Citation(2005) 17 SAcLJ 84
Published date01 December 2005
Date01 December 2005

This article discusses the question of when a payment by funds transfer (ie, the credit of funds into the bank account of the payee) becomes final and complete as a matter of law. This question has never been definitively resolved by judicial authority. This article will address the issue from the differing perspectives of the various parties that are involved in the payment process. It concludes by proposing a set of principles that may be employed in determining the question.

I. Introduction

1 Payment is a concept that the law regularly takes for granted. The nature of an act of payment and its legal consequences are not often considered, but their importance cannot be overstated.

2 This article is concerned with one particular method of payment, the inter-bank funds transfer, which is the process of effecting payment by transferring funds from the bank account of the payer to the bank account of the payee. At various times and in various jurisdictions, this has been called the wire transfer, the telex or telegraphic transfer, the credit transfer or more simply, the funds transfer. There is no uniformity in usage. For simplicity, this article will use the term “funds transfer”.

3 In particular, this article discusses when a payment by funds transfer becomes final. The question has arisen from time to time, but the cases are diverse and disparate and not easily reconcilable. To date, there has not been any attempt by judicial authority to comprehensively set down a coherent set of principles on the subject. This article will attempt to do so, while exploring the question from the different perspectives of the various parties typically involved in a funds transfer.

II. The notion of payment
A. What is payment?

4 Brindle & Cox1 adopts the definition suggested by Prof Royston Goode that payment is “a gift or loan of money or any act offered and accepted in performance of a money obligation”.2 This definition usefully emphasises two features — firstly, that payment does not necessarily involve the delivery of money, and secondly, that acceptance in some form by the payee is required to complete an act of payment.3 The first feature forms the background for the present discussion. The second (which can be discussed first, and relatively briefly) emphasises that payment is never really a unilateral act, but the form and manner in which acceptance is manifested may vary according to the circumstances.

B. Payee’s acceptance

5 The requirement that there should be some form of acceptance by the payee distinguishes a payment from a tender (which may be defined as an offer to make payment).

6 The basic principle is that a payment cannot be forced onto a payee. In the case of the payment of a debt, a debtor cannot compel his creditor to accept payment. The debtor can only make a tender of payment, so that he will have available the defence of tender before action, should the creditor later sue for the debt. As regards how a debtor can make an effective tender, the answer is that he has to offer the amount due in legal tender (ie, cash). Other forms of payment would not be legal tender and is effective only if there is agreement on the part of the debtor.4

C. Acceptance in inter-bank funds transfers

7 In a payment by funds transfer, the payee will typically identify the bank and, very often, the account to which the funds are to be paid. It

has been held that by communicating the details of the receiving bank to the payer, the payee has impliedly authorised the receiving bank to accept the funds on his behalf, as well as indicated to the payer that he will accept as payment the funds that are transferred to the receiving bank. The latter will satisfy the requirement that there must be some form of acceptance of the transfer by the payee.5

8 Where the details of the receiving bank are not specifically communicated by the payee to the payer for the purpose of receiving payment, the analysis becomes more complex. Here, one cannot infer any implied acceptance by the payee. Instead, it is necessary to examine the circumstances as a whole to determine if the payee has actually accepted payment.

9 This may be illustrated by TSB Bank of Scotland Plc v Welwyn Hatfield District Council.6 Following a decision by the House of Lords7 that it was ultra vires for local authorities to enter into swap transactions, local authority B decided that it should repay to local authority W the amount it had received from W under a swap between W and B. To this end, B paid by funds transfer a sum of money into the bank account of W (of which B was aware because payments under the swap were to have been made to this account).8 At the same time, B sent a fax to W and indicated that the payment was to repay in full the net sum received by B under the swap. The next day, W replied to B, saying that they would accept the sum only on account and not in full and final satisfaction of any sums due from B. W further added that if B disagreed, then the money would be returned to B, and in the meantime, the money would be held in a separate holding account. However, instead of actually holding the money in a separate account, W placed it in their own account and retained the interest earned for themselves. When B later replied insisting that payment was to be made on their terms, W remitted the money back to B, but without interest.

10 In the subsequent litigation in which W claimed from B restitution of the net sum paid under the avoided swap transaction, the question whether B’s funds transfer into W’s bank account had discharged B’s liability to make restitution arose as a preliminary issue.9 Hobhouse J ruled that it had. The judge said that a party who received money which he did not wish to accept, should not deal with it as its own. On the facts, the judge held that W, by not returning the money within a reasonable time, not keeping it in a separate account (as they themselves had offered to do), earning interest on it and not paying that interest back to B, had acted in a manner that was inconsistent with a rejection of the payment, and that W was accordingly deemed to have accepted B’s payment by funds transfer.10

11 It is also pertinent to mention, in passing, the case of Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj,11 where a judgment creditor succeeded in garnishing the judgment debtor’s bank balance which was in the process of being transferred to a third party, in circumstances where the third party had no knowledge of the transfer and was thus in no position to assent to or otherwise accept it.

III. Payment by funds transfer
A. A description of the principal players and the terminology

12 There is, by and large, general consistency in the usage of terms describing the various parties and processes involved in a funds transfer.12

13 The party initiating the payment is called the originator, and the party to be paid at the other end is the beneficiary. The originator and the beneficiary may be the same party. At both ends, the banks with whom

they maintain accounts will be respectively the originator’s bank and the beneficiary’s bank. In between, there may be intermediary banks whose role is to pass along the instructions and the payment until they eventually arrive at the beneficiary’s bank.

14 Between the originator and its bank and between any pair of banks further on in the payment chain, instructions will be given from one (the sender) to the other (the recipient or receiving bank). In many jurisdictions, these instructions are referred to as a payment order, although this is not to say that the receiving bank is bound to obey the instructions of the sender.

B. The legal character of a funds transfer

15 As a matter of English law, it is now quite settled that there is no movement of funds as such in a funds transfer. What occurs is an extinction of the liability of the originator’s bank to the originator (in the amount transferred) coupled with the corresponding creation of a new debt obligation of the beneficiary’s bank to the beneficiary in the same amount.13

16 It would also follow that a funds transfer does not operate as an assignment of the bank balance, despite a US decision that suggests otherwise.14 Nor is a funds transfer to be regarded in law as a negotiable instrument.15

C. Classifying funds transfers

17 Funds transfers are commonly classified in two non-mutually exclusive ways — firstly, according to the manner in which the process is

initiated, and secondly, according to the manner in which the various banks and bank accounts involved in the process are structured.

(1) Credit and debit transfers

18 A funds transfer can be classified either as a credit transfer or a debit transfer. A credit transfer, the method typically employed for highvalue, international payments, may best be described as a “push” of funds by the originator to the beneficiary, whereby the originator initiates steps that result in the beneficiary’s account with its bank being credited with the amount to be paid. By contrast, a debit transfer, commonly employed in low-value, consumer-driven payment systems such as GIRO and direct debit cards, may be described as a “pull” of funds by the beneficiary from the originator. Here, the movement of funds occurs in the same way but is initiated by the beneficiary who is given some form of authorisation by the originator to collect payment out of funds residing in the originator’s account with its bank.16

19 This article is concerned mainly with credit transfers, but most of the principles would also apply equally to debit transfers.17

(2) Correspondent bank transfers, in-house transfers and complex account transfers

20 The other important method of classification is by the structure of the banks involved. In Libyan Arab Foreign Bank v Bankers Trust Co,18 Staughton J classified funds transfers into three groups —...

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