Questioning a valid mandate

1 Introduction

A bank should sometimes question an apparently valid mandate. Failure to do so may, in some circumstances, make the bank liable to a third party for a breach of trust or to its customer for negligence in the operation of the account.

The need to question a valid mandate puts the bank in a very awkward position. Refusal to follow a mandate from an authorised signatory is, prima facie, a breach of contract. If the bank suspects that the mandate is invalid, it must choose between the risk of breach of contract and the risk of being liable to a third party.

If it chooses to question the mandate, then it must justify its actions. Is mere suspicion adequate justification or is something more required?

2 The duty to question a valid mandate

The duty to question a valid mandate in certain circumstances is well established. The most common circumstances involve trust accounts, misuse of accounts by authorised signatories. Where the bank suspects money laundering or terrorist financing operations, the considerations are somewhat different.

2.1 Trust accounts

Where the bank knows that an account is a trust account, it owes a duty to the beneficiary. Most of the cases derive from the judgment in Barnes v Addy (1874) 9 Ch App 244 which introduced the categories of “knowing receipt” and “knowing assistance”. If the preconditions apply, then following a customer's mandate may be “knowing assistance” on the part of the banker.

The precise content of these duties has been discussed in a myriad of cases: see Weaver and Craigie, The Law Relating to Banker and Customer in Australia at para 3.4040ff. The duty extends at least to questioning a valid mandate where the circumstances should make a reasonable banker question or prevent the withdrawal of sums from the account: see, for example, Rowlandson v National Westminster Bank Ltd [1978] 1 WLR 798.

The important point is that the bank may be liable for following an apparently valid mandate. In this sense, there is a “duty” on the bank to question the mandate since it has an obligation to safeguard the interests of the beneficiary.

2.2 Non-trust accounts

A similar principle may apply to non-trust accounts. A common case is where a person is an authorised signatory but is not the owner of the account. Examples include company officials, partners, and public officials. The courts often analyse these cases in terms of fiduciary or quasi-fiduciary terms, but it is more straightforward to simply hold that a bank has a contractual duty to safeguard the interests of its customer, the account owner. As Parker J said in Lipkin Gorman v Karpanale [1989] 1 WLR 1340 at 1376:

Finally, it is to be noted that the distinction between liability as a constructive trustee and liability for breach of contract is frequently blurred or unconsidered.

The contractual duty was emphasised by the Court of Appeal in Lipkin Gorman (from the headnote):

it was an implied term in the contract between a bank and its customer that it owed him a duty of care which required it not to pay his cheque without inquiry where it knew facts which would have led a reasonable and honest banker to consider that there was a serious or real possibility that the customer might be being defrauded by the drawing of the cheque

May and Parker L JJ went so far as to say that a bank could be liable to its customer as a constructive trustee if, and only if, it were in breach of the contractual duty of care owed to the customer.

If the bank has reason to believe that the account is being abused by the signatory, it should question an apparently valid mandate. Examples from case law include:

  • a company director drawing on a corporate account for improper purposes: Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555; Karak Rubber Co Ltd v Burden (No 2) [1972] 1 WLR 602;
  • a partner drawing on a partnership account for improper purposes: Lipkin Gorman v Karpanale [1989] 1 WLR 1340 where on the facts it was held that there was no breach; the point was not considered in the appeal to the House of Lords, Lipkin Gorman v Karpanale [1991] 2 AC 548;
  • a public official drawing on an official account for private purposes: Re Gross; Ex parte Kingston (1871) 6 Ch App 632.[fn:1: The “Police account” case; the main issue concerned the bank's right to combine accounts.]

Both Selangor and Karak were criticised in Lipkin Gorman, but the criticism concerned the standard set, not the principle of the contractual obligation to its customer.

2.3 Money laundering

The AML/ATF Act imposes new duties on banks, one of which is to take certain actions when the bank suspects that the account is being used for money laundering or terrorist financing.

The Act does not, however, justify the bank in refusing to follow the customer's mandate. It provides procedures for the bank to follow when there is suspicious activity.

Indeed, questioning the mandate solely on the grounds of suspicion of money laundering may render the bank liable to its customer if the suspicion is incorrect: see, for example, Tayeb v HSBC Bank Plc [2004] EWHC 1529 (Comm) where the bank attempted to reverse a completed CHAPS payment.

3 MAP & Associates

The bank in Westpac New Zealand Ltd v MAP & Associates Ltd [2011] NZSC 89 faced these difficult questions.

Shareholders of a Bolivian bank, Prodem, wished to sell their shareholdings. The purchaser was to be a Venezuelan bank, BIV. The respondent, MAP, was a New Zealand firm of chartered accountants which agreed to act as a deposit agent for the transaction.

MAP established an account in their own name with the appellant bank. MAP advised the bank of the nature of the account, the parties involved and gave sealed instructions which were to be opened when authorised. Some US$50m were transferred into the account.

BIV assigned its interests to another party, and Westpac was given a new set of sealed instructions. When these instructions were opened, Westpac became concerned about the transaction. The mandate required money to be paid out to people or organisations that were not shareholders and it was unaware of the reasons that payment should be made to them. It ask for further information and received a copy of a communication from a person who held power of attorney for the shareholders. The communication confirmed the transfer instructions.

The bank refused to follow the mandate because of its suspicion that there was a breach of trust. MAP applied to the High Court which made an unopposed order requiring Westpac to act on the instructions. It later held that Westpac had no answer to MAP's claim for breach of mandate.

In the Supreme Court, Westpac argued that it had good reason to believe that if it paid according to instructions it would have been dishonestly assisting in a breach of trust. It argued that this belief should be recognised as a valid defence to MAP's claim for a breach of mandate. The bank led no evidence to establish that there was an actual breach of trust.

4 What must the bank prove?

In the MAP Associates case, the Supreme Court said:

The issue is whether a bank can defend itself against a claim for breach of mandate on any basis short of establishing that it would actually have incurred liability for dishonestly assisting in a breach of trust (or other wrongful conduct) by acting on its customer's instructions.

It was common ground that if the bank could establish the breach of trust, then it would have a defence.

The Court held that nothing less than proof of a breach of trust would suffice. It noted that (at para 10)

[a] party cannot assist, dishonestly or otherwise, in the commission of a breach of trust, if no breach of trust is actually occurring.

Most of the Court's justification for the conclusion rested on contractual principles. The bank has a contractual obligation to act in accordance with its customer's mandate. Liability to perform a contract is generally strict. So, for example, where frustration or illegality is used as an excuse, the frustration or illegality must be proved by the person relying on it.

The Court also considered the question of policy. Who should bear the loss when the bank has suspicions, but there is, in fact, no problem with the customer's instructions? The Court echoed the Privy Council dictum in the Tai Hing case,[fn:2: “The business of banking is the business not of the customer but of the bank.” /Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd/ [1985] UKPC 22 at page 12.] saying (at para 16):

Banks are in the business of receiving customers' money and using it to their advantage. The risks involved are inherent in conducting their business and are better managed by the bank than its customer.

The Court also considered the analogy of the fraud exception in letters of credit. In Society of Lloyds v Canadian Imperial Bank of Commerce [1993] 2 Lloyd's Rep 579 (QB), the bank could not prove fraud but argued that a reasonable suspicion of fraud was sufficient to excuse dishonour of drafts drawn under a letter of credit. Saville J rejected the argument, holding that nothing less than proof of actual fraud would be sufficient justification.

Importantly, the Court also said (at para 22):

Looking at the matter more generally, we do not consider the point of principle should depend on the nature of the contract which gives rise to the bank's liability to pay.

5 Application to collection of cheques

The court's emphasis on contractual principles means that MAP Associates has application in other areas. Australian banks refuse to collect cheques which they regard as “suspicious”, and also claim to have a discretion to collect third party cheques.

The duty to collect cheques for a customer is both a common law duty and a statutory one. The common law duty is expressed in Lort Atkin's famous speech where he said “The The bank undertakes to receive money and to collect bills for its customer's account.”[fn:3: /Joachimson v Swiss Bank Corp/ [1921] 3 KB 110 at 127.] The contractual obligation is, however, much older than the Joachimson case.[fn:4: See, for example, /Lubbock v Tribe (1838)/ 3 M & W 607.]

The statutory duty is found in s66(1) of the Cheques Act 1986:

Subject to sections 59 and 70B, where the holder of a cheque lodges the cheque with a financial institution (the deposit institution) for collection for the holder, the deposit institution shall duly present the cheque for payment itself, or ensure that the cheque is duly presented for payment on its behalf, as soon as is reasonably practicable and, if the deposit institution fails to do so, it is liable to the holder for any loss that the holder thereby suffers.

Section 6(2) of the Act prevents the parties from “contracting out” of this obligation. Section 59 deals with circumstances where the presentment is not necessary. Section 70B deals with the consequences of a deemed dishonour of the cheque.

There is no provision in the Cheques Act which would excuse a bank which refuses to collect a cheque for the customer. A Malaysian authority, Tan ah Sam v Chartered Bank 1 MLJ 28; (1971) 45 ALR 770 held that a bank may refuse to collect a cheque if by so doing it could not rely on the statutory protection against conversion.

The statutory defence, a privilege granted only to financial institutions, is found in s95 of the Cheques Act 1986.

Assuming that Tan ah Sam is correct, then in order to justify refusing to collect a cheque for a customer, the bank must bring evidence to show that, on the balance of probabilities, it would be “negligent”, in the sense used in s95 of the Cheques Act 1986, to collect the cheque. It is not enough, according to MAP Associates for the bank to merely have a suspicion.

As noted above and as discussed in (Alan L Tyree 2011, JBFLP 22, 55), banks in Australia regularly breach the duty by refusing to collect cheques. Since the duty to collect cheques is both contractual and statutory, the Financial Ombudsman Service has jurisdiction to consider the matter in the case of individuals and small businesses where the customer suffers damage from the failure to collect.



The “Police account” case; the main issue concerned the bank's right to combine accounts.


“The business of banking is the business not of the customer but of the bank.” Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] UKPC 22 at page 12.


Joachimson v Swiss Bank Corp [1921] 3 KB 110 at 127.


See, for example, Lubbock v Tribe (1838) 3 M & W 607.

Date: 2011-06-29 Wed

Author : Alan L Tyree

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