THE RECEIVING BANK'S ROLE IN CREDIT TRANSFER TRANSACTIONS
| DOI | http://doi.org/10.1111/j.1468-2230.1982.tb02485.x |
| Published date | 01 July 1982 |
| Date | 01 July 1982 |
| Author | Richard King |
THE
MODERN
LAW
REVIEW
-
Volume
45
July
1982
No.
4
THE RECEIVING BANK’S ROLE IN CREDIT
TRANSFER TRANSACTIONS
IN
several recent cases concerning payments made under the credit
transfer system the courts have assumed, without argument, that a
bank when receiving payments from a person who is under an
obligation to make such payments to the bank’s customer acts as
an agent for the customer. It is the purpose of this article to discuss
this assumption.
In bank transfer transactions banks frequently act as agents for
their customers since, when effecting such transactions, the bank acts
upon the instructions of the customer. Thus, in the operation of
a
direct debiting arrangement. the payee’s bank is instructed to obtain
payments due to the payee and in a credit transfer arrangement the
payer’s bank is instructed to effect the payment.2 In both situations
an agency relationship arises, yet it need not be concluded that this
relationship pervades the whole of such transactions. Thus Chorley,
while
in
general suggesting that in credit transfer transactions the
paying bank is to be regarded as the payer’s agent and the collecting
bank as the payee’s agent, states
4:
“
It is arguable, however, that
on
receipt of
a
credit transfer on behalf of his customer the banker
rcceives the money as a borrower under the rule in
Foley
v.
Hill.”
Chitty. on the other hand. states
6
:
“
That the recipient banker-like the paying banker-is engaged
as an agent is indisputable;
it
is less certain who
is
to be re-
garded as his principal. The Memorandum of
1967O
indicates
1
The Brimnes
[1975] Q.B. 929;
Astro Amo Compania Naviera S.A.
v.
Elf Union
S.A.,
The Zographia
M.
119761 2 Lloyd’s Rep. 382;
Momm
v.
Barclays Bunk Inter-
nafional Ltd.
[1977] Q.B. 190;
Mardorf Peach
&
Co. Ltd.
v.
Atfica Sea Carriers
Corporation
of
Liberia, The Laconia
[1977]
A.C.
850;
Afovos Shipping
Co.
S.A.
v.
I<.>
Pagnan
and
Filli.
The Afovos
[19801 2 Lloyd’s Rep. 469.
per
Lloyd
J.
2
Similarly, it
seems
that a bank instructed to issue a letter of credit will be an
agent
of
the buyer-see,
for
example,
Guaranry Trust
of
New York
v.
Van den
Berghs Ltd.
(1925) 22 LL.L.R. 447, 452, 454 and 457;
Eigtred
v.
National Bank
of
Scotland
(1926) 25 LL.L.R. 99.
3
Law
of
Banking
(6th ed.), p. 266.
4
Ibid.
at
p.
261.
6
Chitty on Contructs
(24th
4.).
Vol.
11,
pp. 242-243.
6
A
document, entitled
“
Bank Money Transfer Services
”
and first published in
1967 by the Clearing Banks and the Scottish banks, which is addressed
to
the public
369
-_
VOL.
45
(4)
1
370
THE
MODERN LAW REVIEW
[VOI.
45
that the participating banks are authorised to act for each other
in giro transactions; but
it
does not show who is to be regarded
as principal where an account is paid or remitted to a bank
with
a request that it be credited to an account maintained by a
customer.
Is
the principal the person or bank that remits the
amount or is it the customer for whose credit the amount
is
received?
”
Chitty concludes that the principal is the customer for whose credit
the amount is received and this is the assumption of the cases.
One such case is Mardorf Peach
&
Co.
Ltd.
v.
Attica Sea Carriers
Corporation
of
Liberia, The Laconial Here the question arose as to
whether receipt
of
money by a bank for payment into a customer’s
account constituted an acceptance of the payment by the customer.
The facts were as follows: the Laconia was time chartered to the
plaintiffs on the New York Produce Exchange form, under the terms
of
which hire was to be paid in cash in United States currency semi-
monthly in advance
“
to the owners . .
.
into their bank account with
First National City Bank of New York,
30
Moorgate, London,
E.C.2
to the credit of
O.F.C.
Account
No.
705586.”
At about 15.00 on the
day after the hire became due a messenger from Midland Bank
Limited, which was acting for the charterers, delivered to First
National City Bank
(“
FNC
”)
at Moorgate a payment order under
the London Currency Settlement Scheme for the amount
of
the hire
due. Between
15.10
and
15.15
the payment order was received and
stamped in the sorting office
of
FNC and then taken to the transfer
department where an abbreviated instruction to be carried out
elsewhere in the bank was stamped on
it.
At about the same time,
the owners’ agents, as they had earlier requested, were informed by
an official
of
FNC that a payment order for the amount of hire had
been received. This official was immediately told
to
refuse the money
and return it, whereupon the earlier annotation was deleted and the
words
“
Beneficiary has refused payment. Advise remitter by phone
”
were written on it. At
18.55
on the same day the owners withdrew
the vessel from the charter pursuant to the withdrawal clause. The
issue was whether the owners had waived their right to treat the
payment as unpunctual by accepting
it.
Donaldson
J.
giving judgment on
a
special case stated by arbitra-
tors, held that the hire was not to
be
regarded as paid when the
payment order was handed over the counter at FNC but only when
it was credited by FNC to the nominated account. In the Court
of
and which sets
out
the advantages of bank giro transactions. Since the publication
of
the memorandum any person, regardless
of
whether he has a bank account,
may
pay an amount
of
money to one
of
the participating banks
for
the credit
of
an
account with that
or
any other bank.
7
[1976]
2
All
E.R.
249, C.A.; [1977] A.C.
850, H.L.
The
case also raised
a
question of construction of withdrawal clauses in time charterparties-in the
House
of Lords the decision
of
the Court
of
Appeal in
Tt:
Georgios
C.
119711
1
All
E.R.
193.
where the words
“
In
default of payment
. . .
In
default and
so long
as default continues
.
.
.,”
was overruled.
8
A scheme designed
to
facilitate the settlement of inter-bank dollar accounts.
were construed as meaning
July
19821
CREDIT TRANSFER TRANSACTIONS
371
Appeal, Lord Denning
M.R.
and Lawton L.J. held that payment by
the charterers had taken place when the payment order was handed
to the receiving bank as agent for the owners and was accepted by
it without objection, the basis for this conclusion being that payment
orders are treated as the commercial equivalent of cash by banks
and that after the payment order was handed over the charterers had
no
control over the payment, Accordingly, the owners were to be
treated as having, through their agent, performed an unequivocal act
consistent only with an election not to withdraw the vessel and
consequently their right to withdraw had been waived. Bridge L.J.
dissentedlO on the ground that the payment had not been received
in circumstances which gave the bank an opportunity to reject it.
When the payment order was tendered to the bank as agent for the
owners the bank was entitled to a reasonable opportunity to consider
the position before deciding whether to accept
or
reject the payment
order and the bank's subsequent communication with the owners
followed by rejection was reasonable in the circumstances.
The House
of
Lords unanimously allowed an appeal against this
decision although the assumption that
FNC
was the agent of the
owners was not questioned or the contrary argued." Both Lord
Wilberforce (with whom Lord Simon agreed) and Lord Salmon
held
l2
that
FNC,
though the agent of the owners, had only a limited
authority to accept payment and that that authority extended only
to an acceptance of a payment made punctually. The bank did not
have authority to make commercial decisions on the owners' behalf.
Since the owners had acted immediately in instructing the bank to
reject the payment
as
soon as they were informed that it had been
tendered, there could be no acceptance.ls Lord Salmon went on to
say," however, that
if
the bank had kept the payment for an
unreasonable time, and the charterers had been led to believe that
the owners had accepted payment, this would have constituted a
waiver.18 Lord Fraser rejected the argument that the payment order
could not be said to be ineffective on four grounds
:
first, that since
payment orders take up to 24 hours to process, payment was not
effected at the time of withdrawal since the process had not been
completed; secondly, that receipt of the payment order
by
the bank
did not
of
itself constitute acceptance; thirdly, that the bank was
[
1976) 2
All
E.R.
249,
255-256
and 259-260,
10
Ibid.
at
DD.
262-263.
__
11
[
19771
A.C.
850,
854-855.
12
Ibid.
at pp. 871-872 and 879-880.
13
The
Brirnnes
[19751
Q.B.
929. where the argument proceeded on the assumption
that if the payee's- bank was indeed the agent if the payee and not of the payer
payment would have been made, is
to
be regarded as a special case the facts of which
warranted the assumption-see
ibid.
at p. 871,
per
Lord Wilberforce.
14
Ibid.
at p.
880.
16
On
the basis that the bank could not make a decision of this kind on behalf
of the owners such a proposition must be founded on a duty in the owners
to
instruct the bank that the payment must be rejected
so
that their failure
to
do
so
constitutes a waiver.
18
Ibid.
at pp. 884-886.
372
THE
MODERN
LAW
REVIEW
[Vol.
45
agent only to receive the payment and not to waive the owners’
rights-the function in receiving payment was merely ministerial-
and consequently a reasonable time had to be allowed for the bank
to obtain instructions on the rejection of the payment; and fourthly,
that the marking of the payment order did not constitute a final act
of acceptance by the bank upon which the charterers could rely.
Lord Russell held
l7
that none of the dealings with the payment order
could constitute an unequivocal act of acceptance on behalf of the
owners
so
as to constitute a waiver. although he did intimate that
an entry made in any
of
FNC‘s books relating to the owners might
constitute such an act and it seems that he accepted that the bank
was the agent of the owners to do any act
in
respect of the payment.
The analyses
of
the facts conducted in
The
Laconia
laid great
stress on the distinction between receipt of a payment by the bank
and acceptance of that payment as fulfilling an obligation owed by
the transferor to the bank‘s customer. Clearly,
in
cases where the
customer has instructed the transferor to make payment to his bank
account the bank has no option but to receive the payment. The
decision of four of the members of the House
in
The
Laconia
is
that the bank does not have authority to accept such a payment
save where it is made pursuant to an existing obligation. However,
the decision leaves open the question of whether a payment made
in accordance with an existing obligation and accredited to the
customer must be regarded as having been accepted, upon receipt by
the
bank.
If
this is the case, the bank, since
it
will not usually be
concerned with the way the obligation
to
pay arises and will not
know why the payment is being made, is placed in the position of
being able to accept or otherwise a payment without being aware
of the rights of the parties. Thus the payment may be made
in
cir-
cumstances where the bank’s customer, knowing
of
a breach
of
contract by the transferor entitling him to terminate the contract,
has not in fact terminated
it
at the
time
the payment is made
so
that an unequivocal acceptance of the payment may amount to
a
waiver of his right to do so. While it might be objected that on
Lord Wilberforce’s reasoning such a waiver would require a com-
mercial decision which the bank does not have authority to take, the
payment may be made at a time not expected by the customer with
the result that he fails to issue the instructions to the bank to return
the payment within the reasonable time which Lord Salmon and
Bridge L.J. consider necessary. Indeed, on Lord Fraser’s view it is
for
the bank to obtain the instructions within a reasonable time of
the payment being made. Yet the bank will generally not know
whether instructions are required or not.
In the light of the difficulties produced by the analyses in The
Lacunia and the limited nature
of
the authority with which the bank
is said to be clothed it is relevant to consider whether it is necessary
17
Ibid.
at
p.
888-889.
18
Ibid.
at
p.
889.
July
19821
CREDIT TRANSFER TRANSACTIONS
313
to
introduce the concept
of
agency at all. In
Foley
v.
the
House
of
Lords held that, in the absence of evidence of
a
special
relationship between a bank and its customer, the relationship
is
that
of
dcbtor and creditor.20 Thus Lord Cottenham L.C. said
*’
:
“
The money placed in the custody
of
a banker is, to all intents
and purposes, the money
of
the banker, to do with as he
pleases; he is guilty
of
no breach of trust in employing it; he
is not answerable to the principal if he puts it into jeopardy,
if
he engages
in
a hazardous speculation; he
is
not bound to
keep it
or
deal with it
or
the property of his principal, but he
is of course answerable for the amount, because he has con-
tracted, having received that money, to repay
to
the principal,
when demanded, a sum equivalent to that paid into his hands.”
Similarly Lord Brougham said
22
:
“
I
am now speaking
of
the common position of a banker, which
consists of the common case
of
receiving money from his
customer on condition
of
paying
it
back when asked
for,
or
when drawn upon,
or
of receiving from other parties, to the
credit
of
the customer, upon like conditions to be drawn out
by the customer, or, in common parlance, the money being
repaid when asked for, because the party who receives the
money has the use of it as his own, and in the using
of
which
his trade consists, and but for which no banker could exist,
especially a banker who pays interest.”
These passages suggest that when
a
bank receives money for the
account
of
its customers it receives the money in its own right and
that it makes no difference whether the sum is paid to the bank
by
the customer himself
or
by a third party.
So,
in the same way that it
is inappropriate to say that the bank receives money paid
by
the
customer into his own account as agent for the customer it is also
inappropriate to say that the bank receives money paid by
a
third
party
for
the account
of
the customer as agent for the customer.
This
point was discussed
by
the Divisional Court
of
the Queen’s
Bench Division in
Midland
Bank
Ltd.
v.
Conway
Here, the Midland Bank Ltd. received money paid to it for the
account
of
a person resident in Peru in respect
of
rent payable to
that person as freehold owner
of
demised premises. The Conway
Corporation served upon the bank abatement notices in respect of
a nuisance upon the premises under the terms of the Public Health
Act
1936
upon the basis that the bank was receiving the rent as
agent for the freehold owner within the meaning of section
343
(1)
of
that Act. The court held that in the circumstances the bank was
not an agent for the purposes of the Act.
The
bank gave no receipt
19
(1848) 2
H.L.C.
28.
20
See
also
Jouchimsoti
v.
Swiss
Bauk
Corpornfioti
[I9211
3
K.B.
110,
127,
per
Atkin
L.J.
21
(1848) 2
H.L.C.
28,
36-37.
22
Ibid.
at
p.
43.
[I9651
1
W.L.R.
116.5.
374
THE
MODERN
LAW
REVIEW [Vol.
45
for the money,
it
had no right to refuse acceptance of it and was
acting solely under its duty as a banker to receive any money paid
in. It was not, therefore, a proper inference that there was a special
relationship between the bank and its customer which constituted
the bank an agent to receive the rent. Lord Parker C.J. and Browne
J.
did not, however, express any view as to whether the bank in
receiving money for its customer might be an agent in the more
limited sense discussed in
The
Luconia
although Browne
J.
recog-
nised that the point
“
might give rise to somewhat nice questions.”
Sachs
J.
was more forthright
24
:
“
Here the money was received
by
a bank, and prima facie it was received by virtue of the relationship
of banker and customer; that is quite a different character from that
of an agent.”
Further support for this view is implicit in the judgment
of
Webster
J.
in
Royal
Products
Ltd.
v.
Midland
Bank
Ltd.26 This
case arose from the fact that on November
23,
1972,
the plaintiffs
wished
to
transfer a sum standing
to
their credit in an account with
the defendants to their account with the Bank
of
Industry, Com-
merce and Agriculture Ltd. (“BICAL”) in Malta. On that date
in order to carry out an instruction to this effect the defendants
instructed by telex a correspondent bank
in
Malta, the Bank
of
ValIetta Ltd. (“National
”)
to
pay to BICAL the requisite sum
“
for advice credit Royal Products.” In purported compliance with
this instruction National credited the sum to an internal suspense
account in the name
of
BICAL which was specially opened and
on
the same evening (November
24)
or on the morning
of
the next
day National notified BICAL that they had passed a remittance to
BICAL’s credit
for
the account of the plaintiffs.
On
November
25
BICAL drew a cheque for that sum upon National in favour
of
a
third party and the sum was credited to an account of the third
party on November
27.
On November
25
BICAL closed and ceased
banking operations. The question arose,
inter
alia,
as to whether the
defendants, through their agents, National, had properly complied
with their instructions
in
making the transfer
to
BICAL.
In concluding that the defendants had properly complied with
their instructions Webster J. said
26
:
“
What, then, are the legal implications of [the instructions
given by the plaintiffs to the defendants]? How are they to be
regarded as a matter of law? In my judgment they are to be
regarded simply as an authority and instruction, from a cus-
tomer to its bank, to transfer an amount standing to the credit
of that customer with that bank to the credit of its account with
another bank, that other bank being impliedly authorised by the
customer to accept that credit by virtue of the fact that the cus-
tomer has a current account
with it,
no consent
to
the receipt
of the credit being expected from or required
of
that other
24
Ibid.
at
p.
1171.
38
[19811
2
Lloyd’s
Rep.
194. 20
Ibid.
at
pp.
195-199.
July
19821
CREDIT
TRANSFER TRANSACTIONS
375
bank. by virtue of the same fact.
It
is, in other words, a
banking operation of the kind which is often carried out intern-
ally, that is to say, within the same bank or between two
branches
of
the same bank and which, at least from the point
of view of the customer, is
no
different in nature or quality when,
as in the present case, it is carried out between different
banks.
.
. .
I
would hold that [the defendants] had carried out
[the plaintiffs’] instructions when [they] had enabled
[the
plain-
tiffs] to draw on or otherwise use the amount of credit trans-
ferred, which [the plaintiffs] would have been able to do once
[the defendants] had, in one way
or
another and either directly
or indirectly, made funds available to BICAL to the extent
of
€13,000
and had notified BICAL that the sum was to be
credited to the account
of
[the plaintiffs].”
The following comments may be made. First, that Webster
J.
accepts that
it
is implicit in the relationship of the customer and the
bank that the bank should receive sums paid to it for the account
of the customer. There is no question of a “special relationship”
to take the parties outside the principle in
Foley
v.
Hill.
Secondly,
completion of the instructions occurs when the customer of the
receiving bank is enabled to draw on or otherwise use the sum
transferred.*‘ This must be distinguished from the time when the
sum is credited to the receiving bank which may be prior to com-
pletion and the time when the receiving bank has actually credited
the sum to the account
of
the customer which may be after com-
pletion. Thirdly,
if
the bank is to be considered an agent
of
the
customer for receipt of the sum transferred a difficulty arises as to
when the bank ceases to hold the money as agent and when it starts
to hold the money as debtor. It is clear that Webster
J.
thought
that after the customer had been enabled to draw on or otherwise
use the sum transferred that his remedy against the bank was as an
unsecured creditor and not as an owner of property whose agent
had applied it for unauthorised purposes thus indicating that prior
to the bank actually crediting the sum to the account of the cus-
tomer the bank is a debtor and not an agent.28 Fourthly, Webster
J.
makes no distinction between
“
in-house
”
transactions (that
is
to
say where the transfer is between persons with accounts at the same
bank) and “out-house” transactions (that is to say where the
transfer is between persons with accounts at different banks).
Fifthly,
since the obligations of the customer and the bank regarding receipt
of the sum transferred derive from and are implicit in the relation-
27
The precise moment when this occurs
is
discussed in
The Brimnes
[
19751
Q.B.
929.
Momm
v.
Barclays
Bank
International Ltd.
[1977]
Q.B.
790;
The Laconia
[1977]
A.C.
850;
per
Lords Salmon, Fraser and Russell, and
The Chikuma
I19811
1
Lloyd’s Rcp.
371.
See generally F.
R.
Ryder
[1974]
3
L.M.C.L.Q.
286; 119771 2
L.M.C.L.Q.
114.
28
Ibid.
at p.
196.
See also
Eyles
v.
Ellis
(1827)
4
Bing.
112.
In
Eyles
v.
Ellis,
Best
C.J.
stated (at pp.
113-114)
that the payee had made the bank his agent and
had authorised it to receive the money due
from
the payer. This dictum
is
inconsis-
tent with the
decision
in
MZdlnnd
Bank
Lrd.
V.
Conwny
Corporulion.
376
THE
MODERN
LAW REVIEW [Vol.
45
ship of banker and customer there is no logical reason why an
analysis of the receiving bank’s role should vary depending upon
whether the transfer is made by the customer himself from another
account (as in
Royal
Products Ltd.
v.
Midland Bank Ltd.)
or
whether the transfer is made by a third party. Sixthly, despite the
above, Webster
J.
uses the language of agency when he speaks of
the “bank being impliedly authorised
by
the customer
to
accept
[the] credit.”
I
will return to this later.
Transfers made by third parties were considered in
The Brimnes,2g
A
IS
Awilco
v.
Fulvia
S.p.A.
Di Navigazioni, The Chik~rna,~~
Momm
v.
Barclays Bank Znternational Ltd.31
and
Rekstin
v.
Sever0
Sibirsko
and
The Bank for Russian Trade.32
The first two of these
cases involved the withdrawal of ships from time charterparties upon
the failure of charterers to pay the hire due punctually and the
payment clauses involved were similar to that in
The Laconia
It will
be
useful to analyse the facts of these cases in detail bearing in
mind the above comments.
In
The Brimnes
the charterer’s bank, Hambros, was instructed
to pay the hire to the shipowners’ bank, Morgan Guaranty Trust
(“MGT’’), in New York.88 Hambros also had an account at the
same branch of MGT. Accordingly, it instructed MGT
by
telex to
transfer the appropriate amount from its own account to that of the
shipowners. The Court of Appeal held that the payment to the ship-
owners was only made when MGT decided to credit the shipowners’
account and acted upon that decision, and that until that point
it
was acting as a sub-agent of the charterers.
In
the course of their judgments the members of the court
endorsed a statement
of
Brandon J. at first instance that good
payment can be considered made when the result
of
the transfer
of
funds is to give the transferee the unconditional right to the imme-
diate use of the funds. Edmund Davies
L.J.
said 84:
‘‘
In my judg-
ment that was clearly right, and if the parties had used different
banks, deIivery and acceptance of a banker’s draft or equivalent
document would have constituted the time of payment.” Megaw
L.J.
said
8~
:
“
Whatever mode of payment is used, payment is not achieved
until the process has reached the stage at which the creditor
has
received cash or has a credit available on which,
in
the normal
course of business or banking practice, he can draw,
if
he
so
wishes, in the form of cash.”
Cairns
L.J.
said
8e
:
29
[I9751
Q.B.
929.
10
[1979]
1
Lloyd’s Rep.
367,
per
Goff
J.;
I19801
2
Lloyd’s Rep.
409
(C.A.);
8%
[I9771
Q.B.
790.
**
119331
1
K.B.
47.
m
The
payment clause was substantially
the
same as that
in
The
Loconia.
84
r197.51
Q.B.
929, 948.
86
Ibid.
at p.
963.
36
Ibid.
at
pp.
968-969.
[
19811
1
Lloyd’s Rep.
371.
(H.L.).
July
19821
CREDIT TRANSFER TRANSACTIONS
377
“
I
think that the words
[‘
in cash in United States currency
’I
simply mean that the currency of payment is to be United States
dollars and that the payment must be in a form which does
not involve the giving
of
credit, for example,
it
must not be by
post-dated cheque
or
by
telex message with a ‘value date’
after the due date.”
These statements fell to be considered in
The
Chikuma
where the
position was more complicated, and more typical.
In
this case
Credito Italiano Genova, acting
as
agent for the charterers’ bank,
instructed the owners’ bank by telex
on
January
22,
1976,
to make
the requisite payment to the owners’ account as per the order of the
charterers’ bank.37 The Turin branch of the owners’ bank was to
receive a payment in respect of the same amount, valued at January
26, 1976,
in its account at Chase Manhattan New York where
Credito Italiano Genova also had an account
(“
Telecover you value
26
through Chase Manhattan Bank New York account yours
of
Turin stop”). The arbitrator found as a fact that under Italian
banking law and practice the credit transfer became irrevocable at
about noon
on
January
22.
Despite this, however, Robert Goff
J.
held that
“
payment in cash
”
had not been effected because interest
did not accrue to the account of the owners until January
26
when
the payment was to be covered and interest would have to have been
paid
by
the owners
if
the money had been withdrawn prior to that
date.
The Court of
Appeal
unanimously reversed this decision. although
Waller and Dunn L.JJ. seemed to accept the proposition of Cairns
L.J. cited above as correctly stating the position in English law as
regards
“
value dated
”
credit
transfer^.^^
The court, however, held
that
it
followed from the arbitrator’s finding that the credit transfer
was irrevocable on January
22,
that the substantive part of the telex
ordering the owners’ bank to pay the sum to the account of the
owners was capable
of
being an unconditional payment, and that
due effect had to be given to the arbitrator’s conclusion that it was
such. The sentence in the telex
“
Telecover you value
26
through
Chase Manhattan Bank New York account yours of Turin stop”
was merely an inter-banking
“
direction
”
(Lord Denning
9,
“
com-
munication
”
(Waller L.J.‘O) or
“
transaction
”
(Dunn
L.J.9.
The
court further concluded that the fact that the owners might be
required to pay interest
if
they withdrew the money from the bank
did not affect the nature of the payment as unconditional.
As
Waller L.J. said
42
:
37
Here the payment was payable to the owners
‘‘
care
of
”
their bank. There
seems
to
be
no reason why the use
of
such an expression should materially change
the obligation. especially as the original charterparty made with the
former
owners
of
the vessel contained a payment clause in the usual
terms.
88
119801
2
Lloyd’s Rep. 409, 413 and 414-415.
8s
Ibid.
at
p.
412.
40
Ibid.
at
p.
414.
41
Ibid.
at
p.
415.
42
Ibid.
at
p.
414.
378
THE
MODERN
LAW
REVIEW
[Vol.
45
“In my judgment, the arbitrator, looking at the case as a
whole, was entitled to come to the conclusion that there was
an unconditional payment of the cash; the money had been paid
to the bank as required by
[the
Charterparty]; the arrangements
which are said to impose conditions were conditions which
possibly the owners’ bank was going to impose; and
I
would not
accept that those affected the unconditional availability of the
money, which was the important matter to be considered.”
The House of Lords in a unanimous judgment given by Lord
Bridge reversed this decision. The formulation of Brandon J. in
The
Brimnes as to when payment was made was approved and the
issue became whether the word
“
unconditional
”
when used in that
formulation was to be construed narrowly
so
as to connote only the
absence of a condition which would be recognised in English law
as
being precedent to the performance of
a
contractual obligation or
whether it was to be given a liberal construction
so
as to connote
any requirement which would detract from the owners’ right to the
use of the funds, The House held that the Court of Appeal had
erred
in
giving effect to the former construction, that the latter
construction was correct and that, because of the interest charge
which would have been imposed
if
the money had been withdrawn
from the account, the owners did not have the unconditional use of
the
fund^.'^
Further the House summarily rejected the argument
that the sentence of the telex to the owners’ bank from Credito
Italiano containing the words
“
value
26
”
was an inter-banking
arrangement which did not affect the rights of the owners. In fact
the words were crucial because they informed the owners’ bank
of
the time when the debt which
it
was to assume to the owners
was to be made good, namely by a credit to be effected on January
26 to an account of the owners’ bank at a bank at which both the
owners’ bank and the charterers’ bank had accounts.
In highlighting the difference between English and Italian bank-
ing practice in this area
The Chikuma
is
of
assistance in considering
the role of the owners’ bank when it received the telex instructions
from Credito Italiano. It
is
submitted that
in
deciding to act upon
the telex the bank was not making a decision on behalf of the
owners but was making
a
banking decision, that is to say a decision
as to whether there were sufficient funds to the charterers bank‘s
credit to meet the instruction. The effect of Italian banking law
was
to
render the telex transfer
to
the owners’ bank in
The Chikuma
irrevocable and accordingly the bank was able to make a prudent
decision to credit the owners’ account with the money on the basis
of
the
promise
of the covering transfer of funds which would be made
to
the account at Chase Manhattan
of
the Turin branch
of
the
owners’ bank.
Under English law. however, a telex transfer with a subsequent
43
[
19811
I
Lloyd’s
Rep.
371, 375-376.
July 19821
CREDIT TRANSFER TRANSACTIONS
379
“
value date
”
is not irrevocable in the same way. It follows, there-
fore, that
a
prudent bank will not act upon a transfer instruction
until it is itself a creditor of the transferor’s bank. Taking the facts
of
The Chikuma
as an example, this would not be the case until the
account of the Turin branch of the owners’ bank at Chase Man-
hattan had been credited with funds on January
26.
If,
on the
other hand, the owners’ bank had held a sum of money to the char-
terers bank’s order as in
The Brimnes
the decision to credit the
owners’ account could prudently have been made immediately
although the insertion of a “value date” in these circumstances
would operate as the date when the transfer is to be made.
If
no
“
value date
”
is inserted the banking mechanism used would be
that used in
The Brimnes
rather than that in
The Chikuma.
More-
over, in a similar vein Mocatta
J.
in
Zim Israel Navigation
Co.
Ltd.
v.
Efly Shipping Corporation, The Efl~‘~
doubted whether
a
bank
which received a covering payment to its credit with a bank which
subsequently went into liquidation would be under an obligation to
treat that credit as one on which it was prepared to rely as security
for crediting its own customer’s
If
the above analysis is correct it follows that the decision by the
receiving bank to credit its customer’s account is not a decision made
on behalf of the customer receiving the transfer. Indeed it is more
appropriate to say that, if acting under English law, the bank will
require receipt of the cover as a condition of carrying out the
transferor’s bank‘s instruction.
It
follows from this that wherever a
credit transfer payment of this kind is made, the banks acting in
the transaction, including the payee’s bank, are the agents or sub-
agents of the payer‘” and that the payee’s bank in particular is in
an analogous position to the payee’s bank in
The Brimnes.
The other two cases mentioned above which deal with transfers
made by third parties for the account of a bank’s customer are
Momm
v.
Barclays Bank International Ltd.‘l
and
Rekstin
v.
Sever0
Sibirsko and The Bank for Russian Trade.48
In
Momm
v.
Barclays
Bank Znternational Ltd.
the plaintiffs and another bank (Herstatt)
maintained separate accounts with the defendant bank. The plain-
tiffs and Herstatt concluded
a
currency transaction under the terms
of which Herstatt were to transfer a sum of money to the plaintiffs’
account at the defendant bank valued at June
26,
1974.
On June
25
Herstatt instructed the defendants
to
make
the
transfer. The defend-
~ ~~ ~
44
[1972]
1
Lloyd’s Rep. 18.
XI
Zbid.
at
p.
33.
413
It
may be
noted
that in commercial credit transactions
it
has been held that
a correspondent bank is not a sub-agent of the buyer under the sale contract-see
Equitable Trust
Company
of
New
York
v.
Dawson Partners Ltd.
(1927) 25 L1.L.R.
90 especially at pp. 92 and 97 (Scrutton L.J.
per conrra
at p. 95). The position
in
such transactions
is
not analogous to that
in
The Brimnes
since commercial credits
are founded upon several individual contracts
to
pay cash upon delivery
of
documents-see generally Benjamin’s
Sale
of
Goods
at para. 2224.
47
[19771
Q.B.
790.
48
[1933]
1
K.B.
47.
380
THE
MODERN
LAW
REVIEW
[Vol.
45
ants did this on receipt of the instruction on June
26.
At
4.15
p.m.
on that day Herstatt announced that they were going into liquida-
tion. On June
27,
the defendants reversed the entry to the plaintiffs’
account as Herstatt’s account was in a net deficit position. Kerr J.
held that the transfer was complete when the defendants would have
refused to have accepted countermanding instructions from Herstatt
which would have been when the computer processes to credit the
plaintiffs’ account were set in motion. It made no difference that
the defendants had notified neither the plaintiffs nor Herstatt of this
prior to their purported revocation
of
the transfer.
This must be contrasted with the decision of the Court of Appeal
in
Rekstin
v.
Severo Sibirsko and The Bank for Russian Trade.
In
this case Rekstin obtained a judgment against Severo. In order to
avoid execution Severo ordered the Bank for Russian Trade to
transfer the sums in its account at the bank to a Russian trade
delegation with diplomatic immunity which also had an account at
the bank. After a clerk at the bank had made the necessary book
entry to close Severo’s account, but before the corresponding credit
entry in the delegation’s account had been made,4e Rekstin served a
garnishee order nisi on the bank. On these facts the Court of Appeal
held that the bank still held the sums to the account
of
Severo
and that the garnishee order nisi was effective. In reaching this
conclusion the court treated as important the facts that the trade
delegation knew nothing
of
the proposed transfer, that there was no
transaction between Severo and the delegation underlying it and
that the delegation had never consented to its account being credited
with the sum.
Faced with this latter decision, Kerr J. in
Momm
v.
Barclays Bank
International Ltd.
saids0: “In my view this decision should be
treated as confined to its special facts . . .
I
think that it merely
decided that payment by means of an in-house transfer has not taken
place
if
the payee has not assented to
it,
and perhaps also if the
transfer has not been completed.”
If
this is the correct ratio of the
Rekstin
case it seems to follow that in using the words
“.
.
.
[the
receiving] bank being impliedly authorised by the customer to
accept that credit by virtue of the fact that the customer has
a
current account with it, no consent to the receipt of the credit being
expected from or required of [the receiving] bank
. .
.”,I1
Webster
J.
in
Royal
Products Ltd.
v.
Midland
Bank
Lid.
must not be taken
to
mean that the receiving bank is
“
authorised
”
in the sense that
an agent is given authority by his principal. This is because,
if
the
bank were constituted an agent in this way, there would be
no
need
for any further assent to the receipt of the transfer in cases where
49
In
so
far as the headnote
of
the report suggests that all relevant entries had
already been made to the credit of the delegation’s account,
it
is
inaccurate-see
per
Kerr
J.
In
Momm
v.
Barclays
Bank International Ltd.
at
p.
801.
As
regards the
analysis
put
forward in this article. it would be irrelevant whether the delegation’s
account had been credited
or
not.
60
119771
Q.B.
790, 801-802.
61
119811
2
Lloyd’s Rep.
194,
197;
supra,
at
p.
374.
July
19821
CREDIT
TRANSFER TRANSACTIONS
381
the
transferee does not know of or contemplate the payment. On
the other hand the bank will have a sum of money which it can use
for its own purposes subject to an obligation to repay an equivalent
sum to the true creditor. In an
“
in-house
”
transaction the sum will
be repaid on demand to the intended transferor. In an
“
out-house
”
transaction, as the above analysis of the transfer in
The Chikuma
shows, the sum will be repayable on demand to the transferor’s bank
or an intermediate bank which provides the
“
cover
”
for the credit
to the account of the transferee. It is interesting to note here that in
relation to the use of bank accounts to receive payments, Chitty
states
52
:
“
When the payee prescribes [details of his bank account to
the transferor], he manifests willingness to receive payment through
giro channels.” The mere fact that a payee has a bank account does
not manifest such a willingness and it is not difficult to envisage cases
where a person would not wish money to be paid into his account
(for example, where the account is overdrawn and the customer
knows that the bank will not permit him to draw upon it until the
account is in credit). In this respect it is more appropriate to say,
not that the customer authorises the bank
to
receive a credit, but
that
by
virtue of the relationship
of
banker and customer the bank
impliedly permits the customer to arrange for transfers to be made
to the bank for the credit of the customer.63
If
this analysis of the above-mentioned cases is accepted it follows
that where parties agree that the liability for payment
of
one may
be discharged by payment made into the bank account
of
another,
the payee agrees not that the bank should receive the payment
as
agent but that the liability of the payer may be discharged by
constituting the bank a debtor of the payee in respect
of
the sum
payable.
If
the obligation is formulated in this way it is apparent
that the mere fact that the payer has constituted the bank a debtor
as required cannot affect the actions of the parties
in
respect of their
other rights and liabilities under the contract for the payee has not
done any act or made any representation which can amount to a
waiver
of
his rights. Moreover, no issue arises as to whether it is for
the bank to obtain instructions about what to do with the transfer
or whether the payee should give the bank the necessary instructions,
a point which gave rise to
a
difference
of
opinion in the House
of
Lords in
The
Luconia.
The payee can only be said to have waived
his rights when, knowing
of
the transfer himself he fails
to
instruct
the bank to return it and he cannot
be
fixed with the imperfect
knowledge
of
the bank.64 It is suggested that this is the result which
the parties (including the bank) would expect.
62
Chirry
on
Conrrucrs
(24th ed.).
Vol.
11,
p.
243.
63
The Clearing Bank’s memorandum of
1967
(see note
6
above) gives expression
to
this permission.
84
In
cases involving the withdrawal of ships from time charterparties, an
unequivocal notice of withdrawal cannot in any event
be
prejudiced
by
a failure of
the owners
to
return payments
for
their credit in respect of hire for future periods
382
THE
MODERN
LAW REVIEW
[Vol.
45
One consequence of this analysis relates to the issue of negligence
on the part of the payee’s bank. The situation contemplated here is
a failure by the payee’s bank to use reasonable care to credit a
payment to the account
of
the payee whereby the payment
is
not
available to the payee at the critical time. An example of such a
failure is to be found in
Afovos
Shipping
Co.
S.A.
v.
R.
Pugnun
and
Filli,
The
Af~vos.~~
Here the plaintiffs let their vessel to the
defendants in consideration for hire payable
“
in London to the First
National Bank
of
Chicago [FNBC]
.
.
. for the credit
of
[the
plaintiffs]
.
.
.
in cash
.
.
.
in U.S. currency, semi-monthly in
advance.”
If
hire was due and unpaid the plaintiffs had the right to
withdraw the vessel provided that they gave two days notice in
writing prior to so doing during which time a contractual payment
could still be made. The defendants gave instructions
to
their bank,
Credito Italiano, to make payment by credit transfer to FNBC for
the account of the plaintiffs. Credito Italiano purported to comply
with the instruction by originating a telex transfer. Unfortunately
the telex did not arrive at FNBC because the telex number used
was
not that
of
FNBC and the telex operator omitted
to
check that
he had received the correct
“
answer-back
”
sign. The telex number
had been obtained from the Jaegar
&
Waldmann telex directory, the
most recent edition of which had not been updated due to an
omission by FNBC. In these circumstances Lloyd J. held that FNBC
had been negligent in not providing up-to-date information to Jaegar
&
Waldmann regarding the telex number. However, Lloyd J. further
held that the effective cause of FNBC‘s failure to receive the telex
was the omission of the employee of Credito Italiano to check the
@’
answer-back.” Accordingly the non-payment of the hire could not
be attributed to the plaintiffs and they were entitled to withdraw the
vessel at the expiry of
48
hours from the time of the notice of failure
to
receive the hire.6e
If
the analysis in this article is correct, even
if
the negligence of
FNBC had been an effective cause of the
loss,
that negligence could
not be ascribed to the plaintiffs, the payees, since FNBC was not
their agent for receipt of the telex. The use of the telex transfer was
merely
a
step taken by the defendants (payers) to fulfil their obliga-
tion to constitute FNBC a debtor of the plaintiffs for the required sum.
The choice of method and time of payment lay with the payer, and
~~
although the owners are bound
to
give credit
to
the charterers
for
such amounts as
represent hire unearned at the time
of
withdrawal
upon
the settling of the accounts
between the parties- see
China National Foreign Trade Transport Corporation
V.
Evlogia Shipping Company
S.A.
The Mihalios Xilas
[1979]
2
Lloyd’s Rep. 303;
Scrutton on Charterparties and Bills
of
Lading
(18th ed.), p. 359.
55
C19801
2
Lloyd’s Rep.
460,
per
Lloyd
J.;
The Times,
March
3,
1982
(C.A.).
In
The Zographia M.
119761
2
Lloyd’s Rep. 383 where the bank was held to be in
breach of duty to the owners
(i.e
the payees) the action was based upon negligent
mlsstaternent and flowed from the bank’s assumption of responsibility
for
the accuracy
of
the information it gave and
not
from any implied obligation
to
its customer.
66
The
Court
of
Appeal reversed Lloyd
J.’s
decision
upon
the ground that the two
day
notice period had
not
expired when the owners purported to withdraw the vessel.
July
19821
CREDIT TRANSFER TRANSACTIONS
383
it
is a legitimate construction of a payment agreement of the type
being considered, subject to any express provision
to
the contrary,
that the payer takes the risk of using a method of effecting his
payment which may turn out to be inappropriate or of delaying the
effecting of his payment until the last minute.6T There is
no
reason
for the payee to bear this risk simply because he nominates
a
bank
which, in the events that happen, makes a mistake. Support for this
view is to be found in
Equitable
Trust
Company
of
New
York
v.
Dawson Partners
Ltd.68 where it was held that an issuing bank
could not seek reimbursement from
a
buyer pursuant to a docu-
mentary credit transaction where a correspondent bank nominated
by the buyer mistakenly paid the seller upon documents which did
not comply with the issuing bank's mandate. Moreover, it is open
to the parties
to
provide for a time for payment which apportions
the risk differently or alters the consequences of the risk.
In
conclusion it may be said that more consideration ought to
be given by the courts to the role of banks which receive payments
made for the credit of their customers. By assuming that banks
receiving such payments are acting as agents for the payee and then
stripping the authority conferred
by
this agency on the banks so as
to
make their acts largely ministerial the House of Lords in
The
Laconiu
has not provided for
a
fully coherent analysis
of
this role.
The time has, perhaps, come for the application in this context of
the principle enunciated by the House of Lords in
Foley
v.
Hill.
RICHARD
KING*
67
See
Lord
Fraser's comments in
The
Loconio
at p.
885.
He
goes
on
to say,
6s
(1927) 27
L1.L.R.
49.
*
B.A., Barrister.
however, that the payer
would
not be liable
for
any abnormal delay in processing.
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