The High Court has recently held that a bank and its customer were liable in restitution further to a mistaken payment being made into the customer’s account which the bank then wrongly permitted the customer to draw upon.
The claimant, Mr Jones, imported cars with the assistance of a Mr Sharkey who appeared to act as an agent for Murway Automotive Sales & Leasing (“Murway”). Before the cars were delivered to Mr Jones he had to make payment to Murway. This was done by CHAPS transfers from Mr Jones’ company’s account with Lloyds TSB to a bank, the details of which were provided by Mr Sharkey.
In February 2006, Mr Jones ordered a number of cars through Murway and was instructed to make payment to an account held at the Bank of Scotland. In March 2006, Mr Jones proceeded to make the payment, however due to a mistake on the CHAPS transfer form the monies were transferred to Miss Churcher’s account held with Abbey National Plc (“Abbey”). Mr Jones had previously made a payment to Miss Churcher’s account upon Mr Sharkey’s request.
Upon realising his mistake, Mr Jones contacted Lloyds TSB and Abbey by telephone informing them of the error. Lloyds TSB in turn also contacted Abbey to request that the payment be returned and sent various SWIFT messages to Abbey cancelling the payment and recalling the funds. However, by the time Abbey had requested authority from Miss Churcher to return the funds, she had withdrawn most of the funds and paid them to Mr Sharkey. Mr Jones did not recover any of the monies back from Miss Churcher, nor did he receive the cars that he had ordered.
Mr Jones subsequently issued proceedings against Miss Churcher and Abbey claiming payment in restitution from both defendants as a result of the payment he made being a mistake of fact. Mr Jones argued that Abbey was made aware of the error before Miss Churcher had withdrawn the funds from her account. The law of restitution comprises a body of rules that effectively prevents a person becoming “unjustly enriched” at another’s expense. To succeed in such a claim, the claimant must show that: the defendant has received a benefit or has been enriched; that enrichment is unjust; and that the enrichment is at the claimant’s expense. Both Miss Churcher and Abbey argued that it would be inequitable for the Court to make an order of restitution.
Abbey submitted that it did not have any knowledge of the error until after Miss Churcher had withdrawn the monies and, even if they did have knowledge of the error, they could not have repaid the monies to Mr Jones unless Miss Churcher either gave them permission to do so or they breached their banking mandate with her. To this end, Abbey sought to rely on the defence of “ministerial receipt” arguing that it was powerless to act without Miss Churcher’s consent as the funds had already cleared. The defence of ministerial receipt can be relied upon by an agent, such as a bank, who has received monies from a claimant on behalf of their principal, the customer, and then paid that money to the customer. If the monies credited to the customer are irreversible, the bank may seek to rely on this defence. In the alternative, Abbey raised the defence of “change of position” in that they sought to show that they had changed their position in good faith as a result of the payment. Miss Churcher also sought to rely on this defence and claimed that she had been duped into receiving and paying the monies to Mr Sharkey.
The Court rejected the arguments raised by both defendants and held that they were both liable in restitution for the error of payment made by Mr Jones.
The Court disagreed with Abbey’s defence of ministerial receipt, rejecting its assertions that once monies had cleared into Miss Churcher’s account it was then her money and that Abbey was powerless to act. The Court noted that should a bank wish to protect itself from liability in such circumstances, it should intervene and act. Further, the Court dismissed Abbey’s contention that it had acted in good faith because it had actual knowledge of the error as it had received various communications from Lloyd’s TSB; Abbey had delayed in taking any action to rectify the mistake. As the judge stated:
“Given the risk of misappropriation that can arise when an erroneous payment is made, one would expect all banks to have robust systems in place for rectifying such errors with the appropriate urgency.”
With regard to Miss Churcher, the Court ruled that she had not changed her position in good faith as she failed to make sufficient enquiries as to why the monies were paid into her account and also made no real effort to return the monies to Mr Jones.
This case highlights the need for financial institutions to undertake full investigations into transactions that they suspect may have been made in error and to rectify that error as soon as possible so as to avoid being liable to a third party in restitution. What is clear from the facts of this case is that on a numerous occasions Mr Jones and Lloyds TSB informed Abbey of the error, yet Abbey failed to take any appropriate action. Had the matter concerned a possible fraudulent transaction, it is likely that Abbey would have had certain safeguards in place to stop any monies from being withdrawn while further investigations took place. Clearly, there is a need for banks and other financial institutions to take stock of the implications of this case and review their internal practices and procedures relating to payments made in error and to perhaps bring those procedures in line with those concerning fraud.
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