In two rulings from June of this year, the German Federal Court of Justice (BGH) set out in detail the circumstances in which defective payment orders can be reversed, abandoning its existing case law on “initiator cases” in the process.
Facts of the case
The BGH judgment dated 02 / 06 / 2015 – XI ZR 327 / 14 was based on the following facts (Case 1): The account holder contacted the bank to cancel her husband´s account authority. The husband, who was unaware that his account authority had been cancelled, subsequently initiated a payment to himself. The bank took action against the husband to reverse the payment made to him.
The BGH judgment dated 16 / 06 / 2015 – XI ZR 243 / 13 was based on the following facts (Case 2): The account holder instructed the bank to transfer an amount of EUR 5,000 to the payee. The amount was not credited because the name of the payee did not match the account number. The account holder consequently cancelled the payment order and transferred EUR 5,000 to the payee again using the correct account information. Independently of this, the bank corrected the error in the account details and executed the original payment order again. As a result, the payee received two payments, each in the amount of EUR 5,000. The bank took action against the payee to reverse the cancelled payment order.
Principles regarding the reversal of payment orders
The general principle with regard to transfers in a three-party relationship is that transfers are always reversed within the performance relationship where the error occurred which causes the reversal. Performance relationships exist between the account holder and the bank (cover relationship) and between the account holder and the payee (underlying debt relationship). On the other hand, no performance relationship exists between the bank and the payee. As such, reversal under the law of unjust enrichment does not take place directly between the bank and the payee (priority of the performance relationship principle). Case law has recognised exceptions from this principle when the account holder has not issued a (valid) payment order because he or she was legally incompetent or because a third party was using the account for fraudulent purposes. In these cases by way of exception the bank has a direct claim against the payee for reversal of the transfer.
“Initiator cases” fall between the principle outlined above and the recognised exceptions, and typically occur in two versions:
- The account holder instructs the bank to make a payment, but then cancels the instruction. The bank nonetheless executes the instruction by mistake.
- The bank transfers a higher amount than that stated in the payment order.
Up until now, the BGH has assumed in these cases that the account holder created a prima facie legal entitlement when issuing the original payment order for which he or she was responsible, provided that the payee acted in good faith. According to the BGH the payee is worthy of legal protection because the error only occurred in the cover relationship, meaning that reversal has to take place within the performance relationship. The bank was able to demand the payment from the account holder based on unjust enrichment, while the account holder could only claim against the payee. Thus the account holder bears the risk of insolvency in relation to the payee.
Decision of the Court
In Case 1, the BGH ruled that cancelling the account authority was not the same as cancelling a payment order. It stated that the account authority was no longer effective against the account holder after its cancellation. No effective payment order by the account holder therefore existed at any point in time. This is the material difference from the initiator cases in the eyes of the BGH. In the initiator cases, there is an effective payment order in place which is subsequently cancelled.
In Case 2, the BGH abandoned its previous case law with respect to initiator cases. The only crucial factor for the BGH now is whether an effective payment order was in place at the time when the payment order was executed. If there is no effective payment order in place, the bank must assert its claims under unjust enrichment law against the payee. The BGH argues that as a result of the new law on payment transactions under sections 675j and 675u of the German Civil Code (Bürgerliches Gesetzbuch) there is no recourse to the account holder in the absence of a payment order. It stated that the issue of whether the account holder had created a prima facie legal entitlement for which he or she was responsible was no longer material.
If there is no effective payment order in place when the payment order is executed, the bank has a direct claim against the payee. No claim can be made by the bank against the account holder, nor must the account holder claim against the payee. The bank bears the risk of insolvency in relation to the payee with regard to reversing the transaction.