the receiving bank's role in credit transfer transactions

T H E

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 regarded 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

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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. 1 2 Ibid. at pp. 871-872 and 879-880. 1 3 The Brirnnes [19751 Q.B. 929. where the argument proceeded on the assumption

that if the payee's- bank was indeed the agent i f 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 circumstances 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 commercial 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.


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.


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. recognised 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 customer 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 customer 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. 2 0 Ibid. at pp. 195-199.


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 plaintiffs] to draw on or otherwise use the amount of credit transferred, 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 completion and the time when the receiving bank has actually credited the sum to the account of the customer which may be after completion. 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 customer 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.


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 I S Awilco v. Fulvia S.p.A. Di Navigazioni, The C h i k ~ r n a , ~ ~ 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 shipowners 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 8 4 : ‘‘ In my judgment 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.).


“ 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, “ communication ” (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. 4 1 Ibid. at p. 415. 4 2 Ibid. at p. 414.


“ I n 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 banking 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.


“ value date ” is not irrevocable in the same way. It follows, therefore, 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 charterers 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 E f l ~ ‘ ~ 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 plaintiffs 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-

~ ~~ ~

4 4 [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.


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 liquidation. 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: “ I n 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.


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


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 A f ~ v o s . ~ ~ 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 obligation 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.


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.

the receiving bank's role in credit transfer transactions

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