International payments gone wrong
Alan L Tyree

A bank is requested by its customer to make an international transfer of funds. If the bank does business in the destination country, it may conduct the transaction merely through an adjustment of accounts between itself and its foreign branch.

Alternatively, the bank may have an account with another bank in the foreign country. The transfer may be settled by instructing the foreign bank to debit the account of the transferring bank. A similar arrangement is when the foreign bank maintains an account with the transferring bank. Settlement may be made by crediting the local account of the foreign bank.

When the transferring bank does not have a direct account arrangement with a bank in the destination country, then it must make arrangements with a correspondent bank or, in some cases, with a string of correspondent banks.

The bank will typically instruct a correspondent bank specifying:

• the amount of the transfer;
• the means of settlement, that is, how the correspondent bank is to obtain reimbursement; and
• the identity of the ultimate recipient and how the funds are to be forwarded.

The third instruction will typically be "for the credit of X", "for the account of X" or some similar language. Suppose the transfer fails for some reason. Does either the transferring bank or the corresponding bank hold the funds on trust for X?

In First City Monument Bank plc v Zumax Nigeria Ltd [2019] EWCA Civ 294 it was argued that the funds were held on either an express trust or a Quisclose trust. The arguments succeeded in the first instance: see [2017] EWHC 2804 (Ch).

The proceedings in First City Monument Bank Pls v Zumax Nigeria Ltd related to a number of international bank transfers dating back to 2000, transfers totalling over US$3.75M. The facts are complex, but the issues are straightforward.

Zumax, a Nigerian company, was the original plaintiff. Zumax provided engineering services to oil companies. The original defendant, First City Monument Bank plc ("FCMB") came into existence as a result of several bank mergers, but it was agreed that it inherited the rights and obligations of IMB International Bank plc ("IMB"). At the time of the disputed transfers, IMB was Zumax's main banker.

Redsear Limited was a company incorporated in the Isle of Man. Zumax would invoice an oil company in US dollars, and requested that the funds be paid into a US dollar account that Redsear held with Chase Manhattan International in London. Redsear may have been a nominee of Zumax, but in any case it was common ground that any such funds received by Redsear were held on trust for Zumax. Money in the Redsear US dollar account was used to meet Zumax's US dollar business liabilities with any surplus funds transferred ultimately to Nigeria in the form of Nigerian Naira.

IMB held US dollar accounts with Commerzbank London branch. When money was to be transferred to Zumax, it would be transferred from the Redsear Chase Manhattan account to Commerzbank for the account of IMB. There was some dispute about the precise mechanism used to direct the money on to Zumax.

• Zumax claimed that it should be credited with a proper amount of Nigerian Naira in its account with IMB in Lagos;
• FCMB claimed that Zumax preferred to use an informal market offering a more favourable exchange rate; IMB would draw a Naira denominated cheque in favour of Zumax, the cheque drawn on an account held by IMB with another Nigerian bank.

There were nine disputed transactions. In each case, a Mr Chinye who was a director of both Redsear and of IMB, issued instructions requesting Chase to transfer a substantial sum to Commerzbank for the account of IMB. The first transaction was typical. The instructions read:

Beneficiary: IMB
for further credit to
Zumax Nigeria Limited
Ref: by order of Redsear Ltd UK

The Commerzbank statement reflected this in the credit entry: "For further credit to Zumax Nigeria Limited being USD205000 less our chg Redsear Ltd"

The other eight disputed transactions had similar wording, including the phrase "for further credit to Zumax" or "for final credit to Zumax". Similar language was used in most of the Commerzbank statements although "for further credit" was sometimes abbreviated to "FFC". The final two Commerzbank statements made no reference to Zumax.

It may be unnecessary to say that the funds went missing, probably due to a fraud within Redsear or one of the banks. Zumax claimed that the funds held in the Commerzbank accounts of IMB were held by IMB on trust for Zumax.

Barling J granted Zumax summary judgment, finding that there was an express trust in favour of Zumax at the time when the funds arrived in the Commerzbank account. He also found that the requirements for a Quistclose trust had been established.

The principal judgment of Newey LJ rejected the existence of a trust for four reasons:

• The mere fact of a funds transfer or of a payment for a particular purpose is not sufficient to establish a trust;
• the entries in the Commerzbank statements do not manifest an intention to create a trust, nor do they indicate that the funds are not to be at IMB's free disposal;
• the funds were not "segregated" in any meaningful way; compare with the situation in Quistclose where separate bank accounts were opened specially for the purpose;
• the context is one of banker and customer, one ordinarily associated with a relationship of debtor and creditor; it is very much the exception rather than the rule that the banker becomes a trustee for the customer.

The fourth reason is possibly the most important and probably sufficient to determine the issue. The transfer orders were in a form common to international funds transfers, and no matter what form such an order takes, at the very minimum it must indicate the ultimate recipient of the funds. The phrases "for the benefit of Zumax" or "for the account of Zumax" will have some similar phrase in every transfer order.

The primary judge relied on evidence, both oral and written, mentioning that the funds "belonged" to Zumax or using some similar phrase indicating a proprietary relationship. Newey LJ discounted this evidence, noting that it is common to speak of money in a bank account "belonging" to the customer even though the legal position is totally different: there is no "money in the account", there is only a debt owed by the bank to the customer: see also Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002, Joachimson v Swiss Bank Corp [1921] 3 KB 110, Barwick CJ in Croton v R [1967] HCA 48, Dovey v Bank of New Zealand [1999] NZCA 328 and any of the many cases discussing the banker-customer relationship.

Further, the role of the correspondent bank in international funds transfers has been well-established at least since Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd's Rep 194. In that case, it was held that the correspondent bank acted as agent for the receipt of funds of its customer, a conclusion that was echoed again by Treacy J in Abou-Rahmah v Abacha [2006] 1 Lloyd's Rep 484; the issue did not arise on appeal: Abou-Rahmah v Abacha [2005] EWHC 2662; aff'd [2006] EWCA Civ 1492.; see also Dovey v Bank of New Zealand [1999] NZCA 328

In short, the well-established relationship of banker and customer and the role of correspondent banks in international funds transfers suggest that it would take extremely explicit language to establish that the funds involved in such a transfer were to be held on an express trust. It is certainly not sufficient to use language which may be interpreted as merely identifying the ultimate destination of the funds.

An express trust needs certainty of intention, subject-matter and objects or persons intended to have the benefit: Knight v Knight (1840) 3 Beav 148; 49 ER 58. No such certainty could be ascertained because of the context in which the transaction took place, namely, the banker customer relationship.

Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 established that a trust may arise when money is transferred to another party for a particular purpose which is no longer capable of being met.

Australian courts were initially wary of the Quistclose trust, perhaps due to comments of Gummow J in Re Australian Elizabethan Theatre Trust [1991] FCA 344 where he said (at para 38):

To speak of a Quistclose trust as if it were a new legal institution rather than an example of the particular operation of principle upon the facts as found, is to set the listener or reader off on a false path.

Part of his hostility to the Quistclose might be explained by the way that it was understood at the time. It was thought that the borrower held the money beneficially until such time as the 'purpose' failed at which time a resulting trust arose in favour of the lender.

This understanding of the Quistclose trust was modified in Twinsectra Ltd v Yardley [2002] UKHL 12. The transferee does not hold the money beneficially, but has only the power granted by the transferor to apply the funds in accordance with the transferor's instructions: see the discussion by Lord Millett at paragraph 100. If it becomes impossible to meet those instructions the transferee must return the money to the beneficial owner, not because some new trust arises in favour of the transferor, but because the transferee may no longer make any use of the funds.

Lord Millett also emphasised that a Quistclose trust requires more than just the payment of money for a particular purpose. After all, most payments are made for a particular purpose, including most loans.

This explanation of the Quistclose trust brought it more into line with conventional Australian thinking, but the Australian judicial hostility to the Quistclose trust has not entirely disappeared.

In Raulfs v Fishy Bite Pty Ltd; Fishy Bite Pty Ltd v Raulfs [2012] NSWCA 135 (11 May 2012) Campbell Ja with whom Meagher JA and Barrett Ja agreed seemed to doubt that there is any such thing as a "Quistclose trust". His view was that:

• it is necessary to analyse an individual fact situation for the purpose of deciding whether there is an intention to create a trust, and, if so, on what terms: at para 51; and
• it is wrong to think that there is some sharp dividing line where the parties do or do not intend a payment to be at the free disposal of the recipient: at para 51.

The decision in First City Monument Bank is clearly correct. The International transfer of funds would be brought to a standstill if phrases such as "for the account of X" were held to create an express trust. The decision not only makes commercial sense, but it is in keeping with a long line of banking cases dating back at least to Foley v Hill.