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Anu Arora, Contractual and Tortious Liability in EFT
Transactions in the United Kingdom, 1 L. Computer &
Artificial Intell. 291 (1992)

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Law, Computers &Artificial Intelligence, Volume 1, Number 3, 1992

Contractual and Tortious Liability in EFT

Transactions in the United Kingdom

ANU ARORA
Faculty of Law, University of Liverpool, UnitedKingdom

ABSTRACT This article attempts to examine the legal aspect of the

electronic funds transfers systems with respect to the existing contractual
and tortlous duties owed under the banker-customer relationship. The
implications of the Voluntary Code of Banking Practice on this relationship
are also examined.

The Basic Contract in the Banker-Customer Relationship

The banker-customer relationship Is embedded In contract and it
consists of a general contract which is basic to all transactions together
with any number of special contracts which arise only as and when they
are brought into effect by express agreement.
The main difference between obligations that arise under the
general contract and those that arise under the special contract is that
the general contract governs those undertakings that a bank is obliged to
provide (e.g. deposit account facilities) and the special contract governs
those facilities which the bank may agree to provide by specific
agreement (e.g. letters of credit, foreign currency, banker's drafts, etc.).
The nature of this general contract is based mainly on an implied
contract and the courts have had to determine the extent of the implied
contract by imposing certain terms. The customer is, however, asked to
sign a general mandate when he requests an account to be opened for
him. Whilst the mandate form will contain some of the terms of the
contract, such forms do not attempt to define exhaustively the terms
imposed on the parties. Otherwise no written terms or obligations are
reduced to writing.

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ANUARORA

The bank's implied obligations towards the customer are, therefore,

both central and essential to the banker-customer relationship. The
following obligations are implied by the courts:
" the duty to conform to the customer's mandate, e.g. to make payment
in accordance with any cheque drawn by the customer within a
reasonable time;
" the duty to render statements of account either periodically or when
requested;
" the duty to preserve confidentiality in respect of the customer's affairs;
" the duty to act with reasonable skill and care in handling banking
transactions on behalf of the customer.

Express Terms Imposed on the Customer

The general contract will be reduced to writing with the bank Imposing
its own terms each time a special facility Is offered, e.g. cheque and credit
cards are issued subject to the bank's own terms; letters of credit are
issued subject to the customer entering into a written contract. Any
agreement evidenced in writing and which a customer signs will be
binding on him, whether or not he has read the document.[1] Any
ambiguities are, however, likely to be resolved in favour of the customer
and any standard terms subject to the Unfair Contract Terms Act 1977.
Subject to these rules, however, a bank may by express agreement
seek to Impose liability on the customer for loss or damage resulting to
the customer. In Tai Hing Cotton Ltd v. Liu Chong Bank Ltd [2] the Privy
Council examined the nature of express written terms on the strength of
which the bank sought to impose an obligation on Its customer to verify
his bank statements and to notify the bank of any discrepancies within a
specified time limit. In the Tai Hing case the plaintiff company had
current accounts with three Hong Kong banks on which forged cheques
had been drawn over a period of six years by a dishonest employee. All
the banks had terms of business by which monthly statements were
deemed to be correct unless the customer notified the bank of any error
within an agreed period. The Privy Council held that although under the
general law the customer's account could not be debited, the
effectiveness of the express terms agreed between the parties had to be
examined. The learned judges concluded that the terms that sought to
Impose a positive obligation on the customer to check his statements
(and to notify the bank of any error were contractual terms) did not
constitute what had come to be called "conclusive evidence clauses" and
were therefore not binding. The Privy Council held that the terms were
not such as to bring home to the customer the importance of the
Inspection he was being expressly or Implicitly Invited to make, or that
they were intended to have conclusive effect against him Ifhe raised no

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 LIABILrrY INEFr TRANSACTIONS

query, or failed to raise a query in time, upon his bank statements. The
test to be satisfied by the bank In such circumstances is rigorous but it
must be so because:
the bankers would have their terms of business so construed as to
exclude the rights which the customer would enjoy if they were not
excluded by express agreement.(p. 959)
Once an agreement has been reduced to writing the courts will give effect
to the express terms of the written document and oral evidence will not
be permitted in order to establish a different intention. In such
circumstances the question arises whether an obligation of verification
on the customer which is properly Incorporated in the contract with the
bank can be challenged as being invalid under the Unfair Contract Terms
Act 1977. Section 3 of the Act imposes a test of reasonableness to
contracts in which one of the parties is a consumer or which embody
standard terms of another or is an attempt to render contractual
performance substantially different from that reasonably expected, or to
render non-performance.
The Act applies to the provision of goods or services, including
banking services where one of the parties acts in the ordinary course of
business. The Act also applies to situations where a short time limit is
imposed on one of the parties within which claims may be brought or
defects notified. A clause which limits or restricts the rights of the other
party will only be valid if it is reasonable. Moreover, if the bank is
negligent (whether in breach of its contractual obligations or in breach of
its tortious duty of care) then any term excluding liability Is also subject
to the test of reasonableness. The test applies not merely to terms
defining the bank's duties but also to terms excluding liability for breach.
The onus of proving reasonableness is on the bank and the court
may have regard to a number of factors set out in section 11(5) of the
Unfair Contract Terms Act, including the bank's resources and ability to
underwrite its losses. The section also provides that whether a term
incorporated In the contract is reasonable or not will depend on the
circumstances that were or ought reasonably to have been known to the
parties at the time the contract was entered into.
Additionally, the courts will set aside contracts entered into because
of the undue Influence of the other party of which are the result of
inequality of bargaining power.[3]

Electronic Funds Transfers

The automation of the methods of money transfer has been twofold.
Initially the banks were Involved in the automation of the Internal
processes of the payment instruction; this was done by the
standardisation of payment mandates (e.g. the cheque) and the

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ANU ARORA

automation of the cheque clearing process. The automation of the

Internal banking procedures has also led to the development of
instantaneous payments systems between the banks (Chaps) and the
payment of cheques against the transmission of electronic data, Instead
of payment against the physical presentation of cheques. Automation of
the methods of funds transfers has now been extended to the customer
who can gain access to the bank's central computer to give instructions
(e.g. the automated teller machines, ATMs, which allow him not merely to
withdraw money but to order bank statements, pay bills and transfer
funds from one account to another).
The advantages to the customer of electronic funds transfers (EFTs)
have been Immense. They range from greater competition amongst the
banks and building societies In the provision of services; expanded
consumer choice in the alternative methods of payments; greater
convenience for the customer by the provision of financial services over
a larger geographical area (many of the ATMs are sited in remote areas
where banks would not keep a branch open) and in greater numbers;
greater security because people tend to carry less cash and fewer cheque
books with them; and the potential to reduce costs with banks relying on
fewer staff.
The introduction of several complex EFT systems has meant that the
nature of the general banker-customer relationship and the contractual
Implications will necessarily undergo change. The complexities of the EFT
systems necessitate that each payment method is operated through
Independent contracts which will require the banks internally to reach
express agreements with the providers of software, between themselves
in relation to the operation of each system and with their customers. It is
now Intended to concentrate on the Impact of some of these very
different systems.

Cheque Truncation
It has only been possible for the banks to cope with the Immense volume
of cheques being presented through the clearing system by the extensive
automation of the clearing system which has involved relying largely on
magnetic Ink character recognition (MICR) which can be read by
reader-sorter machines used for clearing cheques. Cheques and deposit
slips are both pre-printed with the bank and branch number, the account
number and the cheque number and when a cheque is deposited for
collection, the account number on the deposit slip and the amount of the
cheque are also added in machine-readable form. This enables cheques
to be processed automatically at the clearing house. The information is
used to record a debit and credit for the drawer and payee, as well as a
net debit and credit for the banks Involved. After this accounting
procedure Is completed the cheques are taken to the branch on which

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 UABILYY IN FF TRANSACTIONS

they are drawn In order to give that branch an opportunity to decide

whether the cheque should be honoured or not. If the cheque is
dishonoured then the accounts are reversed and an adjustment made to
the inter-bank settlement. The courts have held that payment is not made
on the cheque until the branch where the account is kept has had an
opportunity to decide whether or not the cheque should be paid; until
then the initial crediting and debiting of the accounts is provisional.
Although there has been considerable automation of the cheque
clearing process the increase in the volume of cheques and the need to
physically present each cheque to the paying bank places a strain on
banking resources and time. In an attempt to reduce this burden banks
have Introduced a system of cheque truncation.
Cheque truncation is a system which allows the collecting bank to
transmit electronic data captured from the cheque which a customer
pays into his account for collection (e.g. the payee's name, the payee's
account number, the amount of the cheque, together with similar
information relating to the drawer, e.g. the account number to be debited,
his branch sorting number, the drawer's name, etc.). The cheque Is then
kept either at the collecting bank or at a central depository. The cheque
may be truncated either at the branch of the collecting bank where it is
presented for payment or at the head office of the collecting bank. The
cheque truncation system does away with the need to present the cheque
physically for payment; instead payment Is made on the strength of
electronic data transmitted between the banks. Although the Committee
on Banking Services: Law and Practice Report (Cm 622) recommended
that banks should proceed towards full truncation, payment made
through the truncation system is (under the existing law) In breach of a
number of provisions In the Bills of Exchange Act 1882. Some examples
are given below.

Section 45 of the Bills of ExchangeAct 1882

Under the existing law the collecting bank must present the actual
cheque for payment if the bank is not to be held in breach of s. 45 of the
Bills of Exchange Act 1882, or in breach of contract. Section 45 of the Bills
of Exchange Act 1882 requires: "a bill [including a cheque] to be duly
presented for payment" and "the bill must be presented at the proper
place". Under the existing law and practice only actual physical
presentation will satisfy the requirement of due presentment. Section 45
sets out rules for ascertaining the place of presentment. Where the place
for presentment is specified on the bill, that Is the proper place; but
where no place for presentment Is specified but the address of the
drawee or acceptor is given on the bill, then that is the proper place of
presentment. The courts have examined the meaning of presentment and
in Griffin v. Weatherby [4] Blackburn J. said "Presentment for payment

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ANU ARORA

must mean presentment according to mercantile usage; the document

itself must be presented, though not the holder". Again Barclays Bank plc
v. Bank of England [5] indicates that the collecting bank's duty of
presentment is not discharged until the cheque Is physically handed to
the drawee bank.
The system of cheque truncation is based on the payment of the
cheque on the strength of data transmitted electronically. It would seem
that s. 45 of the Bills of exchange Act and the judicial decisions require
the cheque to by physically presented for payment and the collecting
bank will not be discharged because under the cheque truncation system
payment will not be made against a cheque which has been actually
presented to the paying bank or the drawee branch. However, it should
be remembered that banking practice plays a significant role in the
attitude of the courts and once banks can show that cheque truncation is
established banking practice the courts may take account of that
practice. Moreover, s. 45 does not refer to presentment of the cheque (or
other instrument) and it is, therefore, likely that presentment by
electronic data will be sufficient presentment within the wording of the
section provided the banks can establish that cheque truncation is part of
established banking practice.
As an alternative presentment for payment may be waived in
accordance with s. 46(2)(e) which provides "Presentment for payment is
dispensed with ... by waiver of presentment, express or Implied". It may
be that banks can persuade customers to waive the actual presentment of
cheques by express agreement.
Conversely, the paying bank Is under an obligation to its customer
(implied from banking practice) to pay cheques drawn by the customer
only on presentation of the instrument (presentation of the Instrument
must be within a reasonable time).[6] Ifthat means physical presentment
of the cheque then the paying bank may be liable to Its customer because
it pays without a mandate.
If Is, therefore, questionable whether under the existing law the
paying bank could debit the customer's account, as of right, if merely
electronic data is presented and payment made relying entirely on that. If
the bank does not comply with its obligation under s. 45, both the drawer
and Indorser (who are secondarily liable on the bill) are discharged from
any liability. However, banking practice may once again be taken into
account.

Section 59 of the Bills of ExchangeAct 1882

Where a cheque is not physically presented for payment by the collecting
bank a further question that must be resolved is whether payment is
made in due course under s. 59 of the Bills of Exchange Act?

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 LABILITY INEFT TRANSACTIONS

The Act defines "payment in due course" as: "payment made at or

after maturity of the (cheque], to the holder thereof in good faith and
without notice that his title to the bill is defective". The definition does
not require the physical presentation of the cheque for the payment to
have been made in due course provided all the other requirements are
satisfied, i.e. payment is made after the date of Issue, in good faith, etc.
However, banking practice has established that cheques and other
instruments are physically presented for payment and until banking
practice is altered in the course of time cheques must be physically
presented for payment to be in "due course". Additionally, payment must
be in good faith and without notice of any defect In the holder's title.

Section 60 of the Bills of Exchange Act

Section 60 of the Bills of Exchange Act states that where a bank In good
faith and In the ordinary course of business pays a cheque on which an
endorsement Is subsequently found to be forged or unauthorised, the
payment will be treated as having been made in due course. The question
that must be asked is whether payment of a cheque through
electronically transmitted data can be treated as payment in "the
ordinary course of business". The question that has caused some
discussion Is whether a bank can claim protection under s. 60 If it has
acted negligently in making the payment. The section does not specially
provide that a bank must act without negligence, and so it appears that
negligence is not incompatible with good faith. In Carpenters'Co. v. British
Mutual Banking Co. Ltd (71 Branson J. found that the defendant bank had
paid the cheques In good faith and in the ordinary course of business and
was, therefore, protected by s. 60, notwithstanding Its negligence In
collecting the cheques on behalf of the plaintiff's clerk. The judges of the
Court of Appeal were divided on the Issue whether negligence by the
paying bank precludes the protection of s. 60. Mackinnon LJ. said:
A thing that is done in the ordinary course of business may be done
negligently; but I do not think the converse is necessarily true. A thing
may be done negligently and yet be done in the ordinary course of
business.
However, Greer L J. did not agree with the view that a bank could be
protected by s. 60 where It had been guilty of negligence. He took the
view that a bank could not argue: "when acting negligently, that it was
acting in the ordinary course of business".
It is generally thought that the view of the majority in the Carpenters'
case is more acceptable, so that provided a bank acts "in the ordinary
course of business" in paying a cheque it is protected by s. 60 even
though it Is guilty of negligence. However, a bank that pays In obviously
suspicious circumstances will lose the protection of s. 60. In Auchteroni

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ANUARORA

and Co. v. Midland Bank Ltd [8] the court held the bank was justified In
paying over the counter a bill for £876 9s. but it was suggested that a
different course might have been adopted if a bill for a larger amount had
been presented by an office boy or a tramp. In Baines v. National
ProvincialBank Ltd [9] a cheque paid five minutes after closing time was
held to be within the ordinary course of business.

Section 80 of the Bills of Exchange Act 1882

Section 80 will protect the bank If it pays a cheque in "good faith and
without negligence" and payment Is made to another bank. There is no
requirement that payment must be made In the ordinary course of
business and once a system of truncation has been implemented It would
not appear to be negligence to pay under it. If,however, payment through
the presentation of electronic data ignores an account payee crossing or
payment is made to someone other than the named payee then the bank
will be held liable for negligence.

Section 4 of the Cheques Act 1975

The collecting bank Is likely to be able to rely on s. 4 if under a system of
truncation a collecting bank collects cheques that are subsequently
discovered not to belong to the customer on whose behalf it has
collected the cheque. The Act, however, requires the bank to act In "good
faith and without negligence".
Until the existing law is altered by legislation such issues will have
to be resolved by express contract with the bank's customers. The Jack
Committee Report on Banking Services recommended that legislation
should be Introduced to enable cheque truncation to expand. In the
absence of legislation, the Jack Committee recommended that banks
should proceed with truncation by obtaining the express consent of the
consumer. Any such standard terms will then be subject to the Unfair
Contract Terms Act. The express contract will need to deal with Issues
such as (i) the extent of Information that will be transmitted by means of
truncation; (ii) the time period for which the cheque will be kept In
storage In case reference has to be made to the instrument; (iii) the
extent of the bank's liability (and which bank will be liable) where the
cheque Is discovered to be a forgery and that forgery could have been
detected if the cheque has been physically presented will have to be
determined; and (iv) the customer's right to countermand the cheque will
have to be determined.
Finally, the Jack Committee recommended that customers who do
not give their consent to cheques being truncated should be required to
pay the full costs of the presentation.

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 LABILITY INEFT TRANSACTIONS

Electronic Funds Transfer/Points of Sale

A system of EFT payments that Involves the customer in having direct
access to computer terminals is the EFT/PoS (point of sale). The system
enables the customer to make payment for the purchase of goods or
services instantaneously by electronic transfer of funds from his account
directly to the retailer's or supplier's account. A pilot study of the
EFT/PoS system was undertaken in 1989, at locations in Edinburgh, Leeds
and Southampton.[10] Some 500 retailers agreed to participate In the
inaugural service. Although plans for a national EFT/PoS system have
been abandoned in the UK, many European countries have developed
national EFT/PoS systems.
Instead, the UK banks have, in competition, developed Independent
systems. Three banks, National Westminster plc, Midland and the Royal
Bank of Scotland became the founder members of Switch. In 1989, Lloyds
Bank plc signed a four-year agreement with the do-it-yourself chain B & Q
to Introduce EFT/PoS transactions and Barclays Bank plc Introduced the
Connect debit cards. In 1990 Barclays Bank also signed to become a
member of the Switch scheme.
The Switch system is intended as a cost-effective replacement for
the cheque, free of the percentage charges that are levied on credit card
transactions. The system offers a means of processing debit card
payments electronically, but does not require on-line real-time
connections. Switch transactions are held at the retailer's terminal for
subsequent transmission to the bank acting as merchant acquirer. The
appropriate debit (to the consumer's account) and credit (to the
retailer's account) are handled on a bilateral basis between the two banks
concerned. Authorisation for transactions over the cheque guarantee
limit or local floor limit can be obtained through the terminal or by
telephone.
A national EFT/PoS on-line system would (in the absence of
legislation) Involve the making of a number of separate contracts, and the
terms of all of them would have to be consistent if the system were to
work successfully.
The first and simplest contract would be that between the retailer
and the customer who purchases goods or services from him to be paid
for by EFT/PoS. A question of significant Importance which would arise
under this contract would be whether the supplier (retailer) having
accepted payment for goods or services provided by him, by means of a
direct transfer Into his account by the customer's bank, waives his right
against the customer to sue for payment if for any reason the card-Issuer
(bank) fails to complete the payment.
An analogy may be drawn with a payment under a commercial
documentary credit. Ifan undertaking given by the issuing bank under the

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letter of credit is considered to be absolute payment of the amount owed

to the seller, the buyer is under no further liability to the seller of goods
once the credit is opened by the issuing bank. In that situation the seller
has no redress against the buyer if the issuing bank subsequently fails to
make payment on the credit. It has, however, been held that the issue of a
letter of credit constitutes conditional payment only, and if the issuing
bank falls to honour the seller's bill drawn in conformity with the credit,
the rights of the seller against the buyer to Insist on payment in cash will
revive. In Re Charge CardServices Ltd (11] the Court of Appeal upheld the
decision of Millett J., and said that payment by means of credit card is
not, like payment by cheque, conditional on the ultimate payment by the
bank. It Is complete when the sales voucher Is signed and the customer
cannot be made liable If the card issuing company goes Into liquidation
and falls to mpake payment to the retailer.
The second contract would be the pre-existing one between the
customer's bank (the paying bank) and the customer. Under this contract
the customer would be authorised to draw against his account with the
bank by initiating payments to retailers who have EFT/PoS terminals. The
payments would be initiated by the customer using a credit or debit card
and a personal identification number (PIN) given to him by his bank, and
the bank would undertake to make the payment indicated if the
customer's account is sufficiently in credit or if the payment is within the
limits of the customer's agreed overdraft.
If a credit card were used to make an EFT/PoS payment, it would
then be the customer's credit card account which would be debited;
arrangements for such EFT/PoS payments with the credit card company
having been agreed. The customer would then make the payment on
receipt of the credit card statement In the normal way.
If the person or organisation which issued the EFT/PoS card were
different from the customer's bank (the paying bank) the customer would
enter into a contract with the card Issuer setting out the terms under
which the card might be used and the obligations of the customer.
The third contract would be made between the retailer and his bank
(the receiving bank) and would be entered into when the bank sponsors
him for admission to the EFT/PoS system and the retailer is equipped
with a terminal connected to the necessary British Telecom land lines.
This contract would provide that the receiving bank will collect amounts
payable to the retailer under the EFT/PoS system. The bank would also
undertake to credit the retailer's account on receiving payment vouchers
or payment Instructions from him, but the credit would be made available
to the retailer only after a certain Interval to enable the receiving bank to
collect payment.
The fourth contract necessary for the operation of the EFT/PoS
would be a master contract between all the members (whether banks or
other financial institutions) of the EFT/PoS service. Under this contract

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 UABILITY INEFT TRANSACTIONS

the banks or other participating financial institutions would undertake to

make payments to each other after they have committed themselves to
the relevant retailer after payment instructions by their customers have
been transmitted, received and approved.
The fifth contract would exist between the members and the
organisation operating the scheme. This contract would govern the
operation, and to some extent the success of the whole EFT/PoS scheme.
Members would have to agree with the organisation on the distribution,
between themselves, of losses caused by the abuse or malfunction of the
EFT/PoS operating rules comparable to, but of necessity more complex,
than the Chaps clearing rules. Finally, If an institution which Is not a
member participates in the national EFT/PoS service it will be necessary
for It to enter Into an agency contract with its sponsoring bank containing
appropriate indemnity undertakings for the protection of the bank.

Damages Recoverable from the Receiving Bank

The collecting bank's liability in damages to its customer if it fails to
receive and credit a payment to his account, either because of
carelessness or a malfunction of the electronic system to which it is
attributable, is likely to be limited to the amount that would have been
credited to the customer if the Intended payment had been properly
completed. The customer's loss will be the amount of the payment he
does not receive or, Ifthe payment Is in fact made later, his loss will be
the use of that money (that is, the Interest) for the period of delay. The
Banking Code of Practice provides that a customer may recover
consequential loss.
On the other hand, Ifthe intended payee informs the receiving bank
In advance that the expected payment is essential for the conclusion or
carrying out of a transaction, or that the intended payee will suffer
additional loss if payment is not received and credited promptly, It could
be argued that he may recover the amount of the loss he actually suffers
if payment is not completed because of the receiving bank's negligence or
the defective condition of its equipment for which it Is responsible.
In addition to the contractual duties the paying and receiving banks
owe to their respective customers, there Is the possibility that they may
also owe duties to each other's customers to exercise reasonable skill
and care in making and receiving EFT. In the case of a Chaps system the
debtor (payer) gives Instructions to his bank (either by writing or
telephone) to transmit a payment to his bank, and acting through its head
office the payment is transmitted to a central gateway which is used to
route the payment instruction to the creditor's bank. It Is an Integral part
of the Chaps system that the receiving bank should acknowledge
successful transmission of the payment instruction and if it falls to do so
it may be held liable in negligence to the debtor (payer), since a failure to

301
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acknowledge receipt will result in the payment lapsing. The courts have
in the past been reluctant to hold that a bank owed any duty to a person
(third party) who was not a customer, and have ruled that the fact that a
bank breaches a contractual duty of care to its own customer does not
entitle a third person, who Is a party to a transaction with that customer
and who suffers loss In consequence, to recover that loss from the bank.
However, there has been a considerable judicial expansion in the
scope of the tort of negligence, and plaintiffs who have suffered loss as a
result of the failure by persons who supply services to exercise proper
skill and care, have been held entitled to recover damages from those
persons, even for economic loss, despite the absence of any contractual
relationship with them.[12] In Vianni v. Edwin Evans & Son [13] It was
held that the defendants were liable to plaintiffs (and third parties) with
whom they had no direct relationship. It was sufficient that the
defendants should have had the third parties in contemplation as being
likely to be Injured by their carelessness.
It is therefore no longer safe to assume that a payer who employs
his bank to make a Chaps payment has no claim against a receiving bank
which falls to process and collect the payment after an appropriate
payment message has been transmitted to that bank, if the consequence
is that the payer loses the benefit of a commercial transaction with the
receiving bank's customer.
Conversely, it Is a reasonable deduction from the recently decided
cases that an Intended recipient of a Chaps payment may have a claim
against the paying bank If, owing to that bank's negligence, the payment
message Is not properly transmitted and payment is not made on the
same settlement day, and the intended recipient suffers loss In
consequence (for example, because of the payer's subsequent
Insolvency).
If such an action can be brought under the law of the tort of
negligence, It would appear that the measure of damages recoverable
would be the loss suffered by the claimant which was reasonably
foreseeable at the time of the negligent act or default. This would appear
to be the same measure of damages as would be recoverable by the payer
or Intended recipient from his own bank for breach of contract.

Tortlous Llability of a Bank to a Third Party

A bank owes to the customer a duty to exercise proper skill and care (in
contract and in tort) in carrying out any business it agrees to transact. A
bank must undertake certain minimum services, but there Is no limit on
the extent of its duties which will depend on any express undertakings
between the bank and customer. To satisfy the duty of care, the standard
of skill and care which bank officials must exhibit when acting on behalf

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of the bank is that reasonably expected from officials of that standing and
competence.
The precise circumstances in which a bank owes a duty of care is
difficult to determine, but if the bank represents to its customer that it
will undertake a certain business activity, for example by advertising
generally, or if the bank undertakes certain transactions specifically on
the customer's behalf, the duty to take reasonable and proper care
attaches. The considerable diversification of banking business in recent
years has weakened any contention that banking is necessarily confined
to the traditional activities of banks. Generally banks now undertake to
give investment advice so if negligence can be shown in that connection
the Injured customer will have a court of action.
However, the law was somewhat unsettled before Woods v. Martines
Bank Ltd [14) and In the early case of Banbury v. Bank of Montreal [15](in
which the facts were similar to the Woods case) the court held that
because the bank's manager had no duty to advise the customer on
investment matters, he did not owe a duty of care, and the defendant
bank was not in breach of its duty of skill and care owed to the customer.
In this case the court said it is not part of an ordinary banker's business
to give advice on investments generally, but where a banker has special
means of knowledge in the situations in question, it is not out of the
ordinary course of business for the banker to owe a duty of care in giving
advice. Furthermore, if a bank's knowledge is based on its personal
pecuniary interests, the banker can give advice so long as full disclosure
of the facts known to it is made to the customer.
The measure and skill required of the bank depends on the extent of
the facts known to it, but if a bank with knowledge of the complexity of
the matter undertakes to give advice but entrusts the task to
inexperienced officials, the bank will be liable for the negligence of its
officers, whether the payment is made by the bank honouring the cheque
drawn by a customer or by an EFT initiated by the customer.
The bank's duty to use skill and care also requiresit to-take proper
precautions and to organise its business appropriately so as to ensure
that the services it undertakes to provide are carried out efficiently. In
the case of Chaps and EFT/PoS payments, this Is likely to impose an
obligation on the paying bank to ensure that the designated receiving
bank has funds made available to It on the same day as the mandate to
make the payment is given, provided the payer's Instructions reach the
bank before the advertised cut-off time (e.g. for a Chaps payment that is
3.10 p.m.). The question arises whether the paying bank's obligation to
make payment on the day on which it receives the customer's instruction
is absolute, so that If it does not do everything necessary on its part to
ensure the availability of funds to the receiving bank for the benefit of the
payee on the same day, it commits a breach of contract with its
customer.

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It seems likely that the paying bank's duty is the more limited
obligation to exercise proper skill and care to ensure that funds are made
available on the same day. If with a Chaps payment the paying bank's
failure to effect a valid payment and transfer of funds is attributable to
the receiving bank (for example, failure to acknowledged the receipt of a
payment message so that it is not included in the settlement for the day),
the paying bank will not be liable to its customer if it has acted
reasonably in attempting to make payment. This includes at least an
attempt to pass the message a second time to the receiving bank's repair
centre by using its distinctive sorting code number.
If the reason why a payment message has not been sent is that
instructions received by the transmitting branch of the paying bank have
accumulated to such an extent that they cannot all be transmitted before
3.10 p.m. when Chaps payment messages close for the day, it Is
questionable whether the paying bank would be liable to the payer for
failing to fulfil his Instructions If they are carried out as speedily as
possible the following day. In any event, banks should as a general rule
advise customers that whilst all reasonable attempts will be made to
transmit payment to the receiving bank on the same day as the payment
instructions is received, the bank will not be liable where it is prevented
from transmitting and making the payment of the same day by
circumstances beyond its control, for instance, if freak weather
conditions were to prevent payment messages from being transmitted.
It would also appear that if the paying bank warns its customer
when an Instruction is given that owing to congestion of business the
payment may not be sent that day, the bank is not liable if the customer
persists with the instruction, for he then takes the risk of late payment on
himself. The scope of the paying bank's obligations must at present be
determined by the payment obligation, and its duty to exercise skill and
care must be ascertained with regard to the circumstances in which each
Instruction Is given.
In addition to operating its equipment for making Chaps and other
EFT payments efficiently, the paying bank owes a duty to its customers to
exercise reasonable skill and care to ensure that Its equipment Is
adequate to communicate payment messages and to settle payments, and
to maintain that equipment properly. This duty would appear to be
absolute in so far as concerns the paying bank's terminal and modem, so
that it will not be sufficient for the bank to exercise reasonable care In
appointing technical advisers and engineers if they do not carry out their
tasks with appropriate skill and care. The paying bank's duty is to
provide reasonably adequate and effective equipment; it will be liable for
loss suffered by Its customer if the failure to transmit a payment message
and to settle payments that have been transmitted on the same day is
caused by the bank's failure to discover or to remedy defects in its Chaps
or other terminals, or due to a malfunction in the equipment that is not

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remedied because of the fault of the bank's contractors appointed to

maintain the equipment. Therefore, merely appointing independent
contractors will not be sufficient to avoid the bank's liability for a failure
to maintain the payment terminals.

Banks Uablllty for Acts of Third Party

The bank, however, has no control over the British Telecom lines or the
package switching systems for EFT systems, or over the receiving bank's
equipment and If a payment Is not made, or is made incorrectly as a
result of a defect in that equipment, the paying bank will not be liable in
damages for that reason alone.
However, the failure of a payment message to reach the receiving
bank or to reach it in the correct form should be apparent to the paying
bank, either because the paying bank does not obtain the receiving
,bank's acknowledgement of the message transmitted, or from the
settlement figures for the day's work which are made available to the
bank after the close of business. If the bank then fails to do what is
reasonably practical (for example, repeating a failed payment message or
sending a repeat message to the receiving bank's repair centre), the
paying bank will be liable in damages to its customer. Moreover, the bank
will be unable to debit the customer with the amount of the payment
because of its failure to conform to the customers mandate.

Bank's Uabillty for Its Employees

If an instruction to make a Chaps or other EFT payment has not been
carried out, or has been incorrectly carried out as the result of the act or
default of the paying or receiving bank, or of a person for whose acts It is
responsible (for example, a bank employee), the bank Is liable In damages
to its customer for breach of contract, and may also be liable to the other
bank's customer in tort. The paying or collecting bank will also be liable if
a payment Is made through Chaps without any Instruction or mandate
being given by the paying bank's customer, or where a mandate Is given
but the bank employee acts In a manner not in conformity with such an
instruction. The person for whom banks are responsible include their
respective employees acting in the course of their employment, even
though exceeding their function and even though acting fraudulently.
The banks are also responsible for the failure of Independent
contractors employed by them to advise, Install or properly maintain the
equipment required to make and receive Chaps and other EFT payments,
because of the obligation on them to ensure that their equipment is
adequate and operates effectively.
It is clear, however, that the banks will not be vicariously liable for
the failure of British Telecom to provide and properly maintain the land

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line links between the bank's terminals for operating Chaps and the
packet switching unit which enables payment messages to reach the
correct destinations. British Telecom constructs, maintains and operates
the electronic telecommunication and data processing services which it
provides under statutory powers In exercise of its qualified monopoly. It
Is not liable In tort for any loss or damage suffered by any person as a
result of Its failure to provide a telecommunication service or for any
delay In so doing, nor for any failure, Interruption, suspension,
restriction, delay or fault in any telecommunication service it provides.
British Telecom is in exclusive control of the land lines and packet
switching system that form part of the Chaps network, and It acts on its
own behalf In operating them and not on behalf of the settlement banks
that use Chaps. It follows that apart from any contractual undertakings
the banks may give to their customers as to the correct functioning of the
British Telecom land lines and packet switching system, they incur no
liability for the failure of a Chaps payment.

Regulation of Electronic Funds Transfers

The Secretariat of the United Nations Commission on International Trade
Law (UNCITRAL) In its guide on EFT concluded that
the new technology requires an. adjustment of the law in regard to
such matters as the periods of time within which various actions are
to be taken, the presence or the absence of liability arising out of
computer failure at one of the banks, clearing-houses or
communications networks, the time when a funds transfer becomes
final and the consequences of finality.

Standard Form Contracts

The Jack Committee [16] was against the introduction of standard term
contracts even for business customers in the UK. Nevertheless, banks
have tended to introduce written standard terms when issuing cheque
cards and other services. The question that must be asked Is whether
there Is likely to be an extension of the standard term contract with the
expansion of EFr transactions. To some extent this is unavoidable
especially where several parties are Involved in the EFT method of
payment used. The EFT/PoS system, for example, will involve several
parties In a complex contractual relationship. The simplest contract will
be between the customer and the retailer who agrees to accept payment
by the EFT/PoS method. However, contracts will also be settled between
the customer and his bank, which allows the customer's account to be
debited by EFT/PoS; the retailer's bank and his customer, which allows a
corresponding credit to the retailer's account; the customer and supplier

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of the plastic card (if someone other than the bank) to access to the
EFT/PoS system; a master contract between the banks to operate the
EFT/PoS system and allow instructions to be processed; and a final
contract between the providers and users of the software, including
British Telecom for land lines which connect the computer terminals. In
order to enable an EFT/PoS system to operate it is essential that parties
enter Into contracts that are consistent with each other.
Where a party enters into a transaction on the standard terms of
another any attempt to restrict, limit or exclude liability Is subject to the
Unfair Contracts Terms Act 1977, and this will subject the relevant
clauses to the test of reasonableness.

Malfunction
Issues involving security and malfunction are bound to arise in
connection with EFT systems. Members of the public are less familiar
with EFT methods of funds transfers and this in itself may cause
problems. Further EFT systems are open to interception or unauthorised
use. The Issue of 'phantom withdrawals' from bank accounts by use of
plastic cards and the ATM has caused considerable problems. It is an
area where disputes are regularly referred to the Banking Ombudsman
and the National Consumer Council. The Jack Committee recommended
that banks should be liable for direct loss resulting from an EFT system
malfunction. A bank will not be liable where the loss is the result of the
customer's negligence or where the customer realises that the automated
system has not properly processed his mandate or some event beyond
the control of the bank has prevented the mandate from being carried,
e.g. fire or some act of God, or industrial dispute known to the public.
Malfunctions will no doubt always occur and therefore need to be
dealt with within an adequate framework of legal principles or regulatory
guidelines.

Fraud and Security

The plastic debit or credit cards through which the customer gains
access to computer terminals are extremely convenient but this
convenience lends the card to theft loss or other misuse. EFT systems of
payment need to supply an automatic means of identification. The
existing systems tend to rely on machine-readable plastic cards with
personal identification numbers (PINs) in order to gain access to an
account. PINs are only secure so long as the customer can ensure their
secrecy. The Jack Committee was concerned with the level of security
and recommended that banks continue to work towards the development
of secure EFT systems and work has been done In the development of
analysis of voice-prints, patterns in the retina, etc. In several countries,

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ANU ARORA

Including the USA, France and Japan experiments have been done In the
development of the 'smart card', a card containing a microprocessor and
memory which can record Information about the customer and
transactions using the card.
Individual banks, In the UK, have established their own terms and
conditions of liability for loss caused by the fraud or unauthorised use of
EFr systems. In fairness to the customer the Jack Committee took the
view that legal rules were necessary to deal with risk liability.
At present, sections 83 and 84 of the Consumer Credit Act 1974
limits the liability for misuse of credit and debit cards to £50. Moreover,
the Act provides that a customer's liability should cease from the
moment he notifies the bank of the loss of the card and/or compromise of
the PIN, or notification of an erroneous entry in a bank statement whether
or not It Is combined with the discovery of the loss of the card and
compromise of the PIN. The Jack Committee recommended that the limits
of legal liability for loss due to fraud should be similar to those
established in the Consumer Credit Act 1974. Moreover, the Committee
recommended that the bank's duty should be to Its customer In any
dispute arising from a fraudulent transaction, but that the bank would
have a right of relief against any third party who contributed to the loss.
The voluntary Code of Banking Practice (adopted by the banks in
March 1992) requires that banks should be notified of the loss of cards,
or disclosure of the PIN, or a wrong entry on a bank statement "as soon as
Is reasonably practicable". Once notified of the loss, theft or possible
misuse of the card or PIN the card holder Is required to "take action to
prevent further use of card". Moreover, card Issuers will bear the full loss
incurred (I) where the card Is never received by the customer; (1) for all
transactions not authorised by the customer after the card issuer has
been told that the card Is lost or the PIN has been disclosed or is known
to someone other than the customer; (i) If,due to malfunction In the
ATM, or other system, the customer suffers a loss, unless the fault was
obvious or advised by a message or notice on display.
The card issuer's liability is limited to those amounts wrongly
credited to the customer's account and the interest on these
transactions. The customer's liability for unauthorised transactions after
the loss or theft of the card Is notified to the card Issuer Is limited to £50,
but the customer Is liable for all losses resulting from the fraud or 'gross
negligence' of the customer.

Evidence of EFr Transactions

The evidential value of computer records of funds transfers has also
caused some concern. The new technology has thrown up two problems,
namely; the question of the admissibility of computer generated
documents and the authentication problems. The Civil Evidence Act 1986

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(s. 5) and Police and Criminal Evidence Act 1984 (s. 69) provide that a
statement or document produced by a computer will be admissible if
certain conditions are satisfied. These conditions relate to satisfying the
court that the computer was at all material time working properly or if
there was a malfunction it did not affect the production of the document.

Conclusion
Although the Code of Banking Practice goes some way towards meeting
the criticisms of the Jack Committee Report, the Code fails to deal, In
detail, with questions of liability and consumer rights in case of a
disputed EFT transactions. In order to avoid the legal problems which will
arise, further legislation is required to resolve these issues.

Correspondence
Anu Arora, Faculty of Law, University of Liverpool, PO Box 147, Liverpool
L69 3BX, United Kingdom.

Notes
[1] See LEstrange v. Graucob [1934] 2 KB 394.
[2] [985]2 All ER 947.
[3] See National Westminster Bank pk v. Morgan [ 1985] AC 686 and Macaulay v.
SchroederPublishingCo. Ltd [ 1974] 3 All ER 616.
[4] (1868) LR 3 QB 753.
[5] [985]1 All ER 385.
[6] Hare v. Henty [1861] 10 CBNS 66.
(7] (1938]1 KB 511.
[8] [1928] 2 KB 294.
[9] [1927] 96 LJKB 801.
(10] Banking World, January/February 1990, pp. 28-30.
[11] [1988] 3 WLR 764.
[12] See Ann's v. London Borough of Merton [1977] 2 All 504; Ross v. Caunters
[ 1989] Ch. 297; Vianni v. Edwin Evans & Son 11982] QB 438.
[13] [1982] QB 438.
[14] [1959] 1 QB 55.
[15] [1918] AC 624.
[16] Banking Services: law and practicereport,Cm 622.

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