Alan L Tyree

Smartcards and unclaimed money

Alan L Tyree*

June 2005

1  Thomas Cook

The Privy Council recently clarified the law on unclaimed money in Thomas Cook (New Zealand) Limited v. Inland Revenue (New Zealand) [2004] UKPC 53 (10 November 2004). The question concerned unpresented bank drafts and whether the amount was "payable" even though the drafts had not been presented. Presentment was required to raise liability of the issuer.

The drafts in question had all been issued before the close of business 31 December, 1992. There was no written contract between Thomas Cook and the customer to whom the draft was issued. For unexplained reasons, a number of the drafts were never presented for payment. Thomas Cook considered the drafts to be “stale” 12 months after issue. The drafts were payable in some cases to the customer, in other cases to a bank named by the customer.

The drafts were denominated in various foreign currencies. In each case, the customer paid Thomas Cook in New Zealand dollars. The sum paid represented the New Zealand equivalent of the amount of the draft plus any commission and issuing charges.

The Commissioner of Inland Revenue claimed the amount of the outstanding drafts, some NZ$500,000, as “unclaimed money”.

The Act in question was section 4 (1) (e) of the Unclaimed Money Act 1971 (NZ):

[Unclaimed money shall consist of] (e) Any other money, of any kind whatsoever, which has been owing by any holder for the period of six years immediately following the date on which the money has become payable by the holder.

It was argued on behalf of Thomas Cook that the amounts were not “payable” since there could be no liability on the draft until such time as they were presented for payment. This argument was accepted at first instance, but rejected by the Court of Appeal after a detailed consideration of the Bills of Exchange Act 1908 (NZ). The Privy Council expressed some doubts about the Court of Appeal argument. Since it was based on sections of the Act which have no counterpart in the Australian Act, it need not concern us further.

The Board held that “payable” means no more than that the sum is legally due if demanded, it being quite unnecessary that any demand should actually have been made or that any cause of action should in fact have accrued. They noted, correctly in my view, that any other interpretation leads to an absurd result: money could not be "unclaimed" until it was in fact claimed.

In coming to this conclusion, the Board directly addressed the question: must a cause of action have arisen in respect of money before it is to be regarded as "payable" within the meaning of section 4(1)(e) of the 1971 Act?

In finding that no cause of action is necessary, the Board noted that

2  Smart cards

The “smart card” or “electronic purse” is a plastic card with an embedded computer chip. In this note, it is assumed that:

The EFT Code of Conduct gives the user the right to require that any amount on the card be refunded or to credit the amount of the stored value towards providing replacement value usable for the same purpose: cl 15.1.

Clause 15.1 was a controversial inclusion in the Code and will undoubtedly be attacked during the current review of the Code. The “residuals” remaining unused on cards can provide a significant contribution to the profit of a smart card scheme. Permitting the card-holder to reclaim them is opposed by proponents of card schemes.

The purpose of this note is to examine the following question: may the residuals on smart cards or other purchased payment facilities be “unclaimed money” for the purposes of s 69 of the Banking Act 1959?

3  Banking Act

There are many unclaimed money statutes in Australia, but if the money is owed by an ADI, then s 69 of the Banking Act 1959 is the governing statute.

Section 69(1) provides that:

For the purposes of this section, unclaimed moneys means all principal, interest, dividends, bonuses, profits and sums of money legally payable by an ADI but in respect of which the time within which proceedings may be taken for the recovery thereof has expired, and includes moneys to the credit of an account that has not been operated on either by deposit or withdrawal for a period of not less than 7 years.

Section 69(3) requires yearly reporting by the ADI, s 69(5) requires the ADI to pay the sums to the Commonwealth, and s 69(6) discharges, subject to ss 7, the ADI from further liability in respect of the sums paid. Subsection 7 permits the Treasurer to return the money to the ADI who must then pay it to a person who is, in the opinion of the Treasurer, the person entitled to the amount save for the provisions of ss 6.

Section 69 of the Banking Act is drafted about as poorly as any other unclaimed money statute. It talks about money “legally payable” by the ADI but "in respect of which the time within which proceedings may be taken for the recovery thereof has expired", then goes on to include accounts which have not been operated on for a specified period of time.

The drafting is bad since the limitation time period does not begin to run for a normal bank account until a demand is made. This basic principle was firmly established in Joachimson v Swiss Bank Corporation [1921] 3 KB 110 and reaffirmed by the Privy Council in the Thomas Cook case. In other words, it will almost never be the case that the limitations acts preclude recovery of a normal bank account. However, the statute clearly and plainly “includes” such accounts.

The Banking Act satisfies most of the reasoning of the Privy Council, in particular, the apparent assumption, in ss 6, that the person still has a claim on the money.

The Banking Act differs in that it expressly mentions the expiration of the time period where legal proceedings may be brought. Does this mean that a cause of action must have arisen before money becomes “unclaimed money”? Because of the “inclusion” of normal accounts and because the other considerations of the Privy Council apply to the Banking Act, a better interpretation is that the reference to the limitations period is merely to establish the time interval applicable.

In the rest of this note it is assumed that this is the correct interpretation, that is, money is unclaimed if the relevant time period has expired, the period being measured from the time at which the money could have been claimed.

4  Smart card residuals

Applying the Privy Council interpretation, we now turn to the question of smart card “residuals”, the amounts which remain unspent on a card because they are too small, because the card has been lost or misplaced or for any other reason.

If a smartcard is an ’account’, then there is no question that the statute applies. My view is that smartcards are ’accounts’: see Tyree, The Legal Nature of Electronic Money, (1999) 10 JBFLP 273.

Kreltszheim [1] argues that in certain circumstances smart cards and other “electronic money” are not an accounts. However, his definition of “account” is restrictive. He does not consider an arrangement to be an “account” unless the issuing ADI has enough information to combine the account under the principles of Garnett v M’Kewan (1872) LR 8 Ex 10. His argument is that this right of combination is a fundamental characteristic of “accounts”.

Applying this restriction leads to some unusual results. For example, the “anonymous passbook” account that was popular in Austria in recent years could not be an “Kreltszheim account” since the bank does not know the holder of the passbook. Yet it seems to be an account in every other respect, and seems to have been considered as a normal account by the parties concerned.

Further, it is easy to imagine a different technology being used to implement smart cards. For example, a laser could write encoded account figures on the card so that it would be very analogous to a normal passbook or to the anonymous passbook account. It seems hard to justify treating this “laser” smart card differently from the one which is implemented using the normal embedded computer chip.

For these reasons and others outlined in the above referenced article, it seems sensible and, indeed, inevitable that smart cards should be treated as “accounts”. In such a case, the “residuals” on smart cards are unclaimed money within the meaning of s 69 of the Banking Act 1959.

However, even if we assume that a smart card is not an “account”, the Thomas Cook decision raises the possibility that smartcard residuals may still be subject to unclaimed money statutes. The question turns on whether the amounts on the card are sums which are “legally payable”.

Is the sum represented on a smartcard money which is ’legally payable’ by the issuer? I think that it is. The issuer is contractually bound to make payments as directed by the holder provided that the payments are within the terms and conditions of issue. Ordering a payment amounts to “claiming” the funds just as writing a cheque claims funds from an ordinary account.

This is so even if there is no direct right for the card-holder to claim the money directly. The House of Lords has clearly recognised that an arrangement may be a “loan” where the obligation is to repay a third party: Potts v IRC [1951] AC 443; see also Re HPC Productions Ltd [1962] 1 Ch 466. By similar reasoning, the money on the card is “legally payable” even though only payable to a third party.

This is a conclusion which would not be welcomed by smart card operators and their advisors. One argument is that the passbook accounts contemplate that the holder may demand repayment of the entire amount by presentation of the passbook. This is not in the contemplation of the parties to a smart card arrangement. In fact, it is often explicitly stated in the Terms and Conditions that there is no such right.

Since the amounts on the smart card are payable at the direction of the holder, this argument is tenuous to say the least. It seems clear that the Thomas Cook argument applies equally whether the amount may be claimed directly or only indirectly.

5  Other cards

There are several similar types of cards in regular use which require special attention. These include:

The first thing to note is that these cards do not require payment by an ADI. Therefore, s 69 of the Banking Act is not the applicable legislation. Each state and territory has its own unclaimed money legislation which would need to be examined in the light of the Thomas Cook decision.

Single purpose cards do not fit comfortably into the framework of prepaid payment facilities. Phone cards, transport cards and in-store gift cards are more in the nature of prepaid services since normally the money is paid directly to the party issuing the card. However, it would be necessary to examine the individual state and territory legislation (in the light of the Thomas Cook decision) to determine the status of these.

Multi-purpose “gift cards” are no different from the general purpose “smart card” except that they are issued by a non-ADI and have a more limited group of potential payees. The residuals on these cards fit squarely within the Thomas Cook type of analysis. The only question is the applicable legislation and its proper interpretation.

6  Avoidance

Can the statute be avoided by contract? The obvious method is to have a term declaring that the card ’expires’ after a fixed period of time. I doubt that this would work. Consider, for example, a similar term in a bank’s Terms and Conditions declaring that the amount in an account is forfeited after a period of time. I believe it would be struck down as contrary to the statute, and there seems no reason that smart card residuals should be treated differently.

There is another possible interpretation of expiry clauses. Once the clause comes into effect, “the time within which proceedings may be taken for the recovery thereof has expired”. An expiry clause may have the effect of bringing forward the time at which the money becomes “unclaimed”.

The other avoidance possibility is to claim a provision of some service which is not a payment. I believe that this would be struck down as a sham. The whole purpose of a smartcard is to make a third party payment. Declaring it to be something else would be ineffective.


David Kreltszheim. The legal nature of electronic money. JBFLP, 14(3):161, 2003.

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