Bankers' Liability for Mistaken Receipts and Misdirected Funds

25 Pages Posted: 22 Feb 2007

Date Written: February 19, 2007

Abstract

Mistaken receipts and misdirected funds expose banks to multi-faceted liability and generate some of the most knotty legal issues, in particular restitution for unjust enrichment and dishonest assistance in breach of trust or fiduciary duty. The recent Court of Appeal case of Abou-Rahmah v Abacha [2006] EWCA Civ 1492 shows that these knotty issues are here to stay. Anchoring on Abacha, this commentary seeks to review and evaluate the legal developments, and to highlight the areas in serious need of judicial clarification. For comparative purposes, reference will be made to the position under New York and California law.

To the extent that one could extract something concrete from the decision, Abacha appears to stand for the following propositions.

First, for the purposes of the liability for dishonest assistance in a breach of trust or fiduciary duty, dishonesty is measured by an objective standard, so the defendant's conduct would be considered dishonest if it was so regarded by the standards of honest and reasonable men. The application of the objective dishonesty test leads to asking two questions in the following order: First, what is the defendant's actual knowledge of the relevant transactions? Second, in light of the defendant's knowledge, would a reasonable person regard the defendant's conduct as dishonest?

Second, anticipatory change of position is a valid defence to an unjust enrichment claim.

Third, a defendant could not assert change of position if his conduct was commercially unacceptable.

Questions that remain to be answered abound, including the following:

· Is "commercial acceptability" a benchmark against which the test of dishonesty is measured?

· Granted "dishonesty" is an objective standard assessed in light of the defendant's actual knowledge, is it not beneficial to renounce "dishonesty" and revert to "knowing assistance"?

· When receiving funds transferred to it for its customer's account, does a bank receive the funds beneficially?

· Does a non-beneficial receipt negate enrichment for the purposes of an unjust enrichment claim?

· What has non-beneficial receipt got to do with the change of position defence?

· What is the relationship between ministerial receipt and change of position?

· If ministerial receipt and change of position are distinct defences, do they share the same disqualifying criteria?

· To what extent are a bank's general suspicions about its customer's money-laundering activities relevant to establishing dishonesty and disqualifying the change of position defence? Does the policy of deterring money laundering justify a court taking a broad sword to these issues?

Keywords: Dishonest assistance in a breach of trust or fiduciary duty, aiding and abetting, knowing assistance; mistaken payment; misdirected funds, change of position, money laundering, beneficial receipt

JEL Classification: K10,K11,K12,K13,K20,K30,K39,K40,K41,K42,K49

Suggested Citation

Ho, Look Chan, Bankers' Liability for Mistaken Receipts and Misdirected Funds (February 19, 2007). Available at SSRN: https://ssrn.com/abstract=964060 or http://dx.doi.org/10.2139/ssrn.964060

Look Chan Ho (Contact Author)

Des Voeux Chambers ( email )

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