Article - Keeping up with Jones - Nov 09.qxd - Pinsent Masons

Update
This article by Tony Anderson was published in The Lawyer on 26th October 2009. www.thelawyer.com
October 2009
Banking & Finance
Keeping up with Jones
A recent court decision has muddied the waters as to who is liable for payments made in error.
The recent case of Jones versus Churcher and Abbey National
has brought into focus the systems and policies which banks
currently utilise to deal with payments made in error. With
the introduction of the Payment Services Directive it is an
area of banking law which will continue to receive scrutiny.
This article will cover broad point current practices between
remitting and beneficiary banks where payments are made in
error, how the above case has impacted on these practices
and how the scenario will be affected by the PSD.
Much has been written already about the case of Jones -v-
Churcher and Abbey National PLC but with the Payment
Services Regulations ("PSR") due to come into operation on 1
November, it is timely to revisit this case and to consider its
potential effect on current bank protocols surrounding the
processing of payments made in error.
The case is of interest as it appears to question current and
established practices between financial institutions regarding
payment processing. It is also of relevance due to the
volume of payments between financial institutions locally
and globally which statistically means there is a large
number of erroneous payments being made regularly which
would be subject to the findings of this case.
There are various ways that a payment may be erroneous
including:-
where the payment is made to the wrong account with
the correct institution (account number error;)
where the payment is made with to the correct account
but to the wrong institution (sort code error);
where multiple payments of the same amount are made
to the correct account;
A common convention governing the allocation of payments
is account number primacy whereby the sort code and
account number take precedence over any other details
concerning the destination of the payment such as the name
of the account holder.
An existing practice between banks where funds have been
paid into a customer's account by mistake is for the bank
receiving the payment (beneficiary bank) to obtain a debit
authority from it's customer to enable the account to be
debited and money returned to the bank which sent the
payment (remitting bank) and ultimately to the party
sending the payment. Only after the remitting bank has
notified the beneficiary bank that the payment had been
made by mistake will the beneficiary bank act to obtain the
debit authority from its customer. Up until this point the
beneficiary bank will have no knowledge that the processing
of the payment was an error, unless its customer advises the
beneficiary bank that it should not have received the
payment to its account.
In the meantime, if the beneficiary bank's customer has paid
away the money knowing it was an error before the beneficiary
bank receives notification, there is little the beneficiary bank
can do to prevent this from happening. An exception would be
where there is obviously suspicious or fraudulent activity
occurring on the account at which point the beneficiary bank
may freeze the operation of the account in accordance with its
fraud prevention policies. In the above scenario, there may be a
claim for unjust enrichment against the customer however, the
beneficiary bank would not be liable.
Even where the beneficiary bank has sent a debit authority to
its customer for signing, should the customer still choose to
deal with the funds there is little that the beneficiary bank
can do to prevent this occurring (in the absence of suspicious
or fraudulent activity) if the bank does not have a mandate
in place with its customer authorizing it to so act. An
exception would be where the beneficiary bank was certain
that the monies had been paid erroneously. However, if a
beneficiary bank's customer advises the beneficiary bank that
it was entitled to the payment which the remitting bank says
was erroneous, who should the beneficiary bank believe?
continued overleaf

Whilst a beneficiary bank may rely on its fraud prevention
policies to freeze accounts being operated suspiciously, it will
not be alerted to withdrawals from the account which
appear to be made in the ordinary course. In difficult
economic times the instances of people dealing dishonestly
with funds that have come to their account by mistake
rather than returning them to their rightful owners are likely
to increase.
It would be of concern to a bank to freeze funds or to reverse
a credit to an account of one its customers without good
reason. In Jones -v- Churcher and Abbey National PLC His
Honour Judge Havelock Allan QC suggested that there was
nothing in Abbey's current account terms and conditions
which expressly state that the bank will not reverse a credit
after funds have been cleared and no other document was
produced to substantiate the mandate.
This appears to be an unusual position to reach. It suggests
that a bank should ordinarily have the right to reverse a
credit made to an account without the consent of its
customer. It is envisaged that such a position would leave a
bank open to a claim from its customers regarding the
appropriation of funds standing to the customer's account. A
bank acting in such a way would need to be in no doubt as
to the true owner of the funds in question. Issues concerning
Treating Customers Fairly would also become relevant.
Judge Havelock Allan also stated in response to Abbey's
assertion that it would require an indemnity from the
remitting bank before freezing its customers money, that "it
is a worrying feature of the evidence that there appears to be
no convention protocol between banks for requesting or
volunteering an indemnity". Judge Havelock Allan also
suggested that a remitting bank should be used to asking for
a counter indemnity from payers when they report having
mistakenly remitted funds.
What is the practicality of obtaining indemnities between
remitting and beneficiary banks and counter indemnities
between payers and remitting banks? Will these be readily
given? It is conceivable that a remitting bank may also seek
collateral from the payer to support any counter-indemnity
depending on the size of the payment to be processed.
Assuming this would all need to be in place prior to the
processing of a payment, such transactions would become
significantly more complex to execute.
Whilst Jones -v- Churcher and Abbey National PLC was limited
to its fact it still raises serious questions regarding current
conventions between banks for erroneous payments. With
the PSR introducing time limits by which payments need to
be processed, as well as the responsibility and/or liability of
payment service providers where payments are made
defectively or in error, there will be a renewed emphasis
placed on this area of banking practice.
A curious detail of the case was that Jones, a car dealer,
intended to send the funds to a third party, Sharkey but
erroneously paid them to Churcher instead. Sharkey was an
agent who was to forward the funds to a car supplier to
enable cars to be delivered to Jones. Churcher who knew
Sharkey then paid the funds on to him at his insistence.
Sharkey then subsequently absconded with the funds
without completing the transaction. It was only at this point
that Jones sought to pursue Churcher and ultimately Abbey.
Had Jones not made an error in his payment instructions
and paid Sharkey directly he would have suffered the same
loss without the ability to chase either Churcher or
Abbey National.
It is interesting that Abbey National chose not to appeal this
decision considering the significance of the case on current
practices. It will be interesting to ascertain whether other
banks faced with successful claims based on this decision will
look to appeal them to clarify the position.
Tony Anderson is a banking partner at Pinsent Masons
© Pinsent Masons LLP 2009
Should you have any questions please contact Tony Anderson (tony.anderson@pinsentmasons.com) or your usual Pinsent Masons adviser
who will be able to assist you further.
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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