E-banking disputesThe mandate problem

Alan L Tyree

Consultant, Mallesons Stephen Jaques

9 April, 2003 – p.1/21

Some background

EFT Code of Conduct - April 1 2002

Revised Banking Code of Conduct - August2003

ABIO Bulletin 35 - September 2002

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Modern paymentsystems

Modern payment systems circulate liabilitiesof ADIs

A paying bank incurs a liability to thepayee’s bankThe payee’s bank assumes a liability to thepayee“settlement” is a transfer of liabilities of thecentral bank

It is convenient to talk about the transfer offunds and of money

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Payment systemfundamentals

The paying bank pays its own money

The paying bank acts as agent of the payer

Consequencesbank may only debit account if it strictlyfollows the mandatecustomer must frame the mandate carefullybank may debit account for a reasonableinterpretation of an ambiguous mandateor if mislead by customer’s mandate

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Payment systemorganisation

Scheme rules - multilateral contract

Terms and Conditions of Use - FI/customercontract

Merchant agreements - FI/merchant contract

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The problem

System operates solely on account numbers

Entry screen accepts both number & name

User enters contradictory information, usuallywrong account number

A practical suggestion - better entry formats

Two immediate legal issuesReasonable interpretation of mandate?Excused by Scheme rules?

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Reasonableinterpretation - I

Mandate clearly ambiguous/contradictory

London Joint Stock Bank Ltd v Macmillan andArthur [1918] AC 777

Number much more likely to be wrong thanname

Breach of customer’s Macmillan duty?duty to exercise care in framing mandateduty to frame mandate so as not tofacilitate fraud

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Reasonableinterpretation - II

Reasonable interpretation? Dairy ContainersLtd v NZI Bank Ltd [1995] 2 NZLR 30.

Paying bank does not have information. Whatto do?

change system and rules so bank canconfirm mandate (effectively done incheque system)throw losses onto customers via Terms &Conditionsdo nothing, consider losses asself-insurance costs

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Summary

Systems should probably be changed tominimise mistakes

Payments probably in breach of mandate

A mistaken payment has been madeby the customer if account may be debitedby paying bank if in breach of mandate

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Scheme rulesEffect on institutions - multilateral contract

Effect on customersDimond (HH) (Rotorua 1966) v Australiaand New Zealand Banking Group Ltd[1979] 2 NZLR 739Riedell

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RiedellRiedell v Commercial Bank of Australia Ltd[1931] VLR 382

What the books say Riedell says

What Riedell says

Benefits/burdens of Scheme Rules

Scheme rules generally have no effect onclaims for recovery of money paid under amistake of fact

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Application:chargebacks

nature of payment by credit card - may beagency even if no recourse

Amex v CSR [2003] VSC 32 does notcontradict the agency analysis

interest of customer to be protected

compare with stop orders, return of cheques

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Mistake - basicsDavid Securities v Commonwealth Bank ofAustralia (1992) 175 CLR 353

Recovery based on unjust enrichment

Mistake gives rise to prima facie right torecover

Onus then on recipient to show cause whyrestitution is unjust

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Mistake - defencesAustralia and New Zealand Banking GroupLtd v Westpac Banking Corporation (1988)164 CLR 662

Agency defence - accounting to principal

Change of position defence

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Receiving bankliability

Receiving bank is agent for payee

When does the recipient bank “account” to itsprincipal?

account entrynotice to customerfunds drawn via operation of Clayton’s caseaccount balance too smallaccount closed

Agency and change of position

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Summary

A mistaken payment is made to the receivingADI

The receiving ADI has a prima facieobligation to return the payment

The receiving ADI has the onus ofestablishing a defence

Usual defence will be “Change of position”

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Confidentiality

Tournier v National Provincial and UnionBank of England [1924] 1 KB 461

public interestconsent (express or implied)compulsion of lawinterests of the bank

National Privacy Principles

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Recommended bankresponses - I

Establish that a mistake has been made

Query to receiving bank: Is account #1234owned by John Doe?

If “no”no breach of confidence by receiving bankmistake has been maderequest repayment from receiving bank

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Recommended bankresponses - II

Query to receiving bank: Is account #1234owned by John Doe?

If “yes”information about customer disclosed, butTournier exceptioninform customer that no error apparent

NPP considerationsNPP2.1(a) - secondary usageNPP2.1(g) - authorised by law

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Refusal to repay

May refuse only if “accounted” to customer

Must supply name of customer

Must supply some evidence of “accounting”

Tournier self-interest exception permits thisdisclosure

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A better solutionIncorporate the above procedures in BECS(or other Scheme) rules

uniformity in forms/responses/timing etcability to inform customers in uniformmanneridentify evidence required forestablishment of mistakeidentify evidence required to establishagency defence

“But that is impractical!” - no it isn’t. See theBPay rules

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