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Note: At the request of its customer, Bengeo Ltd. (Ordering Customer), Barclays Bank PLC (Sending Bank), in London, sent Malayan Banking Berhad (Receiving Bank), in Singapore, a SWIFT MT 103 Single Customer Credit Transfer (STP) message regarding a payment to PLG International Pte Ltd. (Beneficiary). After sending the MT 103 message, Sending Bank sent a corresponding MT 202 COV (General Financial Institution Transfer) message to Barclays New York (Sending Bank Correspondent) to begin the “Cover Method”1 of payment with Receiving Bank’s New York correspondent, JP Morgan Chase Bank, N.A. (Receiving Bank Correspondent). Upon learning that funds of Ordering Customer were potentially “the subject of fraud”, Sending Bank sent MT 192 (Request for Cancellation) SWIFT messages to cancel the payment instruction. Receiving Bank, however, had acted on the MT 103 message within hours of receiving it and credited Beneficiary’s account for USD 871,085.61. Sending Bank sent an MT 192 message to Receiving Bank titled “FIN 192 Request for Cancellation” that stated:

…PLEASE CANCEL OUR PAYMENT AND RETURN FUNDS TO OURSELVES. OR CONFIRM VIA AUTHENTICATED SWIFT THAT YOU HAVE TREATED OUR PAYMENT AS NULL AND VOID AND PROVIDE FULL RETURN PAYMENT DETAILS. WE HAVE RECEIVED A REQUEST TO RECALL THE FUNDS AS REMITTER STATING REASON AS PAYMENT WAS REPORTED AS FRAUDULENT PROCEEDS

The MT 192 message, however, reached Receiving Bank after its business hours. Sending Bank Correspondent received an MT 292 (Request for Cancellation) message from Sending Bank during its business hours and agreed to cancel the prior MT 202 COV message. On its next business day, Receiving Bank requested that Beneficiary allow it to “adjust the position to debit the funds credited”. Beneficiary refused. Presumably, Receiving Bank requested that Sending Bank reimburse to it the funds paid to Beneficiary, which Sending bank refused. Receiving Bank sued Sending Bank through an “originating summons” seeking three declarations. The High Court of Singapore, International Commercial Court, Cooke, J., entered judgment in favor of Receiving Bank, ordering Sending Bank to pay Receiving Bank USD 871,085.61 plus costs.

Summarizing the declarations requested by Receiving Bank, the Judge noted that the principal issue was:

whether an implied contract arose between [Sending Bank] and [Receiving Bank] by [Sending Bank] sending to [Receiving Bank], and [Receiving Bank] acting upon, the MT 103 STP, under which [Sending Bank] was obliged to initiate a sequence of transfers that would have ultimately led to [Receiving Bank] receiving the funds in relation to the MT 103 STP

Accordingly, the Judge began by reviewing the law of implied contracts. The effect of an implied contract is the same as that of an express contract. What distinguishes the two rests “solely in the manner in which the consent of the parties is manifested.” Such conduct is reviewed based on the surrounding circumstances, notions of reasonableness and whether, from a court’s perspective, “imply[ing] a contract…[is] necessary…because the conduct [is] not explicable on any other basis.” Sending Bank argued that its sending of the MT 103 message should not be construed “as the making of an offer to pay which could be accepted by [Receiving Bank] by paying [Beneficiary].” Sending Bank argued that to pay Beneficiary first without receiving the cover funds would be “contrary to common sense”, and noted other factors that could prevent funds reaching Receiving Bank such as correspondent screening for money laundering and sanctions violations, among others. The Judge rejected these arguments and stated:

[Within] the context of the MT 103 STP and…the supposed simultaneous sending of the MT 202 COV to a correspondent bank in New York to cover the payment instructed by the MT 103 STP, a contract is necessarily created. The contract must necessarily be implied from the sending of the MT 103 STP and the acceptance of the instruction within it, when making the payment. The only question which arises is whether there was some conditionality in the instruction… [Emphasis added]

The Judge then turned to text of the MT 103 message as well as the SWIFT User Handbook, with particular attention to the Standards regarding SWIFT messages. After reviewing the user materials specific to the MT 103 message, the Judge noted that the use of such a message, and the one at issue in the case, undoubtedly constitutes “an instruction to the Receiving Bank to pay a sum of money to the beneficiary named in it.” After reviewing SWIFT materials regarding MT 202 COV and MT 192 messages, the Judge concluded that “the sending of an MT 103 STP carries within it an implied promise to cover the payment which the Receiving Bank is instructed to make. That is why the MT 202 COV is to be issued at the same time as part and parcel of the same operation and is implicitly referenced in the MT 103 STP” message. The Judge noted that “any instruction…can be withdrawn before it is acted on” but “reimbursement must be made for a payment made on instructions.” The Judge then turned to the issue of market practice as Sending Bank argued that Receiving Bank took its own risk that it would not receive the funds when paying under the instruction and that, as such, Receiving Bank could only look to Beneficiary for return of the funds. Thus, the Judge had to decide “whether as a matter of established market practice, the implied promise to reimburse is ineffective because the instruction to pay is itself conditional upon receipt of the funds in the Receiving Bank” or its correspondent.

The Judge noted that the burden of showing a market practice rests on the party alleging it and, moreover, Singapore follows English law such that “[a] term can be implied from custom or usage where it is universal in the sense that it is generally accepted by those who habitually do business in the trade or market concerned”. Sending Bank and Receiving Bank each offered several affidavits and expert witnesses regarding the market practice issue. Through a report and testimony, Sending Bank’s chief expert witness attempted to forward the claim that, as of at least 2008, the market practice of a receiving bank was to treat an MT 103 message as “irrevocable only when the cover payment is received in its account with its correspondent.” Moreover, the expert testified that this practice developed “following the financial crisis of 2008 and the screening processes introduced for AML, counter-terrorism financing (‘CFT’) purposes and sanctions.”Receiving Bank, however, argued that market practice left the decision of whether to pay prior to receipt of cover payment to the Receiving Bank. The Judge accepted the evidence of Receiving Bank’s expert and stated that:

SWIFT merely codified the existing practices of the earlier system [of instructions to pay and reimbursement] by introducing standard message formats so as to reduce the risk of ambiguity and confusion across different banks all over the world. The SWIFT system is purely a secure structured messaging service, not a payment system, and the SWIFT Standards MT is purely formatting standards designed simply to facilitate automated processing of messages.

Ultimately, the Judge rejected the view offered by the expert for Sending Bank as the evidence was “inconsistent” and that it went “nowhere near establishing a market practice which would negate the obligation to reimburse a Receiving Bank that has paid out on the instructions of a Sending Bank under an MT 103 STP.”Sending Bank’s final argument went to the issue of illegality; namely, that had Sending Bank continued the reimbursement process given its suspicion of fraud by its customer, it could have incurred criminal or regulatory liability under English law.

On this final issue, the Judge noted that Sending Bank had offered no evidence that an actual fraud had been committed or was in fact occurring when it decided to cancel the MT 103 STP and MT 202 COV messages; additionally, Sending Bank “remained silent as to the outcome of its suspicions”. The Judge pointed out that Sending Bank had other means of satisfying its reimbursement obligation due to Receiving Bank without facilitating an illegal act once the latter acted on the MT 103 message. In summary, the Judge stated that “[t]his court would wish to encourage all banks to fulfil their obligations in respect of suspected fraud or money laundering but the possibility of a customer being involved in wrongdoing of this kind which impacts upon the bank’s own obligations to other banks is an occupational hazard.” Accordingly, the Judge ordered that the declarations sought by Receiving Bank be granted and that Sending Bank pay Receiving Bank USD 871,085.61 plus costs.

[MJK]

1
The SWIFT Standards describe this process: “If the Sender and the Receiver have no direct account relationship in the currency of the transfer or do not wish to use their account relationship, then third banks will be involved to cover the transaction. The MT 103 STP contains only the payment details and the Sender must cover the customer transfer by sending an MT 202 COV General Financial Institution Transfer to a third bank…”

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.