Tidal Energy decision and the potential impact on New Zealand banking practices

Tidal Energy Limited v Bank of Scotland [2014] EWCA CIV 1107 considered the role of banking practice when payments are executed through the clearing house automated payment system (“CHAPS”).  The English Court of Appeal by majority held that banks are not required to check that the account name aligns with the account number when processing payments.  Loss from any errors will fall squarely on the customer.  This article assesses the Court of Appeal’s decision, and provides a warning for lawyers and clients alike.

Facts

Tidal Energy Limited (“Tidal”) had an obligation to pay one of its suppliers, Design Craft Limited (“Design Craft”) the sum of £217,781.57.  A third party, holding themselves out as a representative of Design Craft, contacted Tidal and supplied payment details so Tidal could repay the required amount.  Tidal, by CHAPS transfer, effected the payment to what Tidal thought was Design Craft’s account by completing the four boxes on the electronic CHAPS transfer form:  sort code, account number, bank and branch name, and account name.

The money was successfully transferred from Tidal’s account with the Bank of Scotland to the Barclays account details that Tidal had been provided with.  However the account did not belong to Design Craft; the account was in the name of a fraudster, “Child Freedom Limited”.  Barclays signalled to the Bank of Scotland that it had received the money and payment was completed, and therefore debited £217,781.57 from the Bank of Scotland.  The Bank of Scotland then debited £217,781.57 from Tidal’s account. 

One week later, Tidal became aware it had been the victim of a fraud when Design Craft informed Tidal it had not received payment.  By this time, all of the money had been withdrawn by the fraudster. 

The issue for the Court of Appeal to consider was whether the Bank of Scotland had the authority to debit Tidal’s account, given that the account name provided by Tidal did not match the account number provided.

Ruling

The majority by 2-1 held that the Bank of Scotland had the authority to debit Tidal’s account despite the payment details on the transfer form being incorrect.

The purpose of the CHAPS system is to achieve rapid, same day payment (usually in less than 90 minutes according to expert evidence in the case).  CHAPS is most commonly used in settlement transactions.  The majority held that as the purpose of CHAPS is to achieve rapid payment, and if account names had to be manually checked each time a CHAPS payment was made, this would not be possible.  Because Tidal contracted with the bank to execute the payment using CHAPS, and it was banking practice that the account name was not checked in CHAPS transfers, the responsibility was on Tidal - the customer - to ensure all of their details were correct.

This case reinforces the rule established in the nineteenth century case of Hare v Henty that “A man who employs a banker is bound by the usages of bankers”, even if that practice is unknown to the customer.  The customer therefore, by execution of the CHAPS form, authorised the bank to make the transfer in accordance with usual banking practice.  As Lord Dyson MR pointed out, the court should avoid a construction of the form which is inconsistent with business common sense; such a construction cannot have been said to be the intention of the parties.

Discussion

Great difficulties would arise if banks were only authorised to make payments when there was correspondence with all four unique identifiers.  For example, if “A B Smith” was entered in account name instead of “Adam Brian Smith” which was the name on the bank’s record, the bank would not be authorised to make the payment, even if the person referred to was clearly correct.  This could have significant consequences for commercial transactions, and may cause parties to fail to meet settlement deadlines. 

However, the practice should be made known to customers when transactions are entered into.  Currently the banking practice that banks will not check account names is not made known to the customer when submitting details into the form, nor is there anything in the form or the admissible background to alert the reasonable customer to this practice.  It may be prudent for banks to update their electronic payment forms to ensure that customers take extra care when making payments, as it is clear from this case that it is the customer that will bear the loss of any mistakes or inaccuracies.

Warning for lawyers and clients

This case should act as a warning for both lawyers and clients in New Zealand alike when using electronic payment mechanisms, in particular CHAPS or an alternative.  As Tidal found out, for banks it is only sort codes and account numbers that matter;  therefore these must be the focus for both lawyers and clients.  Mistakes must be avoided.  Before any payment is made, it is the responsibility of the customer, and not the bank, to ensure the unique identifiers align.  If there are errors, it is the party making the payment that will bear the loss; the bank is not going to be double-checking account names. 

A second warning from the case is that clients need to ensure payment details come from a trusted source.  Have you ever dealt with the party holding themselves out as the company before?  If not, care must be taken.

For lawyers, this case provides an incentive to review internal payment systems, and to ensure that adequate mechanisms are in place to avoid loss.  This could involve checking with the bank that the account specified relates to the name that you have been given, in particular if making a payment to a new client.

If you would like further information please contact Laura Monahan on 07 958 7479.