Wrong way, CHAPS!

Posted: 19th September 2013

Bank cardA company that claimed to have fallen victim to a £217,000 fraud has had its hopes of recompense from its bankers dashed by the High Court.

Tidal Energy Ltd, like thousands of others every day, had used the Clearing House Automated Payment System (CHAPS) to make the payment to a trade creditor. When completing the instruction form, the company gave the wrong account number and sort code for the intended recipient. The money passed into the account of an unconnected third party and disappeared.

The company, which claimed to have been defrauded, asked the Court to rule that Bank of Scotland was obliged to re-credit the full amount to its bank account on the basis that its instruction to the bank to make payment to the intended recipient was not carried out or completed and that it was therefore entitled to its money back.

For its part, the bank argued that it had never undertaken to ensure that the money was sent to the intended recipient. It was normal practice for banks to process payments through CHAPS according to the payee’s account number and sort code and not the name of the payee. The bank insisted that it had complied with the company’s instructions and had been entitled to debit its account.

The Court noted that there appeared to be no clear guidance or legal authority as to where responsibility for such losses should fall. Deciding in favour of the bank and striking out the company’s claim, the Court found that the bank had done what it was authorised to do and had complied with its instructions as the company’s agent.

The Court accepted that there were practical reasons why bank account numbers and sort codes, rather than names, were used to identify recipients of payments through CHAPS. The volume of transactions conducted through the system daily made manual checking impossible within the short timescale required.

There was no evidence that the bank was responsible for any error in transmission of the funds nor that its employees were negligent. It had faithfully discharged its mandate and the payment had ended up with the wrong recipient because the company had given the wrong account number and sort code.