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Chaps Payments Sent To The Wrong Account

A warning from the Court of Appeal to anyone sending payments by CHAPS, the Clearing House Automated Payments System.

The rules of the scheme govern dealings between banks rather than the relationship between banks and customers. The hallmark of CHAPS is the short time-scale for processing payments, 1.5 hours on a ‘straight-through’ basis (ie without manual checks).

Since at least 2007 a majority of UK clearing banks have processed electronic payments, including CHAPS payments, using the payee’s sort code (or bank identifier code) and account number. The payee’s name or account name is ignored. The practice is reflected in the Payment Council’s guidance note “Payment Services Regulations – Industry Best Practice”. It states that payments executed via CHAPS are processed on sort code and account number, referred to as the “unique identifier”.

In the case of Tidal Energy v Bank of Scotland Plc 2014 the Court of Appeal considered the legal issues surrounding a payment made by CHAPS which had been induced by a fraud. On 31 January 2012 the customer issued, and the bank processed, instructions to make a payment through CHAPS to one of the customer’s suppliers, Design Craft Ltd (the intended recipient). The sort code and account number supplied belonged to a different company, Childfreedom Ltd (the actual recipient). The receiving bank was Barclays Bank (the receiving bank).

Notwithstanding the different names, the bank (as the remitting bank) and the receiving bank processed the payment according to the sort code and account number supplied by the customer. The customer’s account with the bank was debited £217,781.57 and the actual recipient’s account with the receiving bank was credited the same amount.

On 6 February 2012 a representative from the customer telephoned the bank to advise that it had been induced by fraud to complete the payment instructions as it did. It was understood that the actual recipient has withdrawn £217,000 by the close of business that day.

The important facts as far as the decision are concerned centred on the bank’s standard transfer form which contained a series of boxes in which details of the payment were to be supplied. These included boxes for the transfer date, the transfer amount, the sender’s sort code and the sender’s account number. They also included four separate boxes for the recipient’s sort code, their bank and branch, their account number and their name. The customer completed the first three boxes relating to the recipient with information it had been supplied by sources purporting to represent the intended recipient, save that it did not specify a branch. The customer completed the fourth box by inserting the intended recipient’s name from its own knowledge.

Section 2 contained the following:

You are hereby authorised to effect these instructions, either by transmission through the Clearing House Automated Payments System or by such other method as you may in your sole discretion decide.

I/We agree that no responsibility is to attach to you for any loss caused by delays, interruptions or errors in transmission of payment, which are not directly due to the negligence or default of your own officers or servants. Please debit the payment from my/our account number detailed in Section 1.

The customer claimed argued the bank failed to comply with its instructions by making payment to the actual recipient rather than the intended recipient and was not authorised to debit the amount from the customer’s account.

The Court of Appeal held that it was necessary to consider what a reasonable person would conclude was intended by the bank’s standard transfer form. Although one of the three Court of Appeal Judges gave a dissenting judgment it was held by a majority that the instructions authorised the bank to make the payment relying upon only the sort code and account number set out in the instructions, so that:

  • Subject to any express terms to the contrary, a customer who uses CHAPS is taken to contract on the basis of the banking practice that governs CHAPS transactions
  • On the evidence (and it may be assumed this is common practice across all banks not just the Bank of Scotland), there was a clear and settled practice that a receiving bank does not check the recipient’s name against the other identifiers
  • Knowledge of the practice is available to all users of CHAPS and is not a banker’s secret, and
  • The preferred construction reflected business common sense, including denying the bank responsibility for the accuracy of the information supplied by the customer

This case should prompt anyone using CHAPS to review their internal payment systems, including training. It is clear that customers must take responsibility for the information they supply to their banks and financial institutions. This is the price of the speed of CHAPS.

For banks, it is sort codes and account numbers which matter. These must be the focus for customers too.

When anyone requests electronic payments through their bank, it is of paramount importance to ensure the payee’s details come from a trusted source, particularly when it is the first payment. This may include requiring written confirmation direct from the payee’s bank as part of establishing a trading relationship. Mistakes must be avoided as mistakes rather than fraud are more likely cause of misdirected payments. Checks and balances are required. As an example of a simple check, staff should be able to identify banks and branches from sort codes (using sources such as the Payments Council) and ensure that there is consistency with the bank and branch named. It is sometimes as basic as checking to make sure you are put the right figure in the right box and if you cannot clearly read or there is some doubt about the payment instructions, get clarification.

In this electronic age, the case is a reminder that names, particularly corporate and trading names (which are subject to change), cannot be relied upon on their own. Registered addresses, registration numbers and other identifiers should be used in legal documents where possible.

If you have a concern arising from this article please contact the Fosters Commercial team and we would be delighted to help by calling 01603 620508 or email anewborough@fosters-solicitors.co.uk

For more information on Fosters Commercial Services please follow this link to the Commercial page.

This article was produced on the 13th August 2014 by our Business & Commercial team for information purposes only and should not be construed or relied upon as specific legal advice.