Unclaimed Money: Westpac Banking Corp v CIR
Alan L Tyree

New Zealand, in common with most legal systems, takes the view that "unclaimed money" should go to the state rather than be a private windfall. Statutes implementing this policy are diverse, and there is little consistency across jurisdictions in the definitions of "unclaimed money".

Whatever "unclaimed money" is, there is a surprising amount of it. People seem to forget about accounts. They are careless in their bookkeeping, they move around and lose documents. They become insane and demented. In the end they all die. "Unclaimed money" may result from any of these events.

The NZ implementation of the policy is contained in the Unclaimed Money Act 1971. The definition of "unclaimed money" is contained in s 2 and s 4. Section 2 provides the typical statutory definition that drives logicians insane:

Unclaimed money means unclaimed money within the meaning of section 4, being unclaimed money situated in New Zealand.

Section 4(1)(a)–(c) lists various kinds of current or savings accounts. Section 4(1)(d) deals with maturing life insurance policies. The catchall, and the only one of interest here, is s 4(1)(e):

Any other money, of any kind whatsoever, which has been owing by any holder for the period of 6 years immediately following the date on which the money has become payable by the holder

There is a proviso to the subsection which need not concern us here.

Commerce requires a payment method that is reliable and safe. The bank cheque has been the traditional solution for large transactions such as house or vehicle purchases. When the transaction is an international one, the traditional solution has been the bank draft.

Bank cheques and bank drafts provide good commercial solutions to the payment problem. The payee/creditor need not be concerned with the creditworthiness of the payer/debtor. The payment cannot be stopped at the whim of the payer/debtor.¹ Both instruments are still widely used although direct electronic transfers are now often used as substitutes.

Bank cheques are instruments drawn by the bank on itself, payable to the customer or to a third party nominated by the customer. Bank drafts are drawn by the bank on an overseas bank, normally denominated in foreign currency.

In either case, the customer ordering the instrument pays the amount (plus fees, of course) to the drawing bank. These funds are usually placed in a special "suspense" account established to meet the instruments when presented for payment.

According to evidence presented in Westpac Banking Corp v CIR [2008] NZHC 1695, an astonishing 1% of bank cheques are not presented within six months of issue. Given that the normal bank cheque or bank draft will be for a substantial sum, the amount of money represented by unpresented instruments is probably quite large.

The issue, of course, is what should be done with this money? If the instruments are never presented, the sums represent a windfall for the banks. Are the sums "unclaimed money"?

This, in turn, reduces to a very simple question: are the sums "owing" and "payable" by the bank at the time the customer purchases the instrument. A very simple question that led to the Privy Council in Thomas Cook (New Zealand) Ltd v. Inland Revenue (New Zealand) [2004] UKPC 53. The very same simple question was re-litigated beginning in 2008, culminating in the decision of the Supreme Court in Westpac, BNZ and ANZ National v CIR [2011] NZSC 36.

Bank drafts are bills of exchange as defined in the Bills of Exchange Act 1908 (the BOEA). Bank cheques are not bills of exchange since they are not drawn "by one person on another",² but rather by the person on themselves. By s84 of the BOEA, these instruments are treated as promissory notes. The drafts in the Thomas Cook case were similar to the bank drafts in the Westpac litigation, and were also held to be bills of exchange.

The problem, and the source of all this expensive litigation, is an elementary principle learned by all banking students: presentment for payment is usually necessary before there is any liability on a bill. This principle is embodied in s45(1) of the NZ act:

Subject to the provisions of this Act, a bill must be duly presented for payment. If it is not so presented, the drawer and indorsers shall be discharged to the extent that they are prejudiced by the omission.

The Commissioner was, of course, familiar with the principle. The counter argument put forward at the beginning of the Thomas Cook case was that the face value of the instrument became "payable" as soon as it was drawn and issued. This became known as the "immediate obligation argument".

The Commissioner also put up an implied term argument: there was, it was argued, an implied term that the bank would reimburse the value of the instrument once it becomes stale.

The argument based on the BOEA won the day at first instance. Chambers J said in CIR v Thomas Cook (New Zealand) Limited [2002] NZAR 625:

The key is presentment. Until presentment, the money is not payable. That is the simple answer to this case. These drafts have never been presented with the consequence that the money has not become payable by Thomas Cook. The money is therefore not "unclaimed money" within s 4(1)(e) of the Unclaimed Money Act.

The Court of Appeal agreed with Chambers J on the "immediate obligation argument". It held that presentment was not just a formality or a method of obtaining payment. Presentment is an essential ingredient for establishing liability.

The Commissioner succeeded with a refined argument: the instruments became "stale" after six months. At that time, the requirement for presentment disappears. The instruments, overdue and unpaid, are deemed to be dishonoured by s47(1) of the BOEA. As dishonoured instruments, the drawer became liable and the money becomes "unpaid money" six years later.

Thomas Cook appealed to the Privy Council: Thomas Cook (New Zealand) Ltd v. Inland Revenue (New Zealand) [2004] UKPC 53, and this is where things became interesting.

The Privy Council took a dim view of the reasoning in the Court of Appeal, in particular questioning whether a holder who fails to present a bill in a timely fashion may then rely on his or her own carelessness and contrary to the obligation to present imposed by the Act may immediately become entitled to sue for liquidated statutory damages. The Privy Council said (at para 11) the conclusion "is, to say the least, a surprising one".

Instead of addressing the arguments directly, the Privy Council noted that the case had been conducted on an assumption that it was not prepared to accept. The assumption was (at para 4):

…that money only becomes "payable" under section 4(1)(e) once an action to claim it could have been brought…

The Board thought that this assumption was incorrect. The Board suggested that the correct formulation was (at para 4):

…"payable" means no more than 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.

As to the need for a demand, the Privy Council was scathing (at para 16):

That surely would be the greatest nonsense of all: to say that money can only become unclaimed money once it has in fact been claimed.

As a side note, the Privy Council litigation was remarkable since the parties' written submissions did not address the question whether there had to be a demand for payment. The argument was raised by the judges at the hearing and, on their promptings, adopted by the Commissioner.

The banks faced a nearly overwhelming obstacle: bank drafts and bank cheques were clearly not substantially different from the drafts in Thomas Cook. It was necessary to show that the Privy Council decision, otherwise binding on the NZ courts, was wrong.

This is always a daunting task, and it proved to be unachievable. MacKenzie J in the High Court found that "there is no distinction which would materially affect the reasoning" of the Privy Council.³ MacKenzie J was asked to reconsider the case on the assumption that the Privy Council decision was incorrect. Rather surprisingly, he did so in some detail. He came to the same conclusion as the Privy Council.

In the Court of Appeal, William Young P and Robertson J dismissed all arguments that the Privy Council decision was made per incuriam. Baragwanath J agreed but also went on to express his view that he would have come to the same decision as the Privy Council.

The Supreme Court adopted the approach of MacKenzie J and of Baragwanath J in considering the case from first principles. It noted that there is a "broad" and a "narrow" meaning of "payable".

The narrow meaning is that it means "unpaid when due". The broader meaning is that "that can be or is able to be paid". The Supreme Court quoted Black's Law Dictionary that "An amount may be payable without being due."

The banks, of course, argued for the narrow meaning, the Commissioner for the broader. The Supreme Court first considered the purpose of the Unclaimed Money Act 1971. After quoting from the speech of the then treasurer, the Court found (at para 34) that:

The main purpose of the 1971 Act is expressed in the first underlying principle mentioned by the Minister, whereby money which is in the hands of another and not claimed by the owner is not to be retained and treated as the holder’s revenue.

The Court concluded that money advanced for drafts or bank cheques was provided to the banks to take up the facility offered for making payments. In substance, the customer was putting the bank in funds which both parties expect to be drawn against by a third party. That expectation has not been fulfilled and so falls within the main purpose of the Act.

The Court also considered the statutory history, but, as so often happens, found that any guide to the meaning of "payable" was inconclusive and ambiguous. The word was used in both the narrow and the broader sense at different points in the legislative history.

In short, the Supreme Court came to the same conclusion as had the Privy Council. In an interesting paragraph (para 49) near the end of the judgment, the Court considered what might have happened had they come to a different decision:

Had we favoured the appellants’ approach to this difficult question of construction, it would have been necessary to consider whether our preference for that different view was sufficient to justify departure from the meaning which had been adopted by the Privy Council. That would have raised questions concerning, on the one hand, desirability of stability in the law and respect for the principle of stare decisis and, on the other, whether there are cogent reasons for reconsideration of, and departure from, that judgment.

Since the judgment of the Court on the meaning of "payable" seems rather delicately balanced, it is easy to suspect that "stability" and "respect" might have carried the day.

Is NZ likely to see more litigation on the unclaimed money problem? We can hope that the question of unpresented bills and cheques will not be litigated again soon. However, there are a number of issues which are bound to be litigated if the Commissioner decides to pursue them.

"Smart cards" are devices which are designed to be prepaid payment facilities. The customer pays in advance for a certain sum to be "loaded" on the card. The customer then pays for goods and services provided by participating merchants by having the amount deducted from the balance available on the card. This form of the smart card has been called an "electronic purse".

Smart cards may be general purpose payment devices or they may be limited. An example of a limited smart card is one that is sold by a shopping centre for use in the stores in the shopping centre. Another example is a "gift card" sold by an individual store. Gift cards have, of course, been around for a long time, but their use is likely to rise and they are more likely to take the form of a smart card.

What is the nature of the fund held by the issuer of the smart card? What if the smart card is never used? Do the funds become "unclaimed money" after a certain period of time?

I have argued elsewhere that the funds held by the issuer of a smart card are in the nature of an account,⁴ but that conclusion is by no means certain.

In any case, the balance of the smart card would appear to be "payable" under the reasoning of both Thomas Cook and Westpac. True, it is not payable to the card holder, but is payable on the holder's order to a third party participating merchant. Does this matter? Probably not. Many loans are payable to third parties and, indeed, most of a current account balance will be paid to third parties.⁵

Smart cards present a further complication, particularly in the limited versions. It is common to have an expiry clause. The clause will be to the effect that any funds not "spent" at the end of the expiry period will be forfeited.

Are these clauses effective? It seems doubtful. If they were effective, why would not a bank impose some kind of expiry clause on accounts?

Smart cards are not the only modern problem facing "unclaimed money" statutes. Mobile telephone accounts often contain expiry clauses; pay-as-you-go Internet accounts are the same. These often contain clauses which purport to be charges for services, but are in effect expiry clauses.

So, the future looks bright for banking lawyers. Technology will develop so that more and more payment functions are performed by telephone and Internet. Where there is a payment facility, there is scope for "unclaimed money".