Alan L Tyree

Final payment vs mistaken payment

Alan L Tyree*

Abstract: Submissions to ASIC on the review of the EFT Code of Conduct sometimes show confusion between finality of payment and the law relating to recovery of payment under a mistake of fact. This article discusses the two distinct concepts in the context of the ASIC Review.

1  The EFT Code review

The Australian Securities and Investments Commission (ASIC) oversees the operation of the Electronic Funds Transfer Code of Conduct. ASIC announced a review of the Code and issued a consultation paper in January 2007. The issues paper outlined a number of issues and, in particular, asked the following question concerning mistaken payments:

Q41 To what extent, and how, should the Code address the issue of mistaken payments? Discuss the usefulness, practicality and cost of implementing some or all of the measures outlined, as well as any other measures you consider appropriate.

The origins of this question lie with Bulletin 35 of the Australian Banking and Financial Services Ombudsman (ABFSO). One of the problems identified by that Bulletin is mistaken payments. Banks began offering customers the option of payments direct to payees bank accounts. The paying customer needs to know the account number of the payee.

The direct payment system is grafted onto the commercial Bulk Electronic Clearing System (BECS). The payment ordered by the consumer customer is included as part of the periodic exchange of direct credit information between the paying and the receiving bank. The BECS system data format does not include the name of the account holders. The entire system runs on account numbers.

As a commercial system, BECS is first class. As a consumer system, it suffers from a lack of error checking. Since the process of entering account numbers into browser forms is inherently error prone, this quickly exposed the problem of mistaken payments. The customer entered an incorrect account number and paid the wrong person.

The ABFSO held a forum on the subject, “Emerging Issues in Electronic Banking Dispute Resolution”, and subsequently revised the original views: see Supplementary Bulletin, September 2003; see also Tyree (2003).

According to the ASIC Discussion paper (at para 7.74):

We understand that general industry practice, while assisting customers to try to recover funds that have been transferred by mistake, is not to accept liability for mistaken payments in any circumstances (unless an entry or other error has been made by the bank’s officer).

This might reflect the paying bank’s position, but the receiving bank is often very uncooperative. Banks claim that their duty of confidentiality prevents them from divulging the identity of the recipient. Banks, of course, admit no liability for receiving the payment.

Hence the question above in the ASIC consultation paper.

ASIC called for submissions on the consultation paper. Several of the submissions addressed the above question, and in several of these, the “clearing house” rules of the payment scheme are discussed. In particular, the BPay submission and the Australian Payment Clearing Association submission discussed their respective rules at some length.

In both cases, there is either the statement or the implication that the rules would require rewriting if the Code is changed to deal with mistaken payments.

The argument in this article is that the recovery of mistaken payments is outside the scope of the clearing rules, and that the content of those rules is irrelevant to the question of mistaken payments. The argument to the contrary confuses the problem of finality of payment with the problem of recovery of mistaken payments.

2  Finality of payment

Payment is final when the payer cannot retrieve the payment by unilateral action. For example, a payment by cheque may be countermanded at any time by the drawer until such time as the cheque is paid. This is a right granted by the Cheques Act 1986 and and is not one of the provisions which may be altered by contract.

Courts have considered finality of payment in cases involving credit transfers. The cases have been “one off” payments and do not provide much guidance for domestic payments.

The best view is that the finality of a domestic payment depends on the rules of the payment system being used. In the case of cheques, this is illustrated by the decision in Riedell v Commercial Bank of Australia Ltd [1931] VLR 382. The clearing house rules provided for return of dishonoured cheques by a certain time. Riedell’s bank returned a cheque after the time provided by the rules.

Except for the rules relating to the time of return, the rules were silent as to the time when payment of the cheque could be considered final. Mann J held, very reasonably, that payment was final with the expiration of the times prescribed for returns.

The BECS rules and the BPay rules have detailed descriptions of the time when payment is final.

These rules are probably binding on the customer. The “probably” in the preceding sentence arises because the customer is not a party to the clearing rules and, in some systems, may not even be able to ascertain the contents of the rules. On the other hand, a New Zealand case has held that a customer who uses the cheque system is bound by its rules: Dimond (HH) (Rotorua 1966) v Australia and New Zealand Banking Group Ltd [1979] 2 NZLR 739.

3  Payment under a mistake

The question of recovery of money paid under a mistake does not even arise if the payment is not final. The whole problem of money paid by mistake is that it has been paid – the payer can no longer control the payment or stop it.

The law of mistaken payment used to be very complicated, but a series of careful judgments by the Australian courts have make it very straightforward. In summary:

The bank of the payer acts as agent of the payer for the purposes of making the payment. The bank of the payee acts as agent of the payee for the purposes of receiving the payment.

The important point here is: the receiving bank is an appropriate defendant in an action for the recovery of money paid under a mistake of fact.

Payment is made to the receiving bank, not to the person for whose account the money is paid. It is true that the receving bank is obliged to credit the account of its principal, the payee. It is true that the receiving bank’s customer may withdraw the sum from the account or close the account.

These considerations go to the defence of the receiving bank, not to the fact that it received money paid under a mistake of fact. The receiving bank has the burden of showing that it should be able to retain the money under one of the established defences.

The most obvious defence is that the receiving bank has changed its position on reliance of the mistaken payment by accounting to its principal. Even before the defence of change of position was firmly established by the High Court, it was recognised that an agent who had accounted to the principal had a defence to an action for the recovery of money paid under a mistake of fact: see Gowers v Lloyds & National Provincial Foreign Bank Ltd [1938] 1 All ER 766; Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662.

Can the receiving bank establish this defence? Has it accounted to its principal. Generally, the answer to this will be “no”. Merely crediting the account is not sufficient: see Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 and the full argument in Tyree (2003).

The point here is that none of this depends upon the clearing rules. Once the receiving bank is found liable to return the mistaken payment, it does not matter how the payment is returned. It can be by BECS, by BPay or by sending the payer a cheque by courier. It is completely unrelated to the reason or form of the original payment.

In particular, it does not require any change to the clearing rules of BECS, of BPay, of the Cheque system or any other payment system.

4  Consumer protection

Consumers require legal protection in several different circumstances. Two of the most important are:

We deal with the first through several legal mechanisms. Legislation such as the Uniform Consumer Credit Code attempts to ensure that the resulting contract is fair. Legislation such as the Contracts Review Act 1980 (NSW) or the unfair terms in consumer contracts provisions of the Fair Trading Act 1999 (VIC) attempt to remedy the situation after the fact.

The second situation is vividly illustrated by a well known saying: “It is safer to steal one dollar from each of a million people than it is to steal one million dollars from a single person.” This situation is addressed with tribunals, alternative dispute resolution schemes and the imposition of codes of conduct.

The bank customer’s inability to recover money paid under a mistake of fact falls squarely within the second category. The mistaken payer has legal rights that are indisputable, but the potential defendants publicly announce that they will not honour those rights. The price of enforcement precludes the payer from any remedy.

Including the rights to recover mistaken payments into the EFT Code of Conduct is an important step in correcting this injustice.

References

Tyree (2003)
Alan L Tyree. Mistaken internet payments. JBFLP, 14 (2): 113–117, Jun 2003.

*
Consultant; formerly Landerer Professor of Information Technology and Law, University of Sydney. The views expressed are those of the author and do not necessarily reflect the views of any other person or organisation.