A bank will be liable in restitution where it allows money mistakenly credited to its customer's account to be withdrawn where it knows of the allegation of mistake.
In Jones v Churcher and Abbey National PLC, the claimant car dealer imported cars through a middleman, Mr Sharkey. The account details to which payment for the cars was to be made to Mr Sharkey's company varied from time to time. By mistake on the CHAPS transfer form, payment was erroneously made into the first defendant's account with Abbey. The first defendant was an acquaintance of Mr Sharkey. On realising the mistake, the claimant notified his bank which in turn reported the mistake to Abbey who also received SWIFT messages from the claimant's bank explaining the mistake, cancelling the payment and recalling the funds. The first defendant also queried the credit to her account with Abbey and asked for the money to be returned to the payer. By the time Abbey sent a debit authority to the first defendant to be signed, the money had been withdrawn and paid to Mr Sharkey. The cars were never supplied and the claimant commenced proceedings for restitution against both defendants.
The court held that both defendants were liable in restitution for the mistaken payment. The first defendant had not changed her position in good faith. She knew the circumstances in which the money was credited to her account were suspicious and had failed to make adequate enquiry or a concerted effort to return the money.
Abbey's defence of ministerial receipt was dismissed. The court rejected the argument that as soon as funds have cleared in a customer's account it is the customer's money and the bank is powerless to act. It held that where money paid by mistake was retained by an agent (the bank), the agent remained liable if it paid money to its principal (the bank's customer) after notice of the claim. Abbey should have intervened.
Abbey's defence of change of position was also dismissed as the court found that Abbey had not acted in good faith as it had actual knowledge that the claimant's bank had asked for the money back as a mistake had been made. Abbey had done nothing to ring-fence the money pending further enquiry.
Things to consider
Financial institutions should act quickly and make all necessary and reasonable enquiries before allowing customers to withdraw funds where there is an allegation that those funds do not belong to them and that a payment has been made by mistake. Robust systems should be in place, perhaps similar to those where an allegation of suspected fraud or money laundering is raised, if liability in restitution is to be avoided.