S*251 Session 111 (1995-1996)
S*0251(Rat #0220, Act #0221 of 1996) General Bill, By Hayes and M.T. Rose
A Bill to amend Title 36, Code of Laws of South Carolina, 1976, relating to
the Uniform Commercial Code by adding Chapter 4A, so as to enact provisions of
law governing funds transfers and the rights and obligations of parties
involved in funds transfers; and to amend Section 36-1-105, relating to the
application of particular provisions of the Uniform Commercial Code, so as to
include references to provisions pertaining to funds transfers.-amended title
10/31/94 Senate Prefiled
10/31/94 Senate Referred to Committee on Judiciary
01/10/95 Senate Introduced and read first time SJ-86
01/10/95 Senate Referred to Committee on Judiciary SJ-86
04/18/95 Senate Committee report: Favorable with amendment
Judiciary SJ-27
04/19/95 Senate Amended SJ-12
04/19/95 Senate Read second time SJ-12
04/19/95 Senate Ordered to third reading with notice of
amendments SJ-12
04/27/95 Senate Read third time and sent to House SJ-21
05/02/95 House Introduced and read first time HJ-4
05/02/95 House Referred to Committee on Judiciary HJ-4
05/31/95 House Recalled from Committee on Judiciary HJ-140
06/01/95 House Read second time HJ-34
01/10/96 House Read third time and enrolled HJ-11
02/06/96 Ratified R 220
02/12/96 Signed By Governor
02/12/96 Effective date 02/12/96
03/06/96 Copies available
03/06/96 Act No. 221
(A221, R220, S251)
AN ACT TO AMEND TITLE 36, CODE OF LAWS OF SOUTH
CAROLINA, 1976, RELATING TO THE UNIFORM COMMERCIAL
CODE BY ADDING CHAPTER 4A, SO AS TO ENACT PROVISIONS
OF LAW GOVERNING FUNDS TRANSFERS AND THE RIGHTS
AND OBLIGATIONS OF PARTIES INVOLVED IN FUNDS
TRANSFERS; AND TO AMEND SECTION 36-1-105, RELATING TO
THE APPLICATION OF PARTICULAR PROVISIONS OF THE
UNIFORM COMMERCIAL CODE, SO AS TO INCLUDE
REFERENCES TO PROVISIONS PERTAINING TO FUNDS
TRANSFERS.
Be it enacted by the General Assembly of the State of South
Carolina:
Funds Transfers
SECTION 1. Title 36 of the 1976 Code is amended by adding:
"CHAPTER 4A.
Uniform Commercial Code--Funds Transfers
SOUTH CAROLINA REPORTER'S INTRODUCTORY
NOTE
In the spring of 1995, the South Carolina Senate Judiciary Committee
requested the South Carolina Law Institute to appoint a committee (the
"Committee") to evaluate the impact of proposed uniform
Article 4A of South Carolina law and to assist the Senate Judiciary
Committee in considering Article 4A for adoption in South Carolina.
The Committee was comprised of lawyers, professors, bankers, corporate
users of wire transfer services, and a representative of the Office of the
Consumer Advocate. The Reporter and a research assistant provided
support to the Committee. After review of the uniform statute and the
Official Comments thereto, versions of Article 4A adopted by other
states, South Carolina statutory and common law, and scholarly
commentary, the Committee unanimously recommended that South
Carolina adopt the uniform version of Article 4A.
Uniformity Of Article 4A.
Funds transfers are effected across state lines and often through
different funds transfer systems. If participants in a funds transfer are to
be certain of their obligations and liabilities, uniformity of funds transfer
rules is imperative.
Virtually all jurisdictions have adopted Article 4A without change
from the proposed uniform statute. The Committee reviewed all non-uniform provisions enacted by other states and determined that most of
the provisions were not substantive. The Committee found no reason to
vary Article 4A from the uniform version and accordingly recommended
that South Carolina adopt the uniform version of Article 4A.
Like other Articles in the Uniform Commercial Code, the uniform
version of Article 4A includes "Official Comments"
addressing the purpose and meaning of the various sections and the
policy considerations on which they are based. Because the Official
Comments provide information of high value in interpreting and
understanding Article 4A, the Committee recommended that they be
included as part of South Carolina's Article 4A legislation. The majority
of adopting states have done likewise. Only Oklahoma, one of the first
states to enact Article 4A, adopted comprehensive state reporter's
comments in addition to the Official Comments. See OKLA.
STAT. ANN. tit. 12A Section 4A (West Supp. 1995). In order to avoid
any implication of non-uniformity that might be raised by the content of
Reporter's Comments, the Committee decided to include South Carolina
Reporter's Comments only after sections which call for comment.
The Impact Of Article 4A On South Carolina Law.
At the time of the Committee's deliberations, no South Carolina
statutory or case law dealt with funds transfers. Very few published
opinions from other jurisdictions were available. Prior to the general
enactment of Article 4A, courts decided funds transfer cases using
various common law principles, or by analogy to Article 4 of the U.C.C.
As a result, pre-Article 4A case law provides little guidance as to how a
court would likely decide a funds transfer issue. For a discussion of how
cases decided prior to the enactment of Article 4A might have been
decided, see OKLA. STAT. ANN. tit. 12A, Section 4A (West Supp.
1995); Tony M. Davis, Comparing Article 4A with Existing Case
Law on Funds Transfers: A Series of Case Studies, 42 ALA. L.
REV. 823 (1991).
The enactment of Article 4A in South Carolina, although important to
clarify national uniformity in regulation of funds transfers, should work
little practical change in South Carolina law for two reasons. First, for
funds transfer issues arising after 1989, it is likely that a South Carolina
court would have looked to Article 4A for guidance. See,
Manufacturas Int'l Ltda. v. Manufacturers Hanover Trust Co., 792
F.Supp. 180 (E.D.N.Y. 1992) (declining to apply Article 4A but
discussing its provisions by analogy). Second, South Carolina banks
using Fedwire as a funds transfer system have operated under Article 4A
since January 1, 1991. Regulation J, which governs funds transfers
through Fedwire, and which incorporated Article 4A as of that date,
preempts inconsistent state law.
NATIONAL CONFERENCE OF
COMMISSIONERS
ON UNIFORM STATE LAWS
PREFATORY NOTE
The National Conference of Commissioners on Uniform State laws
and The American Law Institute have approved a new Article 4A to the
Uniform Commercial Code. Comments that follow each of the sections
of the statute are intended as official comments. They explain in detail
the purpose and meaning of the various sections and the policy
considerations on which they are based.
Description of transaction covered by Article 4A.
There are a number of mechanisms for making payments through the
banking system. Most of these mechanisms are covered in whole or part
by state or federal statutes. In terms of number of transactions, payments
made by check or credit card are the most common payment methods.
Payment by check is covered by Articles 3 and 4 of the UCC, and some
aspects of payment by credit card are covered by federal law. In recent
years electronic funds transfers have been increasingly common in
consumer transactions. For example, in some cases a retail customer can
pay for purchases by use of an access or debit card inserted in a terminal
at the retail store that allows the bank account of the customer to be
instantly debited. Some aspects of these point-of-sale transactions and
other consumer payments that are effected electronically are covered by a
federal statute, the Electronic Fund Transfer Act (EFTA). If any part of
a funds transfer is covered by EFTA, the entire funds transfer is excluded
from Article 4A.
Another type of payment, commonly referred to as a wholesale wire
transfer, is the primary focus of Article 4A. Payments that are covered
by Article 4A are overwhelmingly between business or financial
institutions. The dollar volume of payments made by wire transfer far
exceeds the dollar volume of payments made by other means. The
volume of payments by wire transfer over the two principal wire
payment systems -- the Federal Reserve wire transfer network (Fedwire)
and the New York Clearing House Interbank Payments Systems (CHIPS)
-- exceeds one trillion dollars per day. Most payments carried out by use
of automated clearing houses are consumer payments covered by EFTA
and therefore not covered by Article 4A. There is, however, a significant
volume of non-consumer ACH payments that closely resemble wholesale
wire transfers. These payments are also covered by Article 4A.
There is some resemblance between payments made by wire transfer
and payments made by other means such as paper-based checks and
credit cards or electronically-based consumer payments, but there are also
many differences. Article 4A excludes from its coverage these other
payment mechanisms. Article 4A follows a policy of treating the
transaction that it covers--a "funds transfer"--as a unique
method of payment that is governed by unique principles of law that
address the operational and policy issues presented by this kind of
payment.
The funds transfer that is covered by Article 4A is not a complex
transaction and can be illustrated by the following example which is used
throughout the Prefatory Note as a basis for discussion. X, a debtor,
wants to pay an obligation owed to Y. Instead of delivering to Y a
negotiable instrument such as a check or some other writing such as a
credit card slip that enables Y to obtain payment from a bank, X
transmits an instruction to X's bank to credit a sum of money to the bank
account of Y. In most cases X's bank and Y's bank are different banks.
X's bank may carry out X's instruction by instructing Y's bank to credit
Y's account in the amount that X requested. The instruction that X
issues to its bank is a "payment order." X is the
"sender" of the payment order and X's bank is the
"receiving bank" with respect to X's order. Y is the
"beneficiary" of X's order. When X's bank issues an
instruction to Y's bank to carry out X's payment order, X's bank
"executes" X's order. The instruction of X's bank to Y's
bank is also a payment order. With respect to that order, X's bank is the
sender, Y's bank is the receiving bank, and Y is the beneficiary. The
entire series of transactions by which X pays Y is known as the
"funds transfer." With respect to the funds transfer, X is the
"originator," X's bank is the "originator's bank,"
Y is the "beneficiary" and Y's bank is the
"beneficiary's bank." In more complex transactions there are
one or more additional banks known as "intermediary banks"
between X's bank and Y's bank. In the funds transfer the instruction
contained in the payment order of X to its bank is carried out by a series
of payment orders by each bank in the transmission chain to the next
bank in the chain until Y's bank receives a payment order to make the
credit to Y's account. In most cases, the payment order of each bank to
the next bank in the chain is transmitted electronically, and often the
payment order of X to its bank is also transmitted electronically, but the
means of transmission does not have any legal significance. A payment
order may be transmitted by any means, and in some cases the payment
order is transmitted by a slow means such as first class mail. To reflect
this fact, the broader term "funds transfer" rather than the
narrower term "wire transfer" is used in Article 4A to
describe the overall payment transaction.
Funds transfers are divided into two categories determined by whether
the instruction to pay is given by the person making payment or the
person receiving payment. If the instruction is given by the person
making the payment, the transfer is commonly referred to as a
"credit transfer." If the instruction is given by the person
receiving payment, the transfer is commonly referred to as a "debit
transfer." Article 4A governs credit transfers and excludes debit
transfers.
Why is Article 4A needed?
There is no comprehensive body of law that defines the rights and
obligations that arise from wire transfers. Some aspects of wire transfers
are governed by rules of the principal transfer systems. Transfers made
by Fedwire are governed by Federal Reserve Regulation J and transfers
over CHIPS are governed by the CHIPS rules. Transfers made by means
of automated clearing houses are governed by uniform rules adopted by
various associations of banks in various parts of the nation or by Federal
Reserve rules or operating circulars. But the various funds transfer
system rules apply to only limited aspects of wire transfer transactions.
The resolution of the many issues that are not covered by funds transfer
system rules depends on contracts of the parties, to the extent that they
exist, or principles of law applicable to other payment mechanisms that
might be applied by analogy. The result is a great deal of uncertainty.
There is no consensus about the juridical nature of a wire transfer and
consequently of the rights and obligations that are created. Article 4A is
intended to provide the comprehensive body of law that we do not have
today.
Characteristics of a funds transfer.
There are a number of characteristics of funds transfers covered by
Article 4A that have influenced the drafting of the statute. The typical
funds transfer involves a large amount of money. Multimillion dollar
transactions are commonplace. The originator of the transfer and the
beneficiary are typically sophisticated business or financial organizations.
High speed is another predominant characteristic. Most funds transfers
are completed on the same day, even in complex transactions in which
there are several intermediary banks in the transmission chain. A funds
transfer is a highly efficient substitute for payments made by the delivery
of paper instruments. Another characteristic is extremely low cost. A
transfer that involves many millions of dollars can be made for a price of
a few dollars. Price does not normally vary very much or at all with the
amount of the transfer. This system of pricing may not be feasible if the
bank is exposed to very large liabilities in connection with the
transaction. The pricing system assumes that the price reflects primarily
the cost of the mechanical operation performed by the bank, but in fact, a
bank may have more or less potential liability with respect to a funds
transfer depending upon the amount of the transfer. Risk of loss to
banks carrying out a funds transfer may arise from a variety of causes.
In some funds transfers, there may be extensions of very large amounts
of credit for short periods of time by the banks that carry out a funds
transfer. If a payment order is issued to the beneficiary's bank, it is
normal for the bank to release funds to the beneficiary immediately.
Sometimes, payment to the beneficiary's bank by the bank that issued the
order to the beneficiary's bank is delayed until the end of the day. If
that payment is not received because of the insolvency of the bank that is
obliged to pay, the beneficiary's bank may suffer a loss. There is also
risk of loss if a bank fails to execute the payment order of a customer, or
if the order is executed late. There also may be an error in the payment
order issued by a bank that is executing the payment order of its
customer. For example, the error might relate to the amount to be paid
or to the identity of the person to be paid. Because the dollar amounts
involved in funds transfers are so large, the risk of loss if something goes
wrong in a transaction may also be very large. A major policy issue in
the drafting of Article 4A is that of determining how risk of loss is to be
allocated given the price structure in the industry.
Concept of acceptance and effect of acceptance by the beneficiary's
bank.
Rights and obligations under Article 4A arise as the result of
"acceptance" of a payment order by the bank to which the
order is addressed. Section 4A-209. The effect of acceptance varies
depending upon whether the payment order is issued to the beneficiary's
bank or to a bank other than the beneficiary's bank. Acceptance by the
beneficiary's bank is particularly important because it defines when the
beneficiary's bank becomes obligated to the beneficiary to pay the
amount of the payment order. Although Article 4A follows convention
in using the term "funds transfer" to identify the payment
from X to Y that is described above, no money or property right of X is
actually transferred to Y. X pays Y by causing Y's bank to become
indebted to Y in the amount of the payment. This debt arises when Y's
bank accepts the payment order that X's bank issued to Y's bank to
execute X's order. If the funds transfer was carried out by use of one or
more intermediary banks between X's bank and Y's bank, Y's bank
becomes indebted to Y when Y's bank accepts the payment order issued
to it by an intermediary bank. The funds transfer is completed when this
debt is incurred. Acceptance, the event that determines when the debt of
Y's bank to Y arises, occurs (i) when Y's bank pays Y or notifies Y of
receipt of the payment order, or (ii) when Y's bank receives payment
from the bank that issued a payment order to Y's bank.
The only obligation of the beneficiary's bank that results from
acceptance of a payment order is to pay the amount of the order to the
beneficiary. No obligation is owed to either the sender of the payment
order accepted by the beneficiary's bank or to the originator of the funds
transfer. The obligation created by acceptance by the beneficiary's bank
is for the benefit of the beneficiary. The purpose of the sender's
payment order is to effect payment by the originator to the beneficiary
and that purpose is achieved when the beneficiary's bank accepts the
payment order. Section 4A-405 states rules for determining when the
obligation of the beneficiary's bank to the beneficiary has been paid.
Acceptance by a bank other than the beneficiary's bank.
In the funds transfer described above, what is the obligation of X's
bank when it receives X's payment order? Funds transfers by a bank on
behalf of its customer are made pursuant to an agreement or arrangement
that may or may not be reduced to a formal document signed by the
parties. It is probably true that in most cases there is either no express
agreement or the agreement addresses only some aspects of the
transaction. Substantial risk is involved in funds transfers and a bank
may not be willing to give this service to all customers, and may not be
willing to offer it to any customer unless certain safeguards against loss
such as security procedures are in effect. Funds transfers often involve
the giving of credit by the receiving bank to the customer, and that also
may involve an agreement. These considerations are reflected in Article
4A by the principle that, in the absence of a contrary agreement, a
receiving bank does not incur liability with respect to a payment order
until it accepts it. If X and X's bank in the hypothetical case had an
agreement that obliged the bank to act on X's payment orders and the
bank failed to comply with the agreement, the bank can be held liable for
breach of the agreement. But apart from any obligation arising by
agreement, the bank does not incur any liability with respect to X's
payment order until the bank accepts the order. X's payment order is
treated by Article 4A as a request by X to the bank to take action that
will cause X's payment order to be carried out. That request can be
accepted by X's bank by "executing" X's payment order.
Execution occurs when X's bank sends a payment order to Y's bank
intended by X's bank to carry out the payment order of X. X's bank
could also execute X's payment order by issuing a payment order to an
intermediary bank instructing the intermediary bank to instruct Y's bank
to make the credit to Y's account. In that case execution and acceptance
of X's order occur when the payment order of X's bank is sent to the
intermediary bank. When X's bank executes X's payment order the bank
is entitled to receive payment from X and may debit an authorized
account of X. If X's bank does not execute X's order and the amount of
the order is covered by a withdrawable credit balance in X's authorized
account, the bank must pay X interest on the money represented by X's
order unless X is given prompt notice of rejection of the order. Section
4A-210(b).
Bank error in funds transfers.
If a bank, other than the beneficiary's bank, accepts a payment order,
the obligations and liabilities are owed to the originator of the funds
transfer. Assume in the example stated above, that X's bank executes
X's payment order by issuing a payment order to an intermediary bank
that executes the order of X's bank by issuing a payment order to Y's
bank. The obligations of X's bank with respect to execution are owed to
X. The obligations of the intermediary bank with respect to execution
are also owed to X. Section 4A-302 states standards with respect to the
time and manner of execution of payment orders. Section 4A-305 states
the measure of damages for improper execution. It also states that a
receiving bank is liable for damages if it fails to execute a payment order
that it was obliged by express agreement to execute. In each case
consequential damages are not recoverable unless an express agreement
of the receiving bank provides for them. The policy basis for this
limitation is discussed in Comment 2 to Section 4A-305.
Error in the consummation of a funds transfer is not uncommon.
There may be a discrepancy in the amount that the originator orders to be
paid to the beneficiary and the amount that the beneficiary's bank is
ordered to pay. For example, if the originator's payment order instructs
payment of $100,000 and the payment order of the originator's bank
instructs payment of $1,000,000, the originator's bank is entitled to
receive only $100,000 from the originator and has the burden of
recovering the additional $900,000 paid to the beneficiary by mistake. In
some cases, the originator's bank or an intermediary bank instructs
payment to a beneficiary other than the beneficiary stated in the
originator's payment order. If the wrong beneficiary is paid, the bank
that issued the erroneous payment order is not entitled to receive payment
of the payment order that it executed and has the burden of recovering
the mistaken payment. The originator is not obliged to pay its payment
order. Section 4A-303 and Section 4A-207 state rules for determining
the rights and obligations of the various parties to the funds transfer in
these cases and in other typical cases in which error is made.
Pursuant to Section 4A-402(c) the originator is excused from the
obligation to pay the originator's bank if the funds transfer is not
completed, i.e. payment by the originator to the beneficiary is not made.
Payment by the originator to the beneficiary occurs when the
beneficiary's bank accepts a payment order for the benefit of the
beneficiary of the originator's payment order. Section 4A-406. If for
any reason that acceptance does not occur, the originator is not required
to pay the payment order that it issued or, if it already paid, is entitled to
refund of the payment with interest. This "money-back
guarantee" is an important protection of the originator of a funds
transfer. The same rule applies to any other sender in the funds transfer.
Each sender's obligation to pay is excused if the beneficiary's bank does
not accept a payment order for the benefit of the beneficiary of that
sender's order. There is an important exception to this rule. It is
common practice for the originator of a funds transfer to designate the
intermediary bank or banks through which the funds transfer is to be
routed. The originator's bank is required by Section 4A-302 to follow
the instruction of the originator with respect to intermediary banks. If
the originator's bank sends a payment order to the intermediary bank
designated in the originator's order and the intermediary bank causes the
funds transfer to miscarry by failing to execute the payment order or by
instructing payment to the wrong beneficiary, the originator's bank is not
required to pay its payment order and if it has already paid it is entitled
to recover payment from the intermediary bank. This remedy is
normally adequate, but if the originator's bank has already paid its order
and the intermediary bank has suspended payments or is not permitted by
law to refund payment, the originator's bank will suffer a loss. Since the
originator required the originator's bank to use the failed intermediary
bank, Section 4A-402(e) provides that in this case the originator is
obliged to pay its payment order and has a claim against the intermediary
bank for the amount of the order. The same principle applies to any
other sender that designates a subsequent intermediary bank.
Unauthorized payment orders.
An important issue addressed in Section 4A-202 and Section 4A-203
is how the risk of loss from unauthorized payment orders is to be
allocated. In a large percentage of cases, the payment order of the
originator of the funds transfer is transmitted electronically to the
originator's bank. In these cases it may not be possible for the bank to
know whether the electronic message has been authorized by its
customer. To ensure that no unauthorized person is transmitting
messages to the bank, the normal practice is to establish security
procedures that usually involve the use of codes or identifying numbers
or words. If the bank accepts a payment order that purports to be that of
its customer after verifying its authenticity by complying with a security
procedure agreed to by the customer and the bank, the customer is bound
to pay the order even if it was not authorized. But there is an important
limitation on this rule. The bank is entitled to payment in the case of an
unauthorized order only if the court finds that the security procedure was
a commercially reasonable method of providing security against
unauthorized payment orders. The customer can also avoid liability if it
can prove that the unauthorized order was not initiated by an employee
or other agent of the customer having access to confidential security
information or by a person who obtained that information from a source
controlled by the customer. The policy issues are discussed in the
comments following Section 4A-203. If the bank accepts an
unauthorized payment order without verifying it in compliance with a
security procedure, the loss falls on the bank.
Security procedures are also important in cases of error in the
transmission of payment orders. There may be an error by the sender in
the amount of the order, or a sender may transmit a payment order and
then erroneously transmit a duplicate of the order. Normally, the sender
is bound by the payment order even if it is issued by mistake. But in
some cases an error of this kind can be detected by a security procedure.
Although the receiving bank is not obliged to provide a security
procedure for the detection of error, if such a procedure is agreed to by
the bank Section 4A-205 provides that if the error is not detected because
the receiving bank does not comply with the procedure, any resulting loss
is borne by the bank failing to comply with the security procedure.
Insolvency losses.
Some payment orders do not involve the granting of credit to the
sender by the receiving bank. In those cases, the receiving bank accepts
the sender's order at the same time the bank receives payment of the
order. This is true of a transfer of funds by Fedwire or of cases in which
the receiving bank can debit a funded account of the sender. But in
some cases the granting of credit is the norm. This is true of a payment
order over CHIPS. In a CHIPS transaction the receiving bank usually
will accept the order before receiving payment from the sending bank.
Payment is delayed until the end of the day when settlement is made
through the Federal Reserve System. If the receiving bank is an
intermediary bank, it will accept by issuing a payment order to another
bank and the intermediary bank is obliged to pay that payment order. If
the receiving bank is the beneficiary's bank, the bank usually will accept
by releasing funds to the beneficiary before the bank has received
payment. If a sending bank suspends payments before settling its
liabilities at the end of the day, the financial stability of banks that are
net creditors of the insolvent bank may also be put into jeopardy, because
the dollar volume of funds transfers between the banks may be extremely
large. With respect to two banks that are dealing with each other in a
series of transactions in which each bank is sometimes a receiving bank
and sometimes a sender, the risk of insolvency can be managed if
amounts payable as a sender and amounts receivable as a receiving bank
are roughly equal. But if these amounts are significantly out of balance,
a net creditor bank may have a very significant credit risk during the day
before settlement occurs. The Federal Reserve System and the banking
community are greatly concerned with this risk, and various measures
have been instituted to reduce this credit exposure. Article 4A also
addresses this problem. A receiving bank can always avoid this risk by
delaying acceptance of a payment order until after the bank has received
payment. For example, if the beneficiary's bank credits the beneficiary's
account it can avoid acceptance by not notifying the beneficiary of the
receipt of the order or by notifying the beneficiary that the credit may
not be withdrawn until the beneficiary's bank receives payment. But if
the beneficiary's bank releases funds to the beneficiary before receiving
settlement, the result in a funds transfer other than a transfer by means of
an automated clearing house or similar provisional settlement system is
that the beneficiary's bank may not recover the funds if it fails to receive
settlement. This rule encourages the banking system to impose credit
limitations on banks that issue payment orders. These limitations are
already in effect. CHIPS has also proposed a loss-sharing plan to be
adopted for implementation in the second half of 1990 under which
CHIPS participants will be required to provide funds necessary to
complete settlement of the obligations of one or more participants that
are unable to meet settlement obligations. Under this plan, it will be a
virtual certainty that there will be settlement on CHIPS in the event of
failure by a single bank. Section 4A-403(b) and (c) are also addressed to
reducing risks of insolvency. Under these provisions, the amount owed
by a failed bank with respect to payment orders it issued is the net
amount owing after setting off amounts owed to the failed bank with
respect to payment orders it received. This rule allows credit exposure to
be managed by limitations on the net debit position of a bank.
PART 1
SUBJECT MATTER AND DEFINITIONS
Section 36-4A-101. Short title.
This chapter may be cited as Uniform Commercial Code--Funds
Transfers.
Section 36-4A-102. Subject matter.
Except as otherwise provided in Section 36-4A-108, this chapter
applies to funds transfers defined in Section 36-4A-104.
OFFICIAL COMMENT
Article 4A governs a specialized method of payment referred to in the
Article as a funds transfer but also commonly referred to in the
commercial community as a wholesale wire transfer. A funds transfer is
made by means of one or more payment orders. The scope of Article 4A
is determined by the definitions of "payment order" and
"funds transfer" found in Section 4A-103 and Section
4A-104.
The funds transfer governed by Article 4A is in large part a product of
recent and developing technological changes. Before this Article was
drafted there was no comprehensive body of law -- statutory or judicial --
that defined the juridical nature of a funds transfer or the rights and
obligations flowing from payment orders. Judicial authority with respect
to funds transfers is sparse, undeveloped, and not uniform. Judges have
had to resolve disputes by referring to general principles of common law
or equity, or they have sought guidance in statutes such as Article 4
which are applicable to other payment methods. But attempts to define
rights and obligations in funds transfers by general principles or by
analogy to rights and obligations in negotiable instrument law or the law
of check collection have not been satisfactory.
In the drafting of Article 4A, a deliberate decision was made to write
on a clean slate and to treat a funds transfer as a unique method of
payment to be governed by unique rules that address the particular issues
raised by this method of payment. A deliberate decision was also made
to use precise and detailed rules to assign responsibility, define
behavioral norms, allocate risks, and establish limits on liability, rather
than to rely on broadly stated, flexible principles. In the drafting of these
rules, a critical consideration was that the various parties to funds
transfers need to be able to predict risk with certainty, to insure against
risk, to adjust operational and security procedures, and to price funds
transfer services appropriately. This consideration is particularly
important given the very large amounts of money that are involved in
funds transfers.
Funds transfers involve competing interests -- those of the banks that
provide funds transfer services and the commercial and financial
organizations that use the services, as well as the public interest. These
competing interests were represented in the drafting process and they
were thoroughly considered. The rules that emerged represent a careful
and delicate balancing of those interests and are intended to be the
exclusive means of determining the rights, duties, and liabilities of the
affected parties in any situation covered by particular provisions of the
Article. Consequently, resort to principles of law or equity outside of
Article 4A is not appropriate to create rights, duties and liabilities
inconsistent with those stated in this Article.
Section 36-4A-103. Payment order -- Definitions.
(a) In this chapter:
(1) `Payment order' means an instruction of a sender to a receiving
bank, transmitted orally, electronically, or in writing, to pay, or to cause
another bank to pay, a fixed or determinable amount of money to a
beneficiary if:
(i) the instruction does not state a condition to payment to the
beneficiary other than time of payment;
(ii) the receiving bank is to be reimbursed by debiting an account
of, or otherwise receiving payment from, the sender; and
(iii) the instruction is transmitted by the sender directly to the
receiving bank or to an agent, funds-transfer system, or communication
system for transmittal to the receiving bank.
(2) `Beneficiary' means the person to be paid by the beneficiary's
bank.
(3) `Beneficiary's bank' means the bank identified in a payment
order in which an account of the beneficiary is to be credited pursuant to
the order or which otherwise is to make payment to the beneficiary if the
order does not provide for payment to an account.
(4) `Receiving bank' means the bank to which the sender's
instruction is addressed.
(5) `Sender' means the person giving the instruction to the
receiving bank.
(b) If an instruction complying with subsection (a)(1) is to make
more than one payment to a beneficiary, the instruction is a separate
payment order with respect to each payment.
(c) A payment order is issued when it is sent to the receiving
bank.
OFFICIAL COMMENT
This section is discussed in the Comment following Section
4A-104.
Section 36-4A-104. Funds transfer -- Definitions.
In this chapter:
(a) `Funds transfer' means the series of transactions, beginning with
the originator's payment order, made for the purpose of making payment
to the beneficiary of the order. The term includes any payment order
issued by the originator's bank or an intermediary bank intended to carry
out the originator's payment order. A funds transfer is completed by
acceptance by the beneficiary's bank of a payment order for the benefit
of the beneficiary of the originator's payment order.
(b) `Intermediary bank' means a receiving bank other than the
originator's bank or the beneficiary's bank.
(c) `Originator' means the sender of the first payment order in a
funds transfer.
(d) `Originator's bank' means (i) the receiving bank to which the
payment order of the originator is issued if the originator is not a bank,
or (ii) the originator if the originator is a bank.
OFFICIAL COMMENT
1. Article 4A governs a method of payment in which the person
making payment (the "originator") directly transmits an
instruction to a bank either to make payment to the person receiving
payment (the "beneficiary") or to instruct some other bank to
make payment to the beneficiary. The payment from the originator to
the beneficiary occurs when the bank that is to pay the beneficiary
becomes obligated to pay the beneficiary. There are two basic
definitions: "Payment order" stated in Section 4A-103 and
"Funds transfer" stated in Section 4A-104. These definitions,
other related definitions, and the scope of Article 4A can best be
understood in the context of specific fact situations. Consider the
following cases:
Case #1. X, which has an account in Bank A, instructs that bank to
pay $1,000,000 to Y's account in Bank A. Bank A carries out X's
instruction by making a credit of $1,000,000 to Y's account and
notifying Y that the credit is available for immediate withdrawal. The
instruction by X to Bank A is a "payment order" which was
issued when it was sent to Bank A. Section 4A-103(a)(1) and (c). X is
the "sender" of the payment order and Bank A is the
"receiving bank." Section 4A-103(a)(5) and (a)(4). Y is the
"beneficiary" of the payment order and Bank A is the
"beneficiary's bank." Section 4A-103(a)(2) and (a)(3).
When Bank A notified Y of receipt of the payment order, Bank A
"accepted" the payment order. Section 4A-209(b)(1). When
Bank A accepted the order, it incurred an obligation to Y to pay the
amount of the order. Section 4A-404(a). When Bank A accepted X's
order, X incurred an obligation to pay Bank A the amount of the order.
Section 4A-402(b). Payment from X to Bank A would normally be
made by a debit to X's account in Bank A. Section 4A-403(a)(3). At
the time Bank A incurred the obligation to pay Y, payment of
$1,000,000 by X to Y was also made. Section 4A-406(a). Bank A paid
Y when it gave notice to Y of a withdrawable credit of $1,000,000 to
Y's account. Section 4A-405(a). The overall transaction, which
comprises the acts of X and Bank A, in which the payment by X to Y is
accomplished is referred to as the "funds transfer." Section
4A-104(a). In this case only one payment order was involved in the
funds transfer. A one-payment-order funds transfer is usually referred to
as a "book transfer" because the payment is accomplished by
the receiving bank's debiting the account of the sender and crediting the
account of the beneficiary in the same bank. X, in addition to being the
sender of the payment order to Bank A, is the "originator" of
the funds transfer. Section 4A-104(c). Bank A is the "originator's
bank" in the funds transfer as well as the beneficiary's bank.
Section 4A-104(d).
Case #2. Assume the same facts as in Case #1 except that X instructs
Bank A to pay $1,000,000 to Y's account in Bank B. With respect to
this payment order, X is the sender, Y is the beneficiary, and Bank A is
the receiving bank. Bank A carries out X's order by instructing Bank B
to pay $1,000,000 to Y's account. This instruction is a payment order in
which Bank A is the sender, Bank B is the receiving bank, and Y is the
beneficiary. When Bank A issued its payment order to Bank B, Bank A
"executed" X's order. Section 4A-301(a). In the funds
transfer, X is the originator, Bank A is the originator's bank, and Bank B
is the beneficiary's bank. When Bank A executed X's order, X incurred
an obligation to pay Bank A the amount of the order. Section
4A-402(c). When Bank B accepts the payment order issued to it by
Bank A, Bank B incurs an obligation to Y to pay the amount of the order
(Section 4A-404 (a)) and Bank A incurs an obligation to pay Bank B.
Section 4A-402(b). Acceptance by Bank B also results in payment of
$1,000,000 by X to Y. Section 4A-406(a). In this case two payment
orders are involved in the funds transfer.
Case #3. Assume the same facts as in Case #2 except that Bank A
does not execute X's payment order by issuing a payment order to Bank
B. One bank will not normally act to carry out a funds transfer for
another bank unless there is a preexisting arrangement between the banks
for transmittal of payment orders and settlement of accounts. For
example, if Bank B is a foreign bank with which Bank A has no
relationship, Bank A can utilize a bank that is a correspondent of both
Bank A and Bank B. Assume Bank A issues a payment order to Bank C
to pay $1,000,000 to Y's account in Bank B. With respect to this order,
Bank A is the sender, Bank C is the receiving bank, and Y is the
beneficiary. Bank C will execute the payment order of Bank A by
issuing a payment order to Bank B to pay $1,000,000 to Y's account in
Bank B. With respect to Bank C's payment order, Bank C is the sender,
Bank B is the receiving bank, and Y is the beneficiary. Payment of
$1,000,000 by X to Y occurs when Bank B accepts the payment order
issued to it by Bank C. In this case the funds transfer involves three
payment orders. In the funds transfer, X is the originator, Bank A is the
originator's bank, Bank B is the beneficiary's bank, and Bank C is an
"intermediary bank." Section 4A-104 (b). In some cases
there may be more than one intermediary bank, and in those cases each
intermediary bank is treated like Bank C in Case #3.
As the three cases demonstrate, a payment under Article 4A involves
an overall transaction, the funds transfer, in which the originator, X, is
making payment to the beneficiary, Y, but the funds transfer may
encompass a series of payment orders that are issued in order to effect
the payment initiated by the originator's payment order.
In some cases the originator and the beneficiary may be the same
person. This will occur, for example, when a corporation orders a bank
to transfer funds from an account of the corporation in that bank to
another account of the corporation in that bank or in some other bank.
In some funds transfers the first bank to issue a payment order is a bank
that is executing a payment order of a customer that is not a bank. In
this case the customer is the originator. In other cases, the first bank to
issue a payment order is not acting for a customer, but is making a
payment for its own account. In that event the first bank to issue a
payment order is the originator as well as the originator's bank.
2. "Payment order" is defined in Section 4A-103(a)(1) as
an instruction to a bank to pay, or to cause another bank to pay, a fixed
or determinable amount of money. The bank to which the instruction is
addressed is known as the "receiving bank." Section 4A-103(a)(4). "Bank" is defined in Section 4A-105(a)(2). The
effect of this definition is to limit Article 4A to payments made through
the banking system. A transfer of funds made by an entity outside the
banking system is excluded. A transfer of funds through an entity other
than a bank is usually a consumer transaction involving relatively small
amounts of money and a single contract carried out by transfers of cash
or a cash equivalent such as a check. Typically, the transferor delivers
cash or a check to the company making the transfer, which agrees to pay
a like amount to a person designated by the transferor. Transactions
covered by Article 4A typically involve very large amounts of money in
which several transactions involving several banks may be necessary to
carry out the payment. Payments are normally made by debits or credits
to bank accounts. Originators and beneficiaries are almost always
business organizations and the transfers are usually made to pay
obligations. Moreover, these transactions are frequently done on the
basis of very short-term credit granted by the receiving bank to the
sender of the payment order. Wholesale wire transfers involve policy
questions that are distinct from those involved in consumer-based
transactions by nonbanks.
3. Further limitations on the scope of Article 4A are found in the
three requirements found in subparagraphs (i), (ii), and (iii) of Section
4A-103(a)(1). Subparagraph (i) states that the instruction to pay is a
payment order only if it "does not state a condition to payment to
the beneficiary other than time of payment." An instruction to pay
a beneficiary sometimes is subject to a requirement that the beneficiary
perform some act such as delivery of documents. For example, a New
York bank may have issued a letter of credit in favor of X, a California
seller of goods to be shipped to the New York bank's customer in New
York. The terms of the letter of credit provide for payment to X if
documents are presented to prove shipment of the goods. Instead of
providing for presentment of the documents to the New York bank, the
letter of credit states that they may be presented to a California bank that
acts as an agent for payment. The New York bank sends an instruction
to the California bank to pay X upon presentation of the required
documents. The instruction is not covered by Article 4A because
payment to the beneficiary is conditional upon receipt of shipping
documents. The function of banks in a funds transfer under Article 4A is
comparable to the role of banks in the collection and payment of checks
in that it is essentially mechanical in nature. The low price and high
speed that characterize funds transfers reflect this fact. Conditions to
payment by the California bank other than time of payment impose
responsibilities on that bank that go beyond those in Article 4A funds
transfers. Although the payment by the New York bank to X under the
letter of credit is not covered by Article 4A, if X is paid by the
California bank, payment of the obligation of the New York bank to
reimburse the California bank could be made by an Article 4A funds
transfer. In such a case there is a distinction between the payment by the
New York bank to X under the letter of credit and the payment by the
New York bank to the California bank. For example, if the New York
bank pays its reimbursement obligation to the California bank by a
Fedwire naming the California bank as beneficiary (see Comment 1 to
Section 4A-107), payment is made to the California bank rather than to
X. That payment is governed by Article 4A and it could be made either
before or after payment by the California bank to X. The payment by
the New York bank to X under the letter of credit is not governed by
Article 4A and it occurs when the California bank, as agent of the New
York bank, pays X. No payment order was involved in that transaction.
In this example, if the New York bank had erroneously sent an
instruction to the California bank unconditionally instructing payment to
X, the instruction would have been an Article 4A payment order. If the
payment order was accepted (Section 4A-209(b)) by the California bank,
a payment by the New York bank to X would have resulted (Section
4A-406(a)). But Article 4A would not prevent recovery of funds from X
on the basis that X was not entitled to retain the funds under the law of
mistake and restitution, letter of credit law, or other applicable law.
4. Transfers of funds made through the banking system are commonly
referred to as either "credit" transfers or "debit"
transfers. In a credit transfer the instruction to pay is given by the
person making payment. In a debit transfer the instruction to pay is
given by the person receiving payment. The purpose of subparagraph (ii)
of subsection (a)(1) of Section 4A-103 is to include credit transfers in
Article 4A and to exclude debit transfers. All of the instructions to pay
in the three cases described in Comment 1 fall within subparagraph (ii).
Take Case #2 as an example. With respect to X's instruction given to
Bank A, Bank A will be reimbursed by debiting X's account or otherwise
receiving payment from X. With respect to Bank A's instruction to Bank
B, Bank B will be reimbursed by receiving payment from Bank A. In a
debit transfer, a creditor, pursuant to authority from the debtor, is enabled
to draw on the debtor's bank account by issuing an instruction to pay to
the debtor's bank. If the debtor's bank pays, it will be reimbursed by the
debtor rather than by the person giving the instruction. For example, the
holder of an insurance policy may pay premiums by authorizing the
insurance company to order the policyholder's bank to pay the insurance
company. The order to pay may be in the form of a draft covered by
Article 3, or it might be an instruction to pay that is not an instrument
under that Article. The bank receives reimbursement by debiting the
policyholder's account. Or, a subsidiary corporation may make payments
to its parent by authorizing the parent to order the subsidiary's bank to
pay the parent from the subsidiary's account. These transactions are not
covered by Article 4A because subparagraph (2) is not satisfied. Article
4A is limited to transactions in which the account to be debited by the
receiving bank is that of the person in whose name the instruction is
given.
If the beneficiary of a funds transfer is the originator of the transfer,
the transfer is governed by Article 4A if it is a credit transfer in form. If
it is in the form of a debit transfer it is not governed by Article 4A. For
example, Corporation has accounts in Bank A and Bank B. Corporation
instructs Bank A to pay to Corporation's account in Bank B. The funds
transfer is governed by Article 4A. Sometimes, Corporation will
authorize Bank B to draw on Corporation's account in Bank A for the
purpose of transferring funds into Corporation's account in Bank B. If
Corporation also makes an agreement with Bank A under which Bank A
is authorized to follow instructions of Bank B, as agent of Corporation,
to transfer funds from Customer's account in Bank A, the instruction of
Bank B is a payment order of Customer and is governed by Article 4A.
This kind of transaction is known in the wire-transfer business as a
"drawdown transfer." If Corporation does not make such an
agreement with Bank A and Bank B instructs Bank A to make the
transfer, the order is in form a debit transfer and is not governed by
Article 4A. These debit transfers are normally ACH transactions in
which Bank A relies on Bank B's warranties pursuant to ACH rules,
including the warranty that the transfer is authorized.
5. The principal effect of subparagraph (iii) of subsection (a) of
Section 4A-103 is to exclude from Article 4A payments made by check
or credit card. In those cases the instruction of the debtor to the bank on
which the check is drawn or to which the credit card slip is to be
presented is contained in the check or credit card slip signed by the
debtor. The instruction is not transmitted by the debtor directly to the
debtor's bank. Rather, the instruction is delivered or otherwise
transmitted by the debtor to the creditor who then presents it to the bank
either directly or through bank collection channels. These payments are
governed by Articles 3 and 4 and federal law. There are, however,
limited instances in which the paper on which a check is printed can be
used as the means of transmitting a payment order that is covered by
Article 4A. Assume that Originator instructs Originator's Bank to pay
$10,000 to the account of Beneficiary in Beneficiary's Bank. Since the
amount of Originator's payment order is small, if Originator's Bank and
Beneficiary's Bank do not have an account relationship, Originator's
Bank may execute Originator's order by issuing a teller's check payable
to Beneficiary's Bank for $10,000 along with instructions to credit
Beneficiary's account in that amount. The instruction to Beneficiary's
Bank to credit Beneficiary's account is a payment order. The check is
the means by which Originator's Bank pays its obligation as sender of
the payment order. The instruction of Originator's Bank to Beneficiary's
Bank might be given in a letter accompanying the check or it may be
written on the check itself. In either case the instruction to Beneficiary's
Bank is a payment order but the check itself (which is an order to pay
addressed to the drawee rather than to Beneficiary's Bank) is an
instrument under Article 3 and is not a payment order. The check can be
both the means by which Originator's Bank pays its obligation under
Section 4A-402(b) to Beneficiary's Bank and the means by which the
instruction to Beneficiary's Bank is transmitted.
6. Most payments covered by Article 4A are commonly referred to as
wire transfers and usually involve some kind of electronic transmission,
but the applicability of Article 4A does not depend upon the means used
to transmit the instruction of the sender. Transmission may be by letter
or other written communication, oral communication, or electronic
communication. An oral communication is normally given by telephone.
Frequently the message is recorded by the receiving bank to provide
evidence of the transaction, but apart from problems of proof there is no
need to record the oral instruction. Transmission of an instruction may
be a direct communication between the sender and the receiving bank or
through an intermediary such as an agent of the sender, a communication
system such as international cable, or a funds transfer system such as
CHIPS, SWIFT, or an automated clearing house.
Section 36-4A-105. Other definitions.
(a) In this chapter:
(1) `Authorized account' means a deposit account of a customer in
a bank designated by the customer as a source of payment of payment
orders issued by the customer to the bank. If a customer does not so
designate an account, any account of the customer is an authorized
account if payment of a payment order from that account is not
inconsistent with a restriction on the use of that account.
(2) `Bank' means a person engaged in the business of banking and
includes a savings bank, savings and loan association, credit union, and
trust company. A branch or separate office of a bank is a separate bank
for purposes of this chapter.
(3) `Customer' means a person, including a bank, having an
account with a bank or from whom a bank has agreed to receive payment
orders.
(4) `Funds-transfer business day' of a receiving bank means the
part of a day during which the receiving bank is open for the receipt,
processing, and transmittal of payment orders and cancellations and
amendments of payment orders.
(5) `Funds-transfer system' means a wire transfer network,
automated clearing house, or other communication system of a clearing
house or other association of banks through which a payment order by a
bank may be transmitted to the bank to which the order is addressed.
(6) `Good faith' means honesty in fact and the observance of
reasonable commercial standards of fair dealing.
(7) `Prove' with respect to a fact means to meet the burden of
establishing the fact (Section 36-1-201(8)).
(b) Other definitions applying to this chapter and the sections in
which they appear are:
`Acceptance' Section 36-4A-209
`Beneficiary' Section 36-4A-103
`Beneficiary's bank' Section 36-4A-103
`Executed' Section 36-4A-301
`Execution date' Section 36-4A-301
`Funds transfer' Section 36-4A-104
`Funds-transfer system rule' Section 36-4A-501
`Intermediary bank' Section 36-4A-104
`Originator' Section 36-4A-104
`Originator's bank' Section 36-4A-104
`Payment by beneficiary's bank
to beneficiary' Section 36-4A-405
`Payment by originator to
beneficiary' Section 36-4A-406
`Payment by sender
to receiving bank' Section 36-4A-403
`Payment date' Section 36-4A-401
`Payment order' Section 36-4A-103
`Receiving bank' Section 36-4A-103
`Security procedure' Section 36-4A-201
`Sender' Section 36-4A-103
(c) The following definitions in Chapter 4 apply to this chapter:
`Clearing house' Section 36-4-104
`Item' Section 36-4-104
`Suspends payments' Section 36-4-104
(d) In addition, Chapter 1 contains general definitions and
principles of construction and interpretation applicable throughout this
chapter.
OFFICIAL COMMENT
1. The definition of "bank" in subsection (a)(2) includes
some institutions that are not commercial banks. The definition reflects
the fact that many financial institutions now perform functions previously
restricted to commercial banks, including acting on behalf of customers
in funds transfers. Since many funds transfers involve payment orders to
or from foreign countries, the definition also covers foreign banks. The
definition also includes Federal Reserve Banks. Funds transfers carried
out by Federal Reserve Banks are described in Comments 1 and 2 to
Section 4A-107.
2. Funds transfer business is frequently transacted by banks outside
of general banking hours. Thus, the definition of banking day in Section
4-104(1)(c) cannot be used to describe when a bank is open for funds
transfer business. Subsection (a)(4) defines a new term, "funds
transfer business day," which is applicable to Article 4A. The
definition states, "is open for the receipt, processing, and transmittal
of payment orders and cancellations and amendments of payment
orders." In some cases it is possible to electronically transmit
payment orders and other communications to a receiving bank at any
time. If the receiving bank is not open for the processing of an order
when it is received, the communication is stored in the receiving bank's
computer for retrieval when the receiving bank is open for processing.
The use of the conjunctive makes clear that the defined term is limited to
the period during which all functions of the receiving bank can be
performed, i.e., receipt, processing, and transmittal of payment orders,
cancellations, and amendments.
3. Subsection (a)(5) defines "funds transfer system."
The term includes a system such as CHIPS which provides for
transmission of a payment order as well as settlement of the obligation of
the sender to pay the order. It also includes automated clearing houses,
operated by a clearing house or other association of banks, which process
and transmit payment orders of banks to other banks. In addition the
term includes organizations that provide only transmission services such
as SWIFT. The definition also includes the wire transfer network and
automated clearing houses of Federal Reserve Banks. Systems of the
Federal Reserve Banks, however, are treated differently from systems of
other associations of banks. Funds transfer systems other than systems of
the Federal Reserve Banks are treated in Article 4A as a means of
communication of payment orders between participating banks. Section
4A-206. The Comment to that section and the Comment to Section
4A-107 explain how Federal Reserve Banks function under Article 4A.
Funds transfer systems are also able to promulgate rules binding on
participating banks that, under Section 4A-501, may supplement or in
some cases may even override provisions of Article 4A.
4. Subsection (d) incorporates definitions stated in Article 1 as well
as principles of construction and interpretation stated in that Article.
Included is Section 1-103. The last paragraph of the Comment to
Section 4A-102 is addressed to the issue of the extent to which general
principles of law and equity should apply to situations covered by
provisions of Article 4A.
Section 36-4A-106. Time payment order is received.
(a) The time of receipt of a payment order or communication
canceling or amending a payment order is determined by the rules
applicable to receipt of a notice stated in Section 36-1-201(27). A
receiving bank may fix a cut-off time or times on a funds-transfer
business day for the receipt and processing of payment orders and
communications canceling or amending payment orders. Different cut-off times may apply to payment orders, cancellations, or amendments, or
to different categories of payment orders, cancellations, or amendments.
A cut-off time may apply to senders generally or different cut-off times
may apply to different senders or categories of payment orders. If a
payment order or communication canceling or amending a payment order
is received after the close of a funds-transfer business day or after the
appropriate cut-off time on a funds-transfer business day, the receiving
bank may treat the payment order or communication as received at the
opening of the next funds-transfer business day.
(b) If this chapter refers to an execution date or payment date or
states a day on which a receiving bank is required to take action, and the
date or day does not fall on a funds-transfer business day, the next day
that is a funds-transfer business day is treated as the date or day stated,
unless the contrary is stated in this chapter.
OFFICIAL COMMENT
The time that a payment order is received by a receiving bank usually
defines the payment date or the execution date of a payment order.
Section 4A-401 and Section 4A-301. The time of receipt of a payment
order, or communication canceling or amending a payment order is
defined in subsection (a) by reference to the rules stated in Section
1-201(27). Thus, time of receipt is determined by the same rules that
determine when a notice is received. Time of receipt, however, may be
altered by a cut-off time.
Section 36-4A-107. Federal reserve regulations and operating
circulars.
Regulations of the Board of Governors of the Federal Reserve System
and operating circulars of the Federal Reserve Banks supersede any
inconsistent provision of this chapter to the extent of the
inconsistency.
COMMENT
1. Funds transfers under Article 4A may be made, in whole or in
part, by payment orders through a Federal Reserve Bank in what is
usually referred to as a transfer by Fedwire. If Bank A, which has an
account in Federal Reserve Bank X, wants to pay $1,000,000 to Bank B,
which has an account in Federal Reserve Bank Y, Bank A can issue an
instruction to Reserve Bank X requesting a debit of $1,000,000 to Bank
A's Reserve account and an equal credit to Bank B's Reserve account.
Reserve Bank X will debit Bank A's account and will credit the account
of Reserve Bank Y. Reserve Bank X will issue an instruction to Reserve
Bank Y requesting a debit of $1,000,000 to the account of Reserve Bank
X and an equal credit to Bank B's account in Reserve Bank Y. Reserve
Bank Y will make the requested debit and credit and will give Bank B an
advice of credit. The definition of "bank" in Section
4A-105(a)(2) includes both Reserve Bank X and Reserve Bank Y. Bank
A's instruction to Reserve Bank X to pay money to Bank B is a payment
order under Section 4A-103(a)(1). Bank A is the sender and Reserve
Bank X is the receiving bank. Bank B is the beneficiary of Bank A's
order and of the funds transfer. Bank A is the originator of the funds
transfer and is also the originator's bank. Section 4A-104(c) and (d).
Reserve Bank X, an intermediary bank under Section 4A-104(b),
executes Bank A's order by sending a payment order to Reserve Bank Y
instructing that bank to credit the Federal Reserve account of Bank B.
Reserve Bank Y is the beneficiary's bank.
Suppose the transfer of funds from Bank A to Bank B is part of a
larger transaction in which Originator, a customer of Bank A, wants to
pay Beneficiary, a customer of Bank B. Originator issues a payment
order to Bank A to pay $1,000,000 to the account of Beneficiary in Bank
B. Bank A may execute Originator's order by means of Fedwire which
simultaneously transfers $1,000,000 from Bank A to Bank B and carries
a message instructing Bank B to pay $1,000,000 to the account of Y.
The Fedwire transfer is carried out as described in the previous
paragraph, except that the beneficiary of the funds transfer is Beneficiary
rather than Bank B. Reserve Bank X and Reserve Bank Y are
intermediary banks. When Reserve Bank Y advises Bank B of the credit
to its Federal Reserve account, it will also instruct Bank B to pay to the
account of Beneficiary. The instruction is a payment order to Bank B
which is the beneficiary's bank. When Reserve Bank Y advises Bank B
of the credit to its Federal Reserve account Bank B receives payment of
the payment order issued to it by Reserve Bank Y. Section
4A-403(a)(1). The payment order is automatically accepted by Bank B
at the time it receives the payment order of Reserve Bank Y. Section
4A-209(b)(2). At the time of acceptance by Bank B payment by
Originator to Beneficiary also occurs. Thus, in a Fedwire transfer,
payment to the beneficiary's bank, acceptance by the beneficiary's bank,
and payment by the originator to the beneficiary all occur simultaneously
by operation of law at the time the payment order to the beneficiary's
bank is received.
If Originator orders payment to the account of Beneficiary in Bank C
rather than Bank B, the analysis is somewhat modified. Bank A may not
have any relationship with Bank C and may not be able to make payment
directly to Bank C. In that case, Bank A could send a Fedwire
instructing Bank B to instruct Bank C to pay Beneficiary. The analysis
is the same as the previous case except that Bank B is an intermediary
bank and Bank C is the beneficiary's bank.
2. A funds transfer can also be made through a Federal Reserve
Bank in an automated clearing house transaction. In a typical case,
Originator instructs Originator's Bank to pay to the account of
Beneficiary in Beneficiary's Bank. Originator's instruction to pay a
particular beneficiary is transmitted to Originator's Bank along with
many other instructions for payment to other beneficiaries by many
different beneficiary's banks. All of these instructions are contained in a
magnetic tape or other electronic device. Transmission of instructions to
the various beneficiary's banks requires that Originator's instructions be
processed and repackaged with instructions of other originators so that all
instructions to a particular beneficiary's bank are transmitted together to
that bank. The repackaging is done in processing centers usually referred
to as automated clearing houses. Automated clearing houses are operated
either by Federal Reserve Banks or by other associations of banks. If
Originator's Bank chooses to execute Originator's instructions by
transmitting them to a Federal Reserve Bank for processing by the
Federal Reserve Bank, the transmission to the Federal Reserve Bank
results in the issuance of payment orders by Originator's Bank to the
Federal Reserve Bank, which is an intermediary bank. Processing by the
Federal Reserve Bank will result in the issuance of payment orders by the
Federal Reserve Bank to Beneficiary's Bank as well as payment orders to
other beneficiary's banks making payments to carry out Originator's
instructions.
3. Although the terms of Article 4A apply to funds transfers
involving Federal Reserve Banks, federal preemption would make
ineffective any Article 4A provision that conflicts with federal law. The
payments activities of the Federal Reserve Banks are governed by
regulations of the Federal Reserve Board and by operating circulars
issued by the Reserve Banks themselves. In some instances, the
operating circulars are issued pursuant to a Federal Reserve Board
regulation. In other cases, the Reserve Bank issues the operating circular
under its own authority under the Federal Reserve Act, subject to review
by the Federal Reserve Board. Section 4A-107 states that Federal
Reserve Board regulations and operating circulars of the Federal Reserve
Banks supersede any inconsistent provision of Article 4A to the extent of
the inconsistency. Federal Reserve Board regulations, being valid
exercises of regulatory authority pursuant to a federal statute, take
precedence over state law if there is an inconsistency. Childs v. Federal
Reserve Bank of Dallas, 719 F.2d 812 (5th Cir. 1983), reh. den. 724 F.2d
127 (5th Cir. 1984). Section 4A-107 treats operating circulars as having
the same effect whether issued under the Reserve Bank's own authority
or under a Federal Reserve Board regulation.
Section 36-4A-108. Exclusion of consumer transactions governed
by federal law.
This chapter does not apply to a funds transfer any part of which is
governed by the Electronic Fund Transfer Act of 1978 (Title XX, Public
Law 95-630, 92 Stat. 3728, 15 U.S.C. Section 1693 et seq.) as amended
from time to time.
OFFICIAL COMMENT
The Electronic Fund Transfer Act of 1978 is a federal statute that
covers a wide variety of electronic funds transfers involving consumers.
The types of transfers covered by the federal statute are essentially
different from the wholesale wire transfers that are the primary focus of
Article 4A. Section 4A-108 excludes a funds transfer from Article 4A if
any part of the transfer is covered by the federal law. Existing
procedures designed to comply with federal law will not be affected by
Article 4A. The effect of Section 4A-108 is to make Article 4A and
EFTA mutually exclusive. For example, if a funds transfer is to a
consumer account in the beneficiary's bank and the funds transfer is
made in part by use of Fedwire and in part by means of an automated
clearing house, EFTA applies to the ACH part of the transfer but not to
the Fedwire part. Under Section 4A-108, Article 4A does not apply to
any part of the transfer. However, in the absence of any law to govern
the part of the funds transfer that is not subject to EFTA, a court might
apply appropriate principles from Article 4A by analogy.
PART 2
ISSUE AND ACCEPTANCE OF PAYMENT
ORDER
Section 36-4A-201. Security procedure.
`Security procedure' means a procedure established by agreement of a
customer and a receiving bank for the purpose of (i) verifying that a
payment order or communication amending or canceling a payment order
is that of the customer, or (ii) detecting error in the transmission or the
content of the payment order or communication. A security procedure
may require the use of algorithms or other codes, identifying words or
numbers, encryption, callback procedures, or similar security devices.
Comparison of a signature on a payment order or communication with an
authorized specimen signature of the customer is not by itself a security
procedure.
OFFICIAL COMMENT
A large percentage of payment orders and communications amending
or canceling payment orders are transmitted electronically, and it is
standard practice to use security procedures that are designed to assure
the authenticity of the message. Security procedures can also be used to
detect error in the content of messages or to detect payment orders that
are transmitted by mistake as in the case of multiple transmission of the
same payment order. Security procedures might also apply to
communications that are transmitted by telephone or in writing. Section
4A-201 defines these security procedures. The definition of security
procedure limits the term to a procedure "established by agreement
of a customer and a receiving bank." The term does not apply to
procedures that the receiving bank may follow unilaterally in processing
payment orders. The question of whether loss that may result from the
transmission of a spurious or erroneous payment order will be borne by
the receiving bank or the sender or purported sender is affected by
whether a security procedure was or was not in effect and whether there
was or was not compliance with the procedure. Security procedures are
referred to in Sections 4A-202 and 4A-203, which deal with authorized
and verified payment orders, and Section 4A-205, which deals with
erroneous payment orders.
Section 36-4A-202. Authorized and verified payment
orders.
(a) A payment order received by the receiving bank is the
authorized order of the person identified as sender if that person
authorized the order or is otherwise bound by it under the law of
agency.
(b) If a bank and its customer have agreed that the authenticity of
payment orders issued to the bank in the name of the customer as sender
will be verified pursuant to a security procedure, a payment order
received by the receiving bank is effective as the order of the customer,
whether or not authorized, if (i) the security procedure is a commercially
reasonable method of providing security against unauthorized payment
orders, and (ii) the bank proves that it accepted the payment order in
good faith and in compliance with the security procedure and any written
agreement or instruction of the customer restricting acceptance of
payment orders issued in the name of the customer. The bank is not
required to follow an instruction that violates a written agreement with
the customer or notice of which is not received at a time and in a manner
affording the bank a reasonable opportunity to act on it before the
payment order is accepted.
(c) Commercial reasonableness of a security procedure is a
question of law to be determined by considering the wishes of the
customer expressed to the bank, the circumstances of the customer known
to the bank, including the size, type, and frequency of payment orders
normally issued by the customer to the bank, alternative security
procedures offered to the customer, and security procedures in general
use by customers and receiving banks similarly situated. A security
procedure is deemed to be commercially reasonable if (i) the security
procedure was chosen by the customer after the bank offered, and the
customer refused, a security procedure that was commercially reasonable
for that customer, and (ii) the customer expressly agreed in writing to be
bound by any payment order, whether or not authorized, issued in its
name and accepted by the bank in compliance with the security procedure
chosen by the customer.
(d) The term `sender' in this chapter includes the customer in
whose name a payment order is issued if the order is the authorized order
of the customer under subsection (a), or it is effective as the order of the
customer under subsection (b).
(e) This section applies to amendments and cancellations of
payment orders to the same extent it applies to payment orders.
(f) Except as provided in this section and in Section
36-4A-203(a)(1), rights and obligations arising under this section or
Section 36-4A-203 may not be varied by agreement.
OFFICIAL COMMENT
This section is discussed in the Comment following Section
4A-203.
Section 36-4A-203. Unenforceability of certain verified payment
orders.
(a) If an accepted payment order is not, under Section
36-4A-202(a), an authorized order of a customer identified as sender, but
is effective as an order of the customer pursuant to Section
36-4A-202(b), the following rules apply:
(1) By express written agreement, the receiving bank may limit
the extent to which it is entitled to enforce or retain payment of the
payment order.
(2) The receiving bank is not entitled to enforce or retain
payment of the payment order if the customer proves that the order was
not caused, directly or indirectly, by a person (i) entrusted at any time
with duties to act for the customer with respect to payment orders or the
security procedure, or (ii) who obtained access to transmitting facilities of
the customer or who obtained, from a source controlled by the customer
and without authority of the receiving bank, information facilitating
breach of the security procedure, regardless of how the information was
obtained or whether the customer was at fault. Information includes any
access device, computer software, or the like.
(b) This section applies to amendments of payment orders to the
same extent it applies to payment orders.
OFFICIAL COMMENT
1. Some person will always be identified as the sender of a payment
order. Acceptance of the order by the receiving bank is based on a belief
by the bank that the order was authorized by the person identified as the
sender. If the receiving bank is the beneficiary's bank acceptance means
that the receiving bank is obliged to pay the beneficiary. If the receiving
bank is not the beneficiary's bank, acceptance means that the receiving
bank has executed the sender's order and is obliged to pay the bank that
accepted the order issued in execution of the sender's order. In either
case the receiving bank may suffer a loss unless it is entitled to enforce
payment of the payment order that it accepted. If the person identified as
the sender of the order refuses to pay on the ground that the order was
not authorized by that person, what are the rights of the receiving bank?
In the absence of a statute or agreement that specifically addresses the
issue, the question usually will be resolved by the law of agency. In
some cases, the law of agency works well. For example, suppose the
receiving bank executes a payment order given by means of a letter
apparently written by a corporation that is a customer of the bank and
apparently signed by an officer of the corporation. If the receiving bank
acts solely on the basis of the letter, the corporation is not bound as the
sender of the payment order unless the signature was that of the officer
and the officer was authorized to act for the corporation in the issuance
of payment orders, or some other agency doctrine such as apparent
authority or estoppel causes the corporation to be bound. Estoppel can
be illustrated by the following example. Suppose P is aware that A, who
is unauthorized to act for P, has fraudulently misrepresented to T that A
is authorized to act for P. T believes A and is about to rely on the
misrepresentation. If P does not notify T of the true facts although P
could easily do so, P may be estopped from denying A's lack of
authority. A similar result could follow if the failure to notify T is the
result of negligence rather than a deliberate decision. Restatement,
Second, Agency Section 8B. Other equitable principles such as
subrogation or restitution might also allow a receiving bank to recover
with respect to an unauthorized payment order that it accepted. In Gatoil
(U.S.A.), Inc. v. Forest Hill State Bank, 1 U.C.C. Rep. Serv. 2d 171
(D.Md. 1986), a joint venturer not authorized to order payments from the
account of the joint venture, ordered a funds transfer from the account.
The transfer paid a bona fide debt of the joint venture. Although the
transfer was unauthorized, the court refused to require recredit of the
account because the joint venture suffered no loss. The result can be
rationalized on the basis of subrogation of the receiving bank to the right
of the beneficiary of the funds transfer to receive the payment from the
joint venture.
But in most cases these legal principles give the receiving bank very
little protection in the case of an authorized payment order. Cases like
those just discussed are not typical of the way that most payment orders
are transmitted and accepted, and such cases are likely to become even
less common. Given the large amount of the typical payment order, a
prudent receiving bank will be unwilling to accept a payment order
unless it has assurance that the order is what it purports to be. This
assurance is normally provided by security procedures described in
Section 4A-201.
In a very large percentage of cases covered by Article 4A,
transmission of the payment order is made electronically. The receiving
bank may be required to act on the basis of a message that appears on a
computer screen. Common law concepts of authority of agent to bind
principal are not helpful. There is no way of determining the identity or
the authority of the person who caused the message to be sent. The
receiving bank is not relying on the authority of any particular person to
act for the purported sender. The case is not comparable to payment of a
check by the drawee bank on the basis of a signature that is forged.
Rather, the receiving bank relies on a security procedure pursuant to
which the authenticity of the message can be "tested" by
various devices which are designed to provide certainty that the message
is that of the sender identified in the payment order. In the wire transfer
business the concept of "authorized" is different from that
found in agency law. In that business a payment order is treated as the
order of the person in whose name it is issued if it is properly tested
pursuant to a security procedure and the order passes the test.
Section 4A-202 reflects the reality of the wire transfer business. A
person in whose name a payment order is issued is considered to be the
sender of the order if the order is "authorized" as stated in
subsection (a) or if the order is "verified" pursuant to a
security procedure in compliance with subsection (b). If subsection (b)
does not apply, the question of whether the customer is responsible for
the order is determined by the law of agency. The issue is one of actual
or apparent authority of the person who caused the order to be issued in
the name of the customer. In some cases the law of agency might allow
the customer to be bound by an unauthorized order if conduct of the
customer can be used to find an estoppel against the customer to deny
that the order was unauthorized. If the customer is bound by the order
under any of these agency doctrines, subsection (a) treats the order as
authorized and thus the customer is deemed to be the sender of the order.
In most cases, however, subsection (b) will apply. In that event there is
no need to make an agency law analysis to determine authority. Under
Section 4A-202, the issue of liability of the purported sender of the
payment order will be determined by agency law only if the receiving
bank did not comply with subsection (b).
2. The scope of Section 4A-202 can be illustrated by the following
cases. Case #1. A payment order purporting to be that of Customer is
received by Receiving Bank, but the order was fraudulently transmitted
by a person who had no authority to act for Customer. Case #2. An
authentic payment order was sent by Customer, but before the order was
received by Receiving Bank the order was fraudulently altered by an
unauthorized person to change the beneficiary. Case #3. An authentic
payment order was received by Receiving Bank, but before the order was
executed by Receiving Bank a person who had no authority to act for
Customer fraudulently sent a communication purporting to amend the
order by changing the beneficiary. In each case Receiving Bank acted on
the fraudulent communication by accepting the payment order. These
cases are all essentially similar and they are treated identically by Section
4A-202. In each case Receiving Bank acted on a communication that it
thought was authorized by Customer when in fact the communication
was fraudulent. No distinction is made between Case #1 in which
Customer took no part at all in the transaction and Case #2 and Case #3
in which an authentic order was fraudulently altered or amended by an
unauthorized person. If subsection (b) does not apply, each case is
governed by subsection (a). If there are no additional facts on which an
estoppel might be found, Customer is not responsible in Case #1 for the
fraudulently issued payment order, in Case #2 for the fraudulent
alteration, or in Case #3 for the fraudulent amendment. Thus, in each
case Customer is not liable to pay the order and Receiving Bank takes
the loss. The only remedy of Receiving Bank is to seek recovery from
the person who received payment as beneficiary of the fraudulent order.
If there was verification in compliance with subsection (b), Customer will
take the loss unless Section 4A-203 applies.
3. Subsection (b) of Section 4A-202 is based on the assumption that
losses due to fraudulent payment orders can best be avoided by the use of
commercially reasonable security procedures, and that the use of such
procedures should be encouraged. The subsection is designed to protect
both the customer and the receiving bank. A receiving bank needs to be
able to rely on objective criteria to determine whether it can safely act on
a payment order. Employees of the bank can be trained to
"test" a payment order according to the various steps
specified in the security procedure. The bank is responsible for the acts
of these employees. Subsection (b)(ii) requires the bank to prove that it
accepted the payment order in good faith and "in compliance with
the security procedure." If the fraud was not detected because the
bank's employee did not perform the acts required by the security
procedure, the bank has not complied. Subsection (b)(ii) also requires
the bank to prove that it complied with any agreement or instruction that
restricts acceptance of payment orders issued in the name of the
customer. A customer may want to protect itself by imposing limitations
on acceptance of payment orders by the bank. For example, the
customer may prohibit the bank from accepting a payment order that is
not payable from an authorized account, that exceeds the credit balance
in specified accounts of the customer, or that exceeds some other amount.
Another limitation may relate to the beneficiary. The customer may
provide the bank with a list of authorized beneficiaries and prohibit
acceptance of any payment order to a beneficiary not appearing on the
list. Such limitations may be incorporated into the security procedure
itself or they may be covered by a separate agreement or instruction. In
either case, the bank must comply with the limitations if the conditions
stated in subsection (b) are met. Normally limitations on acceptance
would be incorporated into an agreement between the customer and the
receiving bank, but in some cases the instruction might be unilaterally
given by the customer. If standing instructions or an agreement state
limitations on the ability of the receiving bank to act, provision must be
made for later modification of the limitations. Normally, this would be
done by an agreement that specifies particular procedures to be followed.
Thus, subsection (b) states that the receiving bank is not required to
follow an instruction that violates a written agreement. The receiving
bank is not bound by an instruction unless it has adequate notice of it.
Subsections (25), (26) and (27) of Section 1-201 apply.
Subsection (b)(i) assures that the interests of the customer will be
protected by providing an incentive to a bank to make available to the
customer a security procedure that is commercially reasonable. If a
commercially reasonable security procedure is not made available to the
customer, subsection (b) does not apply. The result is that subsection (a)
applies and the bank acts at its peril in accepting a payment order that
may be unauthorized. Prudent banking practice may require that security
procedures be utilized in virtually all cases except for those in which
personal contact between the customer and the bank eliminates the
possibility of an unauthorized order. The burden of making available
commercially reasonable security procedures is imposed on receiving
banks because they generally determine what security procedures can be
used and are in the best position to evaluate the efficacy of procedures
offered to customers to combat fraud. The burden on the customer is to
supervise its employees to assure compliance with the security procedure
and to safeguard confidential security information and access to
transmitting facilities so that the security procedure cannot be
breached.
4. The principal issue that is likely to arise in litigation involving
subsection (b) is whether the security procedure in effect when a
fraudulent payment order was accepted was commercially reasonable.
The concept of what is commercially reasonable in a given case is
flexible. Verification entails labor and equipment costs that can vary
greatly depending upon the degree of security that is sought. A customer
that transmits very large numbers of payment orders in very large
amounts may desire and may reasonably expect to be provided with
state-of-the-art procedures that provide maximum security. But the
expense involved may make use of a state-of-the-art procedure infeasible
for a customer that normally transmits payment orders infrequently or in
relatively low amounts. Another variable is the type of receiving bank.
It is reasonable to require large money center banks to make available
state-of-the-art security procedures. On the other hand, the same
requirement may not be reasonable for a small country bank. A
receiving bank might have several security procedures that are designed
to meet the varying needs of different customers. The type of payment
order is another variable. For example, in a wholesale wire transfer, each
payment order is normally transmitted electronically and individually. A
testing procedure will be individually applied to each payment order. In
funds transfers to be made by means of an automated clearing house,
many payment orders are incorporated into an electronic device such as a
magnetic tape that is physically delivered. Testing of the individual
payment orders is not feasible. Thus, a different kind of security
procedure must be adopted to take into account the different mode of
transmission.
The issue of whether a particular security procedure is commercially
reasonable is a question of law. Whether the receiving bank complied
with the procedure is a question of fact. It is appropriate to make the
finding concerning commercial reasonability a matter of law because
security procedures are likely to be standardized in the banking industry
and a question of law standard leads to more predictability concerning
the level of security that a bank must offer to its customers. The purpose
of subsection (b) is to encourage banks to institute reasonable safeguards
against fraud but not to make them insurers against fraud. A security
procedure is not commercially unreasonable simply because another
procedure might have been better or because the judge deciding the
question would have opted for a more stringent procedure. The standard
is not whether the security procedure is the best available. Rather it is
whether the procedure is reasonable for the particular customer and the
particular bank, which is a lower standard. On the other hand, a security
procedure that fails to meet prevailing standards of good banking practice
applicable to the particular bank should not be held to be commercially
reasonable. Subsection (c) states factors to be considered by the judge in
making the determination of commercial reasonableness. Sometimes an
informed customer refuses a security procedure that is commercially
reasonable and suitable for that customer and insists on using a higher-risk procedure because it is more convenient or cheaper. In that case,
under the last sentence of subsection (c), the customer has voluntarily
assumed the risk of failure of the procedure and cannot shift the loss to
the bank. But this result follows only if the customer expressly agrees in
writing to assume that risk. It is implicit in the last sentence of
subsection (c) that a bank that accedes to the wishes of its customer in
this regard is not acting in bad faith by so doing so long as the customer
is made aware of the risk. In all cases, however, a receiving bank cannot
get the benefit of subsection (b) unless it has made available to the
customer a security procedure that is commercially reasonable and
suitable for use by that customer. In most cases, the mutual interest of
bank and customer to protect against fraud should lead to agreement to a
security procedure which is commercially reasonable.
5. The effect of Section 4A-202(b) is to place the risk of loss on the
customer if an unauthorized payment order is accepted by the receiving
bank after verification by the bank in compliance with a commercially
reasonable security procedure. An exception to this result is provided by
Section 4A-203(a)(2). The customer may avoid the loss resulting from
such a payment order if the customer can prove that the fraud was not
committed by a person described in that subsection. Breach of a
commercially reasonable security procedure requires that the person
committing the fraud have knowledge of how the procedure works and
knowledge of codes, identifying devices, and the like. That person may
also need access to transmitting facilities through an access device or
other software in order to breach the security procedure. This
confidential information must be obtained either from a source controlled
by the customer or from a source controlled by the receiving bank. If
the customer can prove that the person committing the fraud did not
obtain the confidential information from an agent or former agent of the
customer or from a source controlled by the customer, the loss is shifted
to the bank. "Prove" is defined in Section 4A-105(a)(7).
Because of bank regulation requirements, in this kind of case there will
always be a criminal investigation as well as an internal investigation of
the bank to determine the probable explanation for the breach of security.
Because a funds transfer fraud usually will involve a very large amount
of money, both the criminal investigation and the internal investigation
are likely to be thorough. In some cases there may be an investigation
by bank examiners as well. Frequently, these investigations will develop
evidence of who is at fault and the cause of the loss. The customer will
have access to evidence developed in these investigations and that
evidence can be used by the customer in meeting its burden of proof.
6. The effect of Section 4A-202(b) may also be changed by an
agreement meeting the requirements of Section 4A-203(a)(1). Some
customers may be unwilling to take all or part of the risk of loss with
respect to unauthorized payment orders even if all of the requirements of
Section 4A-202(b) are met. By virtue of Section 4A-203(a)(1), a
receiving bank may assume all of the risk of loss with respect to
unauthorized payment orders, or the customer and bank may agree that
losses from unauthorized payment orders are to be divided as provided in
the agreement.
7. In a large majority of cases the sender of a payment order is a
bank. In many cases in which there is a bank sender, both the sender
and the receiving bank will be members of a funds transfer system over
which the payment order is transmitted. Since Section 4A-202(f) does
not prohibit a funds transfer system rule from varying rights and
obligations under Section 4A-202, a rule of the funds transfer system can
determine how loss due to an unauthorized payment order from a
participating bank to another participating bank is to be allocated. A
funds transfer system rule, however, cannot change the rights of a
customer that is not a participating bank. Section 4A-501(b). Section
4A-202(f) also prevents variation by agreement except to the extent
stated.
Section 36-4A-204. Refund of payment and duty of customer to
report with respect to unauthorized payment order.
(a) If a receiving bank accepts a payment order issued in the name
of its customer as sender which is (i) not authorized and not effective as
the order of the customer under Section 36-4A-202, or (ii) not
enforceable, in whole or in part, against the customer under Section
36-4A-203, the bank shall refund any payment of the payment order
received from the customer to the extent the bank is not entitled to
enforce payment and shall pay interest on the refundable amount
calculated from the date the bank received payment to the date of the
refund. However, the customer is not entitled to interest from the bank
on the amount to be refunded if the customer fails to exercise ordinary
care to determine that the order was not authorized by the customer and
to notify the bank of the relevant facts within a reasonable time not
exceeding ninety days after the date the customer received notification
from the bank that the order was accepted or that the customer's account
was debited with respect to the order. The bank is not entitled to any
recovery from the customer on account of a failure by the customer to
give notification as stated in this section.
(b) Reasonable time under subsection (a) may be fixed by
agreement as stated in Section 36-1-204(1), but the obligation of a
receiving bank to refund payment as stated in subsection (a) may not
otherwise be varied by agreement.
OFFICIAL COMMENT
1. With respect to unauthorized payment orders, in a very large
percentage of cases a commercially reasonable security procedure will be
in effect. Section 4A-204 applies only to cases in which (i) no
commercially reasonable security procedure is in effect, (ii) the bank did
not comply with a commercially reasonable security procedure that was
in effect, (iii) the sender can prove, pursuant to Section 4A-203(a)(2),
that the culprit did not obtain confidential security information controlled
by the customer, or (iv) the bank, pursuant to Section 4A-203(a)(1)
agreed to take all or part of the loss resulting from an unauthorized
payment order. In each of these cases the bank takes the risk of loss
with respect to an unauthorized payment order because the bank is not
entitled to payment from the customer with respect to the order. The
bank normally debits the customer's account or otherwise receives
payment from the customer shortly after acceptance of the payment
order. Subsection (a) of Section 4A-204 states that the bank must
recredit the account or refund payment to the extent the bank is not
entitled to enforce payment.
2. Section 4A-204 is designed to encourage a customer to promptly
notify the receiving bank that it has accepted an unauthorized payment
order. Since cases of unauthorized payment orders will almost always
involve fraud, the bank's remedy is normally to recover from the
beneficiary of the unauthorized order if the beneficiary was party to the
fraud. This remedy may not be worth very much and it may not make
any difference whether or not the bank promptly learns about the fraud.
But in some cases prompt notification may make it easier for the bank to
recover some part of its loss from the culprit. The customer will
routinely be notified of the debit to its account with respect to an
unauthorized order or will otherwise be notified of acceptance of the
order. The customer has a duty to exercise ordinary care to determine
that the order was unauthorized after it has received notification from the
bank, and to advise the bank of the relevant facts within a reasonable
time not exceeding ninety days after receipt of notification. Reasonable
time is not defined and it may depend on the facts of the particular case.
If a payment order for $1,000,000 is wholly unauthorized, the customer
should normally discover it in far less than ninety days. If a $1,000,000
payment order was authorized but the name of the beneficiary was
fraudulently changed, a much longer period may be necessary to discover
the fraud. But in any event, if the customer delays more than ninety
days, the customer's duty has not been met. The only consequence of a
failure of the customer to perform this duty is a loss of interest on the
refund payable by the bank. A customer that acts promptly is entitled to
interest from the time the customer's account was debited or the
customer otherwise made payment. The rate of interest is stated in
Section 4A-506. If the customer fails to perform the duty, no interest is
recoverable for any part of the period before the bank learns that it
accepted an unauthorized order. But the bank is not entitled to any
recovery from the customer based on negligence for failure to inform the
bank. Loss of interest is in the nature of a penalty on the customer
designed to provide an incentive for the customer to police its account.
There is no intention to impose a duty on the customer that might result
in shifting loss from the unauthorized order to the customer.
Section 36-4A-205. Erroneous payment orders.
(a) If an accepted payment order was transmitted pursuant to a
security procedure for the detection of error and the payment order (i)
erroneously instructed payment to a beneficiary not intended by the
sender, (ii) erroneously instructed payment in an amount greater than the
amount intended by the sender, or (iii) was an erroneously transmitted
duplicate of a payment order previously sent by the sender, the following
rules apply:
(1) If the sender proves that the sender or a person acting on
behalf of the sender pursuant to Section 36-4A-206 complied with the
security procedure and that the error would have been detected if the
receiving bank had also complied, the sender is not obliged to pay the
order to the extent stated in paragraphs (2) and (3).
(2) If the funds transfer is completed on the basis of an
erroneous payment order described in clause (i) or (iii) of subsection (a),
the sender is not obliged to pay the order and the receiving bank is
entitled to recover from the beneficiary any amount paid to the
beneficiary to the extent allowed by the law governing mistake and
restitution.
(3) If the funds transfer is completed on the basis of a payment
order described in clause (ii) of subsection (a), the sender is not obliged
to pay the order to the extent the amount received by the beneficiary is
greater than the amount intended by the sender. In that case, the
receiving bank is entitled to recover from the beneficiary the excess
amount received to the extent allowed by the law governing mistake and
restitution.
(b) If (i) the sender of an erroneous payment order described in
subsection (a) is not obliged to pay all or part of the order, and (ii) the
sender receives notification from the receiving bank that the order was
accepted by the bank or that the sender's account was debited with
respect to the order, the sender has a duty to exercise ordinary care, on
the basis of information available to the sender, to discover the error with
respect to the order and to advise the bank of the relevant facts within a
reasonable time, not exceeding ninety days, after the bank's notification
was received by the sender. If the bank proves that the sender failed to
perform that duty, the sender is liable to the bank for the loss the bank
proves it incurred as a result of the failure, but the liability of the sender
may not exceed the amount of the sender's order.
(c) This section applies to amendments to payment orders to the
same extent it applies to payment orders.
OFFICIAL COMMENT
1. This section concerns error in the content or in the transmission
of payment orders. It deals with three kinds of error. Case #1. The
order identifies a beneficiary not intended by the sender. For example,
Sender intends to wire funds to a beneficiary identified only by an
account number. The wrong account number is stated in the order. Case
#2. The error is in the amount of the order. For example, Sender
intends to wire $1,000 to Beneficiary. Through error, the payment order
instructs payment of $1,000,000. Case #3. A payment order is sent to
the receiving bank and then, by mistake, the same payment order is sent
to the receiving bank again. In Case #3, the receiving bank may have no
way of knowing whether the second order is a duplicate of the first or is
another order. Similarly, in Case #1 and Case #2, the receiving bank
may have no way of knowing that the error exists. In each case, if this
section does not apply and the funds transfer is completed, Sender is
obliged to pay the order. Section 4A-402. Sender's remedy, based on
payment by mistake, is to recover from the beneficiary that received
payment.
Sometimes, however, transmission of payment orders of the sender to
the receiving bank is made pursuant to a security procedure designed to
detect one or more of the errors described above. Since "security
procedure" is defined by Section 4A-201 as "a procedure
established by agreement of a customer and a receiving bank for the
purpose of * * * detecting error * * *," Section 4A-205 does not
apply if the receiving bank and the customer did not agree to the
establishment of a procedure for detecting error. A security procedure
may be designed to detect an account number that is not one to which
Sender normally makes payment. In that case, the security procedure
may require a special verification that payment to the stated account
number was intended. In the case of dollar amounts, the security
procedure may require different codes for different dollar amounts. If a
$1,000,000 payment order contains a code that is inappropriate for that
amount, the error in amount should be detected. In the case of duplicate
orders, the security procedure may require that each payment order be
identified by a number or code that applies to no other order. If the
number or code of each payment order received is registered in a
computer base, the receiving bank can quickly identify a duplicate order.
The three cases covered by this section are essentially similar. In each, if
the error is not detected, some beneficiary will receive funds that the
beneficiary was not intended to receive. If this section applies, the risk
of loss with respect to the error of the sender is shifted to the bank which
has the burden of recovering the funds from the beneficiary. The risk of
loss is shifted to the bank only if the sender proves that the error would
have been detected if there had been compliance with the procedure and
that the sender (or an agent under Section 4A-206) complied. In the case
of a duplicate order or a wrong beneficiary, the sender doesn't have to
pay the order. In the case of an overpayment, the sender does not have
to pay the order to the extent of the overpayment. If subsection (a)(1)
applies, the position of the receiving bank is comparable to that of a
receiving bank that erroneously executes a payment order as stated in
Section 4A-303. However, failure of the sender to timely report the error
is covered by Section 4A-205(b) rather than by Section 4A-304 which
applies only to erroneous execution under Section 4A-303. A receiving
bank to which the risk of loss is shifted by subsection (a)(1) or (2) is
entitled to recover the amount erroneously paid to the beneficiary to the
extent allowed by the law of mistake and restitution. Rights of the
receiving bank against the beneficiary are similar to those of a receiving
bank that erroneously executes a payment order as stated in Section
4A-303. Those rights are discussed in Comment 2 to Section
4A-303.
2. A security procedure established for the purpose of detecting error
is not effective unless both sender and receiving bank comply with the
procedure. Thus, the bank undertakes a duty of complying with the
procedure for the benefit of the sender. This duty is recognized in
subsection (a)(1). The loss with respect to the sender's error is shifted to
the bank if the bank fails to comply with the procedure and the sender
(or an agent under Section 4A-206) does comply. Although the customer
may have been negligent in transmitting the erroneous payment order, the
loss is put on the bank on a last-clear-chance theory. A similar analysis
applies to subsection (b). If the loss with respect to an error is shifted to
the receiving bank and the sender is notified by the bank that the
erroneous payment order was accepted, the sender has a duty to exercise
ordinary care to discover the error and notify the bank of the relevant
facts within a reasonable time not exceeding 90 days. If the bank can
prove that the sender failed in this duty it is entitled to compensation for
the loss incurred as a result of the failure. Whether the bank is entitled
to recover from the sender depends upon whether the failure to give
timely notice would have made any difference. If the bank could not
have recovered from the beneficiary that received payment under the
erroneous payment order even if timely notice had been given, the
sender's failure to notify did not cause any loss of the bank.
3. Section 4A-205 is subject to variation by agreement under Section
4A-501. Thus, if a receiving bank and its customer have agreed to a
security procedure for detection of error, the liability of the receiving
bank for failing to detect an error of the customer as provided in Section
4A-205 may be varied as provided in an agreement of the bank and the
customer.
Section 36-4A-206. Transmission of payment order through
funds-transfer or other communication system.
(a) If a payment order addressed to a receiving bank is transmitted
to a funds-transfer system or other third-party communication system for
transmittal to the bank, the system is deemed to be an agent of the sender
for the purpose of transmitting the payment order to the bank. If there is
a discrepancy between the terms of the payment order transmitted to the
system and the terms of the payment order transmitted by the system to
the bank, the terms of the payment order of the sender are those
transmitted by the system. This section does not apply to a funds-transfer system of the Federal Reserve Banks.
(b) This section applies to cancellations and amendments of
payment orders to the same extent it applies to payment orders.
OFFICIAL COMMENT
1. A payment order may be issued to a receiving bank directly by
delivery of a writing or electronic device or by an oral or electronic
communication. If an agent of the sender is employed to transmit orders
on behalf of the sender, the sender is bound by the order transmitted by
the agent on the basis of agency law. Section 4A-206 is an application
of that principle to cases in which a funds transfer or communication
system acts as an intermediary in transmitting the sender's order to the
receiving bank. The intermediary is deemed to be an agent of the sender
for the purpose of transmitting payment orders and related messages for
the sender. Section 4A-206 deals with error by the intermediary.
2. Transmission by an automated clearing house of an association of
banks other than the Federal Reserve Banks is an example of a
transaction covered by Section 4A-206. Suppose Originator orders
Originator's Bank to cause a large number of payments to be made to
many accounts in banks in various parts of the country. These payment
orders are electronically transmitted to Originator's Bank and stored in an
electronic device that is held by Originator's Bank. Or, transmission of
the various payment orders is made by delivery to Originator's Bank of
an electronic device containing the instruction to the bank. In either case
the terms of the various payment orders by Originator are determined by
the information contained in the electronic device. In order to execute
the various orders, the information in the electronic device must be
processed. For example, if some of the orders are for payments to
accounts in Bank X and some to accounts in Bank Y, Originator's Bank
will execute these orders of Originator by issuing a series of payment
orders to Bank X covering all payments to accounts in that bank, and by
issuing a series of payment orders to Bank Y covering all payments to
accounts in that bank. The orders to Bank X may be transmitted together
by means of an electronic device, and those to Bank Y may be included
in another electronic device. Typically, this processing is done by an
automated clearing house acting for a group of banks including
Originator's Bank. The automated clearing house is a funds transfer
system. Section 4A-105(a)(5). Originator's Bank delivers Originator's
electronic device or transmits the information contained in the device to
the funds transfer system for processing into payment orders of
Originator's Bank to the appropriate beneficiary's banks. The processing
may result in an erroneous payment order. Originator's Bank, by use of
Originator's electronic device, may have given information to the funds
transfer system instructing payment of $100,000 to an account in Bank
X, but because of human error or an equipment malfunction the
processing may have converted that instruction into an instruction to
Bank X to make a payment of $1,000,000. Under Section 4A-206,
Originator's Bank issued a payment order for $1,000,000 to Bank X
when the erroneous information was sent to Bank X. Originator's Bank
is responsible for the error of the automated clearing house. The liability
of the funds transfer system that made the error is not governed by
Article 4A. It is left to the law of contract, a funds transfer system rule,
or other applicable law.
In the hypothetical case just discussed, if the automated clearing house
is operated by a Federal Reserve Bank, the analysis is different. Section
4A-206 does not apply. Originator's Bank will execute Originator's
payment orders by delivery or transmission of the electronic information
to the Federal Reserve Bank for processing. The result is that
Originator's Bank has issued payment orders to the Federal Reserve Bank
which, in this case, is acting as an intermediary bank. When the Federal
Reserve Bank has processed the information given to it by Originator's
Bank, it will issue payment orders to the various beneficiary's banks. If
the processing results in an erroneous payment order, the Federal Reserve
Bank has erroneously executed the payment order of Originator's Bank
and the case is governed by Section 4A-303.
Section 36-4A-207. Misdescription of beneficiary.
(a) Subject to subsection (b), if, in a payment order received by
the beneficiary's bank, the name, bank account number, or other
identification of the beneficiary refers to a nonexistent or unidentifiable
person or account, no person has rights as a beneficiary of the order and
acceptance of the order cannot occur.
(b) If a payment order received by the beneficiary's bank identifies
the beneficiary both by name and by an identifying or bank account
number and the name and number identify different persons, the
following rules apply:
(1) Except as otherwise provided in subsection (c), if the
beneficiary's bank does not know that the name and number refer to
different persons, it may rely on the number as the proper identification
of the beneficiary of the order. The beneficiary's bank need not
determine whether the name and number refer to the same person.
(2) If the beneficiary's bank pays the person identified by name
or knows that the name and number identify different persons, no person
has rights as beneficiary except the person paid by the beneficiary's bank
if that person was entitled to receive payment from the originator of the
funds transfer. If no person has rights as beneficiary, acceptance of the
order cannot occur.
(c) If (i) a payment order described in subsection (b) is accepted,
(ii) the originator's payment order described the beneficiary
inconsistently by name and number, and (iii) the beneficiary's bank pays
the person identified by number as permitted by subsection (b)(1), the
following rules apply:
(1) If the originator is a bank, the originator is obliged to pay its
order.
(2) If the originator is not a bank and proves that the person
identified by number was not entitled to receive payment from the
originator, the originator is not obliged to pay its order unless the
originator's bank proves that the originator, before acceptance of the
originator's order, had notice that payment of a payment order issued by
the originator might be made by the beneficiary's bank on the basis of an
identifying or bank account number even if it identifies a person different
from the named beneficiary. Proof of notice may be made by any
admissible evidence. The originator's bank satisfies the burden of proof
if it proves that the originator, before the payment order was accepted,
signed a writing stating the information to which the notice relates.
(d) In a case governed by subsection (b)(1), if the beneficiary's
bank rightfully pays the person identified by number and that person was
not entitled to receive payment from the originator, the amount paid may
be recovered from that person to the extent allowed by the law governing
mistake and restitution as follows:
(1) If the originator is obliged to pay its payment order as stated
in subsection (c), the originator has the right to recover.
(2) If the originator is not a bank and is not obliged to pay its
payment order, the originator's bank has the right to recover.
OFFICIAL COMMENT
1. Subsection (a) deals with the problem of payment orders issued to
the beneficiary's bank for payment to nonexistent or unidentifiable
persons or accounts. Since it is not possible in that case for the funds
transfer to be completed, subsection (a) states that the order cannot be
accepted. Under Section 4A-402(c), a sender of a payment order is not
obliged to pay its order unless the beneficiary's bank accepts a payment
order instructing payment to the beneficiary of that sender's order. Thus,
if the beneficiary of a funds transfer is nonexistent or unidentifiable, each
sender in the funds transfer that has paid its payment order is entitled to
get its money back.
2. Subsection (b), which takes precedence over subsection (a), deals
with the problem of payment orders in which the description of the
beneficiary does not allow identification of the beneficiary because the
beneficiary is described by name and by an identifying number or an
account number and the name and number refer to different persons. A
very large percentage of payment orders issued to the beneficiary's bank
by another bank are processed by automated means using machines
capable of reading orders on standard formats that identify the
beneficiary by an identifying number or the number of a bank account.
The processing of the order by the beneficiary's bank and the crediting
of the beneficiary's account are done by use of the identifying or bank
account number without human reading of the payment order itself. The
process is comparable to that used in automated payment of checks. The
standard format, however, may also allow the inclusion of the name of
the beneficiary and other information which can be useful to the
beneficiary's bank and the beneficiary but which plays no part in the
process of payment. If the beneficiary's bank has both the account
number and name of the beneficiary supplied by the originator of the
funds transfer, it is possible for the beneficiary's bank to determine
whether the name and number refer to the same person, but if a duty to
make that determination is imposed on the beneficiary's bank the benefits
of automated payment are lost. Manual handling of payment orders is
both expensive and subject to human error. If payment orders can be
handled on an automated basis there are substantial economies of
operation and the possibility of clerical error is reduced. Subsection (b)
allows banks to utilize automated processing by allowing banks to act on
the basis of the number without regard to the name if the bank does not
know that the name and number refer to different persons.
"Know" is defined in Section 1-201(25) to mean actual
knowledge, and Section 1-201(27) states rules for determining when an
organization has knowledge of information received by the organization.
The time of payment is the pertinent time at which knowledge or lack of
knowledge must be determined.
Although the clear trend is for beneficiary's banks to process payment
orders by automated means, Section 4A-207 is not limited to cases in
which processing is done by automated means. A bank that processes by
semi-automated means or even manually may rely on number as stated in
Section 4A-207.
In cases covered by subsection (b) the erroneous identification would
in virtually all cases be the identifying or bank account number. In the
typical case the error is made by the originator of the funds transfer. The
originator should know the name of the person who is to receive payment
and can further identify that person by an address that would normally be
known to the originator. It is not unlikely, however, that the originator
may not be sure whether the identifying or account number refers to the
person the originator intends to pay. Subsection (b)(1) deals with the
typical case in which the beneficiary's bank pays on the basis of the
account number and is not aware at the time of payment that the named
beneficiary is not the holder of the account which was paid. In some
cases the false number will be the result of error by the originator. In
other cases fraud is involved. For example, Doe is the holder of shares
in Mutual Fund. Thief, impersonating Doe, requests redemption of the
shares and directs Mutual Fund to wire the redemption proceeds to Doe's
account #12345 in Beneficiary's Bank. Mutual Fund originates a funds
transfer by issuing a payment order to Originator's Bank to make the
payment to Doe's account #12345 in Beneficiary's Bank. Originator's
Bank executes the order by issuing a conforming payment order to
Beneficiary's Bank which makes payment to account #12345. That
account is the account of Roe rather than Doe. Roe might be a person
acting in concert with Thief or Roe might be an innocent third party.
Assume that Roe is a gem merchant that agreed to sell gems to Thief
who agreed to wire the purchase price to Roe's account in Beneficiary's
Bank. Roe believed that the credit to Roe's account was a transfer of
funds from Thief and released the gems to Thief in good faith in reliance
on the payment. The case law is unclear on the responsibility of a
beneficiary's bank in carrying out a payment order in which the
identification of the beneficiary by name and number is conflicting. See
Securities Fund Services, Inc. v. American National Bank, 542 F.Supp.
323 (N.D.Ill. 1982) and Bradford Trust Co. v. Texas American Bank,
790 F.2d 407 (5th Cir. 1986). Section 4A-207 resolves the issue.
If Beneficiary's Bank did not know about the conflict between the
name and number, subsection (b)(1) applies. Beneficiary's Bank has no
duty to determine whether there is a conflict and it may rely on the
number as the proper identification of the beneficiary of the order.
When it accepts the order, it is entitled to payment from Originator's
Bank. Section 4A-402(b). On the other hand, if Beneficiary's Bank
knew about the conflict between the name and number and nevertheless
paid Roe, subsection (b)(2) applies. Under that provision, acceptance of
the payment order of Originator's Bank did not occur because there is no
beneficiary of that order. Since acceptance did not occur Originator's
Bank is not obliged to pay Beneficiary's Bank. Section 4A-402(b).
Similarly, Mutual Fund is excused from its obligation to pay Originator's
Bank. Section 4A-402(c). Thus, Beneficiary's Bank takes the loss. Its
only cause of action is against Thief. Roe is not obliged to return the
payment to the beneficiary's bank because Roe received the payment in
good faith and for value. Article 4A makes irrelevant the issue of
whether Mutual Fund was or was not negligent in issuing its payment
order.
3. Normally, subsection (b)(1) will apply to the hypothetical case
discussed in Comment 2. Beneficiary's Bank will pay on the basis of the
number without knowledge of the conflict. In that case subsection (c)
places the loss on either Mutual Fund or Originator's Bank. It is not
unfair to assign the loss to Mutual Fund because it is the person who
dealt with the impostor and it supplied the wrong account number. It
could have avoided the loss if it had not used an account number that it
was not sure was that of Doe. Mutual Fund, however, may not have
been aware of the risk involved in giving both name and number.
Subsection (c) is designed to protect the originator, Mutual Fund, in this
case. Under that subsection, the originator is responsible for the
inconsistent description of the beneficiary if it had notice that the order
might be paid by the beneficiary's bank on the basis of the number. If
the originator is a bank, the originator always has that responsibility.
The rationale is that any bank should know how payment orders are
processed and paid. If the originator is not a bank, the originator's bank
must prove that its customer, the originator, had notice. Notice can be
proved by any admissible evidence, but the bank can always prove notice
by providing the customer with a written statement of the required
information and obtaining the customer's signature to the statement.
That statement will then apply to any payment order accepted by the
bank thereafter. The information need not be supplied more than
once.
In the hypothetical case if Originator's Bank made the disclosure stated
in the last sentence of subsection (c)(2), Mutual Fund must pay
Originator's Bank. Under subsection (d)(1), Mutual Fund has an action
to recover from Roe if recovery from Roe is permitted by the law
governing mistake and restitution. Under the assumed facts Roe should
be entitled to keep the money as a person who took it in good faith and
for value since it was taken as payment for the gems. In that case,
Mutual Fund's only remedy is against Thief. If Roe was not acting in
good faith, Roe has to return the money to Mutual Fund. If Originator's
Bank does not prove that Mutual Fund had notice as stated in subsection
(c)(2), Mutual Fund is not required to pay Originator's Bank. Thus, the
risk of loss falls on Originator's Bank whose remedy is against Roe or
Thief as stated above. Subsection (d)(2).
Section 36-4A-208. Misdescription of intermediary bank or
beneficiary's bank.
(a) This subsection applies to a payment order identifying an
intermediary bank or the beneficiary's bank only by an identifying
number.
(1) The receiving bank may rely on the number as the proper
identification of the intermediary or beneficiary's bank and need not
determine whether the number identifies a bank.
(2) The sender is obliged to compensate the receiving bank for
any loss and expenses incurred by the receiving bank as a result of its
reliance on the number in executing or attempting to execute the
order.
(b) This subsection applies to a payment order identifying an
intermediary bank or the beneficiary's bank both by name and an
identifying number if the name and number identify different
persons.
(1) If the sender is a bank, the receiving bank may rely on the
number as the proper identification of the intermediary or beneficiary's
bank if the receiving bank, when it executes the sender's order, does not
know that the name and number identify different persons. The receiving
bank need not determine whether the name and number refer to the same
person or whether the number refers to a bank. The sender is obliged to
compensate the receiving bank for any loss and expenses incurred by the
receiving bank as a result of its reliance on the number in executing or
attempting to execute the order.
(2) If the sender is not a bank and the receiving bank proves that
the sender, before the payment order was accepted, had notice that the
receiving bank might rely on the number as the proper identification of
the intermediary or beneficiary's bank even if it identifies a person
different from the bank identified by name, the rights and obligations of
the sender and the receiving bank are governed by subsection (b)(1), as
though the sender were a bank. Proof of notice may be made by any
admissible evidence. The receiving bank satisfies the burden of proof if
it proves that the sender, before the payment order was accepted, signed
a writing stating the information to which the notice relates.
(3) Regardless of whether the sender is a bank, the receiving
bank may rely on the name as the proper identification of the
intermediary or beneficiary's bank if the receiving bank, at the time it
executes the sender's order, does not know that the name and number
identify different persons. The receiving bank need not determine
whether the name and number refer to the same person.
(4) If the receiving bank knows that the name and number
identify different persons, reliance on either the name or the number in
executing the sender's payment order is a breach of the obligation stated
in Section 36-4A-302(a)(1).
OFFICIAL COMMENT
1. This section addresses an issue similar to that addressed by
Section 4A-207. Because of automation in the processing of payment
orders, a payment order may identify the beneficiary's bank or an
intermediary bank by an identifying number. The bank identified by
number might or might not also be identified by name. The following
two cases illustrate Section 4A-208(a) and (b):
Case #1. Originator's payment order to Originator's Bank identifies
the beneficiary's bank as Bank A and instructs payment to Account
#12345 in that bank. Originator's Bank executes Originator's order by
issuing a payment order to Intermediary Bank. In the payment order of
Originator's Bank, the beneficiary's bank is identified as Bank A but is
also identified by number, #67890. The identifying number refers to
Bank B rather than Bank A. If processing by Intermediary Bank of the
payment order of Originator's Bank is done by automated means,
Intermediary Bank, in executing the order, will rely on the identifying
number and will issue a payment order to Bank B rather than Bank A. If
there is an Account #12345 in Bank B, the payment order of
Intermediary Bank would normally be accepted and payment would be
made to a person not intended by Originator. In this case, Section
4A-208(b)(1) puts the risk of loss on Originator's Bank. Intermediary
Bank may rely on the number #67890 as the proper identification of the
beneficiary's bank. Intermediary Bank has properly executed the
payment order of Originator's Bank. By using the wrong number to
describe the beneficiary's bank, Originator's Bank has improperly
executed Originator's payment order because the payment order of
Originator's Bank provides for payment to the wrong beneficiary, the
holder of Account #12345 in Bank B rather than the holder of Account
#12345 in Bank A. Section 4A-302(a) (1) and Section 4A-303(c).
Originator's Bank is not entitled to payment from Originator but is
required to pay Intermediary Bank. Section 4A-303(c) and Section
4A-402(c). Intermediary Bank is also entitled to compensation for any
loss and expenses resulting from the error by Originator's Bank.
If there is no Account #12345 in Bank B, the result is that there is no
beneficiary of the payment order issued by Originator's Bank and the
funds transfer will not be completed. Originator's Bank is not entitled to
payment from Originator and Intermediary Bank is not entitled to
payment from Originator's Bank. Section 4A-402(c). Since Originator's
Bank improperly executed Originator's payment order, it may be liable
for damages under Section 4A-305. As stated above, Intermediary Bank
is entitled to compensation for loss and expenses resulting from the error
by Originator's Bank.
Case #2. Suppose the same payment order by Originator to
Originator's Bank as in Case #1. In executing the payment order
Originator's Bank issues a payment order to Intermediary Bank in which
the beneficiary's bank is identified only by number, #67890. That
number does not refer to Bank A. Rather, it identifies a person that is
not a bank. If processing by Intermediary Bank of the payment order of
Originator's Bank is done by automated means, Intermediary Bank will
rely on the number #67890 to identify the beneficiary's bank.
Intermediary Bank has no duty to determine whether the number
identifies a bank. The funds transfer cannot be completed in this case
because no bank is identified as the beneficiary's bank. Subsection (a)
puts the risk of loss on Originator's Bank. Originator's Bank is not
entitled to payment from Originator. Section 4A-402(c). Originator's
Bank has improperly executed Originator's payment order and may be
liable for damages under Section 4A-305. Originator's Bank is obliged
to compensate Intermediary Bank for loss and expenses resulting from
the error by Originator's Bank.
Subsection (a) also applies if #67890 identifies a bank, but the bank is
not Bank A. Intermediary Bank may rely on the number as the proper
identification of the beneficiary's bank. If the bank to which
Intermediary Bank sends its payment order accepts the order,
Intermediary Bank is entitled to payment from Originator's Bank, but
Originator's Bank is not entitled to payment from Originator. The
analysis is similar to that in Case #1.
2. Subsection (b)(2) of Section 4A-208 addresses cases in which an
erroneous identification of a beneficiary's bank or intermediary bank by
name and number is made in a payment order of a sender that is not a
bank. Suppose Originator issues a payment order to Originator's Bank
that instructs that bank to use an intermediary bank identified as Bank A
and by an identifying number, #67890. The identifying number refers to
Bank B. Originator intended to identify Bank A as intermediary bank.
If Originator's Bank relied on the number and issued a payment order to
Bank B, the rights of Originator's Bank depend upon whether the proof
of notice stated in subsection (b)(2) is made by Originator's Bank. If
proof is made, Originator's Bank's rights are governed by subsection
(b)(1) of Section 4A-208. Originator's Bank is not liable for breach of
Section 4A-302(a)(1) and is entitled to compensation from Originator for
any loss and expenses resulting from Originator's error. If notice is not
proved, Originator's Bank may not rely on the number in executing
Originator's payment order. Since Originator's Bank does not get the
benefit of subsection (b)(1) in that case, Originator's Bank improperly
executed Originator's payment order and is in breach of the obligation
stated in Section 4A-302(a)(1). If notice is not given, Originator's Bank
can rely on the name if it is not aware of the conflict in name and
number. Subsection (b)(3).
3. Although the principal purpose of Section 4A-208 is to
accommodate automated processing of payment orders, Section 4A-208
applies regardless of whether processing is done by automation, semi-automated means, or manually.
Section 36-4A-209. Acceptance of payment order.
(a) Subject to subsection (d), a receiving bank other than the
beneficiary's bank accepts a payment order when it executes the
order.
(b) Subject to subsections (c) and (d), a beneficiary's bank accepts
a payment order at the earliest of the following times:
(1) when the bank (i) pays the beneficiary as stated in Section
36-4A-405(a) or 36-4A-405(b), or (ii) notifies the beneficiary of receipt
of the order or that the account of the beneficiary has been credited with
respect to the order unless the notice indicates that the bank is rejecting
the order or that funds with respect to the order may not be withdrawn or
used until receipt of payment from the sender of the order;
(2) when the bank receives payment of the entire amount of the
sender's order pursuant to Section 36-4A-403(a)(1) or 36-4A-403(a)(2);
or
(3) the opening of the next funds-transfer business day of the
bank following the payment date of the order if, at that time, the amount
of the sender's order is fully covered by a withdrawable credit balance in
an authorized account of the sender or the bank has otherwise received
full payment from the sender, unless the order was rejected before that
time or is rejected within (i) one hour after that time, or (ii) one hour
after the opening of the next business day of the sender following the
payment date if that time is later. If notice of rejection is received by the
sender after the payment date and the authorized account of the sender
does not bear interest, the bank is obliged to pay interest to the sender on
the amount of the order for the number of days elapsing after the
payment date to the day the sender receives notice or learns that the order
was not accepted, counting that day as an elapsed day. If the
withdrawable credit balance during that period falls below the amount of
the order, the amount of interest payable is reduced accordingly.
(c) Acceptance of a payment order cannot occur before the order is
received by the receiving bank. Acceptance does not occur under
subsection (b)(2) or (b)(3) if the beneficiary of the payment order does
not have an account with the receiving bank, the account has been closed,
or the receiving bank is not permitted by law to receive credits for the
beneficiary's account.
(d) A payment order issued to the originator's bank cannot be
accepted until the payment date if the bank is the beneficiary's bank, or
the execution date if the bank is not the beneficiary's bank. If the
originator's bank executes the originator's payment order before the
execution date or pays the beneficiary of the originator's payment order
before the payment date and the payment order is subsequently canceled
pursuant to Section 36-4A-211(b), the bank may recover from the
beneficiary any payment received to the extent allowed by the law
governing mistake and restitution.
OFFICIAL COMMENT
1. This section treats the sender's payment order as a request by the
sender to the receiving bank to execute or pay the order and that request
can be accepted or rejected by the receiving bank. Section 4A-209
defines when acceptance occurs. Section 4A-210 covers rejection.
Acceptance of the payment order imposes an obligation on the receiving
bank to the sender if the receiving bank is not the beneficiary's bank, or
to the beneficiary if the receiving bank is the beneficiary's bank. These
obligations are stated in Section 4A-302 and Section 4A-404.
2. Acceptance by a receiving bank other than the beneficiary's bank
is defined in Section 4A-209(a). That subsection states the only way that
a bank other than the beneficiary's bank can accept a payment order. A
payment order to a bank other than the beneficiary's bank is, in effect, a
request that the receiving bank execute the sender's order by issuing a
payment order to the beneficiary's bank or to an intermediary bank.
Normally, acceptance occurs at the time of execution, but there is an
exception stated in subsection (d) and discussed in Comment 9.
Execution occurs when the receiving bank "issues a payment order
intended to carry out" the sender's order. Section 4A-301(a). In
some cases the payment order issued by the receiving bank may not
conform to the sender's order. For example, the receiving bank might
make a mistake in the amount of its order, or the order might be issued
to the wrong beneficiary's bank or for the benefit of the wrong
beneficiary. In all of these cases there is acceptance of the sender's order
by the bank when the receiving bank issues its order intended to carry
out the sender's order, even though the bank's payment order does not in
fact carry out the instruction of the sender. Improper execution of the
sender's order may lead to liability to the sender for damages or it may
mean that the sender is not obliged to pay its payment order. These
matters are covered in Section 4A-303, Section 4A-305, and Section
4A-402.
3. A receiving bank has no duty to accept a payment order unless
the bank makes an agreement, either before or after issuance of the
payment order, to accept it, or acceptance is required by a funds transfer
system rule. If the bank makes such an agreement it incurs a contractual
obligation based on the agreement and may be held liable for breach of
contract if a failure to execute violates the agreement. In many cases a
bank will enter into an agreement with its customer to govern the rights
and obligations of the parties with respect to payment orders issued to the
bank by the customer or, in cases in which the sender is also a bank,
there may be a funds transfer system rule that governs the obligations of
a receiving bank with respect to payment orders transmitted over the
system. Such agreements or rules can specify the circumstances under
which a receiving bank is obliged to execute a payment order and can
define the extent of liability of the receiving bank for breach of the
agreement or rule. Section 4A-305(d) states the liability for breach of an
agreement to execute a payment order.
4. In the case of a payment order issued to the beneficiary's bank,
acceptance is defined in Section 4A-209(b). The function of a
beneficiary's bank that receives a payment order is different from that of
a receiving bank that receives a payment order for execution. In the
typical case, the beneficiary's bank simply receives payment from the
sender of the order, credits the account of the beneficiary and notifies the
beneficiary of the credit. Acceptance by the beneficiary's bank does not
create any obligation to the sender. Acceptance by the beneficiary's bank
means that the bank is liable to the beneficiary for the amount of the
order. Section 4A-404(a). There are three ways in which the
beneficiary's bank can accept a payment order which are described in the
following comments.
5. Under Section 4A-209(b)(1), the beneficiary's bank can accept a
payment order by paying the beneficiary. In the normal case of crediting
an account of the beneficiary, payment occurs when the beneficiary is
given notice of the right to withdraw the credit, the credit is applied to a
debt of the beneficiary, or "funds with respect to the order"
are otherwise made available to the beneficiary. Section 4A-405(a). The
quoted phrase covers cases in which funds are made available to the
beneficiary as a result of receipt of a payment order for the benefit of the
beneficiary but the release of funds is not expressed as payment of the
order. For example, the beneficiary's bank might express a release of
funds equal to the amount of the order as a "loan" that will
be automatically repaid when the beneficiary's bank receives payment by
the sender of the order. If the release of funds is designated as a loan
pursuant to a routine practice of the bank, the release is conditional
payment of the order rather than a loan, particularly if normal incidents
of a loan such as the signing of a loan agreement or note and the
payment of interest are not present. Such a release of funds is payment
to the beneficiary under Section 4A-405(a). Under Section 4A-405(c)
the bank cannot recover the money from the beneficiary if the bank does
not receive payment from the sender of the payment order that it
accepted. Exceptions to this rule are stated in Section 4A-405(d) and (e).
The beneficiary's bank may also accept by notifying the beneficiary that
the order has been received. "Notifies" is defined in Section
1-201(26). In some cases a beneficiary's bank will receive a payment
order during the day but settlement of the sender's obligation to pay the
order will not occur until the end of the day. If the beneficiary's bank
wants to defer incurring liability to the beneficiary until the beneficiary's
bank receives payment, it can do so. The beneficiary's bank incurs no
liability to the beneficiary with respect to a payment order that it receives
until it accepts the order. If the bank does not accept pursuant to
subsection (b)(1), acceptance does not occur until the end of the day
when the beneficiary's bank receives settlement. If the sender settles, the
payment order will be accepted under subsection (b)(2) and the funds
will be released to the beneficiary the next morning. If the sender
doesn't settle, no acceptance occurs. In either case the beneficiary's bank
suffers no loss.
6. In most cases the beneficiary's bank will receive a payment order
from another bank. If the sender is a bank and the beneficiary's bank
receives payment from the sender by final settlement through the Federal
Reserve System or a funds transfer system (Section 4A-403(a)(1)) or, less
commonly, through credit to an account of the beneficiary's bank with
the sender or another bank (Section 4A-403(a)(2)), acceptance by the
beneficiary's bank occurs at the time payment is made. Section
4A-209(b)(2). A minor exception to this rule is stated in Section
4A-209(c). Section 4A-209(b)(2) results in automatic acceptance of
payment orders issued to a beneficiary's bank by means of Fedwire
because the Federal Reserve account of the beneficiary's bank is credited
and final payment is made to that bank when the payment order is
received.
Subsection (b)(2) would also apply to cases in which the beneficiary's
bank mistakenly pays a person who is not the beneficiary of the payment
order issued to the beneficiary's bank. For example, suppose the
payment order provides for immediate payment to Account #12345. The
beneficiary's bank erroneously credits Account #12346 and notifies the
holder of that account of the credit. No acceptance occurs in this case
under subsection (b)(1) because the beneficiary of the order has not been
paid or notified. The holder of Account #12345 is the beneficiary of the
order issued to the beneficiary's bank. But acceptance will normally
occur if the beneficiary's bank takes no other action, because the bank
will normally receive settlement with respect to the payment order. At
that time the bank has accepted because the sender paid its payment
order. The bank is liable to pay the holder of Account #12345. The
bank has paid the holder of Account #12346 by mistake, and has a right
to recover the payment if the credit is withdrawn, to the extent provided
in the law governing mistake and restitution.
7. Subsection (b)(3) covers cases of inaction by the beneficiary's
bank. It applies whether or not the sender is a bank and covers a case in
which the sender and the beneficiary both have accounts with the
receiving bank and payment will be made by debiting the account of the
sender and crediting the account of the beneficiary. Subsection (b)(3) is
similar to subsection (b)(2) in that it bases acceptance by the
beneficiary's bank on payment by the sender. Payment by the sender is
effected by a debit to the sender's account if the account balance is
sufficient to cover the amount of the order. On the payment date
(Section 4A-401) of the order the beneficiary's bank will normally credit
the beneficiary's account and notify the beneficiary of receipt of the
order if it is satisfied that the sender's account balance covers the order
or is willing to give credit to the sender. In some cases, however, the
bank may not be willing to give credit to the sender and it may not be
possible for the bank to determine until the end of the day on the
payment date whether there are sufficient good funds in the sender's
account. There may be various transactions during the day involving
funds going into and out of the account. Some of these transactions may
occur late in the day or after the close of the banking day. To
accommodate this situation, subsection (b)(3) provides that the status of
the account is determined at the opening of the next funds transfer
business day of the beneficiary's bank after the payment date of the
order. If the sender's account balance is sufficient to cover the order, the
beneficiary's bank has a source of payment and the result in almost all
cases is that the bank accepts the order at that time if it did not
previously accept under subsection (b)(1). In rare cases, a bank may
want to avoid acceptance under subsection (b)(3) by rejecting the order
as discussed in Comment 8.
8. Section 4A-209 is based on a general principle that a receiving
bank is not obliged to accept a payment order unless it has agreed or is
bound by a funds transfer system rule to do so. Thus, provision is made
to allow the receiving bank to prevent acceptance of the order. This
principle is consistently followed if the receiving bank is not the
beneficiary's bank. If the receiving bank is not the beneficiary's bank,
acceptance is in the control of the receiving bank because it occurs only
if the order is executed. But in the case of the beneficiary's bank
acceptance can occur by passive receipt of payment under subsection
(b)(2) or (3). In the case of a payment made by Fedwire acceptance
cannot be prevented. In other cases the beneficiary's bank can prevent
acceptance by giving notice of rejection to the sender before payment
occurs under Section 4A-403(a)(1) or (2). A minor exception to the
ability of the beneficiary's bank to reject is stated in Section
4A-502(c)(3).
Under subsection (b)(3) acceptance occurs at the opening of the next
funds transfer business day of the beneficiary's bank following the
payment date unless the bank rejected the order before that time or it
rejects within one hour after that time. In some cases the sender and the
beneficiary's bank may not be in the same time zone or the beginning of
the business day of the sender and the funds transfer business day of the
beneficiary's bank may not coincide. For example, the sender may be
located in California and the beneficiary's bank in New York. Since in
most cases notice of rejection would be communicated electronically or
by telephone, it might not be feasible for the bank to give notice before
one hour after the opening of the funds transfer business day in New
York because at that hour, the sender's business day may not have started
in California. For that reason, there are alternative deadlines stated in
subsection (b)(3). In the case stated, the bank acts in time if it gives
notice within one hour after the opening of the business day of the
sender. But if the notice of rejection is received by the sender after the
payment date, the bank is obliged to pay interest to the sender if the
sender's account does not bear interest. In that case the bank had the use
of funds of the sender that the sender could reasonably assume would be
used to pay the beneficiary. The rate of interest is stated in Section
4A-506. If the sender receives notice on the day after the payment date
the sender is entitled to one day's interest. If receipt of notice is delayed
for more than one day, the sender is entitled to interest for each
additional day of delay.
9. Subsection (d) applies only to a payment order by the originator
of a funds transfer to the originator's bank and it refers to the following
situation. On April 1, Originator instructs Bank A to make a payment on
April 15 to the account of Beneficiary in Bank B. By mistake, on April
1, Bank A executes Originator's payment order by issuing a payment
order to Bank B instructing immediate payment to Beneficiary. Bank B
credited Beneficiary's account and immediately released the funds to
Beneficiary. Under subsection (d) no acceptance by Bank A occurred on
April 1 when Originator's payment order was executed because
acceptance cannot occur before the execution date which in this case
would be April 15 or shortly before that date. Section 4A-301(b).
Under Section 4A-402(c), Originator is not obliged to pay Bank A until
the order is accepted and that can't occur until the execution date. But
Bank A is required to pay Bank B when Bank B accepted Bank A's
order on April 1. Unless Originator and Beneficiary are the same person,
in almost all cases Originator is paying a debt owed to Beneficiary and
early payment does not injure Originator because Originator does not
have to pay Bank A until the execution date. Section 4A-402(c). Bank
A takes the interest loss. But suppose that on April 3, Originator
concludes that no debt was owed to Beneficiary or that the debt was less
than the amount of the payment order. Under Section 4A-211(b)
Originator can cancel its payment order if Bank A has not accepted. If
early execution of Originator's payment order is acceptance, Originator
can suffer a loss because cancellation after acceptance is not possible
without the consent of Bank A and Bank B. Section 4A-211(c). If
Originator has to pay Bank A, Originator would be required to seek
recovery of the money from Beneficiary. Subsection (d) prevents this
result and puts the risk of loss on Bank A by providing that the early
execution does not result in acceptance until the execution date. Since on
April 3 Originator's order was not yet accepted, Originator can cancel it
under Section 4A-211(b). The result is that Bank A is not entitled to
payment from Originator but is obliged to pay Bank B. Bank A has paid
Beneficiary by mistake. If Originator's payment order is cancelled, Bank
A becomes the originator of an erroneous funds transfer to Beneficiary.
Bank A has the burden of recovering payment from Beneficiary on the
basis of a payment by mistake. If Beneficiary received the money in
good faith in payment of a debt owed to Beneficiary by Originator, the
law of mistake and restitution may allow Beneficiary to keep all or part
of the money received. If Originator owed money to Beneficiary, Bank
A has paid Originator's debt and, under the law of restitution, which
applies pursuant to Section 1-103, Bank A is subrogated to Beneficiary's
rights against Originator on the debt.
If Bank A is the Beneficiary's bank and Bank A credited Beneficiary's
account and released the funds to Beneficiary on April 1, the analysis is
similar. If Originator's order is cancelled, Bank A has paid Beneficiary
by mistake. The right of Bank A to recover the payment from
Beneficiary is similar to Bank A's rights in the preceding paragraph.
Section 36-4A-210. Rejection of payment order.
(a) A payment order is rejected by the receiving bank by a notice
of rejection transmitted to the sender orally, electronically, or in writing.
A notice of rejection need not use any particular words and is sufficient
if it indicates that the receiving bank is rejecting the order or will not
execute or pay the order. Rejection is effective when the notice is given
if transmission is by a means that is reasonable in the circumstances. If
notice of rejection is given by a means that is not reasonable, rejection is
effective when the notice is received. If an agreement of the sender and
receiving bank establishes the means to be used to reject a payment
order, (i) any means complying with the agreement is reasonable and (ii)
any means not complying is not reasonable unless no significant delay in
receipt of the notice resulted from the use of the noncomplying
means.
(b) This subsection applies if a receiving bank other than the
beneficiary's bank fails to execute a payment order despite the existence
on the execution date of a withdrawable credit balance in an authorized
account of the sender sufficient to cover the order. If the sender does not
receive notice of rejection of the order on the execution date and the
authorized account of the sender does not bear interest, the bank is
obliged to pay interest to the sender on the amount of the order for the
number of days elapsing after the execution date to the earlier of the day
the order is canceled pursuant to Section 36-4A-211(d) or the day the
sender receives notice or learns that the order was not executed, counting
the final day of the period as an elapsed day. If the withdrawable credit
balance during that period falls below the amount of the order, the
amount of interest is reduced accordingly.
(c) If a receiving bank suspends payments, all unaccepted payment
orders issued to it are deemed rejected at the time the bank suspends
payments.
(d) Acceptance of a payment order precludes a later rejection of
the order. Rejection of a payment order precludes a later acceptance of
the order.
OFFICIAL COMMENT
1. With respect to payment orders issued to a receiving bank other
than the beneficiary's bank, notice of rejection is not necessary to prevent
acceptance of the order. Acceptance can occur only if the receiving bank
executes the order. Section 4A-209(a). But notice of rejection will
routinely be given by such a bank in cases in which the bank cannot or is
not willing to execute the order for some reason. There are many
reasons why a bank doesn't execute an order. The payment order may
not clearly instruct the receiving bank because of some ambiguity in the
order or an internal inconsistency. In some cases, the receiving bank
may not be able to carry out the instruction because of equipment failure,
credit limitations on the receiving bank, or some other factor which
makes proper execution of the order infeasible. In those cases notice of
rejection is a means of informing the sender of the facts so that a
corrected payment order can be transmitted or the sender can seek
alternate means of completing the funds transfer. The other major reason
for not executing an order is that the sender's account is insufficient to
cover the order and the receiving bank is not willing to give credit to the
sender. If the sender's account is sufficient to cover the order and the
receiving bank chooses not to execute the order, notice of rejection is
necessary to prevent liability to pay interest to the sender if the case falls
within Section 4A-210(b) which is discussed in Comment 3.
2. A payment order to the beneficiary's bank can be accepted by
inaction of the bank. Section 4A-209(b)(2) and (3). To prevent
acceptance under those provisions it is necessary for the receiving bank
to send notice of rejection before acceptance occurs. Subsection (a) of
Section 4A-210 states the rule that rejection is accomplished by giving
notice of rejection. This incorporates the definitions in Section
1-201(26). Rejection is effective when notice is given if it is given by a
means that is reasonable in the circumstances. Otherwise it is effective
when the notice is received. The question of when rejection is effective
is important only in the relatively few cases under subsection (b)(2) and
(3) in which a notice of rejection is necessary to prevent acceptance. The
question of whether a particular means is reasonable depends on the facts
in a particular case. In a very large percentage of cases the sender and
the receiving bank will be in direct electronic contact with each other and
in those cases a notice of rejection can be transmitted instantaneously.
Since time is of the essence in a large proportion of funds transfers, some
quick means of transmission would usually be required, but this is not
always the case. The parties may specify by agreement the means by
which communication between the parties is to be made.
3. Subsection (b) deals with cases in which a sender does not learn
until after the execution date that the sender's order has not been
executed. It applies only to cases in which the receiving bank was
assured of payment because the sender's account was sufficient to cover
the order. Normally, the receiving bank will accept the sender's order if
it is assured of payment, but there may be some cases in which the bank
chooses to reject. Unless the receiving bank had obligated itself by
agreement to accept, the failure to accept is not wrongful. There is no
duty of the receiving bank to accept the payment order unless it is
obliged to accept by express agreement. Section 4A-212. But even if
the bank has not acted wrongfully, the receiving bank had the use of the
sender's money that the sender could reasonably assume was to be the
source of payment of the funds transfer. Until the sender learns that the
order was not accepted the sender is denied the use of that money.
Subsection (b) obliges the receiving bank to pay interest to the sender as
restitution unless the sender receives notice of rejection on the execution
date. The time of receipt of notice is determined pursuant to
Section 1-201(27). The rate of interest is stated in Section 4A-506. If
the sender receives notice on the day after the execution date, the sender
is entitled to one day's interest. If receipt of notice is delayed for more
than one day, the sender is entitled to interest for each additional day of
delay.
4. Subsection (d) treats acceptance and rejection as mutually
exclusive. If a payment order has been accepted, rejection of that order
becomes impossible. If a payment order has been rejected it cannot be
accepted later by the receiving bank. Once notice of rejection has been
given, the sender may have acted on the notice by making the payment
through other channels. If the receiving bank wants to act on a payment
order that it has rejected it has to obtain the consent of the sender. In
that case the consent of the sender would amount to the giving of a
second payment order that substitutes for the rejected first order. If the
receiving bank suspends payments (Section 4-104(1)(k)), subsection (c)
provides that unaccepted payment orders are deemed rejected at the time
suspension of payments occurs. This prevents acceptance by passage of
time under Section 4A-209(b)(3).
Section 36-4A-211. Cancellation and amendment of payment
order.
(a) A communication of the sender of a payment order canceling
or amending the order may be transmitted to the receiving bank orally,
electronically, or in writing. If a security procedure is in effect between
the sender and the receiving bank, the communication is not effective to
cancel or amend the order unless the communication is verified pursuant
to the security procedure or the bank agrees to the cancellation or
amendment.
(b) Subject to subsection (a), a communication by the sender
canceling or amending a payment order is effective to cancel or amend
the order if notice of the communication is received at a time and in a
manner affording the receiving bank a reasonable opportunity to act on
the communication before the bank accepts the payment order.
(c) After a payment order has been accepted, cancellation or
amendment of the order is not effective unless the receiving bank agrees
or a funds-transfer system rule allows cancellation or amendment without
agreement of the bank.
(1) With respect to a payment order accepted by a receiving
bank other than the beneficiary's bank, cancellation or amendment is not
effective unless a conforming cancellation or amendment of the payment
order issued by the receiving bank is also made.
(2) With respect to a payment order accepted by the
beneficiary's bank, cancellation or amendment is not effective unless the
order was issued in execution of an unauthorized payment order, or
because of a mistake by a sender in the funds transfer which resulted in
the issuance of a payment order (i) that is a duplicate of a payment order
previously issued by the sender, (ii) that orders payment to a beneficiary
not entitled to receive payment from the originator, or (iii) that orders
payment in an amount greater than the amount the beneficiary was
entitled to receive from the originator. If the payment order is canceled
or amended, the beneficiary's bank is entitled to recover from the
beneficiary any amount paid to the beneficiary to the extent allowed by
the law governing mistake and restitution.
(d) An unaccepted payment order is canceled by operation of law
at the close of the fifth funds-transfer business day of the receiving bank
after the execution date or payment date of the order.
(e) A canceled payment order cannot be accepted. If an accepted
payment order is canceled, the acceptance is nullified and no person has
any right or obligation based on the acceptance. Amendment of a
payment order is deemed to be cancellation of the original order at the
time of amendment and issue of a new payment order in the amended
form at the same time.
(f) Unless otherwise provided in an agreement of the parties or in
a funds-transfer system rule, if the receiving bank, after accepting a
payment order, agrees to cancellation or amendment of the order by the
sender or is bound by a funds-transfer system rule allowing cancellation
or amendment without the bank's agreement, the sender, whether or not
cancellation or amendment is effective, is liable to the bank for any loss
and expenses, including reasonable attorney's fees, incurred by the bank
as a result of the cancellation or amendment or attempted cancellation or
amendment.
(g) A payment order is not revoked by the death or legal
incapacity of the sender unless the receiving bank knows of the death or
of an adjudication of incapacity by a court of competent jurisdiction and
has reasonable opportunity to act before acceptance of the order.
(h) A funds-transfer system rule is not effective to the extent it
conflicts with subsection (c)(2).
OFFICIAL COMMENT
1. This section deals with cancellation and amendment of payment
orders. It states the conditions under which cancellation or amendment is
both effective and rightful. There is no concept of wrongful cancellation
or amendment of a payment order. If the conditions stated in this section
are not met the attempted cancellation or amendment is not effective. If
the stated conditions are met the cancellation or amendment is effective
and rightful. The sender of a payment order may want to withdraw or
change the order because the sender has had a change of mind about the
transaction or because the payment order was erroneously issued or for
any other reason. One common situation is that of multiple transmission
of the same order. The sender that mistakenly transmits the same order
twice wants to correct the mistake by canceling the duplicate order. Or,
a sender may have intended to order a payment of $1,000,000 but
mistakenly issued an order to pay $10,000,000. In this case the sender
might try to correct the mistake by canceling the order and issuing
another order in the proper amount. Or, the mistake could be corrected
by amending the order to change it to the proper amount. Whether the
error is corrected by amendment or cancellation and reissue the net result
is the same. This result is stated in the last sentence of subsection
(e).
2. Subsection (a) allows a cancellation or amendment of a payment
order to be communicated to the receiving bank "orally,
electronically, or in writing." The quoted phrase is consistent with
the language of Section 4A-103(a) applicable to payment orders.
Cancellations and amendments are normally subject to verification
pursuant to security procedures to the same extent as payment orders.
Subsection (a) recognizes this fact by providing that in cases in which
there is a security procedure in effect between the sender and the
receiving bank the bank is not bound by a communication canceling or
amending an order unless verification has been made. This is necessary
to protect the bank because under subsection (b) a cancellation or
amendment can be effective by unilateral action of the sender. Without
verification the bank cannot be sure whether the communication was or
was not effective to cancel or amend a previously verified payment
order.
3. If the receiving bank has not yet accepted the order, there is no
reason why the sender should not be able to cancel or amend the order
unilaterally so long as the requirements of subsections (a) and (b) are
met. If the receiving bank has accepted the order, it is possible to cancel
or amend but only if the requirements of subsection (c) are met.
First consider the case of a receiving bank other than the beneficiary's
bank. If the bank has not yet accepted the order, the sender can
unilaterally cancel or amend. The communication amending or canceling
the payment order must be received in time to allow the bank to act on it
before the bank issues its payment order in execution of the sender's
order. The time that the sender's communication is received is governed
by Section 4A-106. If a payment order does not specify a delayed
payment date or execution date, the order will normally be executed
shortly after receipt. Thus, as a practical matter, the sender will have
very little time in which to instruct cancellation or amendment before
acceptance. In addition, a receiving bank will normally have cut-off
times for receipt of such communications, and the receiving bank is not
obliged to act on communications received after the cut-off hour.
Cancellation by the sender after execution of the order by the receiving
bank requires the agreement of the bank unless a funds transfer rule
otherwise provides. Subsection (c). Although execution of the sender's
order by the receiving bank does not itself impose liability on the
receiving bank (under Section 4A-402 no liability is incurred by the
receiving bank to pay its order until it is accepted), it would commonly
be the case that acceptance follows shortly after issuance. Thus, as a
practical matter, a receiving bank that has executed a payment order will
incur a liability to the next bank in the chain before it would be able to
act on the cancellation request of its customer. It is unreasonable to
impose on the receiving bank a risk of loss with respect to a cancellation
request without the consent of the receiving bank.
The statute does not state how or when the agreement of the receiving
bank must be obtained for cancellation after execution. The receiving
bank's consent could be obtained at the time cancellation occurs or it
could be based on a preexisting agreement. Or, a funds transfer system
rule could provide that cancellation can be made unilaterally by the
sender. By virtue of that rule any receiving bank covered by the rule is
bound. Section 4A-501. If the receiving bank has already executed the
sender's order, the bank would not consent to cancellation unless the
bank to which the receiving bank has issued its payment order consents
to cancellation of that order. It makes no sense to allow cancellation of a
payment order unless all subsequent payment orders in the funds transfer
that were issued because of the cancelled payment order are also
cancelled. Under subsection (c)(1), if a receiving bank consents to
cancellation of the payment order after it is executed, the cancellation is
not effective unless the receiving bank also cancels the payment order
issued by the bank.
4. With respect to a payment order issued to the beneficiary's bank,
acceptance is particularly important because it creates liability to pay the
beneficiary, it defines when the originator pays its obligation to the
beneficiary, and it defines when any obligation for which the payment is
made is discharged. Since acceptance affects the rights of the originator
and the beneficiary it is not appropriate to allow the beneficiary's bank to
agree to cancellation or amendment except in unusual cases. Except as
provided in subsection (c)(2), cancellation or amendment after acceptance
by the beneficiary's bank is not possible unless all parties affected by the
order agree. Under subsection (c)(2), cancellation or amendment is
possible only in the four cases stated. The following examples illustrate
subsection (c)(2):
Case #1. Originator's Bank executed a payment order issued in the
name of its customer as sender. The order was not authorized by the
customer and was fraudulently issued. Beneficiary's Bank accepted the
payment order issued by Originator's Bank. Under subsection (c)(2)
Originator's Bank can cancel the order if Beneficiary's Bank consents. It
doesn't make any difference whether the payment order that Originator's
Bank accepted was or was not enforceable against the customer under
Section 4A-202(b). Verification under that provision is important in
determining whether Originator's Bank or the customer has the risk of
loss, but it has no relevance under Section 4A-211(c)(2). Whether or not
verified, the payment order was not authorized by the customer.
Cancellation of the payment order to Beneficiary's Bank causes the
acceptance of Beneficiary's Bank to be nullified. Subsection (e).
Beneficiary's Bank is entitled to recover payment from the beneficiary to
the extent allowed by the law of mistake and restitution. In this kind of
case the beneficiary is usually a party to the fraud who has no right to
receive or retain payment of the order.
Case #2. Originator owed Beneficiary $1,000,000 and ordered Bank A
to pay that amount to the account of Beneficiary in Bank B. Bank A
issued a complying order to Bank B, but by mistake issued a duplicate
order as well. Bank B accepted both orders. Under subsection (c)(2)(i)
cancellation of the duplicate order could be made by Bank A with the
consent of Bank B. Beneficiary has no right to receive or retain payment
of the duplicate payment order if only $1,000,000 was owed by
Originator to Beneficiary. If Originator owed $2,000,000 to Beneficiary,
the law of restitution might allow Beneficiary to retain the $1,000,000
paid by Bank B on the duplicate order. In that case Bank B is entitled to
reimbursement from Bank A under subsection (f).
Case #3. Originator owed $1,000,000 to X. Intending to pay X,
Originator ordered Bank A to pay $1,000,000 to Y's account in Bank B.
Bank A issued a complying payment order to Bank B which Bank B
accepted by releasing the $1,000,000 to Y. Under subsection (c)(2)(ii)
Bank A can cancel its payment order to Bank B with the consent of Bank
B if Y was not entitled to receive payment from Originator. Originator
can also cancel its order to Bank A with Bank A's consent. Subsection
(c) (1). Bank B may recover the $1,000,000 from Y unless the law of
mistake and restitution allows Y to retain some or all of the amount paid.
If no debt was owed to Y, Bank B should have a right of recovery.
Case #4. Originator owed Beneficiary $10,000. By mistake Originator
ordered Bank A to pay $1,000,000 to the account of Beneficiary in Bank
B. Bank A issued a complying order to Bank B which accepted by
notifying Beneficiary of its right to withdraw $1,000,000. Cancellation is
permitted in this case under subsection (c)(2)(iii). If Bank B paid
Beneficiary it is entitled to recover the payment except to the extent the
law of mistake and restitution allows Beneficiary to retain payment. In
this case Beneficiary might be entitled to retain $10,000, the amount of
the debt owed to Beneficiary. If Beneficiary may retain $10,000, Bank B
would be entitled to $10,000 from Bank A pursuant to subsection (f). In
this case Originator also cancelled its order. Thus Bank A would be
entitled to $10,000 from Originator pursuant to subsection (f).
5. Unless constrained by a funds transfer system rule, a receiving
bank may agree to cancellation or amendment of the payment order
under subsection (c) but is not required to do so regardless of the
circumstances. If the receiving bank has incurred liability as a result of
its acceptance of the sender's order, there are substantial risks in agreeing
to cancellation or amendment. This is particularly true for a
beneficiary's bank. Cancellation or amendment after acceptance by the
beneficiary's bank can be made only in the four cases stated and the
beneficiary's bank may not have any way of knowing whether the
requirements of subsection (c) have been met or whether it will be able
to recover payment from the beneficiary that received payment. Even
with indemnity the beneficiary's bank may be reluctant to alienate its
customer, the beneficiary, by denying the customer the funds. Subsection
(c) leaves the decision to the beneficiary's bank unless the consent of the
beneficiary's bank is not required under a funds transfer system rule or
other interbank agreement. If a receiving bank agrees to cancellation or
amendment under subsection (c)(1) or (2), it is automatically entitled to
indemnification from the sender under subsection (f). The
indemnification provision recognizes that a sender has no right to cancel
a payment order after it is accepted by the receiving bank. If the
receiving bank agrees to cancellation, it is doing so as an accommodation
to the sender and it should not incur a risk of loss in doing so.
6. Acceptance by the receiving bank of a payment order issued by
the sender is comparable to acceptance of an offer under the law of
contracts. Under that law the death or legal incapacity of an offeror
terminates the offer even though the offeree has no notice of the death or
incapacity. Restatement Second, Contracts Section 48. Comment a. to
that section states that the "rule seems to be a relic of the obsolete
view that a contract requires a 'meeting of minds,' and it is out of
harmony with the modern doctrine that a manifestation of assent is
effective without regard to actual mental assent." Subsection (g),
which reverses the Restatement rule in the case of a payment order, is
similar to Section 4-405(1) which applies to checks. Subsection (g) does
not address the effect of the bankruptcy of the sender of a payment order
before the order is accepted, but the principle of subsection (g) has been
recognized in Bank of Marin v. England, 385 U.S. 99 (1966). Although
Bankruptcy Code Section 542(c) may not have been drafted with wire
transfers in mind, its language can be read to allow the receiving bank to
charge the sender's account for the amount of the payment order if the
receiving bank executed it in ignorance of the bankruptcy.
7. Subsection (d) deals with stale payment orders. Payment orders
normally are executed on the execution date or the day after. An order
issued to the beneficiary's bank is normally accepted on the payment date
or the day after. If a payment order is not accepted on its execution or
payment date or shortly thereafter, it is probable that there was some
problem with the terms of the order or the sender did not have sufficient
funds or credit to cover the amount of the order. Delayed acceptance of
such an order is normally not contemplated, but the order may not have
been cancelled by the sender. Subsection (d) provides for cancellation by
operation of law to prevent an unexpected delayed acceptance.
8. A funds transfer system rule can govern rights and obligations
between banks that are parties to payment orders transmitted over the
system even if the rule conflicts with Article 4A. In some cases,
however, a rule governing a transaction between two banks can affect a
third party in an unacceptable way. Subsection (h) deals with such a
case. A funds transfer system rule cannot allow cancellation of a
payment order accepted by the beneficiary's bank if the rule conflicts
with subsection (c)(2). Because rights of the beneficiary and the
originator are directly affected by acceptance, subsection (c)(2) severely
limits cancellation. These limitations cannot be altered by funds transfer
system rule.
Section 36-4A-212. Liability and duty of receiving bank
regarding unaccepted payment order.
If a receiving bank fails to accept a payment order that it is obliged by
express agreement to accept, the bank is liable for breach of the
agreement to the extent provided in the agreement or in this chapter, but
does not otherwise have any duty to accept a payment order or, before
acceptance, to take any action, or refrain from taking action, with respect
to the order except as provided in this chapter or by express agreement.
Liability based on acceptance arises only when acceptance occurs as
stated in Section 36-4A-209, and liability is limited to that provided in
this chapter. A receiving bank is not the agent of the sender or
beneficiary of the payment order it accepts, or of any other party to the
funds transfer, and the bank owes no duty to any party to the funds
transfer except as provided in this chapter or by express agreement.
OFFICIAL COMMENT
With limited exceptions stated in this Article, the duties and
obligations of receiving banks that carry out a funds transfer arise only as
a result of acceptance of payment orders or of agreements made by
receiving banks. Exceptions are stated in Section 4A-209(b)(3) and
Section 4A-210(b). A receiving bank is not like a collecting bank under
Article 4. No receiving bank, whether it be an originator's bank, an
intermediary bank, or a beneficiary's bank, is an agent for any other
party in the funds transfer.
PART 3
EXECUTION OF
SENDER'S PAYMENT ORDER BY RECEIVING
BANK
Section 36-4A-301. Execution and execution date.
(a) A payment order is `executed' by the receiving bank when it
issues a payment order intended to carry out the payment order received
by the bank. A payment order received by the beneficiary's bank can be
accepted but cannot be executed.
(b) `Execution date' of a payment order means the day on which
the receiving bank may properly issue a payment order in execution of
the sender's order. The execution date may be determined by instruction
of the sender but cannot be earlier than the day the order is received and,
unless otherwise determined, is the day the order is received. If the
sender's instruction states a payment date, the execution date is the
payment date or an earlier date on which execution is reasonably
necessary to allow payment to the beneficiary on the payment date.
OFFICIAL COMMENT
1. The terms "executed," "execution" and
"execution date" are used only with respect to a payment
order to a receiving bank other than the beneficiary's bank. The
beneficiary's bank can accept the payment order that it receives, but it
does not execute the order. Execution refers to the act of the receiving
bank in issuing a payment order "intended to carry out" the
payment order that the bank received. A receiving bank has executed an
order even if the order issued by the bank does not carry out the order
received by the bank. For example, the bank may have erroneously
issued an order to the wrong beneficiary, or in the wrong amount or to
the wrong beneficiary's bank. In each of these cases execution has
occurred but the execution is erroneous. Erroneous execution is covered
in Section 4A-303.
2. "Execution date" refers to the time a payment order
should be executed rather than the day it is actually executed. Normally
the sender will not specify an execution date, but most payment orders
are meant to be executed immediately. Thus, the execution date is
normally the day the order is received by the receiving bank. It is
common for the sender to specify a "payment date" which is
defined in Section 4A-401 as "the day on which the amount of the
order is payable to the beneficiary by the beneficiary's bank."
Except for automated clearing house transfers, if a funds transfer is
entirely within the United States and the payment is to be carried out
electronically, the execution date is the payment date unless the order is
received after the payment date. If the payment is to be carried out
through an automated clearing house, execution may occur before the
payment date. In an ACH transfer the beneficiary is usually paid one or
two days after issue of the originator's payment order. The execution
date is determined by the stated payment date and is a date before the
payment date on which execution is reasonably necessary to allow
payment on the payment date. A funds transfer system rule could also
determine the execution date of orders received by the receiving bank if
both the sender and the receiving bank are participants in the funds
transfer system. The execution date can be determined by the payment
order itself or by separate instructions of the sender or an agreement of
the sender and the receiving bank. The second sentence of subsection (b)
must be read in the light of Section 4A-106 which states that if a
payment order is received after the cut-off time of the receiving bank it
may be treated by the bank as received at the opening of the next funds
transfer business day.
3. Execution on the execution date is timely, but the order can be
executed before or after the execution date. Section 4A-209(d) and
Section 4A-402(c) state the consequences of early execution and Section
4A-305(a) states the consequences of late execution.
Section 36-4A-302. Obligations of receiving bank in execution
of payment order.
(a) Except as provided in subsections (b) through (d), if the
receiving bank accepts a payment order pursuant to Section
36-4A-209(a), the bank has the following obligations in executing the
order:
(1) The receiving bank is obliged to issue, on the execution date,
a payment order complying with the sender's order and to follow the
sender's instructions concerning (i) any intermediary bank or funds-transfer system to be used in carrying out the funds transfer, or (ii) the
means by which payment orders are to be transmitted in the funds
transfer. If the originator's bank issues a payment order to an
intermediary bank, the originator's bank is obliged to instruct the
intermediary bank according to the instruction of the originator. An
intermediary bank in the funds transfer is similarly bound by an
instruction given to it by the sender of the payment order it accepts.
(2) If the sender's instruction states that the funds transfer is to
be carried out telephonically or by wire transfer or otherwise indicates
that the funds transfer is to be carried out by the most expeditious means,
the receiving bank is obliged to transmit its payment order by the most
expeditious available means, and to instruct any intermediary bank
accordingly. If a sender's instruction states a payment date, the receiving
bank is obliged to transmit its payment order at a time and by means
reasonably necessary to allow payment to the beneficiary on the payment
date or as soon thereafter as is feasible.
(b) Unless otherwise instructed, a receiving bank executing a
payment order may (i) use any funds-transfer system if use of that system
is reasonable in the circumstances, and (ii) issue a payment order to the
beneficiary's bank or to an intermediary bank through which a payment
order conforming to the sender's order can expeditiously be issued to the
beneficiary's bank if the receiving bank exercises ordinary care in the
selection of the intermediary bank. A receiving bank is not required to
follow an instruction of the sender designating a funds-transfer system to
be used in carrying out the funds transfer if the receiving bank, in good
faith, determines that it is not feasible to follow the instruction or that
following the instruction would unduly delay completion of the funds
transfer.
(c) Unless subsection (a)(2) applies or the receiving bank is
otherwise instructed, the bank may execute a payment order by
transmitting its payment order by first-class mail or by any means
reasonable in the circumstances. If the receiving bank is instructed to
execute the sender's order by transmitting its payment order by a
particular means, the receiving bank may issue its payment order by the
means stated or by any means as expeditious as the means stated.
(d) Unless instructed by the sender, (i) the receiving bank may not
obtain payment of its charges for services and expenses in connection
with the execution of the sender's order by issuing a payment order in an
amount equal to the amount of the sender's order less the amount of the
charges, and (ii) may not instruct a subsequent receiving bank to obtain
payment of its charges in the same manner.
OFFICIAL COMMENT
1. In the absence of agreement, the receiving bank is not obliged to
execute an order of the sender. Section 4A-212. Section 4A-302 states
the manner in which the receiving bank may execute the sender's order if
execution occurs. Subsection (a)(1) states the residual rule. The
payment order issued by the receiving bank must comply with the
sender's order and, unless some other rule is stated in the section, the
receiving bank is obliged to follow any instruction of the sender
concerning which funds transfer system is to be used, which intermediary
banks are to be used, and what means of transmission is to be used. The
instruction of the sender may be incorporated in the payment order itself
or may be given separately. For example, there may be a master
agreement between the sender and receiving bank containing instructions
governing payment orders to be issued from time to time by the sender to
the receiving bank. In most funds transfers, speed is a paramount
consideration. A sender that wants assurance that the funds transfer will
be expeditiously completed can specify the means to be used. The
receiving bank can follow the instructions literally or it can use an
equivalent means. For example, if the sender instructs the receiving bank
to transmit by telex, the receiving bank could use telephone instead.
Subsection (c). In most cases the sender will not specify a particular
means but will use a general term such as "by wire" or
"wire transfer" or "as soon as possible." These
words signify that the sender wants a same-day transfer. In these cases
the receiving bank is required to use a telephonic or electronic
communication to transmit its order and is also required to instruct any
intermediary bank to which it issues its order to transmit by similar
means. Subsection (a)(2). In other cases, such as an automated clearing
house transfer, a same-day transfer is not contemplated. Normally the
sender's instruction or the context in which the payment order is received
makes clear the type of funds transfer that is appropriate. If the sender
states a payment date with respect to the payment order, the receiving
bank is obliged to execute the order at a time and in a manner to meet
the payment date if that is feasible. Subsection (a)(2). This provision
would apply to many ACH transfers made to pay recurring debts of the
sender. In other cases, involving relatively small amounts, time may not
be an important factor and cost may be a more important element. Fast
means, such as telephone or electronic transmission, are more expensive
than slow means such as mailing. Subsection (c) states that in the
absence of instructions the receiving bank is given discretion to decide.
It may issue its payment order by first-class mail or by any means
reasonable in the circumstances. Section 4A-305 states the liability of a
receiving bank for breach of the obligations stated in Section 4A-302.
2. Subsection (b) concerns the choice of intermediary banks to be
used in completing the funds transfer, and the funds transfer system to be
used. If the receiving bank is not instructed about the matter, it can issue
an order directly to the beneficiary's bank or can issue an order to an
intermediary bank. The receiving bank also has discretion concerning
use of a funds transfer system. In some cases it may be reasonable to
use either an automated clearing house system or a wire transfer system
such as Fedwire or CHIPS. Normally, the receiving bank will follow the
instruction of the sender in these matters, but in some cases it may be
prudent for the bank not to follow instructions. The sender may have
designated a funds transfer system to be used in carrying out the funds
transfer, but it may not be feasible to use the designated system because
of some impediment such as a computer breakdown which prevents
prompt execution of the order. The receiving bank is permitted to use an
alternate means of transmittal in a good faith effort to execute the order
expeditiously. The same leeway is not given to the receiving bank if the
sender designates an intermediary bank through which the funds transfer
is to be routed. The sender's designation of that intermediary bank may
mean that the beneficiary's bank is expecting to obtain a credit from that
intermediary bank and may have relied on that anticipated credit. If the
receiving bank uses another intermediary bank the expectations of the
beneficiary's bank may not be realized. The receiving bank could choose
to route the transfer to another intermediary bank and then to the
designated intermediary bank if there were some reason such as a lack of
a correspondent-bank relationship or a bilateral credit limitation, but the
designated intermediary bank cannot be circumvented. To do so violates
the sender's instructions.
3. The normal rule, under subsection (a)(1), is that the receiving
bank, in executing a payment order, is required to issue a payment order
that complies as to amount with that of the sender's order. In most cases
the receiving bank issues an order equal to the amount of the sender's
order and makes a separate charge for services and expenses in executing
the sender's order. In some cases, particularly if it is an intermediary
bank that is executing an order, charges are collected by deducting them
from the amount of the payment order issued by the executing bank. If
that is done, the amount of the payment order accepted by the
beneficiary's bank will be slightly less than the amount of the
originator's payment order. For example, Originator, in order to pay an
obligation of $1,000,000 owed to Beneficiary, issues a payment order to
Originator's Bank to pay $1,000,000 to the account of Beneficiary in
Beneficiary's Bank. Originator's Bank issues a payment order to
Intermediary Bank for $1,000,000 and debits Originator's account for
$1,000,010. The extra $10 is the fee of Originator's Bank. Intermediary
Bank executes the payment order of Originator's Bank by issuing a
payment order to Beneficiary's Bank for $999,990, but under
Section 4A-402(c) is entitled to receive $1,000,000 from Originator's
Bank. The $10 difference is the fee of Intermediary Bank. Beneficiary's
Bank credits Beneficiary's account for $999,990. When Beneficiary's
Bank accepts the payment order of Intermediary Bank the result is a
payment of $999,990 from Originator to Beneficiary. Section 4A-406(a).
If that payment discharges the $1,000,000 debt, the effect is that
Beneficiary has paid the charges of Intermediary Bank and Originator has
paid the charges of Originator's Bank. Subsection (d) of Section 4A-302
allows Intermediary Bank to collect its charges by deducting them from
the amount of the payment order, but only if instructed to do so by
Originator's Bank. Originator's Bank is not authorized to give that
instruction to Intermediary Bank unless Originator authorized the
instruction. Thus, Originator can control how the charges of Originator's
Bank and Intermediary Bank are to be paid. Subsection (d) does not
apply to charges of Beneficiary's Bank to Beneficiary.
In the case discussed in the preceding paragraph the $10 charge is
trivial in relation to the amount of the payment and it may not be
important to Beneficiary how the charge is paid. But it may be very
important if the $1,000,000 obligation represented the price of exercising
a right such as an option favorable to Originator and unfavorable to
Beneficiary. Beneficiary might well argue that it was entitled to receive
$1,000,000. If the option was exercised shortly before its expiration
date, the result could be loss of the option benefit because the required
payment of $1,000,000 was not made before the option expired. Section
4A-406(c) allows Originator to preserve the option benefit. The amount
received by Beneficiary is deemed to be $1,000,000 unless Beneficiary
demands the $10 and Originator does not pay it.
Section 36-4A-303. Erroneous execution of payment
order.
(a) A receiving bank that (i) executes the payment order of the
sender by issuing a payment order in an amount greater than the amount
of the sender's order, or (ii) issues a payment order in execution of the
sender's order and then issues a duplicate order, is entitled to payment of
the amount of the sender's order under Section 36-4A-402(c) if that
subsection is otherwise satisfied. The bank is entitled to recover from the
beneficiary of the erroneous order the excess payment received to the
extent allowed by the law governing mistake and restitution.
(b) A receiving bank that executes the payment order of the sender
by issuing a payment order in an amount less than the amount of the
sender's order is entitled to payment of the amount of the sender's order
under Section 36-4A-402(c) if (i) that subsection is otherwise satisfied
and (ii) the bank corrects its mistake by issuing an additional payment
order for the benefit of the beneficiary of the sender's order. If the error
is not corrected, the issuer of the erroneous order is entitled to receive or
retain payment from the sender of the order it accepted only to the extent
of the amount of the erroneous order. This subsection does not apply if
the receiving bank executes the sender's payment order by issuing a
payment order in an amount less than the amount of the sender's order
for the purpose of obtaining payment of its charges for services and
expenses pursuant to instruction of the sender.
(c) If a receiving bank executes the payment order of the sender by
issuing a payment order to a beneficiary different from the beneficiary of
the sender's order and the funds transfer is completed on the basis of that
error, the sender of the payment order that was erroneously executed and
all previous senders in the funds transfer are not obliged to pay the
payment orders they issued. The issuer of the erroneous order is entitled
to recover from the beneficiary of the order the payment received to the
extent allowed by the law governing mistake and restitution.
OFFICIAL COMMENT
1. Section 4A-303 states the effect of erroneous execution of a
payment order by the receiving bank. Under Section 4A-402(c) the
sender of a payment order is obliged to pay the amount of the order to
the receiving bank if the bank executes the order, but the obligation to
pay is excused if the beneficiary's bank does not accept a payment order
instructing payment to the beneficiary of the sender's order. If erroneous
execution of the sender's order causes the wrong beneficiary to be paid,
the sender is not required to pay. If erroneous execution causes the
wrong amount to be paid the sender is not obliged to pay the receiving
bank an amount in excess of the amount of the sender's order. Section
4A-303 takes precedence over Section 4A-402(c) and states the liability
of the sender and the rights of the receiving bank in various cases of
erroneous execution.
2. Subsections (a) and (b) deal with cases in which the receiving
bank executes by issuing a payment order in the wrong amount. If
Originator ordered Originator's Bank to pay $1,000,000 to the account of
Beneficiary in Beneficiary's Bank, but Originator's Bank erroneously
instructed Beneficiary's Bank to pay $2,000,000 to Beneficiary's account,
subsection (a) applies. If Beneficiary's Bank accepts the order of
Originator's Bank, Beneficiary's Bank is entitled to receive $2,000,000
from Originator's Bank, but Originator's Bank is entitled to receive only
$1,000,000 from Originator. Originator's Bank is entitled to recover the
overpayment from Beneficiary to the extent allowed by the law
governing mistake and restitution. Originator's Bank would normally
have a right to recover the overpayment from Beneficiary, but in unusual
cases the law of restitution might allow Beneficiary to keep all or part of
the overpayment. For example, if Originator owed $2,000,000 to
Beneficiary and Beneficiary received the extra $1,000,000 in good faith
in discharge of the debt, Beneficiary may be allowed to keep it. In this
case Originator's Bank has paid an obligation of Originator and under the
law of restitution, which applies through Section 1-103, Originator's
Bank would be subrogated to Beneficiary's rights against Originator on
the obligation paid by Originator's Bank.
If Originator's Bank erroneously executed Originator's order by
instructing Beneficiary's Bank to pay less than $1,000,000, subsection (b)
applies. If Originator's Bank corrects its error by issuing another
payment order to Beneficiary's Bank that results in payment of
$1,000,000 to Beneficiary, Originator's Bank is entitled to payment of
$1,000,000 from Originator. If the mistake is not corrected, Originator's
Bank is entitled to payment from Originator only in the amount of the
order issued by Originator's Bank.
3. Subsection (a) also applies to duplicate payment orders. Assume
Originator's Bank properly executes Originator's $1,000,000 payment
order and then by mistake issues a second $1,000,000 payment order in
execution of Originator's order. If Beneficiary's Bank accepts both
orders issued by Originator's Bank, Beneficiary's Bank is entitled to
receive $2,000,000 from Originator's Bank but Originator's Bank is
entitled to receive only $1,000,000 from Originator. The remedy of
Originator's Bank is the same as that of a receiving bank that executes by
issuing an order in an amount greater than the sender's order. It may
recover the overpayment from Beneficiary to the extent allowed by the
law governing mistake and restitution and in a proper case as stated in
Comment 2 may have subrogation rights if it is not entitled to recover
from Beneficiary.
4. Suppose Originator instructs Originator's Bank to pay $1,000,000
to Account #12345 in Beneficiary's Bank. Originator's Bank erroneously
instructs Beneficiary's Bank to pay $1,0000,000 to Account #12346 and
Beneficiary's Bank accepted. Subsection (c) covers this case. Originator
is not obliged to pay its payment order, but Originator's Bank is required
to pay $1,000,000 to Beneficiary's Bank. The remedy of Originator's
Bank is to recover $1,000,000 from the holder of Account #12346 that
received payment by mistake. Recovery based on the law of mistake and
restitution is described in Comment 2.
Section 36-4A-304. Duty of sender to report erroneously
executed payment order.
If the sender of a payment order that is erroneously executed as stated
in Section 36-4A-303 receives notification from the receiving bank that
the order was executed or that the sender's account was debited with
respect to the order, the sender has a duty to exercise ordinary care to
determine, on the basis of information available to the sender, that the
order was erroneously executed and to notify the bank of the relevant
facts within a reasonable time not exceeding ninety days after the
notification from the bank was received by the sender. If the sender fails
to perform that duty, the bank is not obliged to pay interest on any
amount refundable to the sender under Section 36-4A-402(d) for the
period before the bank learns of the execution error. The bank is not
entitled to any recovery from the sender on account of a failure by the
sender to perform the duty stated in this section.
OFFICIAL COMMENT
This section is identical in effect to Section 4A-204 which applies to
unauthorized orders issued in the name of a customer of the receiving
bank. The rationale is stated in Comment 2 to Section 4A-204.
Section 36-4A-305. Liability for late or improper execution or
failure to execute payment order.
(a) If a funds transfer is completed but execution of a payment
order by the receiving bank in breach of Section 36-4A-302 results in
delay in payment to the beneficiary, the bank is obliged to pay interest to
either the originator or the beneficiary of the funds transfer for the period
of delay caused by the improper execution. Except as provided in
subsection (c), additional damages are not recoverable.
(b) If execution of a payment order by a receiving bank in breach
of Section 36-4A-302 results in (i) noncompletion of the funds transfer,
(ii) failure to use an intermediary bank designated by the originator, or
(iii) issuance of a payment order that does not comply with the terms of
the payment order of the originator, the bank is liable to the originator
for its expenses in the funds transfer and for incidental expenses and
interest losses, to the extent not covered by subsection (a), resulting from
the improper execution. Except as provided in subsection (c), additional
damages are not recoverable.
(c) In addition to the amounts payable under subsections (a) and
(b), damages, including consequential damages, are recoverable to the
extent provided in an express written agreement of the receiving
bank.
(d) If a receiving bank fails to execute a payment order it was
obliged by express agreement to execute, the receiving bank is liable to
the sender for its expenses in the transaction and for incidental expenses
and interest losses resulting from the failure to execute. Additional
damages, including consequential damages, are recoverable to the extent
provided in an express written agreement of the receiving bank, but are
not otherwise recoverable.
(e) Reasonable attorney's fees are recoverable if demand for
compensation under subsection (a) or (b) is made and refused before an
action is brought on the claim. If a claim is made for breach of an
agreement under subsection (d) and the agreement does not provide for
damages, reasonable attorney's fees are recoverable if demand for
compensation under subsection (d) is made and refused before an action
is brought on the claim.
(f) Except as stated in this section, the liability of a receiving bank
under subsections (a) and (b) may not be varied by agreement.
OFFICIAL COMMENT
1. Subsection (a) covers cases of delay in completion of a funds
transfer resulting from an execution by a receiving bank in breach of
Section 4A-302(a). The receiving bank is obliged to pay interest on the
amount of the order for the period of the delay. The rate of interest is
stated in Section 4A-506. With respect to wire transfers (other than
ACH transactions) within the United States, the expectation is that the
funds transfer will be completed the same day. In those cases, the
originator can reasonably expect that the originator's account will be
debited on the same day as the beneficiary's account is credited. If the
funds transfer is delayed, compensation can be paid either to the
originator or to the beneficiary. The normal practice is to compensate
the beneficiary's bank to allow that bank to compensate the beneficiary
by back-valuing the payment by the number of days of delay. Thus, the
beneficiary is in the same position that it would have been in if the funds
transfer had been completed on the same day. Assume on Day 1,
Originator's Bank issues its payment order to Intermediary Bank which is
received on that day. Intermediary Bank does not execute that order
until Day 2 when it issues an order to Beneficiary's Bank which is
accepted on that day. Intermediary Bank complies with subsection (a) by
paying one day's interest to Beneficiary's Bank for the account of
Beneficiary.
2. Subsection (b) applies to cases of breach of Section 4A-302
involving more than mere delay. In those cases the bank is liable for
damages for improper execution but they are limited to compensation for
interest losses and incidental expenses of the sender resulting from the
breach, the expenses of the sender in the funds transfer and attorney's
fees. This subsection reflects the judgment that imposition of
consequential damages on a bank for commission of an error is not
justified.
The leading common law case on the subject of consequential damages
is Evra Corp. v. Swiss Bank Corp., 673 F.2d 951 (7th Cir. 1982), in
which Swiss Bank, an intermediary bank, failed to execute a payment
order. Because the beneficiary did not receive timely payment the
originator lost a valuable ship charter. The lower court awarded the
originator $2.1 million for lost profits even though the amount of the
payment order was only $27,000. The Seventh Circuit reversed, in part
on the basis of the common law rule of Hadley v. Baxendale that
consequential damages may not be awarded unless the defendant is put
on notice of the special circumstances giving rise to them. Swiss Bank
may have known that the originator was paying the shipowner for the
hire of a vessel but did not know that a favorable charter would be lost if
the payment was delayed. "Electronic payments are not so unusual
as to automatically place a bank on notice of extraordinary consequences
if such a transfer goes awry. Swiss Bank did not have enough
information to infer that if it lost a $27,000 payment order it would face
liability in excess of $2 million." 673 F.2d at 956.
If Evra means that consequential damages can be imposed if the
culpable bank has notice of particular circumstances giving rise to the
damages, it does not provide an acceptable solution to the problem of
bank liability for consequential damages. In the typical case transmission
of the payment order is made electronically. Personnel of the receiving
bank that process payment orders are not the appropriate people to
evaluate the risk of liability for consequential damages in relation to the
price charged for the wire transfer service. Even if notice is received by
higher level management personnel who could make an appropriate
decision whether the risk is justified by the price, liability based on
notice would require evaluation of payment orders on an individual basis.
This kind of evaluation is inconsistent with the high-speed, low-price,
mechanical nature of the processing system that characterizes wire
transfers. Moreover, in Evra the culpable bank was an intermediary bank
with which the originator did not deal. Notice to the originator's bank
would not bind the intermediary bank, and it seems impractical for the
originator's bank to convey notice of this kind to intermediary banks in
the funds transfer. The success of the wholesale wire transfer industry
has largely been based on its ability to effect payment at low cost and
great speed. Both of these essential aspects of the modern wire transfer
system would be adversely affected by a rule that imposed on banks
liability for consequential damages. A banking industry amicus brief in
Evra stated: "Whether banks can continue to make EFT services
available on a widespread basis, by charging reasonable rates, depends on
whether they can do so without incurring unlimited consequential risks.
Certainly, no bank would handle for $3.25 a transaction entailing
potential liability in the millions of dollars."
As the court in Evra also noted, the originator of the funds transfer is
in the best position to evaluate the risk that a funds transfer will not be
made on time and to manage that risk by issuing a payment order in time
to allow monitoring of the transaction. The originator, by asking the
beneficiary, can quickly determine if the funds transfer has been
completed. If the originator has sent the payment order at a time that
allows a reasonable margin for correcting error, no loss is likely to result
if the transaction is monitored. The other published cases on this issue
reach the Evra result. Central Coordinates, Inc. v. Morgan Guaranty
Trust Co., 40 U.C.C. Rep. Serv. 1340 (N.Y.Sup.Ct. 1985), and Gatoil
(U.S.A.), Inc. v. Forest Hill State Bank, 1 U.C.C. Rep. Serv. 2d 171
(D.Md. 1986).
Subsection (c) allows the measure of damages in subsection (b) to be
increased by an express written agreement of the receiving bank. An
originator's bank might be willing to assume additional responsibilities
and incur additional liability in exchange for a higher fee.
3. Subsection (d) governs cases in which a receiving bank has
obligated itself by express agreement to accept payment orders of a
sender. In the absence of such an agreement there is no obligation by a
receiving bank to accept a payment order. Section 4A-212. The measure
of damages for breach of an agreement to accept a payment order is the
same as that stated in subsection (b). As in the case of subsection (b),
additional damages, including consequential damages, may be recovered
to the extent stated in an express written agreement of the receiving
bank.
4. Reasonable attorney's fees are recoverable only in cases in which
damages are limited to statutory damages stated in subsection (a), (b) and
(d). If additional damages are recoverable because provided for by an
express written agreement, attorney's fees are not recoverable. The
rationale is that there is no need for statutory attorney's fees in the latter
case, because the parties have agreed to a measure of damages which
may or may not provide for attorney's fees.
5. The effect of subsection (f) is to prevent reduction of a receiving
bank's liability under Section 4A-305.
SOUTH CAROLINA REPORTER'S COMMENT
No South Carolina case has applied the rule in Hadley v. Baxendale,
relating to the availability of consequential damages in contract, to a
funds transfer. Adoption of this section [Section 36-4A-305] modifies
the potential common-law applicability of the rule in Hadley in the funds
transfer context. For a discussion of this effect and the policies
underlying Section 36-4A-305, see the Official Comment to this
section.
PART 4
PAYMENT
Section 36-4A-401. Payment date.
`Payment date' of a payment order means the day on which the
amount of the order is payable to the beneficiary by the beneficiary's
bank. The payment date may be determined by instruction of the sender
but cannot be earlier than the day the order is received by the
beneficiary's bank and, unless otherwise determined, is the day the order
is received by the beneficiary's bank.
OFFICIAL COMMENT
"Payment date" refers to the day the beneficiary's bank is
to pay the beneficiary. The payment date may be expressed in various
ways so long as it indicates the day the beneficiary is to receive payment.
For example, in ACH transfers the payment date is the equivalent of
"settlement date" or "effective date." Payment
date applies to the payment order issued to the beneficiary's bank, but a
payment order issued to a receiving bank other than the beneficiary's
bank may also state a date for payment to the beneficiary. In the latter
case, the statement of a payment date is to instruct the receiving bank
concerning time of execution of the sender's order. Section
4A-301(b).
Section 36-4A-402. Obligation of sender to pay receiving
bank.
(a) This section is subject to Sections 36-4A-205 and
36-4A-207.
(b) With respect to a payment order issued to the beneficiary's
bank, acceptance of the order by the bank obliges the sender to pay the
bank the amount of the order, but payment is not due until the payment
date of the order.
(c) This subsection is subject to subsection (e) and to Section
36-4A-303. With respect to a payment order issued to a receiving bank
other than the beneficiary's bank, acceptance of the order by the
receiving bank obliges the sender to pay the bank the amount of the
sender's order. Payment by the sender is not due until the execution date
of the sender's order. The obligation of that sender to pay its payment
order is excused if the funds transfer is not completed by acceptance by
the beneficiary's bank of a payment order instructing payment to the
beneficiary of that sender's payment order.
(d) If the sender of a payment order pays the order and was not
obliged to pay all or part of the amount paid, the bank receiving payment
is obliged to refund payment to the extent the sender was not obliged to
pay. Except as provided in Sections 36-4A-204 and 36-4A-304, interest
is payable on the refundable amount from the date of payment.
(e) If a funds transfer is not completed as stated in subsection (c)
and an intermediary bank is obliged to refund payment as stated in
subsection (d) but is unable to do so because not permitted by applicable
law or because the bank suspends payments, a sender in the funds
transfer that executed a payment order in compliance with an instruction,
as stated in Section 36-4A-302(a)(1), to route the funds transfer through
that intermediary bank is entitled to receive or retain payment from the
sender of the payment order that it accepted. The first sender in the
funds transfer that issued an instruction requiring routing through that
intermediary bank is subrogated to the right of the bank that paid the
intermediary bank to refund as stated in subsection (d).
(f) The right of the sender of a payment order to be excused from
the obligation to pay the order as stated in subsection (c) or to receive
refund under subsection (d) may not be varied by agreement.
OFFICIAL COMMENT
1. Subsection (b) states that the sender of a payment order to the
beneficiary's bank must pay the order when the beneficiary's bank
accepts the order. At that point the beneficiary's bank is obliged to pay
the beneficiary. Section 4A-404(a). The last clause of subsection (b)
covers a case of premature acceptance by the beneficiary's bank. In
some funds transfers, notably automated clearing house transfers, a
beneficiary's bank may receive a payment order with a payment date
after the day the order is received. The beneficiary's bank might accept
the order before the payment date by notifying the beneficiary of receipt
of the order. Although the acceptance obliges the beneficiary's bank to
pay the beneficiary, payment is not due until the payment date. The last
clause of subsection (b) is consistent with that result. The beneficiary's
bank is also not entitled to payment from the sender until the payment
date.
2. Assume that Originator instructs Bank A to order immediate
payment to the account of Beneficiary in Bank B. Execution of
Originator's payment order by Bank A is acceptance under Section
4A-209(a). Under the second sentence of Section 4A-402(c) the
acceptance creates an obligation of Originator to pay Bank A the amount
of the order. The last clause of that sentence deals with attempted funds
transfers that are not completed. In that event the obligation of the
sender to pay its payment order is excused. Originator makes payment to
Beneficiary when Bank B, the beneficiary's bank, accepts a payment
order for the benefit of Beneficiary. Section 4A-406(a). If that
acceptance by Bank B does not occur, the funds transfer has miscarried
because Originator has not paid Beneficiary. Originator doesn't have to
pay its payment order, and if it has already paid it is entitled to refund of
the payment with interest. The rate of interest is stated in Section
4A-506. This "money-back guarantee" is an important
protection of Originator. Originator is assured that it will not lose its
money if something goes wrong in the transfer. For example, risk of
loss resulting from payment to the wrong beneficiary is borne by some
bank, not by Originator. The most likely reason for noncompletion is a
failure to execute or an erroneous execution of a payment order by Bank
A or an intermediary bank. Bank A may have issued its payment order
to the wrong bank or it may have identified the wrong beneficiary in its
order. The money-back guarantee is particularly important to Originator
if noncompletion of the funds transfer is due to the fault of an
intermediary bank rather than Bank A. In that case Bank A must refund
payment to Originator, and Bank A has the burden of obtaining refund
from the intermediary bank that it paid.
Subsection (c) can result in loss if an intermediary bank suspends
payments. Suppose Originator instructs Bank A to pay to Beneficiary's
account in Bank B and to use Bank C as an intermediary bank. Bank A
executes Originator's order by issuing a payment order to Bank C. Bank
A pays Bank C. Bank C fails to execute the order of Bank A and
suspends payments. Under subsections (c) and (d), Originator is not
obliged to pay Bank A and is entitled to refund from Bank A of any
payment that it may have made. Bank A is entitled to a refund from
Bank C, but Bank C is insolvent. Subsection (e) deals with this case.
Bank A was required to issue its payment order to Bank C because Bank
C was designated as an intermediary bank by Originator. Section
4A-302(a)(1). In this case Originator takes the risk of insolvency of
Bank C. Under subsection (e), Bank A is entitled to payment from
Originator and Originator is subrogated to the right of Bank A under
subsection (d) to refund of payment from Bank C.
3. A payment order is not like a negotiable instrument on which the
drawer or maker has liability. Acceptance of the order by the receiving
bank creates an obligation of the sender to pay the receiving bank the
amount of the order. That is the extent of the sender's liability to the
receiving bank and no other person has any rights against the sender with
respect to the sender's order.
Section 36-4A-403. Payment by sender to receiving
bank.
(a) Payment of the sender's obligation under Section 36-4A-402 to
pay the receiving bank occurs as follows:
(1) If the sender is a bank, payment occurs when the receiving
bank receives final settlement of the obligation through a Federal Reserve
Bank or through a funds-transfer system.
(2) If the sender is a bank and the sender (i) credited an account
of the receiving bank with the sender, or (ii) caused an account of the
receiving bank in another bank to be credited, payment occurs when the
credit is withdrawn or, if not withdrawn, at midnight of the day on which
the credit is withdrawable and the receiving bank learns of that fact.
(3) If the receiving bank debits an account of the sender with the
receiving bank, payment occurs when the debit is made to the extent the
debit is covered by a withdrawable credit balance in the account.
(b) If the sender and receiving bank are members of a funds-transfer system that nets obligations multilaterally among participants, the
receiving bank receives final settlement when settlement is complete in
accordance with the rules of the system. The obligation of the sender to
pay the amount of a payment order transmitted through the funds-transfer
system may be satisfied, to the extent permitted by the rules of the
system, by setting off and applying against the sender's obligation the
right of the sender to receive payment from the receiving bank of the
amount of any other payment order transmitted to the sender by the
receiving bank through the funds-transfer system. The aggregate balance
of obligations owed by each sender to each receiving bank in the funds-transfer system may be satisfied, to the extent permitted by the rules of
the system, by setting off and applying against that balance the aggregate
balance of obligations owed to the sender by other members of the
system. The aggregate balance is determined after the right of setoff
stated in the second sentence of this subsection has been exercised.
(c) If two banks transmit payment orders to each other under an
agreement that settlement of the obligations of each bank to the other
under Section 36-4A-402 will be made at the end of the day or other
period, the total amount owed with respect to all orders transmitted by
one bank shall be set off against the total amount owed with respect to
all orders transmitted by the other bank. To the extent of the setoff, each
bank has made payment to the other.
(d) In a case not covered by subsection (a), the time when payment
of the sender's obligation under Section 36-4A-402(b) or 36-4A-402(c)
occurs is governed by applicable principles of law that determine when
an obligation is satisfied.
OFFICIAL COMMENT
1. This section defines when a sender pays the obligation stated in
Section 4A-402. If a group of two or more banks engage in funds
transfers with each other, the participating banks will sometimes be
senders and sometimes receiving banks. With respect to payment orders
other than Fedwires, the amounts of the various payment orders may be
credited and debited to accounts of one bank with another or to a
clearing house account of each bank and amounts owed and amounts due
are netted. Settlement is made through a Federal Reserve Bank by
charges to the Federal Reserve accounts of the net debtor banks and
credits to the Federal Reserve accounts of the net creditor banks. In the
case of Fedwires the sender's obligation is settled by a debit to the
Federal Reserve account of the sender and a credit to the Federal Reserve
account of the receiving bank at the time the receiving bank receives the
payment order. Both of these cases are covered by subsection (a)(1).
When the Federal Reserve settlement becomes final the obligation of the
sender under Section 4A-402 is paid.
2. In some cases a bank does not settle an obligation owed to
another bank through a Federal Reserve Bank. This is the case if one of
the banks is a foreign bank without access to the Federal Reserve
payment system. In this kind of case, payment is usually made by
credits or debits to accounts of the two banks with each other or to
accounts of the two banks in a third bank. Suppose Bank B has an
account in Bank A. Bank A advises Bank B that its account in Bank A
has been credited $1,000,000 and that the credit is immediately
withdrawable. Bank A also instructs Bank B to pay $1,000,000 to the
account of Beneficiary in Bank B. This case is covered by subsection
(a)(2). Bank B may want to immediately withdraw this credit. For
example, it might do so by instructing Bank A to debit the account and
pay some third party. Payment by Bank A to Bank B of Bank A's
payment order occurs when the withdrawal is made. Suppose Bank B
does not withdraw the credit. Since Bank B is the beneficiary's bank,
one of the effects of receipt of payment by Bank B is that acceptance of
Bank A's payment order automatically occurs at the time of payment.
Section 4A-209(b)(2). Acceptance means that Bank B is obliged to pay
$1,000,000 to Beneficiary. Section 4A-404(a). Subsection (a)(2) of
Section 4A-403 states that payment does not occur until midnight if the
credit is not withdrawn. This allows Bank B an opportunity to reject the
order if it does not have time to withdraw the credit to its account and it
is not willing to incur the liability to Beneficiary before it has use of the
funds represented by the credit.
3. Subsection (a)(3) applies to a case in which the sender (bank or
nonbank) has a funded account in the receiving bank. If Sender has an
account in Bank and issues a payment order to Bank, Bank can obtain
payment from Sender by debiting the account of Sender, which pays its
Section 4A-402 obligation to Bank when the debit is made.
4. Subsection (b) deals with multilateral settlements made through a
funds transfer system and is based on the CHIPS settlement system. In a
funds transfer system such as CHIPS, which allows the various banks
that transmit payment orders over the system to settle obligations at the
end of each day, settlement is not based on individual payment orders.
Each bank using the system engages in funds transfers with many other
banks using the system. Settlement for any participant is based on the
net credit or debit position of that participant with all other banks using
the system. Subsection (b) is designed to make clear that the obligations
of any sender are paid when the net position of that sender is settled in
accordance with the rules of the funds transfer system. This provision is
intended to invalidate any argument, based on common-law principles,
that multilateral netting is not valid because mutuality of obligation is not
present. Subsection (b) dispenses with any mutuality of obligation
requirements. Subsection (c) applies to cases in which two banks send
payment orders to each other during the day and settle with each other at
the end of the day or at the end of some other period. It is similar to
subsection (b) in that it recognizes that a sender's obligation to pay a
payment order is satisfied by a setoff. The obligations of each bank as
sender to the other as receiving bank are obligations of the bank itself
and not as representative of customers. These two sections are important
in the case of insolvency of a bank. They make clear that liability under
Section 4A-402 is based on the net position of the insolvent bank after
setoff.
5. Subsection (d) relates to the uncommon case in which the sender
doesn't have an account relationship with the receiving bank and doesn't
settle through a Federal Reserve Bank. An example would be a customer
that pays over the counter for a payment order that the customer issues to
the receiving bank. Payment would normally be by cash, check or bank
obligation. When payment occurs is determined by law outside Article
4A.
Section 36-4A-404. Obligation of beneficiary's bank to pay and
give notice to beneficiary.
(a) Subject to Sections 36-4A-211(e), 36-4A-405(d), and
36-4A-405(e), if a beneficiary's bank accepts a payment order, the bank
is obliged to pay the amount of the order to the beneficiary of the order.
Payment is due on the payment date of the order, but if acceptance
occurs on the payment date after the close of the funds-transfer business
day of the bank, payment is due on the next funds-transfer business day.
If the bank refuses to pay after demand by the beneficiary and receipt of
notice of particular circumstances that will give rise to consequential
damages as a result of nonpayment, the beneficiary may recover damages
resulting from the refusal to pay to the extent the bank had notice of the
damages, unless the bank proves that it did not pay because of a
reasonable doubt concerning the right of the beneficiary to payment.
(b) If a payment order accepted by the beneficiary's bank instructs
payment to an account of the beneficiary, the bank is obliged to notify
the beneficiary of receipt of the order before midnight of the next funds-transfer business day following the payment date. If the payment order
does not instruct payment to an account of the beneficiary, the bank is
required to notify the beneficiary only if notice is required by the order.
Notice may be given by first-class mail or any other means reasonable in
the circumstances. If the bank fails to give the required notice, the bank
is obliged to pay interest to the beneficiary on the amount of the payment
order from the day notice should have been given until the day the
beneficiary learned of receipt of the payment order by the bank. No
other damages are recoverable. Reasonable attorney's fees are also
recoverable if demand for interest is made and refused before an action is
brought on the claim.
(c) The right of a beneficiary to receive payment and damages as
stated in subsection (a) may not be varied by agreement or a funds-transfer system rule. The right of a beneficiary to be notified as stated in
subsection (b) may be varied by agreement of the beneficiary or by a
funds-transfer system rule if the beneficiary is notified of the rule before
initiation of the funds transfer.
OFFICIAL COMMENT
1. The first sentence of subsection (a) states the time when the
obligation of the beneficiary's bank arises. The second and third
sentences state when the beneficiary's bank must make funds available to
the beneficiary. They also state the measure of damages for failure, after
demand, to comply. Since the Expedited Funds Availability Act, 12
U.S.C. 4001 et seq., also governs funds availability in a funds transfer,
the second and third sentences of subsection (a) may be subject to
preemption by that Act.
2. Subsection (a) provides that the beneficiary of an accepted
payment order may recover consequential damages if the beneficiary's
bank refuses to pay the order after demand by the beneficiary if the bank
at that time had notice of the particular circumstances giving rise to the
damages. Such damages are recoverable only to the extent the bank had
"notice of the damages." The quoted phrase requires that the
bank have notice of the general type or nature of the damages that will
be suffered as a result of the refusal to pay and their general magnitude.
There is no requirement that the bank have notice of the exact or even
the approximate amount of the damages, but if the amount of damages is
extraordinary the bank is entitled to notice of that fact. For example, in
Evra Corp. v. Swiss Bank Corp., 673 F.2d 951 (7th Cir. 1982), failure to
complete a funds transfer of only $27,000 required to retain rights to a
very favorable ship charter resulted in a claim for more than $2,000,000
of consequential damages. Since it is not reasonably foreseeable that a
failure to make a relatively small payment will result in damages of this
magnitude, notice is not sufficient if the beneficiary's bank has notice
only that the $27,000 is necessary to retain rights on a ship charter. The
bank is entitled to notice that an exceptional amount of damages will
result as well. For example, there would be adequate notice if the bank
had been made aware that damages of $1,000,000 or more might
result.
3. Under the last clause of subsection (a) the beneficiary's bank is
not liable for damages if its refusal to pay was "because of a
reasonable doubt concerning the right of the beneficiary to
payment." Normally there will not be any question about the right
of the beneficiary to receive payment. Normally, the bank should be able
to determine whether it has accepted the payment order and, if it has
been accepted, the first sentence of subsection (a) states that the bank is
obliged to pay. There may be uncommon cases, however, in which there
is doubt whether acceptance occurred. For example, if acceptance is
based on receipt of payment by the beneficiary's bank under Section
4A-403 (a)(1) or (2), there may be cases in which the bank is not certain
that payment has been received. There may also be cases in which there
is doubt about whether the person demanding payment is the person
identified in the payment order as beneficiary of the order.
The last clause of subsection (a) does not apply to cases in which a
funds transfer is being used to pay an obligation and a dispute arises
between the originator and the beneficiary concerning whether the
obligation is in fact owed. For example, the originator may try to
prevent payment to the beneficiary by the beneficiary's bank by alleging
that the beneficiary is not entitled to payment because of fraud against
the originator or a breach of contract relating to the obligation. The
fraud or breach of contract claim of the originator may be grounds for
recovery by the originator from the beneficiary after the beneficiary is
paid, but it does not affect the obligation of the beneficiary's bank to pay
the beneficiary. Unless the payment order has been cancelled pursuant to
Section 4A-211(c), there is no excuse for refusing to pay the beneficiary
and, in a proper case, the refusal may result in consequential damages.
Except in the case of a book transfer, in which the beneficiary's bank is
also the originator's bank, the originator of a funds transfer cannot cancel
a payment order to the beneficiary's bank, with or without the consent of
that bank, because the originator is not the sender of that order. Thus,
the beneficiary's bank may safely ignore any instruction by the originator
to withhold payment to the beneficiary.
4. Subsection (b) states the duty of the beneficiary's bank to notify
the beneficiary of receipt of the order. If acceptance occurs under
Section 4A-209(b)(1) the beneficiary is normally notified. Thus,
subsection (b) applies primarily to cases in which acceptance occurs
under Section 4A-209(b)(2) or (3). Notice under subsection (b) is not
required if the person entitled to the notice agrees or a funds transfer
system rule provides that notice is not required and the beneficiary is
given notice of the rule. In ACH transactions the normal practice is not
to give notice to the beneficiary unless notice is requested by the
beneficiary. This practice can be continued by adoption of a funds
transfer system rule. Subsection (a) is not subject to variation by
agreement or by a funds transfer system rule.
Section 36-4A-405. Payment by beneficiary's bank to
beneficiary.
(a) If the beneficiary's bank credits an account of the beneficiary
of a payment order, payment of the bank's obligation under Section
36-4A-404(a) occurs when and to the extent (i) the beneficiary is notified
of the right to withdraw the credit, (ii) the bank lawfully applies the
credit to a debt of the beneficiary, or (iii) funds with respect to the order
are otherwise made available to the beneficiary by the bank.
(b) If the beneficiary's bank does not credit an account of the
beneficiary of a payment order, the time when payment of the bank's
obligation under Section 36-4A-404(a) occurs is governed by principles
of law that determine when an obligation is satisfied.
(c) Except as stated in subsections (d) and (e), if the beneficiary's
bank pays the beneficiary of a payment order under a condition to
payment or agreement of the beneficiary giving the bank the right to
recover payment from the beneficiary if the bank does not receive
payment of the order, the condition to payment or agreement is not
enforceable.
(d) A funds-transfer system rule may provide that payments made
to beneficiaries of funds transfers made through the system are
provisional until receipt of payment by the beneficiary's bank of the
payment order it accepted. A beneficiary's bank that makes a payment
that is provisional under the rule is entitled to refund from the
beneficiary if (i) the rule requires that both the beneficiary and the
originator be given notice of the provisional nature of the payment before
the funds transfer is initiated, (ii) the beneficiary, the beneficiary's bank,
and the originator's bank agreed to be bound by the rule, and (iii) the
beneficiary's bank did not receive payment of the payment order that it
accepted. If the beneficiary is obliged to refund payment to the
beneficiary's bank, acceptance of the payment order by the beneficiary's
bank is nullified and no payment by the originator of the funds transfer
to the beneficiary occurs under Section 36-4A-406.
(e) This subsection applies to a funds transfer that includes a
payment order transmitted over a funds-transfer system that (i) nets
obligations multilaterally among participants, and (ii) has in effect a loss-sharing agreement among participants for the purpose of providing funds
necessary to complete settlement of the obligations of one or more
participants that do not meet their settlement obligations. If the
beneficiary's bank in the funds transfer accepts a payment order and the
system fails to complete settlement pursuant to its rules with respect to
any payment order in the funds transfer, (i) the acceptance by the
beneficiary's bank is nullified and no person has any right or obligation
based on the acceptance, (ii) the beneficiary's bank is entitled to recover
payment from the beneficiary, (iii) no payment by the originator to the
beneficiary occurs under Section 36-4A-406, and (iv) subject to Section
36-4A-402(e), each sender in the funds transfer is excused from its
obligation to pay its payment order under Section 36-4A-402(c) because
the funds transfer has not been completed.
OFFICIAL COMMENT
1. This section defines when the beneficiary's bank pays the
beneficiary and when the obligation of the beneficiary's bank under
Section 4A-404 to pay the beneficiary is satisfied. In almost all cases the
bank will credit an account of the beneficiary when it receives a payment
order. In the typical case the beneficiary is paid when the beneficiary is
given notice of the right to withdraw the credit. Subsection (a)(i). In
some cases payment might be made to the beneficiary not by releasing
funds to the beneficiary, but by applying the credit to a debt of the
beneficiary. Subsection (a)(ii). In this case the beneficiary gets the
benefit of the payment order because a debt of the beneficiary has been
satisfied. The two principal cases in which payment will occur in this
manner are setoff by the beneficiary's bank and payment of the proceeds
of the payment order to a garnishing creditor of the beneficiary. These
cases are discussed in Comment 2 to Section 4A-502.
2. If a beneficiary's bank releases funds to the beneficiary before it
receives payment from the sender of the payment order, it assumes the
risk that the sender may not pay the sender's order because of suspension
of payments or other reason. Subsection (c). As stated in Comment 5 to
Section 4A-209, the beneficiary's bank can protect itself against this risk
by delaying acceptance. But if the bank accepts the order it is obliged to
pay the beneficiary. If the beneficiary's bank has given the beneficiary
notice of the right to withdraw a credit made to the beneficiary's account,
the beneficiary has received payment from the bank. Once payment has
been made to the beneficiary with respect to an obligation incurred by
the bank under Section 4A-404(a), the payment cannot be recovered by
the beneficiary's bank unless subsection (d) or (e) applies. Thus, a right
to withdraw a credit cannot be revoked if the right to withdraw
constituted payment of the bank's obligation. This principle applies even
if funds were released as a "loan" (see Comment 5 to Section
4A-209), or were released subject to a condition that they would be
repaid in the event the bank does not receive payment from the sender of
the payment order, or the beneficiary agreed to return the payment if the
bank did not receive payment from the sender.
3. Subsection (c) is subject to an exception stated in subsection (d)
which is intended to apply to automated clearing house transfers. ACH
transfers are made in batches. A beneficiary's bank will normally accept,
at the same time and as part of a single batch, payment orders with
respect to many different originator's banks. Comment 2 to Section
4A-206. The custom in ACH transactions is to release funds to the
beneficiary early on the payment date even though settlement to the
beneficiary's bank does not occur until later in the day. The
understanding is that payments to beneficiaries are provisional until the
beneficiary's bank receives settlement. This practice is similar to what
happens when a depositary bank releases funds with respect to a check
forwarded for collection. If the check is dishonored the bank is entitled
to recover the funds from the customer. ACH transfers are widely
perceived as check substitutes. Section 4A-405(d) allows the funds
transfer system to adopt a rule making payments to beneficiaries
provisional. If such a rule is adopted, a beneficiary's bank that releases
funds to the beneficiary will be able to recover the payment if it doesn't
receive payment of the payment order that it accepted. There are two
requirements with respect to the funds transfer system rule. The
beneficiary, the beneficiary's bank and the originator's bank must all
agree to be bound by the rule and the rule must require that both the
beneficiary and the originator be given notice of the provisional nature of
the payment before the funds transfer is initiated. There is no
requirement that the notice be given with respect to a particular funds
transfer. Once notice of the provisional nature of the payment has been
given, the notice is effective for all subsequent payments to or from the
person to whom the notice was given. Subsection (d) provides only that
the funds transfer system rule must require notice to the beneficiary and
the originator. The beneficiary's bank will know what the rule requires,
but it has no way of knowing whether the originator's bank complied
with the rule. Subsection (d) does not require proof that the originator
received notice. If the originator's bank failed to give the required notice
and the originator suffered as a result, the appropriate remedy is an
action by the originator against the originator's bank based on that
failure. But the beneficiary's bank will not be able to get the benefit of
subsection (d) unless the beneficiary had notice of the provisional nature
of the payment because subsection (d) requires an agreement by the
beneficiary to be bound by the rule. Implicit in an agreement to be
bound by a rule that makes a payment provisional is a requirement that
notice be given of what the rule provides. The notice can be part of the
agreement or separately given. For example, notice can be given by
providing a copy of the system's operating rules.
With respect to ACH transfers made through a Federal Reserve Bank
acting as an intermediary bank, the Federal Reserve Bank is obliged
under Section 4A-402(b) to pay a beneficiary's bank that accepts the
payment order. Unlike Fedwire transfers, under current ACH practice a
Federal Reserve Bank that processes a payment order does not obligate
itself to pay if the originator's bank fails to pay the Federal Reserve
Bank. It is assumed that the Federal Reserve will use its right of
preemption which is recognized in Section 4A-107 to disclaim the
Section 4A-402(b) obligation in ACH transactions if it decides to retain
the provisional payment rule.
4. Subsection (e) is another exception to subsection (c). It refers to
funds transfer systems having loss-sharing rules described in the
subsection. CHIPS has proposed a rule that fits the description. Under
the CHIPS loss-sharing rule the CHIPS banks will have agreed to
contribute funds to allow the system to settle for payment orders sent
over the system during the day in the event that one or more banks are
unable to meet their settlement obligations. Subsection (e) applies only if
CHIPS fails to settle despite the loss-sharing rule. Since funds under the
loss-sharing rule will be instantly available to CHIPS and will be in an
amount sufficient to cover any failure that can be reasonably anticipated,
it is extremely unlikely that CHIPS would ever fail to settle. Thus,
subsection (e) addresses an event that should never occur. If that event
were to occur, all payment orders made over the system would be
canceled under the CHIPS rule. Thus, no bank would receive settlement,
whether or not a failed bank was involved in a particular funds transfer.
Subsection (e) provides that each funds transfer in which there is a
payment order with respect to which there is a settlement failure is
unwound. Acceptance by the beneficiary's bank in each funds transfer is
nullified. The consequences of nullification are that the beneficiary has
no right to receive or retain payment by the beneficiary's bank, no
payment is made by the originator to the beneficiary and each sender in
the funds transfer is, subject to Section 4A-402(e), not obliged to pay its
payment order and is entitled to refund under Section 4A-402(d) if it has
already paid.
Section 36-4A-406. Payment by originator to beneficiary;
discharge of underlying obligation.
(a) Subject to Sections 36-4A-211(e), 36-4A-405(d), and
36-4A-405(e), the originator of a funds transfer pays the beneficiary of
the originator's payment order (i) at the time a payment order for the
benefit of the beneficiary is accepted by the beneficiary's bank in the
funds transfer and (ii) in an amount equal to the amount of the order
accepted by the beneficiary's bank, but not more than the amount of the
originator's order.
(b) If payment under subsection (a) is made to satisfy an
obligation, the obligation is discharged to the same extent discharge
would result from payment to the beneficiary of the same amount in
money, unless (i) the payment under subsection (a) was made by a means
prohibited by the contract of the beneficiary with respect to the
obligation, (ii) the beneficiary, within a reasonable time after receiving
notice of receipt of the order by the beneficiary's bank, notified the
originator of the beneficiary's refusal of the payment, (iii) funds with
respect to the order were not withdrawn by the beneficiary or applied to
a debt of the beneficiary, and (iv) the beneficiary would suffer a loss that
could reasonably have been avoided if payment had been made by a
means complying with the contract. If payment by the originator does
not result in discharge under this section, the originator is subrogated to
the rights of the beneficiary to receive payment from the beneficiary's
bank under Section 36-4A-404(a).
(c) For the purpose of determining whether discharge of an
obligation occurs under subsection (b), if the beneficiary's bank accepts a
payment order in an amount equal to the amount of the originator's
payment order less charges of one or more receiving banks in the funds
transfer, payment to the beneficiary is deemed to be in the amount of the
originator's order unless upon demand by the beneficiary the originator
does not pay the beneficiary the amount of the deducted charges.
(d) Rights of the originator or of the beneficiary of a funds transfer
under this section may be varied only by agreement of the originator and
the beneficiary.
OFFICIAL COMMENT
1. Subsection (a) states the fundamental rule of Article 4A that
payment by the originator to the beneficiary is accomplished by
providing to the beneficiary the obligation of the beneficiary's bank to
pay. Since this obligation arises when the beneficiary's bank accepts a
payment order, the originator pays the beneficiary at the time of
acceptance and in the amount of the payment order accepted.
2. In a large percentage of funds transfers, the transfer is made to
pay an obligation of the originator. Subsection (a) states that the
beneficiary is paid by the originator when the beneficiary's bank accepts
a payment order for the benefit of the beneficiary. When that happens
the effect under subsection (b) is to substitute the obligation of the
beneficiary's bank for the obligation of the originator. The effect is
similar to that under Article 3 if a cashier's check payable to the
beneficiary had been taken by the beneficiary. Normally, payment by
funds transfer is sought by the beneficiary because it puts money into the
hands of the beneficiary more quickly. As a practical matter the
beneficiary and the originator will nearly always agree to the funds
transfer in advance. Under subsection (b) acceptance by the beneficiary's
bank will result in discharge of the obligation for which payment was
made unless the beneficiary had made a contract with respect to the
obligation which did not permit payment by the means used. Thus, if
there is no contract of the beneficiary with respect to the means of
payment of the obligation, acceptance by the beneficiary's bank of a
payment order to the account of the beneficiary can result in
discharge.
3. Suppose Beneficiary's contract stated that payment of an
obligation owed by Originator was to be made by a cashier's check of
Bank A. Instead, Originator paid by a funds transfer to Beneficiary's
account in Bank B. Bank B accepted a payment order for the benefit of
Beneficiary by immediately notifying Beneficiary that the funds were
available for withdrawal. Before Beneficiary had a reasonable
opportunity to withdraw the funds Bank B suspended payments. Under
the unless clause of subsection (b) Beneficiary is not required to accept
the payment as discharging the obligation owed by Originator to
Beneficiary if Beneficiary's contract means that Beneficiary was not
required to accept payment by wire transfer. Beneficiary could refuse the
funds transfer as payment of the obligation and could resort to rights
under the underlying contract to enforce the obligation. The rationale is
that Originator cannot impose the risk of Bank B's insolvency on
Beneficiary if Beneficiary had specified another means of payment that
did not entail that risk. If Beneficiary is required to accept Originator's
payment, Beneficiary would suffer a loss that would not have occurred if
payment had been made by a cashier's check on Bank A, and Bank A
has not suspended payments. In this case Originator will have to pay
twice. It is obliged to pay the amount of its payment order to the bank
that accepted it and has to pay the obligation it owes to Beneficiary
which has not been discharged. Under the last sentence of subsection (b)
Originator is subrogated to Beneficiary's right to receive payment from
Bank B under Section 4A-404(a).
4. Suppose Beneficiary's contract called for payment by a Fedwire
transfer to Bank B, but the payment order accepted by Bank B was not a
Fedwire transfer. Before the funds were withdrawn by Beneficiary, Bank
B suspended payments. The sender of the payment order to Bank B paid
the amount of the order to Bank B. In this case the payment by
Originator did not comply with Beneficiary's contract, but the
noncompliance did not result in a loss to Beneficiary as required by
subsection (b) (iv). A Fedwire transfer avoids the risk of insolvency of
the sender of the payment order to Bank B, but it does not affect the risk
that Bank B will suspend payments before withdrawal of the funds by
Beneficiary. Thus, the unless clause of subsection (b) is not applicable
and the obligation owed to Beneficiary is discharged.
5. Charges of receiving banks in a funds transfer normally are
nominal in relationship to the amount being paid by the originator to the
beneficiary. Wire transfers are normally agreed to in advance and the
parties may agree concerning how these charges are to be divided
between the parties. Subsection (c) states a rule that applies in the
absence of agreement. In some funds transfers charges of banks that
execute payment orders are collected by deducting the charges from the
amount of the payment order issued by the bank, i.e. the bank issues a
payment order that is slightly less than the amount of the payment order
that is being executed. The process is described in Comment 3 to
Section 4A-302. The result in such a case is that the payment order
accepted by the beneficiary's bank will be slightly less than the amount
of the originator's order. Subsection (c) recognizes the principle that a
beneficiary is entitled to full payment of a debt paid by wire transfer as a
condition to discharge. On the other hand, Subsection (c) prevents a
beneficiary from denying the originator the benefit of the payment by
asserting that discharge did not occur because deduction of bank charges
resulted in less than full payment. The typical case is one in which the
payment is made to exercise a valuable right such as an option which is
unfavorable to the beneficiary. Subsection (c) allows discharge
notwithstanding the deduction unless the originator fails to reimburse the
beneficiary for the deducted charges after demand by the beneficiary.
PART 5
MISCELLANEOUS PROVISIONS
Section 36-4A-501. Variation by agreement and effect of funds-transfer system rule.
(a) Except as otherwise provided in this chapter, the rights and
obligations of a party to a funds transfer may be varied by agreement of
the affected party.
(b) `Funds-transfer system rule' means a rule of an association of
banks (i) governing transmission of payment orders by means of a funds-transfer system of the association or rights and obligations with respect to
those orders, or (ii) to the extent the rule governs rights and obligations
between banks that are parties to a funds transfer in which a Federal
Reserve Bank, acting as an intermediary bank, sends a payment order to
the beneficiary's bank. Except as otherwise provided in this chapter, a
funds-transfer system rule governing rights and obligations between
participating banks using the system may be effective even if the rule
conflicts with this chapter and indirectly affects another party to the
funds transfer who does not consent to the rule. A funds-transfer system
rule may also govern rights and obligations of parties other than
participating banks using the system to the extent stated in Sections
36-4A-404(c), 36-4A-405(d), and 36-4A-507(c).
OFFICIAL COMMENT
1. This section is designed to give some flexibility to Article 4A.
Funds transfer system rules govern rights and obligations between banks
that use the system. They may cover a wide variety of matters such as
form and content of payment orders, security procedures, cancellation
rights and procedures, indemnity rights, compensation rules for delays in
completion of a funds transfer, time and method of settlement, credit
restrictions with respect to senders of payment orders and risk allocation
with respect to suspension of payments by a participating bank. Funds
transfer system rules can be very effective in supplementing the
provisions of Article 4A and in filling gaps that may be present in Article
4A. To the extent they do not conflict with Article 4A there is no
problem with respect to their effectiveness. In that case they merely
supplement Article 4A. Section 4A-501 goes further. It states that
unless the contrary is stated, funds transfer system rules can override
provisions of Article 4A. Thus, rights and obligations of a sender bank
and a receiving bank with respect to each other can be different from that
stated in Article 4A to the extent a funds transfer system rule applies.
Since funds transfer system rules are defined as those governing the
relationship between participating banks, a rule can have a direct effect
only on participating banks. But a rule that affects the conduct of a
participating bank may indirectly affect the rights of nonparticipants such
as the originator or beneficiary of a funds transfer, and such a rule can be
effective even though it may affect nonparticipants without their consent.
For example, a rule might prevent execution of a payment order or might
allow cancellation of a payment order with the result that a funds transfer
is not completed or is delayed. But a rule purporting to define rights and
obligations of nonparticipants in the system would not be effective to
alter Article 4A rights because the rule is not within the definition of
funds transfer system rule. Rights and obligations arising under Article
4A may also be varied by agreement of the affected parties, except to the
extent Article 4A otherwise provides. Rights and obligations arising
under Article 4A can also be changed by Federal Reserve regulations and
operating circulars of Federal Reserve Banks. Section 4A-107.
2. Subsection (b)(ii) refers to ACH transfers. Whether an ACH
transfer is made through an automated clearing house of a Federal
Reserve Bank or through an automated clearing house of another
association of banks, the rights and obligations of the originator's bank
and the beneficiary's bank are governed by uniform rules adopted by
various associations of banks in various parts of the nation. With respect
to transfers in which a Federal Reserve Bank acts as intermediary bank
these rules may be incorporated, in whole or in part, in operating
circulars of the Federal Reserve Bank. Even if not so incorporated these
rules can still be binding on the association banks. If a transfer is made
through a Federal Reserve Bank, the rules are effective under subsection
(b)(ii). If the transfer is not made through a Federal Reserve Bank, the
association rules are effective under subsection (b)(i).
Section 36-4A-502. Creditor process served on receiving bank;
setoff by beneficiary's bank.
(a) As used in this section, `creditor process' means levy,
attachment, garnishment, notice of lien, sequestration, or similar process
issued by or on behalf of a creditor or other claimant with respect to an
account.
(b) This subsection applies to creditor process with respect to an
authorized account of the sender of a payment order if the creditor
process is served on the receiving bank. For the purpose of determining
rights with respect to the creditor process, if the receiving bank accepts
the payment order the balance in the authorized account is deemed to be
reduced by the amount of the payment order to the extent the bank did
not otherwise receive payment of the order, unless the creditor process is
served at a time and in a manner affording the bank a reasonable
opportunity to act on it before the bank accepts the payment order.
(c) If a beneficiary's bank has received a payment order for
payment to the beneficiary's account in the bank, the following rules
apply:
(1) The bank may credit the beneficiary's account. The amount
credited may be set off against an obligation owed by the beneficiary to
the bank or may be applied to satisfy creditor process served on the bank
with respect to the account.
(2) The bank may credit the beneficiary's account and allow
withdrawal of the amount credited unless creditor process with respect to
the account is served at a time and in a manner affording the bank a
reasonable opportunity to act to prevent withdrawal.
(3) If creditor process with respect to the beneficiary's account
has been served and the bank has had a reasonable opportunity to act on
it, the bank may not reject the payment order except for a reason
unrelated to the service of process.
(d) Creditor process with respect to a payment by the originator to
the beneficiary pursuant to a funds transfer may be served only on the
beneficiary's bank with respect to the debt owed by that bank to the
beneficiary. Any other bank served with the creditor process is not
obliged to act with respect to the process.
OFFICIAL COMMENT
1. When a receiving bank accepts a payment order, the bank
normally receives payment from the sender by debiting an authorized
account of the sender. In accepting the sender's order the bank may be
relying on a credit balance in the account. If creditor process is served
on the bank with respect to the account before the bank accepts the order
but the bank employee responsible for the acceptance was not aware of
the creditor process at the time the acceptance occurred, it is unjust to the
bank to allow the creditor process to take the credit balance on which the
bank may have relied. Subsection (b) allows the bank to obtain payment
from the sender's account in this case. Under that provision, the balance
in the sender's account to which the creditor process applies is deemed to
be reduced by the amount of the payment order unless there was
sufficient time for notice of the service of creditor process to be received
by personnel of the bank responsible for the acceptance.
2. Subsection (c) deals with payment orders issued to the
beneficiary's bank. The bank may credit the beneficiary's account when
the order is received, but under Section 4A-404(a) the bank incurs no
obligation to pay the beneficiary until the order is accepted pursuant to
Section 4A-209(b). Thus, before acceptance, the credit to the
beneficiary's account is provisional. But under Section 4A-209(b)
acceptance occurs if the beneficiary's bank pays the beneficiary pursuant
to Section 4A-405(a). Under that provision, payment occurs if the credit
to the beneficiary's account is applied to a debt of the beneficiary.
Subsection (c)(1) allows the bank to credit the beneficiary's account with
respect to a payment order and to accept the order by setting off the
credit against an obligation owed to the bank or applying the credit to
creditor process with respect to the account.
Suppose a beneficiary's bank receives a payment order for the benefit
of a customer. Before the bank accepts the order, the bank learns that
creditor process has been served on the bank with respect to the
customer's account. Normally there is no reason for a beneficiary's bank
to reject a payment order, but if the beneficiary's account is garnished,
the bank may be faced with a difficult choice. If it rejects the order, the
garnishing creditor's potential recovery of funds of the beneficiary is
frustrated. It may be faced with a claim by the creditor that the rejection
was a wrong to the creditor. If the bank accepts the order, the effect is
to allow the creditor to seize funds of its customer, the beneficiary.
Subsection (c)(3) gives the bank no choice in this case. It provides that
it may not favor its customer over the creditor by rejecting the order.
The beneficiary's bank may rightfully reject only if there is an
independent basis for rejection.
3. Subsection (c)(2) is similar to subsection (b). Normally the
beneficiary's bank will release funds to the beneficiary shortly after
acceptance or it will accept by releasing funds. Since the bank is bound
by a garnishment order served before funds are released to the
beneficiary, the bank might suffer a loss if funds were released without
knowledge that a garnishment order had been served. Subsection (c)(2)
protects the bank if it did not have adequate notice of the garnishment
when the funds were released.
4. A creditor may want to reach funds involved in a funds transfer.
The creditor may try to do so by serving process on the originator's
bank, an intermediary bank or the beneficiary's bank. The purpose of
subsection (d) is to guide the creditor and the court as to the proper
method of reaching the funds involved in a funds transfer. A creditor of
the originator can levy on the account of the originator in the originator's
bank before the funds transfer is initiated, but that levy is subject to the
limitations stated in subsection (b). The creditor of the originator cannot
reach any other funds because no property of the originator is being
transferred. A creditor of the beneficiary cannot levy on property of the
originator and until the funds transfer is completed by acceptance by the
beneficiary's bank of a payment order for the benefit of the beneficiary,
the beneficiary has no property interest in the funds transfer which the
beneficiary's creditor can reach. A creditor of the beneficiary that wants
to reach the funds to be received by the beneficiary must serve creditor
process on the beneficiary's bank to reach the obligation of the
beneficiary's bank to pay the beneficiary which arises upon acceptance
by the beneficiary's bank under Section 4A-404(a).
5. "Creditor process" is defined in subsection (a) to
cover a variety of devices by which a creditor of the holder of a bank
account or a claimant to a bank account can seize the account. Procedure
and nomenclature varies widely from state to state. The term used in
Section 4A-502 is a generic term.
Section 36-4A-503. Injunction or restraining order with respect
to funds transfer.
For proper cause and in compliance with applicable law, a court may
restrain (i) a person from issuing a payment order to initiate a funds
transfer, (ii) an originator's bank from executing the payment order of
the originator, or (iii) the beneficiary's bank from releasing funds to the
beneficiary or the beneficiary from withdrawing the funds. A court may
not otherwise restrain a person from issuing a payment order, paying or
receiving payment of a payment order, or otherwise acting with respect
to a funds transfer.
OFFICIAL COMMENT
This section is related to Section 4A-502(d) and to Comment 4 to
Section 4A-502. It is designed to prevent interruption of a funds transfer
after it has been set in motion. The initiation of a funds transfer can be
prevented by enjoining the originator or the originator's bank from
issuing a payment order. After the funds transfer is completed by
acceptance of a payment order by the beneficiary's bank, that bank can
be enjoined from releasing funds to the beneficiary or the beneficiary can
be enjoined from withdrawing the funds. No other injunction is
permitted. In particular, intermediary banks are protected, and
injunctions against the originator and the originator's bank are limited to
issuance of a payment order. Except for the beneficiary's bank, nobody
can be enjoined from paying a payment order, and no receiving bank can
be enjoined from receiving payment from the sender of the order that it
accepted.
Section 36-4A-504. Order in which items and payment orders
may be charged to account; order of withdrawals from account.
(a) If a receiving bank has received more than one payment order
of the sender or one or more payment orders and other items that are
payable from the sender's account, the bank may charge the sender's
account with respect to the various orders and items in any sequence.
(b) In determining whether a credit to an account has been
withdrawn by the holder of the account or applied to a debt of the holder
of the account, credits first made to the account are first withdrawn or
applied.
OFFICIAL COMMENT
Subsection (a) concerns priority among various obligations that are to
be paid from the same account. A customer may have written checks on
its account with the receiving bank and may have issued one or more
payment orders payable from the same account. If the account balance is
not sufficient to cover all of the checks and payment orders, some checks
may be dishonored and some payment orders may not be accepted.
Although there is no concept of wrongful dishonor of a payment order in
Article 4A in the absence of an agreement to honor by the receiving
bank, some rights and obligations may depend on the amount in the
customer's account. Section 4A-209(b)(3) and Section 4A-210(b).
Whether dishonor of a check is wrongful also may depend upon the
balance in the customer's account. Under subsection (a), the bank is not
required to consider the competing items and payment orders in any
particular order. Rather it may charge the customer's account for the
various items and orders in any order. Suppose there is $12,000 in the
customer's account. If a check for $5,000 is presented for payment and
the bank receives a $10,000 payment order from the customer, the bank
could dishonor the check and accept the payment order. Dishonor of the
check is not wrongful because the account balance was less than the
amount of the check after the bank charged the account $10,000 on
account of the payment order. Or, the bank could pay the check and not
execute the payment order because the amount of the order is not
covered by the balance in the account.
Section 36-4A-505. Preclusion of objection to debit of
customer's account.
If a receiving bank has received payment from its customer with
respect to a payment order issued in the name of the customer as sender
and accepted by the bank, and the customer received notification
reasonably identifying the order, the customer is precluded from asserting
that the bank is not entitled to retain the payment unless the customer
notifies the bank of the customer's objection to the payment within one
year after the notification was received by the customer.
OFFICIAL COMMENT
This section is in the nature of a statute of repose for objecting to
debits made to the customer's account. A receiving bank that executes
payment orders of a customer may have received payment from the
customer by debiting the customer's account with respect to a payment
order that the customer was not required to pay. For example, the
payment order may not have been authorized or verified pursuant to
Section 4A-202 or the funds transfer may not have been completed. In
either case the receiving bank is obliged to refund the payment to the
customer and this obligation to refund payment cannot be varied by
agreement. Section 4A-204 and Section 4A-402. Refund may also be
required if the receiving bank is not entitled to payment from the
customer because the bank erroneously executed a payment order.
Section 4A-303. A similar analysis applies to that case. Section
4A-402(d) and (f) require refund and the obligation to refund may not be
varied by agreement. Under 4A-505, however, the obligation to refund
may not be asserted by the customer if the customer has not objected to
the debiting of the account within one year after the customer received
notification of the debit.
Section 36-4A-506. Rate of interest.
(a) If, under this chapter, a receiving bank is obliged to pay
interest with respect to a payment order issued to the bank, the amount
payable may be determined (i) by agreement of the sender and receiving
bank, or (ii) by a funds-transfer system rule if the payment order is
transmitted through a funds-transfer system.
(b) If the amount of interest is not determined by an agreement or
rule as stated in subsection (a), the amount is calculated by multiplying
the applicable Federal Funds rate by the amount on which interest is
payable, and then multiplying the product by the number of days for
which interest is payable. The applicable Federal Funds rate is the
average of the Federal Funds rates published by the Federal Reserve
Bank of New York for each of the days for which interest is payable
divided by three hundred sixty. The Federal Funds rate for any day on
which a published rate is not available is the same as the published rate
for the next preceding day for which there is a published rate. If a
receiving bank that accepted a payment order is required to refund
payment to the sender of the order because the funds transfer was not
completed, but the failure to complete was not due to any fault by the
bank, the interest payable is reduced by a percentage equal to the reserve
requirement on deposits of the receiving bank.
OFFICIAL COMMENT
1. A receiving bank is required to pay interest on the amount of a
payment order received by the bank in a number of situations.
Sometimes the interest is payable to the sender and in other cases it is
payable to either the originator or the beneficiary of the funds transfer.
The relevant provisions are Section 4A-204(a), Section 4A-209(b) (3),
Section 4A-210(b), Section 4A-305(a), Section 4A-402(d) and Section
4A-404(b). The rate of interest may be governed by a funds transfer
system rule or by agreement as stated in subsection (a). If subsection (a)
doesn't apply, the rate is determined under subsection (b). Subsection
(b) is illustrated by the following example. A bank is obliged to pay
interest on $1,000,000 for three days, July 3, July 4, and July 5. The
published Fed Funds rate is .082 for July 3 and .081 for July 5. There is
no published rate for July 4 because that day is not a banking day. The
rate for July 3 applies to July 4. The applicable Fed Funds rate is .08167
(the average of .082, .082, and .081) divided by 360 which equals
.0002268. The amount of interest payable is $1,000,000 X .0002268 X 3
= $680.40.
2. In some cases, interest is payable in spite of the fact that there is
no fault by the receiving bank. The last sentence of subsection (b)
applies to those cases. For example, a funds transfer might not be
completed because the beneficiary's bank rejected the payment order
issued to it by the originator's bank or an intermediary bank. Section
4A-402(c) provides that the originator is not obliged to pay its payment
order and Section 4A-402(d) provides that the originator's bank must
refund any payment received plus interest. The requirement to pay
interest in this case is not based on fault by the originator's bank.
Rather, it is based on restitution. Since the originator's bank had the use
of the originator's money, it is required to pay the originator for the
value of that use. The value of that use is not determined by multiplying
the interest rate by the refundable amount because the originator's bank
is required to deposit with the Federal Reserve a percentage of the bank's
deposits as a reserve requirement. Since that deposit does not bear
interest, the bank had use of the refundable amount reduced by a
percentage equal to the reserve requirement. If the reserve requirement is
12%, the amount of interest payable by the bank under the formula stated
in subsection (b) is reduced by 12%.
Section 36-4A-507. Choice of law.
(a) The following rules apply unless the affected parties otherwise
agree or subsection (c) applies:
(1) The rights and obligations between the sender of a payment
order and the receiving bank are governed by the law of the jurisdiction
in which the receiving bank is located.
(2) The rights and obligations between the beneficiary's bank
and the beneficiary are governed by the law of the jurisdiction in which
the beneficiary's bank is located.
(3) The issue of when payment is made pursuant to a funds
transfer by the originator to the beneficiary is governed by the law of the
jurisdiction in which the beneficiary's bank is located.
(b) If the parties described in each paragraph of subsection (a)
have made an agreement selecting the law of a particular jurisdiction to
govern rights and obligations between each other, the law of that
jurisdiction governs those rights and obligations, whether or not the
payment order or the funds transfer bears a reasonable relation to that
jurisdiction.
(c) A funds-transfer system rule may select the law of a particular
jurisdiction to govern (i) rights and obligations between participating
banks with respect to payment orders transmitted or processed through
the system, or (ii) the rights and obligations of some or all parties to a
funds transfer any part of which is carried out by means of the system.
A choice of law made pursuant to clause (i) is binding on participating
banks. A choice of law made pursuant to clause (ii) is binding on the
originator, other sender, or a receiving bank having notice that the funds-transfer system might be used in the funds transfer and of the choice of
law by the system when the originator, other sender, or receiving bank
issued or accepted a payment order. The beneficiary of a funds transfer
is bound by the choice of law if, when the funds transfer is initiated, the
beneficiary has notice that the funds-transfer system might be used in the
funds transfer and of the choice of law by the system. The law of a
jurisdiction selected pursuant to this subsection may govern, whether or
not that law bears a reasonable relation to the matter in issue.
(d) In the event of inconsistency between an agreement under
subsection (b) and a choice-of-law rule under subsection (c), the
agreement under subsection (b) prevails.
(e) If a funds transfer is made by use of more than one funds-transfer system and there is inconsistency between choice-of-law rules of
the systems, the matter in issue is governed by the law of the selected
jurisdiction that has the most significant relationship to the matter in
issue.
OFFICIAL COMMENT
1. Funds transfers are typically interstate or international in
character. If part of a funds transfer is governed by Article 4A and
another part is governed by other law, the rights and obligations of
parties to the funds transfer may be unclear because there is no clear
consensus in various jurisdictions concerning the juridical nature of the
transaction. Unless all of a funds transfer is governed by a single law it
may be very difficult to predict the result if something goes wrong in the
transfer. Section 4A-507 deals with this problem. Subsection (b) allows
parties to a funds transfer to make a choice-of-law agreement.
Subsection (c) allows a funds transfer system to select the law of a
particular jurisdiction to govern funds transfers carried out by means of
the system. Subsection (a) states residual rules if no choice of law has
occurred under subsection (b) or subsection (c).
2. Subsection (a) deals with three sets of relationships. Rights and
obligations between the sender of a payment order and the receiving bank
are governed by the law of the jurisdiction in which the receiving bank is
located. If the receiving bank is the beneficiary's bank the rights and
obligations of the beneficiary are also governed by the law of the
jurisdiction in which the receiving bank is located. Suppose Originator,
located in Canada, sends a payment order to Originator's Bank located in
a state in which Article 4A has been enacted. The order is for payment
to an account of Beneficiary in a bank in England. Under subsection
(a)(1), the rights and obligations of Originator and Originator's Bank
toward each other are governed by Article 4A if an action is brought in a
court in the Article 4A state. If an action is brought in a Canadian court,
the conflict of laws issue will be determined by Canadian law which
might or might not apply the law of the state in which Originator's Bank
is located. If that law is applied, the execution of Originator's order will
be governed by Article 4A, but with respect to the payment order of
Originator's Bank to the English bank, Article 4A may or may not be
applied with respect to the rights and obligations between the two banks.
The result may depend upon whether action is brought in a court in the
state in which Originator's Bank is located or in an English court.
Article 4A is binding only on a court in a state that enacts it. It can have
extraterritorial effect only to the extent courts of another jurisdiction are
willing to apply it. Subsection (c) also bears on the issues discussed in
this Comment.
Under Section 4A-406 payment by the originator to the beneficiary of
the funds transfer occurs when the beneficiary's bank accepts a payment
order for the benefit of the beneficiary. A jurisdiction in which Article
4A is not in effect may follow a different rule or it may not have a clear
rule. Under Section 4A-507(a)(3) the issue is governed by the law of the
jurisdiction in which the beneficiary's bank is located. Since the
payment to the beneficiary is made through the beneficiary's bank it is
reasonable that the issue of when payment occurs be governed by the law
of the jurisdiction in which the bank is located. Since it is difficult in
many cases to determine where a beneficiary is located, the location of
the beneficiary's bank provides a more certain rule.
3. Subsection (b) deals with choice-of-law agreements and it gives
maximum freedom of choice. Since the law of funds transfers is not
highly developed in the case law there may be a strong incentive to
choose the law of a jurisdiction in which Article 4A is in effect because
it provides a greater degree of certainty with respect to the rights of
various parties. With respect to commercial transactions, it is often said
that "[u]niformity and predictability based upon commercial
convenience are the prime considerations in making the choice of
governing law . . . ." R. Leflar, American Conflicts Law,
Section 185 (1977). Subsection (b) is derived in part from recently
enacted choice-of-law rules in the States of New York and California.
N.Y. Gen. Obligations Law 5-1401 (McKinney's 1989 Supp.) and
California Civil Code Section 1646.5. This broad endorsement of
freedom of contract is an enhancement of the approach taken by
Restatement (Second) of Conflict of Laws Section 187(b) (1971). The
Restatement recognizes the basic right of freedom of contract, but the
freedom granted the parties may be more limited than the freedom
granted here. Under the formulation of the Restatement, if there is no
substantial relationship to the jurisdiction whose law is selected and there
is no "other" reasonable basis for the parties' choice, then the
selection of the parties need not be honored by a court. Further, if the
choice is violative of a fundamental policy of a state which has a
materially greater interest than the chosen state, the selection could be
disregarded by a court. Those limitations are not found in subsection
(b).
4. Subsection (c) may be the most important provision in regard to
creating uniformity of law in funds transfers. Most rights stated in
Article 4A regard parties who are in privity of contract such as originator
and beneficiary, sender and receiving bank, and beneficiary's bank and
beneficiary. Since they are in privity they can make a choice of law by
agreement. But that is not always the case. For example, an
intermediary bank that improperly executes a payment order is not in
privity with either the originator or the beneficiary. The ability of a
funds transfer system to make a choice of law by rule is a convenient
way of dispensing with individual agreements and to cover cases in
which agreements are not feasible. It is probable that funds transfer
systems will adopt a governing law to increase the certainty of
commercial transactions that are effected over such systems. A system
rule might adopt the law of an Article 4A state to govern transfers on the
system in order to provide a consistent, unitary, law governing all
transfers made on the system. To the extent such system rules develop,
individual choice-of-law agreements become unnecessary.
Subsection (c) has broad application. A system choice of law applies
not only to rights and obligations between banks that use the system, but
may also apply to other parties to the funds transfer so long as some part
of the transfer was carried out over the system. The originator and any
other sender or receiving bank in the funds transfer is bound if at the
time it issues or accepts a payment order it had notice that the funds
transfer involved use of the system and that the system chose the law of
a particular jurisdiction. Under Section 4A-107, the Federal Reserve by
regulation could make a similar choice of law to govern funds transfers
carried out by use of Federal Reserve Banks. Subsection (d) is a
limitation on subsection (c). If parties have made a choice-of-law
agreement that conflicts with a choice of law made under subsection (c),
the agreement prevails.
5. Subsection (e) addresses the case in which a funds transfer
involves more than one funds transfer system and the systems adopt
conflicting choice-of-law rules. The rule that has the most significant
relationship to the matter at issue prevails. For example, each system
should be able to make a choice of law governing payment orders
transmitted over that system without regard to a choice of law made by
another system."
Reference to Funds Transfers added
SECTION 2. Section 36-1-105(2) is amended to read:
"(2) Where one of the following provisions of this title
specifies the applicable law, that provision governs and a contrary
agreement is effective only to the extent permitted by the law (including
the conflict of laws rules) so specified:
Rights of seller's creditors against
sold goods. Section 36-2-402.
Applicability of the Chapter on
Bank Deposits and Collections. Section 36-4-102.
Bulk transfers subject to the
Chapter on Bulk Transfers. Section 36-6-102.
Applicability of the Chapter on
Investment Securities. Section 36-8-106.
Perfection provisions of the
Chapter on Secured Transactions. Section 36-9-103.
Governing law in the Chapter on
Funds Transfers. Section
36-4A-507."
Time effective
SECTION 3. This act takes effect upon approval by the
Governor.
Approved the 12th day of February, 1996. |