Verification clauses
Alan L Tyree

The banker-customer contract does not impose a duty on the customer to read the bank statement or to discover errors in it. This was true even when accounts were kept in a passbook which the customer brought in from time to time to update: see Kepitigalla Rubber Estates Ltd v National Bank of India Ltd [1909] 2 KB 1010. Kepitigalla was approved by the New Zealand Court of Appeal in National Bank of New Zealand Ltd v Walpole and Patterson Ltd [1975] 2 NZLR 7 and by the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80.

Banks may attempt to impose a duty on the customer to read the statement and to notify the bank within a certain time of any error. Such clauses are commonly called 'verification clauses'. The Privy Council in Tai Hing saw no objection in principle to such clauses, at least in a commercial context.

A typical short verification clause will read something like the following:

The bank's statement of my/our current account will be confirmed by me/us without delay. In case of absence of such confirmation within a fortnight, the bank may take the said statement as approved by me/us.

It will be seen that the clause imposes two duties on the customer:

• the customer should read and verify the bank statement; and
• the customer must notify the bank in the event of any discrepancy.

Verification clauses are a particular brand of 'conclusive evidence clauses'. The High Court also has held that conclusive evidence clauses do not offend against public policy when used in a commercial contract: Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643.

Conclusive evidence clauses are commonly found in standby credits and in first demand guarantees, and have long been held to be valid in that context. Lord Denning explained the reasoning in Bache & Co (London) Ltd v Banque Vernes et Commerciale de Paris SA [1973] 2 Ll.L.R 437:

I would only add this: this commercial practice (of inserting conclusive evidence clauses) is only acceptable because the bankers or brokers who insert them are known to be honest and reliable men of business who are most unlikely to make a mistake. Their standing is so high that their word is to be trusted.

The quotation shows, however, why cases on conclusive evidence clauses may not apply directly to verification clauses. In the latter case, the bank is attempting to assert conclusive evidence on the basis of something that the customer has not done.

Canadian law follows the common law in holding that there is no duty in the absence of a verification clause: see Canadian Pacific Hotels Ltd v Bank of Montreal (1987) 40 DLR (4th) 385. However, Canadian courts have consistently upheld the validity of verification clauses: see Arrow Transfer Co Ltd v Royal Bank of Canada (1972) 27 DLR (3d) 81 and Columbia Graphophone Co v Union Bank of Canada (1916) 38 OLR; 34 DLR 743.

Since a verification clause imposes new duties on a customer, it must be brought to the customer's attention. Indeed, in the Tai Hing case, the bank failed by reason of not sheeting home to the customer the importance of the clause and the consequences of failing to examine the statement and report errors.

If the clause is effective, then it will provide the bank with substantial defences if the customer does not notify errors. In Columbia Graphophone Co v Union Bank of Canada (1916) 38 OLR; 34 DLR 743, Middleton J held (at 332) that the clauses were 'intended to be real agreements, and to define the relation between the parties, and relieved the bank from all liability'. The Supreme Court of Canada held that an effective verification clause provide the bank with a complete defence when paying against a forged drawer's signature: Arrow Transfer Co Ltd v Royal Bank of Canada (1972) 27 DLR (3d) 81.

The Singapore Court of Appeal has upheld verification clauses in the commercial context: Pertamina Energy Trading Ltd v Credit Suisse [2006] SGCA 27. The Court explicitly reserved its opinion on whether the clauses would be effective against a consumer, suggesting that the clause might be voided by the Unfair Contract Terms Act (Singapore).

A more or less standard verification clause was held insufficient to protect the bank against the fraud of one of its employees: /Jiang Ou v EFG Bank AG [2011] SGHC 149. The Court held that the clause, interpreted so as to protect the bank from its own employees' fraud, violated the Unfair Contract Terms Act (Singapore). It also found the clause void as offending public policy. Shifting the risk of fraud by bank employees strikes at the heart of the integrity of the banking system.

Even in a commercial context, a verification clause cannot be effective unless it is shown that the statements are received by the customer. The burden of proof is, of course, on the bank to show this: see Rajah J in Pertamina Energy Trading Ltd v Credit Suisse [2006] SGCA 27. It may be very difficult for the bank to show that the statement has been received.

Most consumer accounts are covered by the ePayments Code. The ePayments Code replaces the former Electronic Funds Transfer Code of Conduct ('the EFT Code').

Clause 4.4 of the EFT Code provided:

Account institutions will suggest to account holders that all entries on statements be checked and any apparent error or possible unauthorised transaction be promptly reported to the account institution. This suggestion will be contained on the account statement. Institutions will not seek to restrict or deny account holders their rights to make claims or to attempt to impose time limits on users to detect errors or unauthorised transactions.

This would seem to preclude imposing a verification clause on any account covered by the EFT Code.

The ePayments Code is the fashionably renamed EFT Code of Conduct. It does not address the question of verification clauses directly, but section 4.2(b) provides that the terms and conditions for a facility must:

not impose liability or responsibilities on users that exceed their liability and responsibilities under this Code

The ePayments Code generally does not have any requirement that the customer examine the statement and report errors.

However, the appalling sections concerning recovery of payments made under a mistake of fact do impose time limits. These sections, ss 24–34), essentially purport remove common law rights from consumers, replacing them with a mish-mash of rights that are unlikely to be of much value. Different rules apply depending upon whether the mistaken payment is reported within 10 business days (s28), between 10 business days and 7 months or greater than 7 months.

These sections are possibly the worst example of so-called 'consumer protection' in any consumer code, rivalling even the original Banking Code of Conduct which barely survived its issue. Presumably terms and conditions may contain limited verification clauses which reflect these sections of the ePayments Code, but there is little point in repeating the terms of the Code.

Consumer rights, like any payer's rights, to recover mistaken payments are well known: see, for example, (Tyree 2003). It is completely unacceptable that a Code which presumably protects consumers strips them of easy access to remedies.

There remains the possibility that a verification clause covering a consumer account would be declared void under the Unfair Contract Terms of the Australian Consumer Law.

Banks currently encourage customers to forego paper statements in favour of on line electronic statements. The use of electronic statements may introduce new considerations since the bank will have a record that the statement was accessed from a certain Internet address.

Showing that the statement was accessed from a particular Internet address does not show conclusively that the customer has seen the statement, but it will often be strong evidence to that effect.

Of course, a customer is under a duty to notify the bank of known errors that might cause damage to the bank: Greenwood v Martins Bank Ltd [1933] AC 51; [1932] All ER Rep 318. Using the electronic record to show that it is likely that the customer has in fact read the statement provides strong evidence that the customer has breached the Greenwood duty if errors are not reported.