Antony Sassi David Smyth February 28 2023 Top court allows customer's claim against bank for unauthorised transfers – "an oldie but goodie" RPC | Litigation - Hong Kong Antony Sassi, David Smyth Litigation IntroductionBackgroundFirst instanceCourt of AppealCourt of Final AppealCommentIntroduction In PT Asuransi Tugu Pratama Indonesia TBK v Citibank NA,(1) the Court of Final Appeal allowed the plaintiff's claim for most of the aggregate amount of unauthorised debits from its account with the defendant bank. In an important unanimous judgment by one of the Court's highly respected non-permanent judges (from another common law jurisdiction), the Court held that the limitation period for the plaintiff's primary claim in debt commenced upon its demand as a customer for payment of the debt. Further, the Court held that the bank was not entitled to a partial defence of contributory negligence with respect to the plaintiff's claim in debt. As the judgment notes at the beginning:This is a dispute about limitation. In reality however, it is about one of the oldest and most litigated questions in commercial law, namely the rights of a corporate customer against a banker who has paid money out of its account on the dishonest instructions of an authorised signatory.(2)BackgroundThe plaintiff opened an account with a subsidiary of the bank in 1990. The account was transferred to the bank's Hong Kong branch in 1994. Between 1994 and 1998, approximately US$50 million had been misappropriated from the account in 26 transfers by the wrongful actions of the signatories to the account. The bank made a final payment out of the account to two of the signatories and then closed the account as instructed on 30 July 1998.On 6 October 2006 the plaintiff wrote to the bank, claiming that the 26 transfers had been dishonest and demanding repayment. The plaintiff commenced the proceedings in February 2007. The plaintiff's claims were for reconstitution of the debit entries resulting from the unauthorised transfers (a claim in debt) and, alternatively, for damages for breach of duty of care owed in contract and/or tort.First instanceAt first instance, the judge held that the bank had breached its duties to make inquiries about the transfers when a pattern had emerged by the time of the third transfer indicating impropriety in the operation of the account. However, the judge found that the closure of the account in July 1998 was authorised and held that the plaintiff's claim had been time-barred because the six-year limitation period commenced upon closure.Court of AppealThe Court of Appeal dismissed the plaintiff's appeal. The Court of Appeal's reasoning was slightly different and in one material respect it came to a different conclusion. The Court of Appeal considered that the closure of the plaintiff's bank account had not been authorised but nonetheless had been effective to terminate the banker-customer relationship. Therefore, like the judge, the Court of Appeal considered that the plaintiff's claim for the wrongful payments accrued in July 1998 and had become time-barred by the time that the proceedings were commenced in February 2007.Both the judge and the Court of Appeal considered that had the limitation defence been unsuccessful, the damages due to the plaintiff would have been reduced by 50% on account of the plaintiff's contributory negligence.Court of Final AppealBefore the Court of Final Appeal, two issues arose. In summary, they were as follows:Did a cause of action for sums debited to the account without authority arise upon the closure of the account, without the need for a demand?Was a defence of contributory negligence available to a bank with respect to a customer's claim to recover the balance that ought to be standing to the credit in their account with the bank, which had been emptied by unauthorised payments?The first issue was the more important one. In a unanimous judgment (given by Lord Sumption) the Court found for the plaintiff on both issues.LimitationThe plaintiff's primary claim was for a "debt" represented by the reconstituted balance of the account which was payable on demand. It is well settled as a matter of banking law that the six-year limitation period only commences upon a customer's demand for payment of the debt. In this case, the plaintiff had made the demand on 6 October 2006 and the proceedings had commenced on 2 February 2007 – within the relevant limitation period. On the facts, the Court did not accept the bank's argument that the banker-customer relationship had effectively come to an end when the account was closed in July 1998. First, and importantly, the Court considered that the purported closure of the account was unauthorised and insufficient to bring the banker-customer relationship to an end without the customer's agreement. Second, irrespective of whether the closure of the account had been authorised, the Court noted:A banking contract may be terminated by a bank at any time on notice. But there is no principle of law which entitles a bank unilaterally to abrogate its outstanding liabilities or to discharge a debt without paying it. To effectually terminate the relationship, it must pay (or at least tender) the outstanding reconstituted balance.(3)Therefore, it followed that the debt still subsisted when it was demanded by the plaintiff in October 2006 and the limitation period for the debt claim did not commence until then.Contributory negligenceThe Court noted that a partial defence of contributory negligence would be available in respect of a claim for damages for breach of a bank's duty of care in making payments to third parties. However, this was not relevant in respect of the plaintiff's debt claim. First, the debt claim on which the plaintiff succeeded was not a claim in respect of "damage" for the purpose of section 21(1) ("Apportionment of liability in case of contributory negligence") of the Law Amendment and Reform (Consolidation) Ordinance (Cap 23). Second, as the Court noted:Secondly, in claiming the debt Tugu is not claiming any relief on account of the "fault" of the Bank in failing to make relevant inquiries. The debt arises from the deposits made into the account from Tugu's operating subsidiaries. The Bank's failure to make relevant inquiries is merely the reason why the debt was never effectually discharged.(4)DecisionThe Court allowed the plaintiff's appeal, ordering that it was entitled to judgment for the aggregate amount of the unauthorised debits apart from the first two. It appears that the bank had not challenged the finding before both lower courts that by the time of the third payment instruction it should have known enough to prevent it from relying on the apparent (or ostensible) authority of the signatories to direct the transfers.(5)The plaintiff was also entitled to interest at prime rate plus 1% from 6 October 2006 (the date of its demand to the bank). The plaintiff will also likely recover most of its substantial costs both of the final appeal and in the lower courts.CommentThe following points are worth noting:The outcome in the case represented a complete and substantial victory for the plaintiff (a bank customer).The outcome was dependent on the findings in the lower courts that, by the time of the third payment instruction, the bank had known enough to prevent it from relying on the apparent authority of the signatories of the account – in particular, the important finding by the Court of Appeal that the closure of the account was unauthorised (although the Court of Appeal considered it effective to terminate the banker-customer relationship). As the Court of Final Appeal noted, the closure of the account was not on behalf of any of the plaintiff's signatories but, importantly, a "principal to principal" transaction between the bank and the plaintiff – in the absence of a properly authorised instruction to close the account, the relationship of banker-customer continued.(6)The Court's judgment is compelling reading regarding a banker's duty to make payments out of an account only with the authority of the customer. The judgment analyses the law relating to the apparent (or ostensible) authority of an agent of a corporate customer by reason of their position as a signatory and/or officer of a company and considers what constitutes sufficient notice of a want of authority to require a bank to make inquiries before paying out in accordance with a bank mandate.The judgment usefully reviews the different claims that a customer may make against a bank with respect to unauthorised transactions on their account, be those claims based on contract, duty of care or debt. The case highlights the primacy of a claim in debt with respect to unauthorised transactions on a customer's bank account. Claims based on breach of contract or duty of care are more susceptible to:a complete limitation defence (especially where, for example, it takes years to discover the misappropriation); anda partial defence of contributory negligence.In this case, the plaintiff's only viable claim which had not been defeated by a limitation defence had been for a debt and such a claim was not susceptible to a defence of contributory negligence.As the judgment notes, a customer's account could be dormant for many years without affecting their right eventually to demand the balance.(7)Banks will have to review their procedures for accepting instructions from customers – particularly corporate customers – to reduce their exposure to claims with respect to unauthorised transfers.The judgment is a good example of the importance of considering at the outset of a dispute the reliefs that a party should seek (pursuant to their cause(s) of action). As the judgment states:If a bank has debited an account without authority, damages will be nominal because an unauthorised debit is a nullity. The customer is entitled to disregard it and require the account to be reconstituted as it should have been. In that case, what is reconstituted is simply the bank's records. It is not the bank's liability, which has always been for the balance undiminished by the unauthorised debits. The customer's only effective financial remedy is accordingly in debt for the reconstituted balance of the account, and that debt is likewise payable on demand.(8)Finally, the judgment highlights (once again) the vital importance of the role of eminent overseas non-permanent judges to the Court of Final Appeal – particularly in matters of commercial law and irrespective of how old and litigated such questions may be.For further information on this topic please contact Jacky Darsono, Antony Sassi or David Smyth at RPC by telephone (+852 2216 7000) or email ([email protected], [email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.Endnotes (1)  HKCFA 3, 6 February 2023.(2) Supra note1, at para 5.(3) Supra note 1, at para 28.(4) Supra note 1, at para 31.(5) Supra note 1, at para 15.(6) Supra note 1, at para 21 and 26.(7) Supra note 1, at para 23. "No doubt . . . this may be inconvenient to banks, but it is a fundamental incident of their business."(8) Supra note 1, at para 24.