CHAPTER 8 – UNAUTHORISED CHEQUE PAYMENTS AND ELECTRONIC FUNDS

TRANSFERS

8.1 – INRODUCTION

 Bank-customer relationship and duties discussed in Chapter 4.

 Focus on unauthorized payments: breaches of bank mandates.
 Examines unauthorized payments with cheques.
 Explores cases of non-mandated or mandate-violating cheque payments.
 Addresses unauthorised payments via Electronic Funds Transfer (EFT).
 Analyses scenarios of electronic payments contrary to customer mandates.
 Discusses liabilities: collecting bank in cheque situations.
 Explores liability of beneficiary bank in electronic payment contexts.
 Chapter covers comprehensive analysis of unauthorised bank payments.

8.3 – UNAUTHORISED ELECTRONICE TRANSFERS

INTRODUCTION

 EFT includes credit and debit transfers, similar to cheques, as customer instructions to banks.
 Credit transfers involve the originator instructing their bank to transfer funds to the
beneficiary's account.
 Debit transfers occur when the beneficiary claims money from the debtor's bank where the
account is held.
 EFT executed through payment orders based on bank-customer agreement or general
mandate.
 Banks act as mandatories, not representatives, in EFT transactions.
 Banks must exercise reasonable care, perform mandates in good faith, and adhere to
payment order terms (common law).
 Banks obliged to maintain efficient security systems for EFT operations.
 Customers must provide clear and unambiguous payment instructions to prevent fraud or
deception (common law and Code of Banking Practice).
 No comprehensive legislation in South Africa for EFT; governed by common-law principles,
specific acts, and soft law agreements.
 Banks can unilaterally determine rules and conditions for EFT transactions, limiting their
liability for unauthorized payments.
 Payments by smart card, e-money, or electronic transfer’s processed based on account
number, unlike cheques that verify payee name and account number.
 South African banks stopped accepting cheques over R5 million from 2002, leading to a rise
in electronic fund transfers.
 Limited legal precedent on bank liability in EFT due to lack of governing legislation and
customer agreement typically assigning risk to customers.

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PAYMENT WITHOUT A MANDATE

FORGED/UNAUTHORISED PAYMENT INSTRUCTION

 Credit transfers are generally electronic, but payment instructions can be given through
various methods including bank cards, electronic devices, oral, or written instructions to the
bank.
 Risk of forgery and unauthorized payments exists with oral or written instructions.
 Instructions in computer language replace handwritten signatures, but lack of security
measures can lead to undetected alterations or transfers.
 Bank cards can be lost or stolen, enabling third parties to make unauthorized transactions.
 Banks protect themselves through agreements, allocating the risk of loss due to theft or fraud
to the customer.
 Code of Banking Practice reinforces security measures, requiring customers to keep PINs
and passwords confidential and report theft promptly.
 Customers are responsible for losses if they act fraudulently or negligently, as stated in bank-
customer agreements.
 Paying banks breaching mandates by transferring funds without authorization can be held
liable.
 In the Diners Club case (Diners Club Ltd v Singh), the court upheld the bank-customer
agreement clause, making the customer liable for amounts credited regardless of card usage.
 However, scrutiny under the Consumer Protection Act may alter such agreements in cases
where the Act applies.
 In ABSA Bank Ltd v Hanley, the bank was held liable due to its failure to apply prudent banking
practices, not the customer's negligence, regarding a fraudulent transfer.

COUNTERMAND OF PAYMENT

 Common law allows a mandator to revoke a mandate before completion

 Bank obligated to honor countermand of payment, including cheques, in bank-customer
agreements
 Electronic funds transfer (EFT) delivery time depends on bilateral transfer or clearing system
use
 Bilateral transfer immediate, but clearing system causes delay due to sorting and batching
 Originator can countermand payment instruction during clearing system delay
 No legislation governs countermanding of EFTs, unlike cheques under BEA provisions
 For intra-bank transfers, countermand notice must reach before payment into beneficiary's
account
 For inter-bank transfers, countermand possible before beneficiary's bank receives instruction
 Bank-customer agreements can restrict countermand rights, binding customer if no revocation
allowed
 If allowed, countermand can be done by not transferring funds or reversing the credit transfer
 Distinction between originator's countermand and bank's unilateral reversal of credit transfer
 Take & Save Trading CC v The Standard Bank of SA Ltd case: attempted reversal objected
by beneficiary, court ruled transfer final without beneficiary consent.

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PAYMENT CONTRARY TO MANDATE

 Unique problems in negotiable instruments, especially cheques, not found in credit transfers
 Cheques face issues like irregular/unauthorized indorsements
 BEA protects drawee bank in specific cases, like paying a crossed cheque to a non-banker
 No legislation for electronic funds transfers, originator bank lacks protection in certain cases
 Indorsements not applicable in electronic transfers, but issues like exceeding authorized
amount or transferring before the specified date can arise

PAYMENT OF A LARGER AMOUNT THAN INSTRUCTED

 Originator's mandate obliges the bank to pay the instructed amount.

 Unauthorised alteration by someone other than the originator voids the bank's obligation to
pay the increased amount.
 Customer must exercise care in preparing the mandate.
 Written payment instructions should not allow easy alteration.
 Customer negligence causing increased payment results in customer bearing the loss.
 Originator's bank bears the loss if alteration occurred without originator's negligence.
 Bank can potentially recover losses from the beneficiary or the person altering the instruction
based on unjustified enrichment, meeting specific requirements.

PAYMENT PRIOR TO THE DUE DATE

 Originator's bank liability for unauthorized payment doesn't usually arise with electronic
payments due to their immediate nature.
 Liability occurs when a customer provides oral or written payment instruction for a future date,
but the bank transfers the money earlier, breaching its mandate.
 The bank is also liable if the customer countermands the payment instruction before the due
date.
 In both cases, the bank might recover its loss from the person unjustifiably enriched by the
payment, if specific requirements for the claim are met.

RECOVERY OF UNAUTHORISED EFT

THE BANK’S RIGHT OF RECOVERY

(A) REVERSAL OF CREDIT CARD TRANSFER

 Instances often occur where banks make unauthorised, unintended, or fraudulent
transfers, leading to questions about the conditions under which these credit transfers can
be reversed.
 Banks have the authority to reverse credit transfers that were erroneously made without
the customer's authorization.
 However, the debate surrounding the reversal of credit transfers was initiated by the Take
and Save Trading CC v Standard Bank of South Africa Ltd case.
 In this case, a statement was made suggesting that once a credit transfer is made, it
becomes final and irreversible without the consent of the beneficiary.

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  This view was met with criticism from Schulze, who argued that in cases where the
beneficiary was never entitled to receive the money, their consent should not be a
prerequisite for reversal.
 Schulze highlighted scenarios such as mistaken identity, incorrect transfer amounts,
premature transfers, or transfers obtained through fraud, where reversals without
beneficiary consent would be fair and in line with public policy.
 The Nedbank v Pestana case established that completed and unconditional payments
cannot be unilaterally reversed by banks.
 However, it also acknowledged that reversals are valid in cases involving fraud or theft,
emphasising the importance of looking into the true nature of the transactions behind bank
entries.
 The Supreme Court of Appeal, in the Nissan South Africa (Pty) Ltd v Marnitz case,
distinguished the Take and Save Trading case.
 It ruled that if stolen money or funds were erroneously transferred to an unauthorised
person, the credit transfer could be reversed without the consent of the beneficiary.
 In the context of unauthorised payments, it can be concluded that credit transfers can be
reversed either with or without beneficiary consent.
 Reversals without consent are applicable in cases where it is established that the
beneficiary was not entitled to the transferred funds, indicating the invalidity of the credit
transfer.
 This position was reaffirmed in ABSA Bank Ltd v Lombard Insurance Co, where it was
confirmed that banks can employ credit transfer reversals to recover funds transferred
without authorisation or due to fraud.
 However, the willingness of a bank to reverse a credit transfer depends on the specific
provisions outlined in the bank-customer agreement, emphasising the importance of
individual case evaluations.

(B) ENRICHMENT
 Originator's bank cannot debit customer's account if electronic funds transfer breaches
common law or bank-customer agreement.
 Bank can recover money from beneficiary or fraudster in such cases.
 Principles of unjustified enrichment from cheque context are applicable to credit transfers.
 ABSA Bank Ltd v Lombard Insurance Co Ltd case example:
- Employee fraudulently transferred customer money into personal account, eliminating
overdraft.
- Respondent sought recovery using condictio ob turpem vel iniustam causam.
- Court ruled bank could resist claim using suum receipt defence.
 Payment must be made in the true debtor's name and requires an agreement between
parties.
 Effective payment by electronic means necessitates the payee's unfettered right to
immediate fund use, established by agreement or conduct.
 Debt-extinguishing agreement cannot be against good morals; invalid if both parties are
aware of payment with stolen funds.

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  Validity of payment cannot be questioned if creditor is in good faith and unaware of stolen
funds.
 Common law imposes a duty of care on collecting banks; extensive legislation against
money laundering applies.
 Further legal developments should occur through legislation, not judicial decisions.
 Payments into customer’s account extinguish debt, regardless of the method (including
electronic transfer).

THE ORIGINATOR’S RIGHT OF RECOVERY

 Absence of contractual relationship between payment order originator and beneficiary bank.
 Analogous situation to the relationship between the owner of a cheque and the collecting
bank.
 Gilbey's Distillers and Vintners (Pty) Ltd v ABSA Bank
- Issue: Does the beneficiary bank owe a duty of care to the originator, similar to the duty
of care between a collecting bank and the true owner of a cheque?
- The court held there was no probity of contract between the originator's bank and the
beneficiary bank.
- If a series of mandates is required for a payment instruction, no direct connection exists
between the first principal and subsequent intermediaries.
- Originator not in a comparable position to the plaintiff in another case (Indac Electronics
(Pty) Ltd v Volkskas Bank Ltd).
- Beneficiary bank not akin to a collecting bank, which vouches for its customer's identity.
- Plaintiff needed to establish a legal duty of care for direct compensation in case of
economic loss; court not convinced to extend liability in this manner.
 Opinions of Malan, Pretorius, and Du Toit
- Agreement with the court on the absence of a contractual nexus between the originator
and the beneficiary bank.
- Disagreement with the court's approach to liability for economic loss.
- Highlighting the issue: Matching account number with beneficiary name, supported by a
comparative study and UNCITRAL Model Law.
- Collecting bank's liability based on customer identity and overall evaluation of
circumstances.
- Argument for the beneficiary bank's professional responsibility: Expectation of reasonable
care and skill in executing payments.
- Suggestion that in the future, a duty of care might be recognised, potentially through
legislation governing electronic funds transfers.

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