Banks must ensure there are adequate safeguards in placefor dealing with payments made by mistake. A bankmay be liable in restitution where it has credited a mistaken payment to a customer's account.
The recent case of Jones v (1) Churcher (2) Abbey National PLC (2009) considered whether a party who had paid funds into another party's bank account in error could recover those funds from the receiving bank or whether recovery could only be obtained from the customer who had been paid in error.
The claimant's secretary had included the wrong account details on a CHAPS transfer form and funds had been paid into the wrong bank account. Miss Churcher, the recipient of the funds, had later been persuaded to pay the funds on to a third party who had subsequently disappeared, leaving Miss Churcher with no means of returning the funds. The claimant therefore sought to recover his money from Abbey National ("the Bank").
The Bank had received notice shortly after the transfer to Miss Churcher had taken place that the payment had been made to her account in error. However, through a series of events no action had been taken by the Bank to place a hold on the funds until some time after the payment had been made, by which time the funds had been paid on by Miss Churcher to the third party.
The Bank argued that it had a defence of 'ministerial receipt'. It stated that it was acting as an agent for its customer and (because the funds were transmitted under the CHAPS rules, which state that CHAPS payments represent cleared funds immediately upon receipt) Miss Churcher was entitled to immediate use of the funds and the credit to her was irreversible without her consent.
The judge dismissed this argument and held that there was no reason why the Bank was irrevocably committed simply by making a credit entry to a customer's account.
The judge viewed the case as turning on the question of whether the Bank had a defence of 'change of position'. For this defence to succeed the Bank would have had to establish that it had, in good faith, allowed Miss Churcher to draw upon the funds. This would have been the case if the Bank had not been notified that the funds were being recalled at the request of the claimant. In this case the Bank had been notified of the recall request several days before any of the funds were withdrawn by Miss Churcher. It had, however, failed to take any action until it was too late and the funds had been withdrawn.
The judge acknowledged that there were risks for a bank in withholding funds from a customer without good cause. However, he stated that where a bank has information to indicate that a mistake has been made, that should be enough for it to make further investigations before allowing a customer to withdraw those funds. The judge therefore held that a claim in restitution did lie against the Bank.
It is established practice for banks to act quickly in cases where there are allegations of fraud. However, this case suggests that banks should also establish tighter procedures for dealing with cases where there are allegations that a payment has been made by mistake. In particular, the judge stated that, whilst it should not be a prerequisite for any step taken to safeguard money transferred in error, banks should not be coy about offering or asking for an indemnity in such circumstances. Remitting banks should, in turn, be asking the payer for a counter-indemnity when a mistake is reported. The judge expressed surprise that there appeared to be no protocol between banks for requesting or volunteering an indemnity.
The judge also stated that steps should be taken to ring-fence funds which are the subject of an allegation of mistaken payment, pending further inquiries. Depending on the information provided or the outcome of any investigations it may be sufficient for a bank to freeze the relevant funds.
Subject to any appeal, this case indicates that it is no longer enough for banks to protect themselves where there are allegations of fraud. More must now be done by banks to also safeguard their position where there are allegations that a payment has been made by mistake.