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42 THE MODEL LAW ON INTERNATIONAL CREDIT TRANSFERS was adopted by UNCITRAL in 1992. A Directive based on the principles of the Model Law was issued on 27 January 1997 by the European Parliament and Council of the European Union (the EU Directive). However, there have been no further enactments of this Model Law.
43 The Model Law arose out of the development of electronic credit transfer systems.39 Prior to the development of these systems, international funds transfers tended to be made by debit transfer, through the collection of cheques and other similar instruments.40 New high-speed systems have significantly increased the number of international transfers, and highlighted concerns about the differences in the legal rules governing these transactions. The Model Law attempts to overcome these differences. In the United States, article 4A of the Uniform Commercial Code (UCC) has a similar function. The underlying purpose of these instruments, and the EU Directive, is to improve payments systems and thereby facilitate trade between States.
44 A “credit transfer” is defined in article 2(a) as the series of operations, beginning with the originator’s payment order, made for the purpose of placing funds at the disposal of a beneficiary. It includes any payment order issued by the originator’s bank or an intermediary’s bank intended to carry out the originator’s payment order. If the originator’s bank and the beneficiary’s bank are not members of the same clearing system, then the transfer must be made through an intermediary bank.41
45 The Model Law applies to those entities that execute payment orders as an ordinary part of their business (article 1(2)), and therefore is not limited to banks. This wider scope exists because in many countries non-banks, such as the postal service, operate a credit transfer service that is directly competitive with the services offered by banks. Furthermore, it was practically impossible to formulate a definition of “bank” in a manner acceptable to all countries.42 However article 1(2) does not include other participants in the transfer process, such as telecommunications carriers, who do not enter into the actual banking process. The EU Directive refers to “credit institutions” rather than banks.43
46 The Model Law applies to all credit transfers, including those where a consumer is a party (in practice a very small proportion of all international transfers). A footnote to article 1 states that the Model Law does not “deal with issues related to the protection of consumers”.44 Consumer protection is a primary aim of the EU Directive and is stressed by certain information requirements (for example, regarding charges and avenues for redress) which are not included in the Model Law.45
47 A payment order must be unconditional to fall within the scope of the Model Law (article 2(b)). However, if a bank receives an instruction that is conditional and executes it issuing an unconditional payment order, then the sender of the instruction has the same rights and obligations as the sender of a payment order (article 3(1)). This provision covers the situation where a condition is to be fulfilled at the originator’s bank.46 The definition of “cross-border credit transfer order” in the EU Directive also requires an order to be unconditional (article 2(g)).
48 A single international credit transfer involves at least two banks (and sometimes more, if intermediary banks are involved) located in different jurisdictions. There is therefore potential for conflict between the various legal rules governing these transactions. For this reason, article 4A of the UCC provides that a funds transfer system may select the law to govern an entire credit transfer if any part of that transfer is carried out through that system (4A–507(c)). For example, any transfer made using the Clearing House Interbank Payments System (CHIPS) or Fedwire47 will be subject to the law of the State of New York.48
49 Under the Model Law, parties to a credit transfer are free to vary their rights and obligations by agreement (article 4). In the absence of any express agreement regarding choice of law, optional article Y suggests that the law of the State of the receiving bank should apply. The position is unclear if parties have neither specified an applicable law nor adopted article Y. Article Y was deleted from the main text of the Model Law at the 1992 UNCITRAL session but is included in a footnote “for States that might wish to adopt it”.49
50 No obligation to execute a payment order arises until the bank receiving the order has accepted it. If the sender and the receiving bank have a prior agreement that the bank will execute orders on receipt, the bank will be deemed to have accepted the order on receipt (articles 7(2)(a) and 9(1)(a)). This provision contrasts with article 4A of the UCC which states that a payment order cannot be accepted by prior agreement.50
51 The receiving bank has a full discretion to reject an order. If the sender has sufficient funds with the bank, then any notice of rejection must be given no later than the banking day following the end of the execution period (articles 7(3) and 9(2)). If the bank fails to give a required notice of rejection, then it is deemed to have accepted the order (articles 7(2)(e) and 9(1)(h)). However if the bank does not hold sufficient funds for the sender and fails to give notice, then the order ceases to have effect at the end of the fifth banking day following the end of the execution period (articles 7(4) and 9(3)).
52 Under article 19(1) a credit transfer is complete when the beneficiary’s bank accepts the payment order. The bank is then obliged to credit the beneficiary in accordance with the payment order and the law governing the relationship between the bank and the beneficiary (article 10(1)). Under article 19(2) the transfer is deemed complete notwithstanding the deduction of any charges by a receiving bank from the amount transferred. The EU Directive takes
a stricter approach to the deduction of charges; the originating bank is
liable to pay the originator any amount that has been deducted without authorisation.51
53 Article 17 provides that a receiving bank that has not fulfilled its obligations (for example, by delaying a transfer) is liable only for interest on the funds that it held beyond the time for which it should have held them. This provision was made because usually an originator does not suffer loss if a transfer is made late, unless there are consequential damages, which are not provided for in the Model Law.52 Article 18 states that remedies are exclusive, precluding any resort to other legal doctrines. However a party may rely on any remedy that may exist when a bank has improperly executed, or failed to execute, a payment order with intent to cause loss, or recklessly and with actual knowledge that loss might result.
54 The body of New Zealand case law on the subject of international credit transfers is not large. However, some of the issues were considered recently by the Court of Appeal.53
55 Regarding the completion of a credit transfer, there are distinctions drawn at common law based on whether or not the transfer is made “in-house” (that is, whether the amount credited to the beneficiary’s account is debited from an account within the same institution). An in-house credit transfer is complete when the bank makes the decision to credit the beneficiary’s account.54
56 However, as a matter of course, international credit transfers will not be “in-house” as they involve banks located in different States (even if those banks are branches of the same parent institution). In these cases, payment is complete at the time when the funds are freely available to the beneficiary.55 This situation contrasts with the position under the Model Law article 19(1) when the transfer is complete once the beneficiary’s bank has accepted the payment order. There is authority for the proposition that the transfer is complete when the beneficiary’s bank receives an instrument which it treats as the equivalent of cash.56
57 In Dovey v Bank of New Zealand, the plaintiff Mr Dovey claimed that the Bank of New Zealand (BNZ) had failed to carry out his instructions in effecting a transfer from his BNZ account to his account with a branch of the Bank of Credit and Commerce International (BCCI), which was placed into liquidation shortly after Mr Dovey’s funds were received. In a discussion of the legal aspects of transfers of money, Tipping J (for the Court) considered the concept of “transfer” to be a misnomer in that no actual assignment of funds takes place. Rather, a chose in action is discharged in respect of one party, and created in respect of another.57
58 Mr Dovey contended inter alia that at the critical time (when the BCCI was placed into liquidation) his money was held by a clearing bank acting as the BNZ’s agent. However, Tipping J considered “[t]hat proposition has only to be stated to demonstrate its apparent lack of merit” and that the clearing bank was the agent of the receiving bank, not of the BNZ.58 The Court of Appeal had no hesitation in upholding the High Court decision that the BNZ had done everything that was required of it to effect the transfer, and that the material and substantial cause of Mr Dovey’s loss was his decision to use BCCI as his bank, followed by the bank’s collapse.59 The Court cited with approval the decision in Royal Products Ltd v Midland Bank Ltd60 that if the customer could draw on the receiving bank for the remitted funds, then the paying bank had fully carried out its customer’s mandate. This statement of when a transfer is deemed complete is consistent with the decision in The Brimnes.
59 If adopted, this Model Law would automatically apply to all international credit transfers entered into by New Zealand parties with institutions located in other Contracting States. It would not apply to debit transfers. If a State wished to adopt the Model Law to govern domestic credit transfers as well, to ensure unity of the law, then it would only be necessary to change the scope of application in article 1.61
60 The Model Law on International Credit Transfers was concluded eight years ago. Given that no State other than the European Union (through the EU Directive) has incorporated this Model Law into domestic legislation, we question the usefulness of adopting it. The relative lack of litigation regarding these transactions, indicating that credit transfers generally run smoothly according to international banking practice, together with the recent confirmation in Dovey of when a paying bank has fulfilled its obligations, lead the Commission to conclude there is no need to enact this Model Law in New Zealand.
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