3PLR – MOMM AND OTHERS V. BARCLAYS BANK INTERNATIONAL
POLICY, PRACTICE AND PUBLISHING, 3PLR, LAW REPORTS
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MOMM AND OTHERS
V.
BARCLAYS BANK INTERNATIONAL LTD
QUEEN’S BENCH DIVISION
(1977) QB 790
27 MAY 1976
3PLR/1976/89 (QB)
BEFORE
LORD KERR J
REPRESENTATION
Simmons & Simmons (for the plaintiffs)
Durrant Piesse (for the defendants)
H S Narulla ESQ Barrister
MAIN ISSUES
Bank – Payment – Time of payment – Transfer order – Payer and payee both having accounts with bank – Payer sending order to transfer money from his account to payee’s account – Bank making transfer – Accounts not produced by computer until following morning – Payer having gone into liquidation – Bank not sending out advice notes – Bank reversing ledger entries – Whether transfer ineffective until advice notes despatched – Whether bank entitled to reverse entries and debit payee’s account.
Bank – Payment – Time of payment – Payment order – Payment to be made on ‘value’ day – Computerised accounts not produced until morning following value day – Whether ‘value’ day extended until following morning – Whether ‘day’ ending at close of working hours.
The plaintiffs, who were a German banking partnership, and another German bank (‘the H bank’) maintained separate accounts with the same branch of the defendants, an English bank. The defendants’ transactions were carried out by computer; in an in-house transaction a customer’s final balance was not known until the following morning. It was therefore possible for the defendants to reverse the ledger entries to alter an unacceptable debit position in a customer’s account without the customer’s knowledge, but that was seldom done. Although the defendants were not allowed to grant any overdraft facilities to the H bank, overdraft positions had occasionally arisen and no payment orders had ever been refused or reversed. On 24 June 1974 the plaintiffs and the H bank concluded a currency exchange transaction whereby, in exchange for deutschmarks transferred from the plaintiffs’ account to a nominee of the H bank, the H bank would transfer to the plaintiffs £120,000, by credit to the plaintiffs’ account with the defendants. The transfers were to be on the basis of of ‘value 26 June 1974’, ie payment was to be made on that date. On 25 June the H bank instructed the defendants to transfer £120,000 from their account to the plaintiffs’ account. At midday on 26 June, on receipt of the H bank’s instructions, B, an employee of the defendants, authorised the transfer and set the appropriate computer processes in motion to debit the H bank’s account, to credit the plaintiffs’ account and to prepare the advice note to be sent to the plaintiffs. At 4.15 pm on the same day the H bank announced that it was going into liquidation. On 27 June the defendants reversed the entries in the accounts of the H bank and the plaintiffs, since the H bank was in a net debit position. The plaintiffs claimed repayment of the £120,000. The defendants contended that the decision to effect the transfer on 26 June was on a conditional basis to be finalised on 27 June after assessing the net credit position of the H bank; alternatively, that since neither the H bank nor the plaintiffs had been informed that the defendants had complied with the H bank’s instructions, the transfer had not been completed.
MAIN JUDGEMENT
Held –
Payment was complete when B decided to accept the H bank’s instructions to credit the plaintiffs and the computer processes for doing so were set in motion. His decision to sanction the transfer was not provisional, although it might have been to some extent influenced by the knowledge that it would be possible to reverse it on the following day; the defendants would not have accepted countermanding instructions from the H bank once the credit processes had been set in motion. Those processes were completed before the defendants purported to revoke the payment
by reversing the entries on the following morning. Notice to the payee was not an essential ingredient of a completed payment; it was not necessary that an advice note recording the credit to the plaintiffs’ account should have been received by or despatched to them. The defendants were not entitled to treat the following morning as an extension of a value day. For banking purposes, a ‘day’ ended at the close of working hours. It had to be clearly ascertainable by the end of a day whether a payment due to be made on that day had been made or not; that decision could not be held in suspense until the following morning. Accordingly, the defendants had made an unauthorised reverse payment by the plaintiffs to the H bank and the plaintiffs’ claim therefore succeeded (see p 594 b to g, p 597 d to g and p 598 e to h, post).
Eyles v Ellis (1827) 4 Bing 112, The Brimnes [1974] 3 All ER 88 and Mardorf Peach & Co Ltd v Attica Sea Carriers Corpn of Liberia [1976] 2 All ER 249 applied.
Rekstin v Severo Sibirsko and the Bank for Russian Trade Ltd [1932] All ER Rep 534 distinguished.
Cases referred to in judgment
Brimnes, The, Tenax Steamship Co Ltd v Owners of the motor vessel Brimnes [1974] 3 All ER 88, [1975] 1 QB 929, [1974] 3 WLR 613, [1974] 2 Lloyd’s Rep 241, CA, Digest (Cont Vol D) 52, 298a.
British & North European Bank Ltd v Zalstein [1927] 2 KB 92, [1927] All ER Rep 556, 96 LJKB 539, 137 LT 127, 3 Digest (Repl) 179, 307.
Continental Caoutchouc & Gutta Percha Co v Kleinwort Sons & Co (1904) 90 LT 474, 9 Com Cas 240, CA, 3 Digest (Repl) 191, 366.
Eyles v Ellis (1827) 4 Bing 112, 12 Moore CP 360, 5 LJOSCP 110, 130 ER 710, 3 Digest (Repl) 339, 1095.
Land Development Association, Re, Kent’s Case (1888) 39 Ch D 259, 57 LJCH 977, 59 LT 449, 1 Meg 69, CA, 9 Digest (Reissue) 346, 2043.
Mardorf Peach & Co Ltd v Attica Sea Carriers Corpn of Liberia, The Laconia [1976] 2 All ER 249, [1976] QB 835, [1976] 2 WLR 668, CA.
Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj and the Bank for Russian Trade Ltd [1933] 1 KB 47, [1932] All ER Rep 534, 102 LJKB 16, 147 LT 231, CA, 3 Digest (Repl) 178, 297.
Zim Israel Navigation Co v Effy Shipping Corpn, The Effy [1972] 1 Lloyd’s Rep 18.
Cases also cited
Akrokerri (Atlantic) Mines Ltd v Economic Bank [1904] 2 KB 465, [1904–7] All ER Rep 1054.
Burnett v Westminster Bank Ltd [1965] 3 All ER 81, [1966] 1 QB 742.
Capital and Counties Bank v Gordon [1903] AC 240, [1900–3] All ER Rep 1017, HL.
Empresa Cubana de Fletes v Lagonisi Shipping Co Ltd, The Georgios C [1971] 1 All ER 193, [1971] 1 QB 488, CA.
Maxwell v Deare (1853) 8 Moo PCC 363.
Morrell v Wootten (1852) 16 Beav 197.
Zographia M, The (1976) unreported.
Action
By a writ issued on 23 September 1975 the plaintiffs, Herbert Momm and 11 other persons, a partnership trading as Delbrueck & Co, claimed against the defendants, Barclays Bank International Ltd, £120,000 and a declaration that the defendants had wrongfully debited the plaintiffs’ account with the defendants with £120,000 which remained due to the plaintiffs. The facts are set out in the judgment.
Norman C Tapp QC and M Moore-Bick for the plaintiffs.
Christopher Staughton QC and N Chambers for the defendants.
Cur adv vult
27 May 1976. The following judgment was delivered.
KERR J read the following judgment. The plaintiffs are a German banking partnership with offices in Cologne and Hamburg. They claim £12,000 from the defendants on the ground that on 27 June 1974 this sum was wrongfully debited from their account at the defendants’ branch at 168 Fenchurch Street, in the City of London. The defendants deny liability and say that the case raises an important issue of banking law following on the computerisation of customers’ accounts. It arises out of the failure of another German bank, Bankhaus ID Herstatt KGaA which also had an account at the same branch. On 24 June 1974 the plaintiffs and Herstatt concluded a contract for a normal currency exchange transaction whereby the plaintiffs agreed to transfer to Herstatt a quantity of deutschmarks against the transfer by Herstatt to the plaintiffs of £120,000 in sterling. Both transfers were on the basis of ‘value 26 June 1974’. This meant that the payments had to be made on that date. Herstatt designated an account at a Hamburg bank to which the deutschmarks were to be credited and the plaintiffs designated their account at the defendants’ branch to which the sterling was to be credited. The plaintiffs may have known from previous transactions that Herstatt also had an account at this branch, but they did not of course know—nor were they concerned—whether the payment would be made by a transfer from that account or in some other way. On the following day Herstatt instructed the branch by telex to make certain payments, including this one, ‘value 26 June’. They instructed the defendants to pay two sums of £10,000 and £5,000 respectively into two accounts which Herstatt had with other London banks, and they also instructed them to transfer £120,000 from their account to the plaintiffs’ account at the same branch. The latter payment was accordingly an ‘in-house’ payment, as it was called in the evidence, whereas the others were ‘out-house’ payments.
In order to follow what happened next it is necessary to refer to two background matters. The first concerns Herstatt’s account at this branch. The second concerns the procedure within the so-called inward sterling transfer department of the branch—and no doubt also at other branches of the defendants—for in-house and out-house payments. Herstatt had no overdraft facilities on this account. In the case of ‘external’ accounts, as this was, the Bank of England imposes stringent restrictions on the grant of overdraft facilities for more than 24 hours, though in practice these may be interpreted somewhat elastically, particularly if the account-holder is a bank. But from about November 1973 the defendants’ international division, which is in the same building as this branch, had given instructions that no overdraft facilities were to be granted to Herstatt, because their financial position had become somewhat suspect. However, overdraft positions nevertheless arose on Herstatt’s account for a day or two from time to time, in particular in December 1973 when the debit balance exceeded £50,000 on two occasions and £40,000 on another, and again in May 1974 when it was about £19,000. Whenever this happened the branch drew Herstatt’s attention to the position by telephone or telex, and the matter was soon put right. No payment orders from Herstatt were ever refused; nor was there ever any occasion—as happened in the present case—when a payment order was first carried out but subsequently reversed.
The procedure for dealing with payment orders of the kind with which I am here concerned is shortly as follows. Out-house payments to other banks for £5,000 or more are made by means of banker’s payments despatched by messengers during banking hours on the ‘value’ date. If the account is overdrawn on that day, or may turn out to be overdrawn at the end of the day, it is therefore necessary to make a once-and-for-all decision whether to make the payment or not. In relation to in-house payments the position is more flexible, since the decision whether or not to make the payment can be deferred a little longer, or—in the view of the defendants’ witnesses—can even be reversed in the accounts on the following day. The effect
of such a reversal is the crucial issue in this case. I should add for the sake of completeness that transfers between different branches of the defendants are treated in the same way as ordinary out-house payments.
In relation to some accounts on which there may be numerous and substantial debits and credits in the course of a single day, such as with banking customers, problematic decisions may of course arise if the credit-worthiness of the customer is suspect or if an overdrawn position at the end of the day is for some other reason to be avoided. A funds control unit in the department is able to keep some approximate check on the movements in and out of particular accounts, but for various reasons it is impossible to monitor the position to any reliable extent. This problem has been accentuated by the introduction of computerisation to which I turn in a moment. But before doing so I must explain how, on the evidence, the problem was dealt with when customers’ accounts were kept in ledgers. The position concerning outhouse payments was then the same as it is now in that a once-and-for-all decision had to be made during banking hours. But the position was different in relation to inhouse payments. The debits and credits were posted during the day in the appropriate ledgers as they arose. It was then possible to see the final position shortly after the close of banking hours before the staff left. If a customer’s account then showed an unacceptable debit position certain entries might be reversed as between two in-house accounts before the end of the working day. In effect, therefore, the branch then sometimes availed itself of the opportunity, but still on the same ‘value’ date, to decline to comply with one or more payment orders. The relevant entries in the customers’ ledgers would then be reversed by appropriate deletions and corrections. This would be done without the knowledge of the customers concerned, and the statements subsequently sent to them would not show that it had happened. But the bank’s books would show a final position for each customer at the end of each day which was treated as unalterable. Accordingly, at the end of each day it would be certain, as one would expect, whether a particular payment had or had not been made on that day, and on this basis there would therefore be no difference between in-house and out-house payments. The defendants, like all bankers, are fully aware of the importance to customers, whether they be payers or payees, of the ‘value’ date specified in their transactions. It is the date of contractual payment. If payment is not made on that date then the payer will be in breach and his credit may suffer accordingly. Conversely, the payee relies on the payer’s compliance with the obligation to make or to cause to be made the payment on that date and on the availability of the funds in his account on that date.
The difficulty produced by computerisation—at any rate under the defendants’ procedure—is that a customers’ final balance is not known until it has been produced by computer during the night and is available on the following morning. The defendants’ procedure is as follows. The manager of the inward sterling transfer department at the time was a Mr Dunn and his assistant a Mr Bass. Whenever a payment order was received from a customer whose account was overdrawn without appropriate overdraft facilities by compliance with the order, the matter was referred to one of them. A decision was then made whether to comply with the order or to refuse to comply or to refer it to higher authority. The latter is the international division in the same building. One of the managers concerned with such enquiries in the international division, and also concerned in the present case, is a Mr Delf. If compliance with the order is authorised, either within the branch or by the international division, then the appropriate action is taken at once. In the case of outpayments of £5,000 or more, banker’s payments are then prepared manually and irrevocably despatched by messenger during banking hours. The appropriate debit is also put on the computer, but for present purposes it is only necessary to explain the computer procedure in relation to in-house payments.
In relation to in-house payments the computer process is set in operation at once in the same way as in relation to out-house payments. Cards are punched out so
that the appropriate debits and credits of the two customers’ accounts can be produced by the computer. There is a small computer in the branch which produces the cards during the day, and these are taken in batches to the defendants’ central computer in another part of the City for processing during the night. The small computer within the branch does three things during the night. First, it produces an advice note and a duplicate concerning every transaction which has taken place during the day. Secondly, though this is not relevant for present purposes, it produces banker’s payments for sums under £5,000 to be despatched on the following day. Thirdly, it reconciles and balances all transactions within the branch which have taken place during the day.
The central computer gets through a staggering amount of work during the night. First, it produces a list showing the credit or debit balance of each customer’s account at the end of the previous day in all of the defendants’ branches. Secondly, it produces a list of accounts which should have the manager’s attention: these are called ‘manager’s refers’ and indicate excess borrowings. Thirdly, in relation to these accounts it produces a so-called disposable disposition sheet (indicating that it is a disposable duplicate) showing recent transactions on these accounts. Fourthly, it produces statements for every customer to whom a statement is due to be despatched on or about that date. Fifthly, it produces a ledger sheet for every customer’s account whenever 40 lines on such sheets have been completed; meanwhile, these sheets are being printed on a continuous basis inside the computer recording the previous day’s debits or credits. The ledger sheets are for the branch’s internal use and are in effect the only thing which can nowadays be described as the bank’s books. Apart from entries of an administrative nature, mainly concerned with the timetable for sending out statements, the ledger sheets contain precisely the same entries as the statements themselves.
At about 9 am on the following morning the ‘manager’s refers’ are considered both in the international division and in the inward sterling transfer department. If necessary, the disposable disposition sheets are referred to. Someone in the position of Mr Delf or higher in the international division may then speak to Mr Dunn or Mr Bass on the telephone and give instructions about particular accounts if the previous day’s transactions or debit balances give cause for concern or warrant some action. In the vast majority of cases, if action is to be taken, this takes the form of a telephone call or telex to the customer concerned, drawing his attention to the state of his account, asking him to remedy the position, and possibly sounding some warning note about the future. In some cases, however, though no witness could remember it ever having happened in relation to a banking customer, the previous day’s transactions might be ‘reversed’.
Reversals can of course only be made in relation to in-house transfers. Their effect would be to delete one or more of the previous day’s debits made by the computer in the relevant customer’s ledger sheet and statement (if one had been printed overnight) and similarly to delete the corresponding credits in the account of the other customer or customers concerned. The computer can be instructed to do this on the following day in one of three ways. First, in theory, it could be instructed to delete the entries completely as though they had never been made, but in practice this would be extremely difficult and appears in fact never to have been done. Secondly, by using the so-called ‘one day back-value code’, the computer could be instructed to reverse the entry under the date of the previous day. As I understand it, it would then appear as though the reversal had in fact taken place on the previous day. In practice, however, this method also involves considerable problems, since the computer would then reprint and reproduce everything else which had taken place on the previous day. The normal method, insofar as reversals were normal at all, was accordingly simply to reverse the entries under the date of the following day. This is what happened in the present case.
In the rare cases in which such reversals occur—though no specific instance was
referred to in the evidence—steps would then be taken to seek to ensure that the customers concerned did not get to know about the reversals having taken place. In saying this, I am not implying that anything underhand takes place or making any criticism, but this is what would in fact happen. First, the relevant advice notes and duplicates relating to the transactions in question would be sorted out and not despatched to the customers concerned. In all other cases the advice notes printed overnight would be despatched on the following day and the duplicates would be sent together with the next statement. Secondly, the pages of the statements in which the original and reverse entries appeared, as and when produced by the central computer, would be retyped so as to omit these, but they would of course continue to appear in the ledger sheets. All this also happened in the present case. Finally, I should add, for the sake of completeness, that the rare cases of reversal such as I have been describing must of course be distinguished from the ordinary cases of wrong debits and credits which simply result from some human error. These would appear in the customer’s statements and would also be covered by advice notes in the usual way. One sees these in one’s own bank statements from time to time, and minor examples of them also appeared in the plaintiffs’ statements which were in evidence.
The issue in the present case is shortly whether the debit of Herstatt’s account of £120,000 on 26 June 1974, and a corresponding credit in the plaintiffs’ account on the same day, which were processed by the central computer overnight but reversed on the following day, constituted a completed payment on the first day, followed by an unauthorised debit on the second day, or whether no completed payment was ever made. The defendants contend that for either or both of two reasons there was no completed payment. First, because no advice note was sent, or other communication made, to the plaintiffs before the credit on their account was reversed. Secondly, because the defendants maintain that the decision to credit the plaintiffs’ account was only provisional on 26 June, and that the final decision against making the payment was made on 27 June by reversing the entries. The latter submission is made in particular in the context of a number of recent shipping cases to which I shall have to return, in which the time of decision was treated as the relevant time.
I must next complete the history. As already mentioned, on 25 June 1974, pursuant to their contract, Herstatt instructed the defendants’ branch to transfer the sum of £120,000 ‘value June 26th’ to the plaintiffs’ account at this branch, and also gave instructions for two out-payments on the same day totalling £15,000. This telex was submitted to Mr Bass at about midday on 26 June. The reason for consulting him was that on the morning of 26 June the computerised balance of Herstatt’s account at the close of business on the previous day showed a debit of about £4,650. This fact in itself had caused no concern to anyone, since there had been no communication about it between Mr Delf, Mr Dunn or Mr Bass. Nor had there been any communication with Herstatt about it, as there had been on previous occasions when they had been overdrawn. This is perhaps not surprising, since there had been considerable movements on Herstatt’s account during the previous days without any resulting debit balances. A transfer from the plaintiffs of £150,000 and to the plaintiffs of £160,000 had taken place between these parties on 24 June. But since Herstatt’s account was overdrawn on the morning of 26 June, though only to a small extent, the telex instructions for further payments totalling £135,000 ‘value 26th’ were referred to Mr Bass. He had to make a decision. He could comply with the instructions or he could refuse to comply with them wholly or in part, or he could consult Mr Delf. His difficulty was, as on every such occasion, that he could not know whether or to what extent these payments would be covered by credits coming in during the day. In fact, though he did not then know it, £140,000 was received for Herstatt’s credit at some unknown time on the same day. However, there were also some smaller further debits, with the result that the opening debit balance of about £4,650 rose to about £15,350 by the end of the day. But in the context of the
history of the account as a whole over the last six months this was by no means alarming, and in itself hardly significant. At any rate, and in all the circumstances not surprisingly, Mr Bass decided to allow the payments to be ‘actioned’ without reference to higher authority. He accordingly gave instructions that all three payments, the in-house transfer of £120,000 and the two out-house payments of £10,000 and £5,000 respectively, were to be made. Banker’s payments for the latter two sums were prepared and despatched. As regards the £120,000 the appropriate computer processes were set in motion to debit Herstatt’s account, credit the plaintiffs’ account, and to produce the corresponding advice notes.
Now, Mr Bass said in evidence that he distinguished in his mind between the outpayments of £15,000 and the in-house transfer of £120,000. He said that he decided to ‘action’ the latter payment only on a provisional basis. This is where it is necessary to choose one’s words with care in determining what Mr Bass’s mental process was, insofar as this may be relevant. It was in no way an unusual situation. Mr Bass and Mr Dunn, as well as Mr Delf, were continually making decisions of this kind several times a day. They were fully conscious of the importance of making payments on the ‘value’ day. There was nothing unusual or particularly difficult about this decision; indeed, Mr Bass did not even refer it to Mr Delf. I think that his decision to sanction the transfer without reference to Mr Delf may to some extent have been influenced by the thought at the back of his mind that if it should unexpectedly appear from the balance on the following morning that this payment had remained substantially uncovered by credits during the day, and if Herstatt were then unable to provide some satisfactory explanation or promise to remedy the situation quickly, there was always the possibility of reversing the entries on the following day. Mr Bass had this at the back of his mind in relation to all substantial in-house payments which might produce an impermissible overdraft. However, on my impression of the witnesses and of the evidence as a whole, it was only to this very limited extent that Mr Bass—or for that matter Mr Dunn or Mr Delf—would have regarded the transfer as ‘provisional’. Thus, the plaintiffs would have been allowed to draw against it at once. If they had enquired whether the payment had been made, they would have been given an affirmative and not an equivocating answer, and I do not accept the evidence insofar as it suggested otherwise. No instructions would have been accepted from Herstatt to revoke the payment after the computerisation processes had begun. To express the position in legal terms, I do not accept that this was merely a conditional transfer in the sense that whether or not it stood depended on what might or might not happen on the following morning. It was an unconditional transfer, but subject to the remote possibility of the entries being reversed on the following day. This possibility, however remote and indeed unprecedented in the case of a banking customer, merely had the effect that the decision whether or not to make certain in-house payments was somewhat easier than in relation to corresponding out-house payments. But apart from this, the decision-making process itself, and all the physical processes in ‘actioning’ such payments on the ‘value’ date, were precisely the same.
However, at about 4.15 pm on 26 June it was announced that Herstatt had ceased trading and were going into liquidation. But for this, this action would never have seen the light of day. Mr Delf got to hear about it shortly thereafter by telephone from Germany. His recollection is that he then gave instructions either to Mr Dunn or to Mr Bass that the entries relating to the transfer of £120,000 should be reversed on that day. I emphasise these words because he emphasised them in the way in which he gave his evidence, and he clearly recognised the importance of arriving at a final position on the ‘value’ date itself. However, neither Mr Dunn nor Mr Bass had any recollection of this having happened. I cannot accept the accuracy of Mr Delf’s recollection on this point. Both Mr Dunn and Mr Bass only heard about Herstatt’s failure when they read about it in the press early the following morning. They then spoke to Mr Delf on the telephone. Even then, as I am satisfied on their
evidence, the position remained fluid for some little time while further enquiries were being made. At first the only decision was to hold up the despatch of the advice notes concerning the debit and credit of the £120,000. Shortly thereafter Mr Delf gave instructions for the entries to be reversed, and this was done by instructing the computer to debit the plaintiffs’ account and to credit Herstatt’s account with £120,000 on 27 June. Mr Delf also gave instructions that the relevant pages in the statements of Herstatt and the plaintiffs should be retyped before being sent to them, omitting the original entries and their reversals. Insofar as it might be relevant—though in my view it is not—I find that none of this would have happened if Herstatt had not ceased trading and if there had merely been a debit balance of about £15,350 on their account on the morning of 27 June. The reason why it was done was that the defendants did not wish an unauthorised debit balance to appear in Herstatt’s account at the time when they went into liquidation.
The subsequent events are of little importance. The plaintiffs made various enquiries directed to ascertain whether or not the £120,000 had been paid. They were told that it had not, ‘due to the present position of Herstatt’s account’. However, when they asked to see the branch’s internal records, the photostat copies of the ledger sheets relating to their account were at once sent to them without any prevarication. These clearly showed the original entries on 26 June and their reversal on 27 June, but for some reason these passed unnoticed. It was only several months later, when the plaintiffs came to see photostat copies of Herstatt’s ledger sheets, which had apparently equally readily been sent to Herstatt, that they realised what had happened. They then brought this action.
The issue is whether or not a completed payment had been made by the defendants to the plaintiffs on 26 June. This is a question of law. If the answer is Yes, then it is not contested that the plaintiffs have a good cause of action. If there were no authorities on this point, I think that the reaction, both of a lawyer and a banker, would be to answer this question in the affirmative. I think that both would say two things. First, that in such circumstances a payment has been made if the payee’s account is credited with the payment at the close of business on the value date, at any rate if it was credited intentionally and in good faith and not by error or fraud. Secondly, I think that they would say that if a payment requires to be made on a certain day by debiting a payer customer’s account and crediting a payee customer’s account, then the position at the end of that day must be in fact and in law that this has either happened or not happened, but that the position cannot be left in the air. In my view both these propositions are correct in law.
The only authorities which are of any assistance are those concerning so-called in-house payments. The oldest of them was decided by the Court of Common Pleas nearly 150 years ago. It is indistinguishable on its facts, unless the process of computerisation has changed the law, which the defendants do not contend. It was an action between payer and payee, but it was rightly not suggested, if there was a completed payment as between them, that the position could be different as between the customers and the bank. In Eyles v Ellis the plaintiff and the defendant had accounts at the same bank. The plaintiff sued the defendant for rent. The defendant contended that he had paid it. What happened was this. The defendant instructed his banker to transfer the amount of the rent to the plaintiff’s account on a Friday, 8 October, the banker having omitted to do so on a previous occasion. The defendant’s account was then overdrawn, but the banker complied with the plaintiff’s instructions on that Friday by transferring the amount in his books from the defendant’s account to the plaintiff’s account. On the same day the defendant wrote to the plaintiff to inform him that the mistake had been rectified, but this letter did not reach the plaintiff until the Sunday. Meanwhile the banker failed on the
intervening Saturday. The short judgment of the court was given by Best CJ ((1827) 4 Bing 112 at 113, 114) and is worth quoting in full:
‘The learned serjeant was right in esteeming this a payment. The Plaintiff had made the Maidstone Bankers his agents, and had authorized them to receive the money due from the Defendant. Was it then paid, or was that done which was equivalent to payment? At first, not; but on the 8th a sum was actually placed to the Plaintiff’s account; and though no money was transferred in specie, that was an acknowledgment from the bankers that they had received the amount from Ellis. The Plaintiff might then have drawn for it, and the bankers could not have refused his draft.’
The rest of the court concurred. Eyles v Ellis has been referred to with apparent approval in a number of subsequent cases, and its correctness has never been questioned: see per Lopes LJ in Re Land Development Association, Kent’s case ((1888) 39 Ch D 259 at 271); per Sankey J in British and North European Bank Ltd v Zalstein ([1927] 2 KB 92 at 96, 98, [1927] All ER Rep 556 at 558, 559); and per Mocatta J in Zim Israel Navigation Co v Effy Shipping Corpn. The important feature of the case for present purposes is that the payment was held to be complete when the payee’s bank account was credited and before the payee had had any notice that this had happened.
I then turn to a case on which counsel for the defendants relied strongly. This was Rekstin v Severo Sibirsko and Bank for Russian Trade, a decision of the Divisional Court and the Court of Appeal. The facts were very unusual. I will refer to the first defendants, a Russian trading organisation, as ‘Severo’ and to the second defendant as ‘the bank’. The plaintiffs had obtained a judgment against Severo who had an account at the bank. Severo clearly wished to prevent the plaintiffs from levying execution against the moneys in that account. A Russian trade delegation with diplomatic immunity also had an account at the bank. The plaintiffs therefore decided, without the knowledge or consent of the delegation, to close their account and to transfer all the moneys in it to that of the delegation. The plaintiffs so instructed the bank by letter. On receipt of the letter a clerk of the bank made the necessary book entry to close Severo’s account and also prepared a slip preparatory to crediting the delegation’s account with the equivalent sum. However, the corresponding credit entry in the delegation’s account had not yet been made when the plaintiffs served on the bank a garnishee order nisi in respect of their judgment against Severo. Insofar as the headnote of the report suggests that all relevant entries had then already been made to credit the delegation’s account, it is inaccurate. The following three questions arose. (1) Was the mere notice to the bank to close Severo’s account sufficient to bring to an end the relation of banker and customer between Severo and the bank? This was answered in the negative, because the bank continued to owe the moneys in the account to Severo until it had either paid them to Severo or to their order. (2) Was the mandate to the bank to transfer the moneys to the account of the trade delegation still revocable in the circumstances? This was answered in the affirmative and is relevant to the present case. (3) If so, did the garnishee order operate as a revocation? This was also answered in the affirmative and is irrelevant here.
It is not easy to extract from the judgments any clear ratio decidendi underlying the answer to the second issue. Counsel for the defendants submitted that the ratio was simply that payment to the trade delegation had not been completed because
it had not received any notice of the payment. This was said in Continental Caoutchouc & Gutta Percha Co v Kleinwort Sons & Co where money was paid to the defendant bank under a mistake by the payer of which the payee was aware. It was held that in these circumstances the payer could recover the money from the bank as money received to the payer’s use—a result which might well have followed even after the bank had given notice of the mistaken payment to the payee. However, at any rate in the absence of any mistake, a requirement of notice to the payee would be in direct conflict with Eyles v Ellis, which does not appear to have been cited in either of these cases and is not referred to in the judgments. I cannot accept this analysis of the effect of the decision in Rekstin v Severo Sibirsko and Bank for Russian Trade. I think that the majority of the judgments show that the decision was based on either or both of two grounds. First, that there had been no final appropriation of the money to the credit of the trade delegation. Secondly, and evidently of greater importance in the minds of the members of the two courts, the fact that the trade delegation knew nothing of the proposed transfer, that there was no transaction between Severo and the delegation underlying it, and that the delegation had accordingly never assented to its account being credited with these moneys. Both these reasons distinguish the case from the present one. In my view this decision should be treated as confined to its special facts. As counsel for the plaintiffs submitted, I think that it merely decided that payment by means of an in-house transfer has not taken place if the payee has not assented to it, and perhaps also if the transfer has not been completed. I therefore reject counsel for the defendants’ submission that for present purposes Rekstin v Severo Sibirsko and Bank for Russian Trade decides that there could not have been any completed payment to the plaintiffs unless and until an advice note recording the credit to their account had been despatched to them or had been received by them. Counsel for the defendants preferred to rely on the time of despatch rather than on the time of receipt, because the evidence showed, as indeed one knows from one’s own experience, that in practice some days may elapse before an account holder receives notice of a debit or credit to his account. But in my view the time of despatch would in any event be logically unjustifiable as the relevant time. If notice to the account holder is required, then it seems to me that only the receipt of the notice will do. However, apart from the fact that this would be wholly inconsistent with Eyles v Ellis, such a rule would create all sorts of commercial difficulties and would also put a large question mark against the point of time up to which a payer could countermand his instructions. What would happen, for instance, if he instructed the bank to revoke notice of the payment to the payee by telex or telephone between the despatch of the advice note by post and its receipt? The evidence showed, in my view rightly as a matter of law, that the defendants would not have accepted countermanding instructions from Herstatt once the process of crediting the plaintiffs’ account had been set in motion pursuant to Herstatt’s telex instructions.
This analysis of the legal position is strongly supported by one of the recent shipping cases to which I have already referred. They all concerned situations in which charterers made or purported to make a late payment of time-charter hire and the shipowners claimed to have validly withdrawn the vessel from the charterers’ service before the payment was made. The issue was accordingly always a race between the effective time of payment and the time of withdrawal. The only one of these cases which is of direct assistance for present purposes is The Brimnes, Tenax Steamship Co Ltd v Owners of the motor vessel Brimnes since this concerned an in-house payment. The relevant facts were as follows. The charterers’ bankers, Hambros, were instructed to pay the hire to the shipowners’ bankers, MGT in New York, where Hambros also had an
account. To pay the hire, Hambros instructed MGT by telex to transfer the appropriate amount from Hambros’ account to that of the owners. The position was complicated by the fact that the owners had previously assigned the hire to MGT, with the result that there was some difference of opinion in the Court of Appeal whether MGT were acting as payees or as the owners’ bankers in receiving the hire, but this is irrelevant for present purposes. All the members of the Court of Appeal clearly considered that payment was complete when MGT decided to credit the shipowners’ account and acted on that decision. In a later case, which concerned an out-house payment before a differently constituted Court of Appeal, Mardorf Peach & Co Ltd v Attica Sea Carriers Corpn of Liberia, The Laconia, this point was taken a little further by making it clear that the time of payment was the time when the bank accepted the payment order and decided to act on it, irrespective of the time which had to elapse before the bank’s internal accounting processes had been completed.
Counsel for the defendants’ answer to The Brimnes was that it was never argued, nor necessary to argue, that the time of payment was later than the time when the bank decided to act on the instructions to credit the shipowners’ account and began to act on that decision, and that this point was also not argued in any of the other cases. This is correct. He also relied on a passage in the judgment of Megaw LJ ([1974] 3 All ER 88 at 111, [1975] 1 QB 929 at 964) where he said that ‘the time of payment could not be earlier than the time when MGT made their decision to debit Hambros’ account … ‘ But taking the judgments as a whole, it is clear that it never occurred to anyone that notice to the payee was an essential ingredient of a completed payment. Both Eyles v Ellis and Rekstin v Severo Sibirsko and Bank for Russian Trade were cited in argument, but neither was mentioned in the judgments. The judgments are wholly consistent with Eyles v Ellis but do not in any way reflect what counsel for the defendants seeks to extract from Rekstin v Severo Sibirsko and Bank for Russian Trade. I therefore conclude that the authorities clearly support the contention that payment in the present case was complete when Mr Bass decided to accept Herstatt’s instructions to credit the plaintiffs’ account and the computer processes for doing so were set in motion. Indeed, the present case is a fortiori to The Brimnes and The Laconia, because these processes were in fact completed before the defendants purported to revoke the payment by reversing the entries on the following morning.
This only leaves one further point with which I have to some extent already dealt. The defendants’ witnesses said that they acted on the basis that the following morning was to be treated as an extension of the ‘value’ day, because the final balances for that day are not available from the computer until then, and because they always had in mind the possibility of being able to reverse the entries. I cannot accept this. A day is a day. For banking purposes it ends at the close of working hours, and otherwise at midnight. Commerce requires that it should be clearly ascertainable by the end of a day whether a payment due to be made on that day has been made or not. Whether this has happened or not cannot be held in suspense until the following morning. In this case the payment was made on the due day. What happened on the following morning was that the defendants made an unauthorised reverse payment by the plaintiffs to Herstatt.
The defendants suggest that this result will send their system into disarray. But I do not see why, even if this were relevant. It is no more difficult to decide whether to make an in-house payment than an out-house payment, nor to set the necessary processes in motion if the payment is to be made. The consequences of an affirmative
decision should be the same in both cases. The only result will be that the defendants will no longer be able to rely, as against their own payee customers, on the possibility of having second thoughts on the following morning.
It follows that this action succeeds and that there will be judgment for the plaintiffs.
Judgment for the plaintiffs.
