acting in a business capacity, a clause disclaiming liability for the correspondent bank’s
negligence is likely to be upheld as reasonable under the 1977 Act on the ground that the originator’s bank has no
control over its correspondent.
o On the other hand, where the originator is a consumer, there must be a greater chance that the clause will be
considered both unreasonable and unfair under the Regulations.
 Where the originator selects a reputable bank to act as its correspondent, any claim that the bank failed to exercise reasonable
care and skill in choosing its correspondent is unlikely to succeed.

Duty owed only to Originator who is Customer

 The bank’s obligation is owed only to an originator or transferor who is a customer.
 In certain cases, the originator’s bank carries out a giro operation at the request of a member of the public who is not its
customer.
 If the amount is paid by the originator to the credit of the customer of the bank which he approaches, the sum received is on
behalf of the beneficiary.
 But if the money is to be transferred to the account of a customer of another bank, the position is unclear.
o The better view is, in this type of case, the transferring bank has no contractual relationship with the originator. It has
not accepted him as customer, and has no intention of entering into a contract with him.
o It accepts money for transmission solely in reliance on an established practice.
o Thus, no privity of contract between originator and transferring bank.
 The duty of care owed by the originator’s bank to the originator does not extend to the beneficiary.
o First, there is no contractual link between them.
o Even when the beneficiary has an account with the bank, any duty of care owed to the beneficiary is owed by the bank
in its capacity as the beneficiary’s bank and not as the originator’s bank.
o Secondly, in the normal course of events, the originator’s bank will not owe the beneficiary a duty of care in tort.

Midland Bank v Seymour [1955] 2 Lloyd's Rep 147 at p168 (English High Ct)
Significance: In case of ambiguities – bank can take a reasonable meaning but first need to seek clarification.
Facts: the instruments were ambiguous because they did not clearly spell out the information that the bill of lading had to contain.
Held: When the application gives incomplete, vague or ambiguous instructions, the bank should first seek clarification from the
application before the second choice, which is to give the unclear instructions a reasonable interpretation or refuse to follow the
instruments altogether. When an agent acts upon ambiguous instructions, he is not in default if he can show reasonable meaning.

European Asian Bank v Punjab & Sind Bank (No 2) [1983] 1 W.L.R. 642 esp at p 656 (English Ct of Appeal)
Held: Where ambiguity is patent and different parts of the document were clearly inconsistent with each other, bank should seek
clarification (especially with the facilities of modern communications available to him) instead of acting on a reasonable
interpretation of unclear instructions. Bank required to refer back to person giving instruments for further clarifications, especially
so if time permits.

2. Transferring/ Originator’s Bank relationship with correspondent bank

- Principal – agent relationship

- Responsibility for correspondent’s default
o Royal Products v Midland Bank (fund transfer)
o Mackersey v Ramsays, Bonar & Co (bill of exchange)
o Equitable Trust Co of New York v Dawson Partners (1927) 27 Ll L Rep 49 (letter of credit)
- Exclusion clauses are commonly used
o Calico Printers v Barclays Bank (1930) 36 Com Cas 71 (successful exclusion clause, bill of exchange
case)

- Issue: whether the originator has a direct right against the intermediaries?

o The knowledge that the transaction would be carried out by an intermediary bank doesn’t mean that there is a contractual r/s
between the originator and the intermediary bank. For e.g., the originator may not even know National is the intermediary
bank. The originator would always want to hold their own bank liability  more nexus.

Royal Products Ltd v. Midland Bank Ltd [1981 ] 2 Lloyd's Rep. 194 – must read case
Significance:
(1) The customer’s instructions for funds transfer were complied with as long as funds were made available to the
beneficiary bank;
(2) There was no privity of contract between the customer and the correspondent bank engaged by the customer’s bank.

Facts:
 The plaintiffs wished to transfer £13,000 from their account in Midland bank to their account in National, but in order
to save on transaction charges, gave instructions to Midland bank transfer to BICAL Bank, who will then transfer the
money to their account in BICAL, which will then transfer to National.
 The instruction to transfer to BICAL was given on 23 rd Nov 1972, but Midland bank transferred the money to National,
and instructed National to transfer to BICAL, with instructions for BICAL to transfer back to National instead.
 National, upon receipt of instructions on 24th Nov, did not send a banker’s order to BICAL, but instead credited the
amount to an internal suspense account in BICAL’s name.
 The plaintiff was then informed that his remittance to BICAL was complete.
 BICAL on the other hand used the £13,000 with National to settle other debts.
 BICAL collapsed on 25th Nov, and the plaintiff could not recover the money.
 They sued on several grounds, including
o (1) their instructions were never complied with by Midland Bank, so they are entitled to get back their money
on the grounds of money had received.
o (2) National was their agents, and breached certain fiduciary duties in carrying out their duties.

Held, Per Webster J:

 (1) The execution of a funds transfer instruction was an ordinary banking operation and Midland owed RP a duty of
care. There was no need for strict compliance with the plaintiff’s instructions to transfer the money to BICAL, and
Midland bank was not in breach of its mandate as long as it carried out its instruction with skill and care.
 In this case, the plaintiff’s instructions [i.e. payment to be made to BICAL] were complied with as long as National, the
agents, made funds available to BICAL by one way or another to an extent of £13,000 and notified BICAL that the sum
was to be credited to the plaintff’s account.
 For (2), Midland Bank was entitled to use National Bank as their correspondent in transferring the money , but as Royal
Products had given Midland no authority which would have the effect of creating privity of contract between them and
National, National was not an agent of the plaintiffs and did not owe them any fiduciary duties.
o Recognizes the bank’s right to instruct a correspondent.
o Although Midland was RP’s agent, it didn’t have power to bring RP and National under a contractual r/s
together. Possible for National and RP to be in a contractual r/s with specific authority (the Pf’ can give
authority to put itself into a contract to the agent with the agent’s agent).
o RP (Pfs) had given no authority to Midland to create privity of contract between National and RP. In the
 absence of such specific authority  no contractual r/s.
 PE: Even if there was an assignment, National Bank as an assignee, did not owe them any fiduciary duties.
 [On the nature of the transfer] BICAL was impliedly authorized by the customer to accept that credit by virtue of the
fact that the customer had an account with it, no consent to the receipt of the credit being expected from or required of
the same bank, by virtue of the same fact.
o NOTE: This is qualified by the fact that the originator and beneficiary are the same person. It should not be
thought that, simply by virtue of holding its customer’s account, a bank necessarily has its customer’s authority
to accept a transfer of funds from a third party into the account.
 The originator’s bank’s duty of care and skill imposes on it 3 specific obligations.
 First, the amount has to be transferred on time;
 Second, the bank is under a duty to engage a reliable correspondent in the beneficiary’s country;
 Third, its obligation is owed only to an originator or transferor who is a customer

Mackersey v. Ramsays, Bonar & Co (1843) 9 Cl. &. Fin. 846, esp. 651 (and see Equitable Trust Co. of New York v. Dawson Partners );
Facts: Aus 1829 – M instructed his bank, R&Co, to collect a bill in Calcutta. R instructed their London correspondents –
Coutts & Co. Coutts instructed their correspondent in Calcutta – Palmer & Co. Aug 1830 – no news; R & Co. wrote to Coutts
and queried. Coutts replied in Dec 1829 that the bill was accepted; payment expected in Jan 1830. Nov 1830 and July 1831:
further queries by R&Co. to Coutts. Feb 1832: M instructed R& Co to collect a second bill in Calcutta; Coutts forwarded
instructions to Alexander & co (new correspondents) in Calcutta. Dec 1832 – Alexander notified Coutts that they were
holding funds from first bill (first bill has been collected) Turns out that his was collected in Jan 1830 but notification came
only 2 years later. Collected 1089 Rupees: 100 Sterlings. M replied – I hope I will be getting interest
Feb 1834 – R and Co wrote to Coutts where’s the money, any news of the 2nd bill? Coutts replied – no further news. June
1834: M was told that Alexander collected 2nd bill, credited Coutts’s a/c but insolvency before transmitting funds
Transpired that only the amount on the 2nd bill was lost; R accounted to M for the money on the 1 st bill -104 pounds with
interest, M, through his brother, successfully claimed from R&Co to the amount of the 2nd bill.
Note how banking has changed.
Held: illustrates bank customer r/s in context of collection of payment. Recognizes the banks’s right to instruct a
correspondence. Don’t’ have to get permission from the customer to use correspondence. In both cases, the correspondent
banks were the ones who made the mistakes but held that the originator’s bank was liable for the default. Problematic if
there’s a line of correspondence. Where does the chain of responsibility lies?

Equitable Trust Co. of New York v. Dawson Partners (1927) 27 Ll. L. Rep.. 49 (principal's liability);
Significance: Bank issuing a letter of credit was held responsible for the correspondent. The principle is applicable also to the
circumstances arise which are unknown to the originator or cannot be reported to him in time and which are plainly of substantial
significance for him.
Facts: Dawson Partners Ltd. bought a quantity of vanilla beans from a seller in Batavia (Jakarta). They opened a credit in his
favour through Equitable Trust Co, instructing them to provide finance on presentation of certain documents, including a
certificate of experts. Equitable Trust Co. paid on tender of a certificate by a single expert. The seller was fraudulent and
shipped rubbish but the expert who inspected the cargo failed to notice it.
Held: At common law, the originator’s bank is vicariously liable for the negligence or default of its correspondent . Pfs not
entitled to be reimbursed by the buyers as the bank acted contrary to the instructions by making available finance on a certificate
of one expert instead of two. The accepting bank can only claim indemnity if the conditions on which it is authorised to accept are
in the matter of the accompanying documents strictly observed. There is no room for documents which are almost the same, or
which will do just as well. Business could not proceed securely on any other lines. The bank's branch abroad, which knows
nothing officially of the details of the transaction thus financed, cannot take upon itself to decide what will do well enough and
what will not. If it does as it is told or declines to do anything else, it is safe. if it departs from the conditions laid down, it acts at its
own risk.

Exclusion clauses
- The bank will commonly exclude liability for their sub-contractors - intermediaries.
- If the originator doesn’t have contractual with intermediaries, can only sue own bank, but the own bank will commonly have exclusion
clause for intermediaries.

Calico Printers v Barclays Bank (1930) 36 Com Cas 71 (successful exclusion clause, bill of exchange case)
Facts:
 Claimant engaged Barclays as its agent for the presentment of a bill of exchange, accompanied by commercial paper for
goods, to the buyer.
 Barclays, in turn, engaged its correspondent, the AP bank.
 As the bill was dishonoured, the claimant ordered Barclays to arrange for the storing and insurance of the goods
 This instruction was transmitted by Barclays to AP bank, which stored the goods but failed to insure them.
 In the contract between Barclays and the Principal, there is a clause saying that the bank reserves the right to appoint
an agent for carrying out its obligations.
 The bank accepted the customer’s instructions subject to an exemption clause: “collections are to be undertaken at
depositor’s risk only on the understanding that no liability whatever attaches to the bank in connection therewith or
with the storage and insurance of the relative goods.
 The goods were destroyed in a fire, and the claimant sued the 2 banks for breach of contract.

Held: Barclays Bank was not liable, as an exemption clause included in the contract between it and the claimant exonerated
it from liability for the negligence of its correspondents. AP Bank was held not to be liable to the claimant as there was no
privity between them. As a general rule, there was no privity of contract between a principal and his agent’s sub-agent.

- PE: Would this decision be valid today? Would the clause be unreasonable as between Barclays Bank and the
principle? UCTA.
- However, the above decision may not stand in the US:***NOTE US LAW***
o The originator can have a privity of contract with his bank’s correspondent if the latter had been expressly
selected by him: Silverstein v Chartered Bank 392 NYS 2d. 296
o In another case, the correspondent was also held to be in privity of contract with the originator: Evra
Corporation v Swiss Bank (below)

3. Originator/transferring bank R/s with beneficiary

- No contractual duty
- In Tort?

Wells v First National Commercial Bank [1998] PNLR 552 (English CA)
Facts: A company irrevocably instructed its bank to make a payment of £275,000 to claimant. The payment was not made.
The claimant sued the bank in negligence (tort) claiming that the bank owed it a duty of care to pay the sum of £275,000.
Held: On the facts, no duty of care. A banker is under no duty to pay bills or notes accepted or made by his customer and
domiciled with him for payment in the absence of special agreement, express or implied. In any event, even if there is such
an agreement between the drawee and drawer of the instrument, the will normally impose no contractual liability on the
drawee to the payee or other holder of the instrument, as there was no privity of contract between them. Would be better if
the beneficiary had direct contact with the originator’s bank prior or during the funds transfer such that there is a
contractual relationship.
N.B: In Singapore, hard to find a duty of care to establish a breach of the duty with. General tortious principle appears to be
difficult to be applied in such cases. However, Singapore courts cautious in protecting commercial interests; so the court
might impose tortious liability if the case is right.

cf. Shawmut Worcester County v.First American Bank (1990) 731 F. Supp. 57. _US CASE
Held: The beneficiary bank is the agent for its customer accounts not for the wire initiator bank or the initiator. The court
found that, even if there is an agency relationship between the beneficiary's bank and the initiator's bank, it ends at the
time beneficiary bank "finally" pays beneficiary. Once paid, the beneficiary bank is under no obligation to reverse the wire.

Abyaneh v. Merchant Bank North (1987) 670 F. Supp. 1298;

sec also Kashanchi v. Texas Commerce Medical Bank (1983) 703 F. 2d 936 (5th Cir.)(verifying customer's identity); contrast:

El Zayed v. Bank of Nova Scotia (1988) 91 N.S.R. (2d) 349 (CA).

 C. POSITION OF CORRESPONDENT BANK

1. Relationship with originator

- Usually no contractual obligations
o Royal Products v Midland Bank (supra)
o Held: Usually no contract, unless special case where originator had given the originator’s bank authority to
establish a contract with correspondent on originator’s behalf
- Contrast US position:
o Evra v Swiss Bank Corp
o Held District Court: correspondent bank is presumed to be an agent of the originator until such time as the
transaction is completed. (Case reversed by Circuit Ct of Appeal on the amount of damages, but not on the
finding that there was privity of contract)
- Tort?

Evra Corporation v. Swiss Bank Corporation 522 F. Supp. 820 (1981), revd. on another ground: 673 F. 2d 951(1982);
Significance: Alternative view on privity. Case is important in international funds transfer. When different jurisdictions
hold different views, there would be arguments on which jurisdictions to follow. Conflict of laws.
Facts: A rental was due under a charterparty at Banque de Paris at a predetermined time.
 The charterer ordered his bank in Chicago to transfer the rent.
 A telex message was transmitted by the London branch of the Chicago bank (Chase) to its correspondent in Geneva, the
defendant.
 Due to the fact that the defendant’s fax machine ran out of paper, the message was not received by the defendants.
 When the breakdown was discovered, the time for payment of rent was over, and the shipowner withdrew the ship.
 The charterer brought an action against the correspondent bank, and the defendant.
Held: Correspondent was liable under Illinois law. There was privity. Contractual r/s between Evra and SBC - different
position from the above cases. Under art4 of the UCC, the court analyzed the position of the collecting bank and held that an
analogy can be made. The collecting bank agency’s status is presumed to be one of contract. Any collecting bank when
collecting item for owner is presumed to be agent of owner until that item is collected. By analogy, the correspondence’s
bank must be treated as the agent of the originator (owner) until such time as the transaction is completed. Agency r/s here
hence implicitly contractual r/s too.
Note: Decision was reversed on appeal on grounds that the loss was too remote. CA partially overruled on the issue of
damages but didn’t touch on the point about privity of contract. Also held that doesn’t owe a tortious r/s with the
originator. Not a real authority since CA didn’t touch on this.
of contract. Also held that doesn’t owe a tortious r/s with the originator. Not a real authority since CA didn’t touch on this.

- However, chances are, in practice, there is an exemption clause saying that the customer will bear all liability arising
from negligence of agents (like in Calico Printers)
- You can argue that the exemption clause is unreasonable, but it will be difficult to succeed.
- If there is an action in tort, the situation will fail the test of foreseeability.

Calico Printers Association v. Barclays Bank Ltd (1930) 36 Com. Cas. 71

Facts: the Pfs instructed Barclays Bank to send bills of exchange with documents of title to a buyer in Berirut, but
nominated as the foreign bank to handle the presentation a bank which BB themselves would not ordinarily have used. (in
spite of this, it was held that the foreign bank was an agent for BB). The instructions to BB by the Pfs, their customers,
included the following;, “documents to be surrendered against payment; if goods are not taken up, please do your best on
our behalf to warehouse and insure them against fire”. The bank accepted the customer’s instructions subject to an
exemption clause: “collections are to be undertaken at depositor’s risk only on the understanding that no liability whatever
attaches to the bank in connection therewith or with the storage and insurance of the relative goods. BB sent clear
instructions to foreign bank, but goods remained in customs house uninsured and a fire broke out.
Held: No contractual r/s between the correspondent bank in Pakistan and the customer.

cf. Vroegop, [1990] LMCLQ 547, esp. 550

Walker v. Texas Commerce Bank (1986) 635 F Supp 678.

 D. Position of recipient bank

1. Relationship with the beneficiary

- Contract

2. Relationship with its instructing bank

- Contract
- Transition from being agent of instructing bank to being agent of beneficiary

3. Relationship with originator

- No contract
- Tort?
o UK – difficult
o USA (don’t need to know US cases)
 eg of successful case:
 Securities Fund Services Inc v American National Bank 542 F Supp 323 (USDC 1982)
 Contrast:
o Bradford Trust Co v Tex American Bank 790 F 2d 407 (5th Cir 1986)
o Shawmut Worcester Country v First American Bank and Trust Co (1990) 731 F
Supp 57
- Restitutionary claims against beneficiary’s bank
o E.g. change of position defence. When some bank is so negligent – can that bank allege that it can’t pay back
because they have already changed the position?

Securities Fund Services v. American National Bank, 542 F. Supp. 323 (USDC 1982)
Facts: A fraudster from SFS forged an instrument which misled a trustee into selling shares deposited with him, and into ordering
his own bank (the originator’s bank) into remitting the proceeds to an account with the beneficiary’s bank. Fraudster claimed the
account belonged to a perfectly respectable entity. The beneficiary’s bank accepted payment of the amount involved, even though
the said account was in the name of a totally different person.
Held:
 PE: In US law, there is privity of k between the principal, and his agent’s sub-agent.
 In US law, there is duty to check account name, art 4(a) of UCC
 The loss of the transferred funds is the reasonably foreseeable result of a deposit made where the name on the transfer
instructions differs from the name on the account into which the funds are deposited.
 PE: In SG, if you remit money into an account, you just need the payee number
 PE: Will an action in common law for restitution be allowed? No, cos the bank will argue that the money transferred is no
longer your money but the originating bank’s money under Foley v Hill. So you cannot trace the money, no action in common
law restitution
 PE: Could you have an action by obtaining an equitable tracing order? See case of Re Untalan
Comments:
 It is to be doubted whether a similar view would be taken by an English court. In particular, the question of proximity is likely
to present a thorny issue. If the originator sought to recover damages resulting from consequential loss, he would have to deal
with the issue of foreseeability.
 However, if all the originator sought to recover was the sum of money credited by the beneficiary’s bank to an inappropriate
account, the originator might very well succeed in an action in restitution.
o Although in most cases, the beneficiary’s bank would be able to establish the defence of change of position resulting
from withdrawal of the funds.

Bradford Trust Co v Texas American Bank 790 F.2d 407 (2nd Cir 1986)
- Loss resulting from forged instruction was held to fall on the Originator’s bank, which had failed to detect forgery and not
on the beneficiary’s bank, which overlooked the difference between the name of the account holder and the name of the
beneficiary nominated in the order.
- PE: English Law would probably reach a similar result by accepting the defence of the beneficiary’s bank that it had
changed its position when the funds were withdrawn by the beneficiary (fraudster).
Shawmut Worcester County v First American Bank (1990) 731F.Supp 57
- Beneficiary’s bank was held not to have been negligent when, instead of crediting funds to an account maintained solely by
the beneficiary, it received them for a joint account in the name of a beneficiary and a 3P.

2. PAYMENT AND COUNTERMAND

E. PAYMENT & COUNTERMAND

- Situations where a countermand is conducted:

o Either by the request of the originator
o When the transferor is insolvent
o When payment to beneficiary is late:
- In a situation where SWIFT doesn’t reverse directions, this would clearly affect the countermand situation: Once money
has been released into the system, the originator cannot countermand the payment.
- Note issue of beneficiary assenting
o May not be an issue in every case – can argue that assent is implicit  so not even an issue to start with.
- Typical situation: In the case where the originator has given countermand direction, then the originator’s bank would
have to obey the instructions since it’s the originator’s agent. The originator could sue the agent in contract and agent’s
counter defence would be that it’s too late to countermand anymore.

When is a funds transfer completed?

 A countermand is precluded when an order of transfer is executed, but when is an order of transfer executed?
 An attractive argument is that the order is performed when payment is complete.
 But the question remains, when is payment complete?
 The object is to find a test for determining the moment at which funds are received by the beneficiary or his agent, so as to
preclude a countermand.
 The difficulty is, the position of the beneficiary’s bank varies from transaction to transaction., this means that it is impossible to
give a general answer as to when payment is complete.
 In each situation, a number of factors have to be considered:
o First, the nature of the money transfer. The moment a SWIFT transfer is concluded is different from the moment a
telex transfer is executed. In some other cases, the master agreement between the banks determines the time at which
an instruction to transfer becomes irrevocable.
o Second, the time of payment may depend on the number of parties involved and the role assumed by each of them.
o Take the example of a transfer involving the originating and beneficiary bank, correspondent. Between the originating
bank and the correspondent bank, the transaction may be complete and executed when the correspondent dispatches
it own message to the beneficiary’s bank.
o The beneficiary, however, may not may not be regarded as having been paid until the amount is credited to his
account by the beneficiary’s bank.
 There are 6 points of time where payment may be regarded as executed:
o First, time at which the originator’s instruction is transmitted by his bank
o Second, time at which the instruction reaches the beneficiary’s bank or agent.
o Third, the time at which the beneficiary’s bank sets into motion the internal machinery for crediting the beneficiary’s
account.
o Forth, the time at which the beneficiary’s account is credited with the amount.
o Fifth, the time at which the beneficiary is notified of the receipt of funds.
o Sixth, the time at which the beneficiary consents to receive the funds.
 Cases can be broadly divided into 2 groups, (1) those dealing with attempts to countermand money transfer orders or to
reverse payment, (2) those concerning the completion of a payment before a specific dateline.
 Relevance of agency principles
 Successful countermand:
o Banque Worms v Bank of America (OB made good the mistake to O)

Banque Worms v Bank of America

Significance: (OB made good the mistake to O)
Facts: 2nd direction is to countermand the transfer and asked to pay someone else instead. The 2nd direction was received before
the 1st direction; but because of a mistake, the bank paid according to the 1st direction. The bank voluntary paid back the 2nd person
because the bank realized it was responsible for the countermand. Issue: whether money could be obtained from the 1st
beneficiary from the mistaken payment.
Held: Restitution not possible, bank couldn’t get money back. Discharge for value rule  once the bank receives the money,
because the 1st beneficiary was indebted to the bank, the bank could used this money to discharge, and hence couldn’t get money
back

- Relevant factors
o Nature of money transfer
 e.g. in-house transfer rules may be different from a Swift transfer in whether payment can be
countermand.
o Number of parties involved
 Where there’s many intermediaries banks, the question may depends on where the money is in the chain
of transfer.
o When the fund transfer is completed.
 Various possible points in time when funds transfer might be said to be completed
 At least 6 points in time (note ellinger’s txtbook)  not suggesting that every step is right, just
possible times
o The first possible earliest time: when the originator gives instructions to originator’s
bank. (when the originator transfer money to his bank)
o Last step: when the beneficiary agrees to receive the funds. or when the beneficiary is
notified of the transfer (note may be a different time from when the amount is credited
into the beneficiary’s bank)

 Also depends on whether It’s a countermand or payment situation.

Cases involving countermand of payment

 Attempts to countermand arise in different circumstances.
 Early cases, suggested that payment is incomplete until the beneficiary manifests his consent to the transfer of the
funds: Rekstin v Sevro Sibirsko (1933)
o But this case has a narrow scope of application
o In this case, the originator did not owe any debt to the beneficiary, and was apparently not expecting payment,
and there was no evidence to establish the beneficiary’s assent to payment.
 In most modern transfers, the amount is transmitted to B’s account at his own request; B’s bank is given authority of
crediting B’s account by implication.
 The basic principles of agency support the view that the transfer of money to B’s bank is tantamount to receipt of funds
by B himself.
 Thus it can be argued that payment becomes complete and irrevocable at the moment it reaches the hand of B’s agent.
 But it is not clear at which point in time the beneficiary’s bank makes its decision to accept the amount involved on the
beneficiary’s behalf.

Rekstin v. Severe Sibirsko Gosudarstvennoe [1933] 1 K.B. 47;

Significance: assent important
Facts: Originator a Russian trading cpy while the beneficiary was a Russian trade delegation. The beneficiary had
diplomatic immunity. Court judgement had been obtained against the originator. Originator wanted to take the money and
keep it out of reach from debt creditors and wanted to credit with the stated owned enetities so that the order couldn’t
touch the state bank account. Originator transferred all the money in his account to the beneficiary’s account (in house
transfer). But court order passed when the originator’s account is closed, but the beneficiary hasn’t been informed or
credited.
Held: money still with originator, as beneficiary has not assented to receiving the funds, and didn’t even know that the
money was coming. The bank also didn’t t have authority to hold the fund on benefit of the beneficiary. Unusual situation
N.b: unusal case, may not be the same in other cases.

When does payment accrue to the beneficiary?

 For in-house transfers, payment is made if payee’s account is credited with payment at the close of business on the
value date, if such payment is made in good faith and intentionally: Momm v Barclays
 For CHIPS transfers, the transfer of funds was irrevocable from the time it was ‘released’ by the computer terminal of
the originating (or correspondent) bank: Delbrueck & Co v Manufacturers Hanover Trust
 From the above cases, it can be argued that the question of countermand is governed by banking practice rather than by
 abstract application of legal principles.
 The general principle is that a money transfer is complete when the funds are made available to the beneficiary’s bank
and accepted by it, intentionally, on the beneficiary’s behalf

Momm v. Barclays Bank International Ltd [1977] Q.B. 790;

Facts German bank - Hertzstack bank had certain foreign trading r/s with other banks. H wanted to transfer certain money
to Momm, with both of their accounts with Barclays Bank (in house transfer). HB doesn’t have enough money to transfer, so
the Barclays Bank decided to grant an overdraft to credit to Momm’s account. Internal procedure, and Momm wasn’t
notified yet. Practically, the beneficiary won’t know anyway but Momm suspected something and asked for credit and debit
account. Momm alleged that they were entitled to the money reversed. Instructions (25 june) credit (26june) 27 (reversal)

Held: Payment is made if the payee’s account is credited with the payment at the close of the business on the value date, if it
was credited intentionally and in good faith and not by error or fraud. If a payment requires to be made on a certain day by
debiting a payor customer’s account and crediting a payee customer’s account, then at the end of the day in fact and in law
must be that this has either happened or not happened, but the position cannot be left in the air.
Barclays note entitled to reverse the credit. Result may be different if reversal was on the same day as crediton. Wasn’t very
clear what was the evidence for this decision. Held that if the bank had started internal processes to account, it made a
decision to credit the beneficiary’s account. In this case, there was more than a decision to credit, there were notes and
alleges etc, just that bank wasn’t notified.
(Obiter): Countermand not possible once the process of crediting the payee’s a/c commences – payment is complete at
‘decision time’. That signifies the decision was already reached and on momms analaysis, that signifies that the debt is
already discharged.

Delbrueck & Co v. Manufacturers Hanover Trust Co 609 F. 2d 1047 (1979);

Facts: Pf had account with df’s bank consisting of 12.5 million dollars. Pf asked bank to transfer to H’s account in Chase
manhanttan bank (beneficiary’s bank) using the CHIPS system 11.40am NY time). Unknown to the bank, H’s was already
closed down at 10.30am. After ½hr after instructions to the bank, Pf wanted to stop payment. Despite attempts to stop
payment, money was transferred at the end of the day. Originator vs originator’s bank

Held Claimant’s action dismissed.

 The technology involving CHIPS transfer was such that a transfer executed through this network reached the
beneficiary’s bank almost as soon as it was released by the computer terminal of the originator’s bank.
 It was an understanding of all banks participating in the system that funds transferred by means of CHIPS could be
drawn upon by the B as soon as the electronic message was received by B’s bank.
 Thus the transfer of funds to the credit of H’s account was complete from the time it was effected by the defendant
(originator’s) bank.
 The fact that credit was not entered in H’s account until 9pm on 26 June was merely a matter of bookkeeping and
therefore irrelevant.
 Based on the rules/operation of the CHIPS system and the view of banks using it, the transfers were irrevocable at
11.36/7 am. The crediting of the a/c at 9pm was irrelevant. Court also used assignment reasoning – rejected in Libyan
Arab v BT.
N.B: This is way earlier that the other cases (US decision, not binding. And the US legislature actually overturned this
decision by enacting a provision that countermand is possible at this stage) Similar to the chips system. Used funds transfer
as assignment. But in singapore’s law, this is not adhered to. No countermand with regards to assignment analogy.

FDIC v. European American Bank and Trust Co. (1983) 576 F. Supp. 950
Held: suggests that payment complete when funds available even if no credit

Tayeb v HSBC (2004, UK High Ct)

Facts: Large amount of money transfer into Tayeb’s account  Suspicion of money laundering. But money was credited
already, tried to reverse the money transfer.
Held: Under the CHAPS system, the transfer was ordinarily irreversible once the receiving bank had authenticated the
transfer, sent an acknowledgement informing the sending bank that the transfer had been received and credited the funds
to its customer’s account.
 Revisiting the case of Royal Products v Midland bank, payment was deemed to have been made when funds were
made available to the beneficiary’s bank through one way or another.
 Thus the conclusion to be drawn from the above cases is that a money transfer is complete when the funds are
made available to the beneficiary’s bank and accepted by it, intentionally, on the beneficiary’s behalf

Typical fact situation of a payment of out time

The main issue is what constitutes due or timely payment?

 The basic rule was formulated by the CA in The Brimnes that any transfer of funds to B’s bank for the credit of B’s
account so as to give B the unconditional right to the immediate use of funds transferred was good payment.
o Transfer is complete when the beneficiary can treat the money as the equivalent of cash. When the beneficiary
can withdraw the amount from the bank in instance.
o This draws on the analogy that payment was complete if made in cash.
 Unfortunately, it is difficult to determine the time at which the credit balance entered into B’s account becomes the
equivalent of cash.
 Where a payment is made after the due date, the beneficiary’s bank did not have authority to accept such late payment
on behalf of the beneficiary: The Laconia
o Transfer not complete. Recipient bank had only taken provisional steps to credit the beneficiary’s account but
had not made a conscious decision to accept payment.
A secondary issue will be whether B’s bank had the authority to accept payment.
 In most cases where funds are transferred in accordance of terms with an underlying contract between O and B, the
bank will have the beneficiary’s actual authority to receive and accept payment.
 In cases where B have instructed the bank not to accept payment, O can still claim that B’s bank had apparent authority
to receive and accept payment.
 To succeed in this claim, O must establish that he relied on the bank’s appearance of authority.
 O must not know or reasonably know of the limit on the bank’s authority.
 Further, it can be argued that O is put on notice when he makes payment outside the terms of the contract (e.g. make
late payment)
 This puts onus on O to enquire about the extent of authority of B’s bank to accept such payment so as to bind the payee.
 In The Laconia, Lord Salmon observed that the shipowners could have deemed to have accepted the payment if the
bank had kept it for an unreasonable time.

The Brimnes (1975, UK CA)

Held: Transfer is complete when the beneficiary can treat the money as the equivalent of cash. When the beneficiary can
withdraw the amount from the bank in instance.

The Laconia (1977, UK House of Lords)

Facts:
 The beneficiary’s bank received a telex requiring it to credit the shipowner’s account with an amount due under a
charterparty.
 This telex was received at B’s bank after the date (where payment is due) appointed in the charterparty, but shortly
before the bank was given instruction by shipowners to refuse payment.
 The bank began taking steps required for crediting the shipowner’s account, but on receiving the instructions to refuse
payment, it refunded the amount to O’s bank before executing the actual entry to remit the money.
 One issue arising is whether the transfer of funds to B’s bank had the effect of completing payment due from the
charterer.
Held (HL):
 Transfer not completed before the amount was refunded, as B’s bank had not taken a conscious decision to accept
payment.
 The steps taken by it for processing the telegraphic transfer were purely provisional and procedural.
 [Per Lord Salmon] However, the shipowners could have been deemed to have accepted the payment if their bank had
kept it for an unreasonable time.
 Idea of authority and assent coming in here.
Comment:
 The Laconia illustrates that payment as between O and B will be complete only where B’s bank has B’s actual or
apparent authority both to receive and accept the transfer of funds on the beneficiary’s behalf. Their lordships held that
the shipowner’s bank had only limited authority to receive payment and obtain instructions from the owners, it did not
have the authority to accept the late payment on behalf of the owners.
 Prof not convinced. How to show that there was a conscious decision to accept money.

Giro Transfers
 A Giro transfer will be considered conditional, and therefore not an effective payment, where it does not provide the
beneficiary the same availability as cash: The Chikuma (Transfer made on dateline, but interest on money can only
accrue after dateline)

The Chikuma [1981] 1 W.L.R. 314

Facts:
 A rental was due in Rome on 22 Jan 1976.
 On the preceding day, the charterers instructed their bank to remit the funds.
 By a telex message dispatched on the due date, O’s bank remitted the funds to B’s bank.
 The amount was received on the same day, but it was noted that the “value date” was shown as Monday 26 Jan.
 Under Italian law, the funds become available to the shipowners on 22 Jan, but interest was to accrue only from 26 Jan.
 On 23 Jan, the shipowners decided to treat this remittance as out of date, and instructed their banks to reject payment.
Held (Per Lord Bridge):
 For the ship-owners, that payment in the context of money transfers encompassed settlement not only by legal tender
but also by means of final credit entries.
 Broadly speaking, payment was effected when the transferee or B, had unconditional use of the amount settle by means
of the ledger entry.
 An amount which could not be used for investment purposes, for example, for obtaining interest on it, was not the
equivalent of cash.
Comments:
 There is criticism that the case should have been regarded as governed by English law, under which funds would have
accrued to the ship-owners unconditionally when credited to their account regardless of the stipulated “value date”.
 Such criticism is unfounded, as the majority of English banks would regard the stipulation of “value date” in a money
transfer order as an indication that B’s account should not be credited before that date.
 Thus, it is believed that under English banking practice, the amount would not have been entered into the shipowner’s
question until 26 Jan.

 In summary, it is arguable that the cases decided on this point emphasize the need to make funds available to
the beneficiary by the stipulated date.
 They are available only if the beneficiary can utilize them without any restrictions as if they were cash.

Middle East Banking Co. v. State Street Bank International (1987) 821 F. 2d 897 (rectification of error).

When is a Funds Transfer Completed?

Tayeb v HSBC [2004] EWHC 1529, [2004] 4 All E.R. 1024

Facts:
 The claimant T had an account with the Derby branch of HSBC.
 On Sept 21 2000, a representative of the purchaser of T’s databased transferred by CHAPS some £944,114.27 to the
claimant’s account.
 The bank acknowledged the transfer through CHAPS by sending out an acknowledgment code and credited the
claimant’s account at 14:02.
 Later that day at 16:14, the bank’s manager became suspicious of the transfer and froze the account, citing money
laundering concerns.
 On the following day, the bank retransferred by CHAPS the same amount back to the payor, and closed the claimant’s
account.
 It was common ground that T’s circumstance justified the bank being suspicious, although the origin of payment was
subsequent found to be completely honest.
 T sued to bank to recover the amounts due, citing that the bank remitted the money back without T’s mandate.
 The bank raised 2 defences: First, T’s account remained reversible until the end of the day of receipt (by Momm’s v
Barclays Bank, above); Second, such remittance was effected to save HSBC from incurring possible liability (1) as
constructive trustee of proceeds from breach of trust; (2) under money laundering regulations.
Held:
[On the legal nature of CHAPS transfers]
 In accordance with the bank contract, T opened an account that was available for receiving incoming CHAPS transfers
which complied with the CHAPS rules and the terms of the account.
 Judging by CHAPS transfer rules, it was clear that payment through CHAPS was effected on a real time, irrevocable
basis. (See above first part on how CHAPS works)
 Further, although CHAPS rules provide for exceptions where payments can be revocable, such payments are only
revocable where they have not been credited to the account holder, and must be revoked by 12 noon the next business
day.
 When the recipient bank’s (HSBC in this case) computer terminal transmitted a “logical acknowledgement” (LAK) in
response to the payment message sent by the remitting bank, such payment was deemed complete.
 Once a LAK was issued by the recipient bank and the funds were credited to the payee’s account, they became a debt
due to the payee from the bank.
 On facts, if T had made inquiries at the branch between 14:02 and 16:14; he would have been told that the transfer had
been included in that balance and he could have withdrawn from the account on that basis.
 Thus payment already completed at 14:02 on 21 Sept and the bank could not debit T’s account without prior
permission.
 Rule in Momms v Barclays Bank held to be inapplicable as payment through CHAPS was effected on a real time basis.
[On the bank’s second defence]
 The apprehension of a constructive trust action was unrealistic, as it is difficult to see how, in cases of this sort, the
recipient bank could be held to have the required knowledge that the funds were trust property.
 Furthermore, with regards to money laundering laws, the provisions in question did not sanction a remittance back of
the funds without the customer’s consent once such funds have been credited to the customer’s account.

Preparation for class

Question 1: When is a funds transfer completed?
Helpful reading:
- Look at the cases on the reading list on payment and countermand
- Chapter from Ellinger’s Modern Banking Law
- Optional: article by Eric Chan [2005] 17 SAcLJ 84
Question 2: Please refer to the hypothetical question on the Question sheet.
Question 3: Please reflect on how the UNCITRAL Model Law on International Credit Transfers deals with the problems
that might arise in international electronic fund transfer transactions.