2004
The international transfer of funds, like almost all payments, uses agency relationships to achieve the final payment. The transferor bank receives its instructions from the payer/customer. The instructions will always provide for a destination, usually something like “account xyx with the ABC Bank”. In some cases, the instructions may only name the intended payee as in “For the account of John Doe at ABC Bank”.
Let’s call the transferring bank T and the receiving bank R.
Just as in a domestic payment transaction, T is acting as agent for the payer/customer. R is acting as agent of the payee for the purposes of receiving payment. The special feature of an international transfer is that T will usually require the services of an overseas bank to complete the transfer.
It is not always necessary to use an overseas correspondent. If R and T are in a “senior” correspondent relationship, then the transfer may be a simple matter. The two banks may maintain “nostro” and “vostro” accounts with each other. These accounts may be used to settle the transaction, either with a credit to the “vostro” account held with T or a debit to the “nostro” account held with R. The “nostro”–“vostro” terminology depends on the point of view. It is, obviously, not necessary that both “nostro” and “vostro” accounts be maintained in order to effect a settlement.
Where the banks do not maintain a “senior” correspondent relationship, then another means of settlement must be found. This will involve one or more correspondent banks. In the simplest case, T will contact a correspondent bank C with which both T and R maintain a “senior” relationship. C will credit the account of R and debit the account of T in order to complete the transaction.
More complex scenarios are, of course, possible and sometimes necessary, but even the most complex arrangement is reduced to a series of transactions of the type described.
In Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 147, Webster J held that T was acting as the payer’s agent, C was acting as T’s agent. He rejected an argument that C was also acting as the payer’s agent, but accepted that T would have vicarious liability for C’s negligence.
The distinction is important since, as is well known, an agent has a fiduciary responsibility to the principal. More importantly for present purposes, the agent’s duty is to act strictly within the terms of his or her authority.
Devlin J, in Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147, said (at 168):
It is a hard law sometimes which deprives an agent of the right to reimbursement if he has exceeded his authority, even though the excess does not damage his principal’s interests.
It is, however, sometimes difficult to determine the scope of the authority given to a paying bank. Royal Products also rejected the notion that instructions given to T are to be subject to the doctrine of “strict compliance”, that is, that every part of the instruction must be given a “legal implication” (per Webster J, at 199).
As an agent, T must act within its authority and perform its obligations with appropriate care and skill. Acting within its authority means
Paying the right person
the right amount
in a timely fashion and
observing any other special instructions of the principal.
These application of these principles were at the heart of the dispute in Dovey v Bank of New Zealand [2000] 3 NZLR 641.
The appellant, Mr Dovey, was a very unlucky man. He was an airline pilot who retired from Air New Zealand in 1991. He formed the belief that the NZ dollar would fall and that his superannuation funds would provide a better return if invested outside New Zealand in pounds sterling.
To achieve this aim, he instructed an officer at BNZ to transfer his funds to “his account” at BCCI (Luxembourg). At the time of the instruction, Mr Dovey did not have an account number, but had completed arrangements to open an account. The transfer instruction called for transfer by “tested telex”.
Using the SWIFT message system, BNZ instructed the Midland Bank to act on its behalf. BNZ held a “nostro” account with Midland and instructed that this account be debited as a means of settlement. Midland paid the amount to the National Westminster Bank for the account of BCCI (Luxembourg) shortly after 1am on 5 July 1991 London time, and BNZ debited Mr Dovey’s account. At 1pm London time, liquidators were appointed for the BCCI Group.
Three days before accepting the transfer instruction, BNZ had suspended its dealing limits with BCCI. This was based both on public information and on information from its London offices. BNZ did not suspend actual dealing with BCCI since BCCI maintained a “vostro” account with BNZ which was “a very substantial sum in excess of the dealing limit.” BNZ did not maintain a “nostro” account with BCCI. BNZ was well protected from any consequences of a BCCI collapse.
None of this was conveyed to Mr Dovey.
The action alleged breach of contract in three respects:
BNZ had failed to carry out the transfer, and therefore Mr Dovey was entitled to have his account recredited
BNZ breached its instructions by using a SWIFT transfer instead of the instructed “tested telex” and
BNZ should have warned Mr Dovey that BCCI was in difficulty.
The argument that the transfer was not complete was bound to fail. There was no question but that the funds had reached BCCI, so the argument was that BCCI held the funds on its own behalf since it had not notified Mr Dovey of receipt. Alternatively, it was argued that BCCI had no authority to accept funds on behalf of Mr Dovey.
The argument that notice might be required was based on the old case of Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj [1933] 1 KB 47. Faced with pressing creditors, funds were transferred to the account of the Russian Trade Delegation which had diplomatic immunity. The Court held that the transfer was incomplete and that the creditors were entitled to attach the funds.
For some time Rekstin’s case had been explained on the grounds that the transfer was incomplete because notice had not been given to the account holder of the receiving bank. The true explanation was given by Kerr J in Momm v Barclays Bank International [1977] QB 79: the bank held the funds on its own account since the Trade Delegation had not given the bank authority to receive these funds on its behalf.
Mr Dovey, on the other hand, had conferred authority on BCCI by requesting an account to be opened and by providing details to the transferring bank: see Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 147. The situation is similar to a domestic transaction where bank details are supplied to a creditor to establish a direct credit transfer.
Mr Dovey’s instructions called for transfer by tested telex, but the bank used SWIFT messages. The Court found
SWIFT was the common method perhaps the only practical method of making the transfer
a tested telex message would have resulted in a transfer at the same time and
there was nothing to show that Mr Dovey considered the tested telex to be an essential feature of the transfer.
This is primarily a matter of interpretation to determine the metes and bounds of the bank’s authority. The Court’s conclusion was, in effect, that the bank acted within its authority. If Mr Dovey had emphasised the importance of using a particular transfer method, then the result would be different.
The plaintiff’s attempt to find an implied term that the bank was obliged to warn or inform him was probably doomed to failure. The Court considered a number of variations on the theme, finding that none of them met the stringent test necessary to imply a term into the contract.
How would the Dovey case be decided in Australia? On the first issue, the completion of the transfer, I think an Australia court would have undoubtedly come to the same conclusion as the New Zealand court. Although Royal Products has not been considered in an Australian case, it seems likely that the agency arrangements outlined above would be accepted.
On the issue of SWIFT vs tested telex, the result would probably have been the same. As noted above, the issue is one of interpretation of the instructions.
On the issue of the bank’s obligation to inform Mr Dovey of BCCI’s position, the matter becomes more interesting.
Dovey was argued entirely on contractual principles, the plaintiff arguing that there was an implied term that the bank should have warned of the risk. There was no consideration
that the bank was acting as agent of Mr Dovey
of any statutory obligations on the bank
of any applicable Codes of practice.
It is not clear why there was no considerations of an agent’s obligation beyond the simple banker customer contract. The other two omissions are simply a reflection of New Zealand’s naive belief in the market as a protection for consumers. As a consequence, its statutory protections are minimal and the Code of Banking Practice (in effect at the time) useless: see comments on the Australian/New Zealand comparison in the Proceedings of the Banking and Financial Services Law Association, available at http://www.austlii.edu.au/ alan/nz-20-years.html.
In Australia, these arguments have always been intertwined with arguments concerning the obligations under the Trade Practices Act 1974 (“TPA”) and the Australian Securities and Investments Act 2001 (“ASICA”). In addition, Australia now has a real (as opposed to the former “Clayton’s”) Code of Banking Practice.
There is nothing in the Code of Banking Practice which would clearly demand that the bank disclose its information about the precarious position of BCCI. Clause 2.1(b)(i) commits the bank to:
promote better informed decisions about our banking services by providing effective disclosure of information;
A “banking service” means “any financial service or product provided by us in Australia to you”: clause 40.
There is at least an argument that the Bank breached its obligation to promote a better informed decision.
Clause 2.2 provides:
We will act fairly and reasonably towards you in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us.
This is probably not enough to carry the day for Mr Dovey, although it would be interesting to hear the expert evidence on what is “fair”, “reasonable” and “ethical” in the circumstances. Since the Code is intended to have contractual effect between the bank and its customers, the clause must have some meaning.
Mr Dovey would also try s12BC or s12CC of ASICA. One problem is to determine which section applies. Both prohibit unconscionable conduct in certain circumstances involving the supply of financial services. Section 12CB(5) states that:
- A reference in this section to financial services is a reference to financial services of a kind ordinarily acquired for personal, domestic or household use.
It seems reasonable to conclude that the international transfer of nearly NZ$750,000 and its conversion to a different currency is not such a service.
The application of s12CC is limited by ss(6):
…a reference in this section to the supply or possible supply of financial services is a reference to the supply or possible supply of financial services to a person whose acquisition or possible acquisition of the financial services is or would be for the purpose of trade or commerce.
Mr Dovey acquired the financial service as a means to make professional investments. It is at least arguable that it was done for the purposes of trade or commerce.
Section 12CC(2) gives a non-exclusive “shopping list” of matters which the court may consider in determining if the supplier has engaged in conduct which was unconscionable. Most interesting is s12CC(3)(g) and (i):
- if the person is a corporation–the requirements of any applicable industry code …
- the extent to which the supplier unreasonably failed to disclose to the service recipient: (i) any intended conduct of the supplier that might affect the interests of the service recipient; and (ii) any risks to the service recipient arising from the supplier’s intended conduct (being risks that the supplier should have foreseen would not be apparent to the service recipient)
So, should the bank have disclosed the BCCI risks to Mr Dovey? The answer is certainly not completely apparent. To succeed, Mr Dovey would need to show that the risks arose from the bank’s “intended conduct” which could possibly be the intended SWIFT transfer to BCCI. Without that “conduct” there would have not been the risk to Mr Dovey’s funds, so it could be said that the risk arose from the intended conduct.
The various matters in s12CC(2) are not to be read in isolation. It could be argued that the combination of ss(g) and ss(i) together with clause 2.2 of the Code of Banking Practice impose a duty to disclose the known risk.
The obligations on an ADI who undertakes an international transfer of funds has not been considered in an Australian case.
One Australian case deals with the obligations of a receiving bank in a domestic transfer, at least when the transferring bank and the receiving bank are the same. In Nemur Varity Pty Ltd v National Australia Bank Limited & Anor [1999] VSC 342; [2002] VSCA 18, the plaintiff ordered a telegraphic transfer. The order was ambiguous in that it stated the name of the intended payee correctly, but provided an incorrect account number. The transfer was made to a fraudulent third party who had provided the account number.
Ashley J held that the bank owed its customer a duty to be reasonably sure that the transfer was made to the correct account. On the evidence, he held that a reasonable banker would have made inquiries and that those inquiries would have shown the discrepancy between the named payee and the account number.
This point was not disturbed by the Court of Appeal. However, the evidence in the case was unsatisfactory since the bank led no evidence on the issue. In those circumstances, Batt JA noted that “not surprisingly” the judge found that the bank had been in breach of its duty in making the telegraphic transfer.
While it is clear that there is an obligation to “follow instructions” the various methods used and problems encountered make the problem more complex than those encountered in a simple domestic payment. Dovey v Bank of New Zealand [2000] 3 NZLR 641 shows that there may be more to the matter than simple banker–customer contractual issues.