18 October, 2015
From time to time, cases of funds which were wrongly transferred to a third party’s bank account are reported in the media. In some of these cases, the payor made a mistake in transferring the funds to the third party’s bank account.
Occasionally, banks may wrongly deposit funds into a third party’s account because they mistakenly thought that they were following the customer’s mandate.
Legal difficulties arise when the third party does not return the wrongly deposited funds. Quite apart from any criminal offences that may be triggered by the receipt or retention of such monies, is it a civil wrong to retain, or even receive, these monies?
This interesting question was considered in the recent English case of Santander UK plc v Royal Bank of Scotland plc, HSBC Bank plc and Nationwide Building Society  EWHC 2560 (Ch) (“Santander”).
Santander UK plc (“the Applicant”) had erroneously made payments to the customers (“the Third Parties ”) of three other financial institutions (“the Recipient Banks”), as it had mistakenly thought that it had its own customer’s mandate to do so.
The Applicant’s mistake arose in a number of circumstances, namely:
(a) the customer had instructed the Applicant to make a payment and the Applicant made it twice. Hence, the second payment was without the customer’s authority;
(b) the Applicant, despite receiving instructions from the customer to cancel the original fund transfer, nevertheless went ahead and made the mistaken payment;
(c) the Applicant mistakenly made a payment to an account other than that authorised by its customer; and
(d) the Applicant’s customer died before his or her instruction to pay was implemented.
This article is only intended for general reading. Under no circumstances is it to be relied upon in substitution for specific advice on any issue(s) that may arise relating to its subject matter.
In all cases, the Applicant was unable to debit its customer’s account. Also, the Third Parties did not return the wrongly transferred funds or consent to their details being shared by the Recipient Banks with the Applicant.
The Applicant thereafter took out a “paper” application (in which only the Applicant was heard) for a special type of pre-discovery order (known as a Norwich Pharmacal order) against each of the Recipient Banks to disclose information about the identity of the Third Parties, namely, their full names, contact addresses, e-mail addresses, telephone numbers and dates of birth.
Generally, a Norwich Pharmacal order may be made if it is shown that the Third Party had committed a wrong and the Third Party’s wrongdoing was facilitated by the Recipient Bank or in which the Recipient Bank was innocently mixed up.
At first instance, Master Matthews sitting in the English High Court declined to make the orders sought because:
(a) there was no evidence of any wrongdoing by the Third Parties before the money arrived in their bank accounts. The Applicant’s claim against the Third Parties in restitution (unjust enrichment) arose only after they received the payment and did not involve a wrongdoing under the Norwich Pharmacal jurisdiction; and
(b) even if the Third Parties were guilty of wrongdoing under the Norwich Pharmacal jurisdiction, that could only be refusing to return the money once received and demand made for its return. However, on the facts, there was no evidence that the Third Parties had refused to repay the money. Also, the Recipient Banks had not facilitated the non-repayment of the money by the Third Parties to the Applicant and were not “mixed up” in that non-repayment since their role was completed at the point of transfer of the money to the Third Parties.
He also noted that even if a Norwich Pharmacal order should be made, it would suffice for only the names and addresses of the Third Parties to be disclosed.
Subsequently, the Applicant requested Master Matthews to reconsider his decision because in separate proceedings for such applications, Mr Justice Birss, a High Court judge, had granted the Norwich Pharmacal orders sought by the Applicant against other banks and building societies, and restated certain principles applicable to cases involving recovery of money paid by mistake. In particular, Mr Justice Birss had taken the position that a Norwich Pharmacal order can be justified as a claim in restitution was a wrong and the recipient entity had sufficiently facilitated the commission of the wrong.
Although Master Matthews disagreed with the reasoning of Mr Justice Birss in the other proceedings, he felt bound by that decision and ordered the Recipient Banks to disclose to the Applicant the names and contact addresses of the Third Parties only. The other personal details were deemed unnecessary in commencing any proceedings against the Third Parties.
He also required the Applicant to give an undertaking not to use any documents or information obtained as a result of his order except for the purpose of enforcing its legal rights concerning the mistaken payment, unless the court permitted
We now turn to the reasoning of Master Matthews on the two legal issues on the grounds for a Norwich Pharmacal order.
1. Whether a claim in restitution is a wrong
In his judgment, Master Matthews noted that Mr Justice Birss had relied on an English Court of Appeal decision, Bankers Trust v Shapira  1 WLR 1274 (“Bankers Trust”), in holding that a claim in restitution was a claim capable of justifying a Norwich Pharmacal order. However, Master Matthews noted that Bankers Trust was concerned with different facts and did not support the position that a personal claim for repayment of a sum of money was a wrong which would justify “a serious invasion of privacy” to require disclosure of a customer’s personal information.
In addition, the timing of when the wrong was committed was critical. Unlike the facts in Bankers Trust where the fraud was committed at the outset with the recipient bank subsequently facilitating the disposal of the proceeds of the fraud, the cases that Mr Justice Birss was concerned with did not involve any wrong committed at the outset. The third party in those cases had not induced the payment and did not know that the monies would be coming. Hence, “[i]t was not in any legal or moral sense wrong of the third party merely to receive it” [emphasis in original]. The third party’s only “wrong” committed in those cases was “to refuse to pay the money back when that was demanded”.
2. Whether a recipient bank has facilitated the commission of the third party’s wrongdoing
Even if a claim in restitution could be a sufficient “wrong” to theoretically justify a Norwich Pharmacal order, Master Matthews observed that in practice, a recipient bank could never have facilitated the third party’s “wrong” of refusing to return the money mistakenly paid. This was because the recipient bank did nothing to enable the third party to refuse to repay the money when asked. The recipient bank did not facilitate the mistaken payment made to the third party by merely providing the bank account, as the relevant wrong was not the mistaken payment, but the refusal to pay back the money when asked.
Master Matthews’ comments in Santander suggest that it is not a civil wrong, or even a moral wrong, for a third party (i.e. a recipient bank’s customer) to merely receive wrongly deposited monies, so long as the third party did not induce the payment or knew that it was coming. In other words, the third party has not committed a civil wrong if all it did was “passively to receive the money into the third party’s own bank account”.
However, it would be a civil wrong for the third party to refuse to return the money when demanded. Similarly, a recipient bank has committed no wrong if all it did was to receive the money mistakenly paid since the relevant wrong is not the receipt of the mistaken payment but the third party’s refusal to return the money when asked.
It is not clear whether Master Matthews’ comments will be picked up in future English cases, given that his decision was ultimately to grant the Norwich Pharmacal orders albeit to a limited extent. It also remains to be seen whether a third party would commit a civil wrong if he becomes aware of the wrongly deposited monies, but does not take any step to return the monies as no demand was made.
As for when a recipient bank is construed to facilitate the commission of the third party’s wrongdoing, the line between passive involvement in, and actual facilitation of, the third party’s wrongdoing is difficult to draw. One way to resolve this issue is,
as Master Matthew tried to do in Santander, to identify the relevant wrongdoing precisely. But it may not always be possible to do so in cases where the wrongdoing is inextricably intertwined with a recipient bank’s usual work functions.
Quite apart from the bank’s usual work functions, it has a duty of care to obtain and carry out its customer’s mandate. Arising from that duty is the general principle that a bank cannot debit its customer’s account without the approval of its customer.
Against the backdrop of that general principle, interesting issues are raised regarding whether a bank would be construed to have facilitated the wrongdoing of a third party where it does not have the customer’s mandate to return the wrongly deposited funds when demanded by the paying bank and therefore refuses to return the funds.
The grey areas in this area of the law indicate that third party recipients of wrongly transferred monies should exercise utmost care in dealing with such funds, as they are exposed not only to the risk of criminal sanctions, but also to the likely civil consequences of their actions.
As Santander is an English case, it remains to be seen whether a Singapore court would reach the same conclusion as Master Mathews when deciding on cases which have a similar factual matrix to Santander.
Gerard Ng, Partner, RHTLaw Taylor Wessing