Question 3 For two years, Jenny Ford has been the Administrator and Trustee of t

Question

Question 3

For two years, Jenny Ford has been the Administrator and Trustee of the will of her late father, Harry Ford, who died in October 2007. She established an account some time ago at her Bank in the name of ‘Jenny Ford – Trustee for the Estate Late Harry Ford’. She continues to act as the trustee in distributing the last funds in her late father’s estate and there is $10, 000 standing in the account. Jenny finds herself very short of cash and last month drew a cheque on the Estate account for $1, 500 to meet pressing living expenses. As she is becoming more financially pressed, Jenny now believes that she will have to do the same again this month. She drew the last cheque to pay a local grocery store and the Bank manager is shown this cheque by an employee who believes that there may be something wrong with this payment.

Advise the Bank as to its legal duties and obligations.

Explanation / Answer

Banks are expected to comply strictly with their customer's payment orders, issuing corresponding payment orders that precisely match that of their customer's. There are limited circumstances in which a bank is able to refuse a payment order, and in the case that it does, the bank must inform the customer at the earliest opportunity that it is doing so and, where possible, provide an explanation. In Bank of New South Wales v Laing [1954] AC 135 it was held that there was an obligation on a bank to comply with their customer's payment order so long as the account was in credit. Banks are also entitled to reject a payment order where the customer has breached the agreed terms and conditions governing the account, for example by not providing two signatures for a joint account payment, or where making the payment would be considered unlawful.

A conflict can occur where a bank is provided with what may appear to be an authorised payment order, but in fact was made as a result of fraudulent activity, raising questions as to the extent of the duty of care a bank owes to its customer in confirming the validity of the payment order instruction.

The PSRs provide that a bank's customer would be liable for all losses arising from the unauthorised use of a 'payment instrument' if he has intentionally or with 'gross negligence' failed to comply with his obligations, for example by not complying with the terms and conditions of the use of the payment instrument, failing to notify the bank without 'undue delay' (and no later than 13 months after the date of the transaction) of its loss, theft, misappropriation or unauthorised use, or failing to take reasonable steps to keep the personalised security features of the payment instrument safe

the Financial Conduct Authority has indicated that while a customer is obligated under the PSRs to take all reasonable steps to keep the personalised security features of his payment instrument safe, a contractual term which prohibits the customer from writing down or recording a password or PIN in any form goes beyond 'reasonable steps' and may potentially be unfair under the UTCCRs. A term specifying that a customer will be liable for any unauthorised transaction if he records his password or PIN, will be inconsistent with the UTCCRs and is likely to be considered unenforceable. What constitutes reasonable steps will depend on the circumstances, but payment service providers must specify the steps they expect customers to take in their pre-contract disclosure information.

Under the PSRs, the bank bears the burden of proof where a customer's claim that a transaction is unauthorised is rejected. A rejection must be supported by sufficient evidence to prove that the customer is guilty of fraud, gross negligence or intentional breach, and the bank must provide an explanation for the rejection to the customer.

Both banks and their customers have a duty not to facilitate fraud on the customer's account and care must be taken by both parties to ensure they meet their legal obligations. Where a private bank is dealing with individuals it needs to ensure that it complies with all its internal procedures as well as standard banking practice, otherwise it could find that, in the event of fraud, a court would not allow it to rely on any exclusion of liability clause in its standard terms and conditions.

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