Case Note: Tidal Energy Limited v Bank of Scotland plc
This recent decision of the English Court of Appeal will be of interest to all lawyers (whether in-house or in private practice) who advise financial institutions on their contractual relationships with customers. The Court in this judgment considers what may constitute extraneous material which is reasonably available for the purpose of contractual construction and finds that a “banking practice” unknown to the customer can be used by a Court to reach a commercially sensible construction.
Banking “practice” is an important part of the operation of the banking and payment processing systems throughout the world. Operation in accordance with usual practice is undertaken on a daily basis with customers, without those customers necessarily having any knowledge of these practices. Customers complete and sign various banking documents without considering the behind the scenes operations but in a recent decision in the English Court of Appeal, the Court has found that customers in their dealings with banks will be subject to those banking practices.
Principles of contractual construction in both England and Australia allow the use of extraneous material or surrounding circumstances to assist the court to reach a commercially sensible interpretation where those circumstances where known to both parties or were reasonably available.2
Insofar as what constitutes circumstances reasonably available, the New South Wales Court of Appeal recently set out the application of this principle in an Australian context:
“The scope of the legitimate surrounding circumstances, knowledge of which is to be attributed to a reasonable person in the position of the contracting parties, is to be understood by reference to what the parties knew in the context of their mutual dealings. Whilst it does not involve a species of constructive notice, “the reasonable person may be taken to know of things that go beyond those that the parties thought to be important or those to which there was actual subjective advertence by the parties”.3
It has also been said that surrounding circumstances may be facts which are notorious, so that knowledge of them will be presumed.4
In the case of Tidal Energy Limited v Bank of Scotland plc, before the English Court of Appeal, the question arose as to whether banking practice could be relied upon by a Court to construe an agreement between a bank and its customer. The banking practice in issue was not an express term of the written instrument and the customer was not aware of it.
The Court in a majority decision found that the banking practice could be relied upon to construe the contractual document and find a commercially sensible construction.
Tidal owed Design Craft Limited (“Design Craft”), the sum of Â£217,781.57. Tidal completed the bank’s CHAPS transfer form (“the transfer form”), to give instructions for the making of the payment.
In section 1 the transfer form required the customer to insert what it described as “Details of the CHAPS transfer”. These included details of the destination of the transfer being “Receiving (beneficiary) sort code”, “Receiving (beneficiary) bank and branch”, “Receiving (beneficiary) customer account number” and “Receiving (beneficiary) customer name”. Tidal completed the first three of these categories with the banking information with which it had been supplied, purportedly by Design Craft. In the fourth category Tidal inserted the name of the intended recipient of its funds, Design Craft Ltd.
Section 2 of the transfer form was headed “Your confirmation”. There followed a statement, which Tidal was required to confirm with appropriate signatures, as follows:
“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.
Neither this instruction for a CHAPS transfer nor your acceptance of it shall be enforceable by the payee or any other third party …”
The statement in section 2 of the transfer form went on to point out that any personal information relating to individuals named in the form might be processed for purposes related to, for example, anti-money laundering and anti-terrorism laws, and might be transferred outside the jurisdiction.
The bank received Tidal’s instruction at 09.38 on 31 January 2012. At 15.20 their processing team initiated the transfer through CHAPS by sending the funds from the bank’s account at the Bank of England to the account of Barclays at the Bank of England. All of the payee information on the transfer form (receiving customer’s account number at Barclays, sort code of Barclays, receiving customer’s name and the invoice number in respect of which the payment was being made) was reproduced. Barclays made a credit entry in the account corresponding to the account number and sort code. It was an account in the name of Childfreedom Limited, not Design Craft. On the same day, the bank made a debit entry on Tidal’s account to show the money leaving the Tidal account.
Some days later, Tidal telephoned the bank to say that it had been induced by fraud to provide the account details in the transfer form. The bank communicated this information to Barclays. The Barclays customer had already withdrawn Â£217,000 from the account.
At the trial of this matter, the evidence before the judge included a witness statement from an employee of the bank. This witness statement said that it was not banking practice to check customer names when executing CHAPS transfers. The witness explained that it was normal banking practice for banks to process payments through CHAPS on the basis of bank account number and sort code only and not on the basis of the name of the payee. It was not practicable to scrutinise every payment: CHAPS transfers were treated on a straight through basis, because the objective of CHAPS was to achieve speed of credit. He explained the requirement to provide the name of the beneficiary by saying that certain provisions of the Financial Action Task Force Recommendations required members of CHAPS, for anti-money laundering and counter-terrorist purposes, to include the beneficiary name when making payments via wire transfers, including CHAPS.
JUDGMENT AT FIRST INSTANCE
The Judge at first instance said that the first step was to ask what the bank was authorised to do, and then to examine whether the bank, as agent of Tidal, complied with that instruction. He answered the first part of this question by saying that the instruction was to pay a sum of money “to the beneficiary” by CHAPS transfer to the account number and sort code specified. Although he accepted that the account name was important to Tidal, the evidence was that CHAPS did not operate in such a way that the beneficiary’s name formed part of the identifier which determined the destination of the payment. This was because the volume of CHAPS transactions would make manual checking impossible within the short timescale.
The judge concluded from the evidence of how CHAPS works that a receiving bank which receives a CHAPS transfer and which is able to match an account number and sort code to one of its accounts will be expected to credit that account with the money and send an acknowledgment to the remitting bank. At that point payment is complete. He therefore rejected Tidal’s argument that the payment was not completed, and that the instructions had not been complied with.
The Master of the Rolls said:
“In my view, the critical question in this case is whether the banking practice described by Mr Johnson [the expert] can be relied on in order to construe the transfer form.”5
Floyd LJ (in the minority) referred to a number of decisions where the Courts found that a customer is bound by the usages or reasonable usages of bankers6 but went on to say that where the banking practice is unknown to the customer or not reasonably available then it cannot have a bearing on construction of the contractual document.7
Floyd LJ said that the evidence did not show that there was material available to the customer to show how this system worked and that it did not use the payee’s name in processing payments. He found that the expert evidence showed that the banking practice was known within banking circles and documents containing the practice were not targeted at customers. As such the banking practice could not be used as extraneous material in construction.
The Master of the Rolls (in the majority) found that the CHAPS practice was not a secret and was available to customers if they enquired. He said:
“I would expect that most customers would not be interested in obtaining such information, and they would be content if the CHAPS transfer is executed in accordance with usual banking practice. But even if that is wrong, the important point is that the CHAPS practice of clearing banks would have been reasonably available to the appellant and any other customer who wished to use the CHAPS payments system.” [emphasis added]
He also said
“Even if a banking practice is not reasonably available to the customer, the court should still be astute to avoid a construction of the contract which is inconsistent with business common sense.”8
Tomlinson LJ also found for the bank but expressed reservations about whether the banking practice was reasonably available to Tidal. He thought that the Master of the Rolls was right that the practice would have been reasonably available but in the absence of compelling evidence to this effect looked further. He found for the bank but on the basis that the transfer form signed by Tidal carried with it an instruction to carry out the payment through the CHAPS system as it is currently operated in accordance with usual practice. He went on to say:
“the proper analysis is that the customer by execution of the form authorised the bank to execute the transfer in accordance with usual banking practice, thereby rendering that practice the contractual method of performance.”9
The Court was split as to whether the banking practice was reasonably available to the customer. The majority found for the bank but there still remained uncertainty as to what constituted “reasonably available”. The Master of the Rolls was prepared to say that material was reasonably available where it was not a secret and could be ascertained by enquiry. This is a potentially important point for all contract construction cases and lawyers may consider this case when looking for authority on what material constitutes extraneous material which is reasonably available.
For banks, there are many daily practices which are well known to bank staff but which would not in the normal course be known to customers. This case, while there was some uncertainty, demonstrates that English Courts will be prepared to construe an agreement so as to include banking practice even where the customer is not aware of such practice. If the practice could be ascertained by enquiry then that may be enough.
Australian Courts have said that surrounding circumstances used in aid of construction may go beyond material which the parties have adverted to but it will be open to question whether an Australian Court would make a similar finding to the English Court of Appeal in this case. Intricacies of banking practice would not be readily described as notorious however it could be that such practice will be a matter a reasonable person may be taken to know where it assists the Court to avoid a construction which is inconsistent with business common sense.
The finding of Lord Tomlinson that the usual banking practice could be implied into the transfer form also operates to the assistance of banks. The instruction from the client made no reference to banking practice but Lord Tomlinson was prepared to imply that an instruction from the client to use a particular system included a term that the system would be used in accordance with usual practice. This is not a surprising result particularly where the operation of the system was judged to be not unreasonable by the Court.
Banks may draw comfort from this decision but need to also take note of the uncertainty as to what will constitute reasonably available information. The Court in this case found in favour of the bank but it may be that other banking practices and other forms used will not come to the rescue of banks where transactions go awry.
Banks should not take for granted that their practices and systems will always be used in the construction of their agreements with clients. Where banking practices are an important part of the operation of any system, banks will be well advised to consider:
– the extent to which those practices may be known to customers or may be made known to customers; and
– how a customer may reasonably be asked to agree to such practice when giving instructions to the bank.
Editor’s Note: This article was originally published by LexisNexis in the Australian Banking and Finance Law Bulletin (2014) 30(10) BLB. The Court of Appeal’s decision in Tidal Energy is now reported in  Bus LR 1167
-  EWCA Civ 1107
- See Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896 at 912-913 and Byrnes v Kendle (2011) 243 CLR 253 at  and Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188
- Newey v Westpac Banking Corporation  NSWCA 319 at 
- Hillcrown Pty Ltd v O’Brien  QCA 129 at 
- at 
- Hare v Henty (1861) 10 CB (N.S.) 65, 77 and Barclays Bank plc v Bank of England  1 All ER 385 and Tayeb v HSBC Bank plc,  4 All ER 1024
- at  and 
- at 
- at