2002
The Riedell case showed that a collecting bank must use its rights under the clearing house rules to assist its customer. The Riedell case is discussed and its principles applied to the problem of “chargebacks” in credit card schemes.
On 7 November, 1924, Peter Riedell deposited a cheque for £249 to the credit of his account with the Shepparton, Victoria branch of the Commercial Bank of Australia (the “CBA”). The cheque was an order cheque and, in accordance with the practice of the time, he indorsed the cheque to the bank. His account was credited with the amount of the cheque.
The cheque was drawn on the Bourke Street branch of the Bank of New South Wales (“BNSW”). Later on the 7th, the cheque was sent by post to the Melbourne office of the CBA. It was received there on the morning of the 8th and taken that same morning to the clearing house where it was handed to the representative of the BNSW. The clearing house rules required settlement of daily balances to be made through the Commonwealth Bank the following business day, in this case on Monday, 10 November.
Something was wrong with the account of the drawer. On the night of the 11th, the BNSW sent a telegram to the manager of the Shepparton branch of the CBA. It was received on the morning of the 12th. The relevant part of the telegram said:
You remittances seventh …favour Riedell two hundred forty–nine pounds unpaid. Effects not clear. Please endeavour protect our interests.
Late on the 12th, the BNSW posted the cheque to the Shepparton branch. It bore the markings “Effects not clear”. The cheque, together with a covering letter was received in the post of the 13th. Upon receipt of the cheque, the CBA debited Riedell’s account with the amount of the cheque. The BNSW also sent a “pro forma debit” through the clearing house which was received at the Shepparton branch on the 14th where it was stamped “paid”.
The cheque was presented again, but was returned marked “payment stopped”. The CBA continued to maintain that the cheque had been dishonoured. Riedell continued to claim that it had been paid and brought the action against the bank.
Although the cheque was indorsed by Riedell, Mann J had no difficulty in finding that the bank was not a holder for value.2 The credit recorded in the ledger was a provisional one which would become absolute only when the cheque was collected, ie, when funds were “clear”. The bank dealt with the cheque as an agent of Riedell.
The significant issue in the case was the effect of the clearing house rules. So far as relevant, the rules provided for return of dishonoured cheques within a fixed period of time. Any later return was referred to by the rules as “stale”. The rules provided:
Any stale return, and any return wrongly delivered, may …be afterwards rejected by the receiving bank. [emphasis added]
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 defendant bank argued that the word “may” in the rules was too vague to create any definite obligation to refuse the return. This was rejected, partly on the grounds that the correspondence between the banks showed that each was well aware of the defendant’s rights under the rules.
The effect of the rule, as found by the court, is worth quoting since it has been subject to much misinterpretation:3
In effect, the course taken by defendant amounted to this, that, having received payment on behalf of its principal by means of a settled account, it returned that payment without authority and without any obligation to return it, by a similar means.
Riedell’s case is often said to represent the proposition that the customer has the benefit of the clearing house rules. Thus, (Weaver et al. 2003) at para [12.610]:
…it was held that a collecting bank’s customer is entitled to the benefits of clearing house rules relating to the return of dishonoured cheques.
(Tyree 2002) describes the effect of the case in similar terms.4
Weaver and Craigie also note that (Hapgood 1996) questions the correctness of the decision. This is true only in that Paget seems to give a very extended interpretation to the decision. After quoting from the case, Paget says:5
Even so, it is still an open question whether the payee of a cheque may so rely on the rules of a clearing house as to be entitled to take advantage of any breach of a rule …Whether there is privity with a paying bank through the payee’s (collecting) bank is also an unanswered question.
Riedell’s case is questioned only to the extent of doubting that the customer may use the rules to “attack” a paying bank.6
This shows the danger of the usual description of Riedell’s case. It is true that the customer has the benefit of the rules, but only in the following sense: the bank, as agent of the customer, must use their best efforts to protect the interests of the principal. This includes using any rights that the bank may have under the clearing house rules.
The difference is significant, for in the “agent-principal” description of the Riedell case, it could never be imagined that the customer could rely upon the rules in an action against the paying bank. Similarly, suggestions that the customer should also have the burden of clearing house rules are misguided. The customer does, however, by depositing the cheque agree to the delays inherent in the clearing system.7
Section 67 of the Cheques Act 1986 has changed the common law position. Under that section, a paying bank is under a statutory obligation to pay or dishonour as soon as is reasonably practicable. If it fails to do so, then, barring some problem with the holder’s title to the cheque, the bank may not dishonour the cheque and is liable to pay the cheque to the holder. In determining what is “reasonably practicable”, the clearing rules would obviously be a relevant consideration: see, for example, Jet Fuels Petroleum Distributors Pty Ltd v Australia & New Zealand Banking Group Ltd (1995) 115 FLR 134.
Peter Riedell would today have a credit card. He would, no doubt, from time to time find that goods or services paid for were not delivered and he would seek to have the payment stopped or reversed. If the card issuer did not do so, Riedell would seek to reclaim on the basis that the issuer had not used their power for his benefit.
All existing credit card schemes contain “chargeback” clauses. The exact details of the clauses vary, but they permit the card issuer to initiate a reversal of payment under certain conditions. A reversal of payment is called a “chargeback”. Like the clearinghouse rules in times past, the scheme rules are considered to be confidential.
Until recently, card issuers claimed that the right of chargeback was to be exercised solely at their discretion. Peter Riedell’s victory in 1924 applied only to the stop payment of cheques.
As we have noted above, the application of the Riedell principle depends upon agency relationships. Just as it is well settled that the collecting bank acts as agent for the holder, it has long been accepted that the paying bank acts as agent for the drawer when paying the cheque. The agency relationship is the reason that the drawer must exercise care in drawing a cheque so as to not mislead the agent: see London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777 and the many cases that have followed.
If, then, the card issuer is acting as agent of the cardholder in making a payment to a merchant, it follows that the issuer should use the chargeback powers for the benefit of the cardholder.
The issue then becomes: is the card issuer an agent of the cardholder for the purposes of making payments to suppliers of goods and services?
Payment by credit card was considered in Charge Card Services Ltd, Re [1987] Ch 150, affd [1989] Ch 497. It was there held that payment by credit card was, in the circumstances, “absolute” as opposed to “conditional”. This means no more than that the merchant was unable to have recourse to the cardholder should the credit card issuer be unable to pay.
The case was further considered in Richardson (Inspector of Taxes) v Worrall [1985] STC 693 and in Customs and Excise Commissioners v Diners Club Ltd [1989] 2 All ER 385. In these cases it was held that the customer had an initial monetary liability to the merchant which was discharged by presentation and acceptance of the credit card.
These cases were considered in American Express International Inc. v Commissioner of State Revenue [2002] VCAT 376 (24 May 2002), where it was said that:
as a general rule where a customer agrees to purchase goods from a merchant who has indicated he will accept credit cards, the customer is undertaking to pay for the goods either by cash or a credit card and the customer is under a liability to the merchant to do so. The customer discharges that liability by paying cash or invoking his agreement with the credit card provider and signing a document with the credit card that will enable the merchant to get paid by the credit card provider.
Under this analysis, the card issuer satisfies, on behalf of the cardholder, any liability owed to the merchant for goods or services supplied. If this is correct, then the card issuer is acting as agent to make a payment on the cardholder’s behalf.
The Amex tribunal specifically rejected the view that the merchant accepts the liability of the card issuer as consideration for the sale of goods or services so that the cardholder never becomes liable to the merchant.
These cases were taxation cases concerned with the interpretation of taxation statutes, so it could be argued that the analysis is not of general import. However, the analysis makes sense from a general payment system point of view. A modern payment involves a financial institution incurring a liability to the payee on the order or under the directions of the payer: see Tyree and Beatty (Tyree and Beatty 2000) and Geva (Geva 1986). The payer, in turn, incurs a liability to the financial institution or has an existing liability reduced. This all suggests that the financial institution is acting as the payer’s agent in making the payment.
Although the above is concerned with “three-party” cards, the analysis for “four-party” cards is similar. The card issuer incurs a liability to the “merchant acquirer” which in turn incurs a liability to the merchant.
The drawer of a cheque has a right to countermand the order. The source of this right is twofold. Before the introduction of the Cheques and Payment Orders Act 1986, the right flowed from the fact that the paying bank is the agent of the drawer and the paying bank owed no independent obligation to the holder.
Following the introduction of the Cheques Act 1986, the right is guaranteed by s90(1)(a) of the Act.8 This statutory guarantee of the right might have been necessary since s67 imposes on the paying bank a statutory obligation to the holder.
It does not follow merely from an agency relationship that a cardholder has the rights to order a stop payment. The reason is that the card issuer has an independent obligation to honour vouchers. The analogy is with a documentary credit. The issuing bank has an independent obligation to the beneficiary. Even though it is making payment as agent for the credit applicant,9 the credit applicant has no rights to interfere with the issuing bank’s obligation to make the payment.10
If this analysis is correct, then the application of the Riedell principle indicates that a card issuing bank is obliged to use its power of issuing a chargeback in the interests of the cardholder.
Following a review and recommendations by Richard Viney, a new Code of Banking Practice will come into effect in August 2003. The old Code had been rightly criticised as an ineffective document which was, in effect, a pre-emptive strike by the Australian Bankers Association. It was developed and implemented with minimal consultation and did little to further the protection of consumers. In fact, in some respects it took away existing rights: see Tyree (Tyree 1995).
The new Code addresses the chargeback problem. By clause 20 the card issuing bank promises to claim a chargeback right if one exists and if the customer has notified the bank of the disputed transaction in time.11 It will claim the chargeback for the most appropriate reason,12 and will refuse to accept a refusal by the Merchant Acquirer unless consistent with the card scheme rules.13 The bank also undertakes to provide information on chargeback rights at least once a year.14
These principles of Clause 20 of the new Code of Banking Practice represent a welcome change for consumer interests and are consistent with the conclusion that the card issuer is acting as agent for the cardholder.
The Code does not, of course, apply to non-bank card issuers. It is hoped that they will adopt similar codes of practice, but in the absence of a code the above analysis suggests that their obligations to their cardholders are similar to those enunciated in the Code. Adjudicators in the dispute resolution schemes established by Credit Unions and Building Societies should apply the principle.