The case reaffirms the view that a CHAPS transfer is as good as a cash payment - but also highlights a risk that can arise if compliance with the UK's money laundering rules is taken too far.
CHAPS, or the Clearing House Automated Payment System, is a method of transferring cleared funds from one bank account to another, and is often used in business and legal transactions, where real time transfers are necessary.
The case concerned Hosni Tayeb from Tunisia, who had been running the top level internet domain for Libya, prior to negotiating the sale of the domain database to the Libyan Corporation General Posts and Telecommunications Company (GPTC).
On 21st September 2000, GPTC's solicitor instructed the CHAPS transfer of the purchase price - £944,114.27 - from a Barclays Bank account into Tayeb's newly opened HSBC account. Barclays informed HSBC that the payment was going to be made, and then initiated the transfer of the money.
This arrived into the account, and an automatic acknowledgement was sent to Barclays confirming the receipt of the money.
On the assumption that the transferred purchase price had also been credited into his HSBC account, Tayeb completed the sale of the database.
However, the HSBC branch assistant manager, Mr Wigham, had been suspicious about the transfer, and placed a marker on the account – effectively preventing any withdrawals from the account without the bank's approval.
According to court papers, a day later, after meeting with Tayeb, Mr Wigham arranged for the money to be re-transferred back to the Barclays account from which it had come. He then closed the account, and cancelled the interest that had accrued in the short time that the database purchase price had been credited there.
As Mr Justice Colman said in his ruling, "The position therefore appears to be that GPTC have received delivery of the domain name database but, having initially remitted the price to HSBC, have, by the re-transfer, received a windfall payment equivalent to the price."
Tayeb sued the bank.
In its defence, HSBC argued that the suspicious circumstances of the transfer justified its actions. In particular, the bank was concerned that it would commit an offence under the Criminal Justice Act 1988 and that it would breach the Money Laundering Regulations.
The main question for the court was whether the money had actually been transferred into Tayeb's account, or whether the bank had retained sufficient control over the money to enable it to re-transfer the money back to Barclays.
The ruling
According to Justice Colman, "There is a continuing duty on the bank to credit to the account all such transfers it receives from external sources and which comply with the terms subject to which the account is constituted."
"However," he continued, "the bank's entitlement to decline to accept a transfer is not in the nature of an option exercisable according to the bank's perception of what is commercially desirable but the consequence of the operation of the terms of the account contract with its customer."
Worries about breaching the 1988 Act and Money Laundering Regulations were not sufficient to allow HSBC to decline to accept the transfer because an offence would not be committed so long as the bank reported their suspicions to the National Criminal Intelligence Service.
"The proposition that by reason of its justifiable suspicions, the bank retained an overriding discretion to reverse the transfer into the account after the 12 noon deadline on the next banking day on the basis of banking practice has not been established on the evidence," said Justice Colman.
"Any such practice would not only be fundamentally inconsistent with the bases of the contract with its customer and with the CHAPS rules, as I have demonstrated, but would go well beyond what was reasonably required either for compliance with the Criminal Law or for the reasonable protection of the bank against the risk of liability as a constructive trustee," he added.
This meant that once the funds were credited into Tayeb's account, had been authenticated and the acknowledgment sent, "HSBC became indebted to the Claimant in respect of the transfer".
The fact that the bank had placed a marker on the account, freezing it, did not withdraw the debt due to Tayeb – it simply prevented him from accessing the funds.
Accordingly the bank was now due to pay Tayeb the purchase price, plus interest.