In Tidal Energy Limited v Bank of Scotland Plc (2014), a majority decision of the Court of Appeal upheld that under the proper construction of a CHAPS transfer form, the beneficiary name was not a required identifier and payment may be made to an account matching the stated sort code and account number. The Master of the Rolls held that a customer who uses CHAPS is taken to contract on the basis of the banking practice that governs CHAPS transactions, whereby payments are processed on the basis of sort code and account number alone.   

Background

Tidal Energy Limited ("Tidal") was a customer of Bank of Scotland ("BoS"). Tidal completed a transfer form to pay the sum of £217,781.57 to an account held with Barclays Bank with a particular sort code and account number and in the name of its supplier Design Craft. The designated receiving account was not in fact in the name of Design Craft but in the name of "Childfreedom Ltd". It was unknown to Tidal and BoS at the time that Tidal had been the victim of fraud. The funds were transferred.

At first instance, Tidal's case was that BoS had not carried out the instruction on the transfer form to make a payment to Design Craft and BoS should, therefore, re-credit Tidal with the sum lost. Evidence was produced that CHAPS did not operate by including the beneficiary's name as part of the unique identifier. This was for the practical reason that the volume of transactions meant that a manual method of checking would prevent the payments being processed in time. It was held that there was no requirement under the CHAPS Rules that the beneficiary's name be included and the sort code and account number were the only identifiers that needed to be matched.

Tidal appealed. The appeal was based on the proper construction of the CHAPS transfer form. Two primary questions were answered:

1.     Can banking practice be relied on in order to construe the transfer form?

2.     In what circumstances, pursuant to the transfer form, is the bank authorised to debit the account with the amount specified on the form? In particular, does the form authorise the bank to debit the account when money has been paid into an account having the number and sort code identified, but in the name of someone other than the beneficiary named in the form?

Decision

The Master of the Rolls, Dyson MR, giving the leading judgment, dismissed the appeal and agreed with the Judge at first instance. He held that banking practice would be relevant to inform the meaning of the contract itself, even if unknown to the customer. Therefore, subject to any contrary express terms, a customer who uses CHAPS is taken to contract on the basis of the banking practice that governs CHAPS transactions. In light of accepted banking practice, Dyson MR rejected Tidal's construction that the beneficiary name is a required identifier. It was not reasonable nor commercially sensible. In particular, he cited the fact that the object of CHAPS is to achieve rapid payment and that the Court should lean against a construction which involves imposing a requirement on a receiving bank which would frustrate the customer's wish to have money transferred rapidly.

Tomlinson LJ also relied on the practical implications but framed his judgment differently. He found that a customer's instruction made by executing the specific CHAPS form in question was an instruction to make a payment transfer in accordance with the current CHAPS Rules and the CHAPS transfer system as currently operated in accordance with the usual practice adopted by participating clearing banks..

In Floyd LJ's dissenting judgment, he argued that the banking practice was not reasonably available to customers and, therefore, would not be part of the admissible background. In light of this, his judgment stated that a payment cannot be made until the identifiers (sort code, bank name, account number and customer name) conformed to the destination account. He also rejected the argument that business common sense and the CHAPS system would be undermined, reasoning that a bank would merely have to draw attention to the relevant aspect of the system on their CHAPS form.

Comment

The decision was a close one and Tomlinson LJ indicated that his initial view tended towards the interpretation of Floyd LJ. However, the judgment by the Court can be seen as a victory for pragmatism, with common banking practice bearing a significant role in the ultimate decision. Tomlin LJ, in particular, highlighted a number of ways in which the beneficiary name would be a particularly impractical identifier. For example, he cited the difficulty in determining to what extent minor differences between the beneficiary name stated on the transfer form and the actual intended beneficiary name should prevent payment being made.

Ultimately, though, the question of construction was the determining point and once banking practice was accepted as part of the evidential background, the reasonable construction went only one way. Whilst the decision highlights the importance of accurately completing the account number and sort code when completing a transfer form, a more general point can be made – that customers should be aware of the terms and conditions under which such payments (and other banking transactions) are made.