English High Court considers unjust enrichment claim by APP fraud victim against receiving bank

The recent case of Terna Energy Trading Doo v Revolut Ltd¹ is one of a number of recent cases of claims by an APP fraud victim against a receiving bank.  You can read our overview here.

Background

Terna Energy Trading Doo (the claimant), a Serbian company, instructed its bank, UniCredit Serbia, to transfer €700,000 to an account with Revolut Ltd (the defendant) held by Zdena Fashions Ltd, an English company.

UniCredit Serbia used a correspondent bank to effect the transaction.  After the claimant instructed UniCredit Serbia to make the payment to Zdena Fashions, UniCredit Serbia debited the claimant’s account with it.  At the same time, the defendant’s account with the correspondent bank was credited with an equivalent amount and the defendant then credited Zdena Fashion’s account, issuing electronic money to its customer, backed by the credit in its correspondent bank account.  It is common ground between the parties that this payment mechanism constituted an indirect transfer of funds and that there was no direct transfer of funds between them.

The claimant’s instruction to its bank to make this payment was induced by an APP fraud by third parties. Within hours of Zdena Fashions receiving the money, it was entirely dissipated.

The claimant brought a claim for unjust enrichment against defendant (the receiving bank), to recover the €700,000. The claimant brought no claim against its own bank, UniCredit Serbia, or Zdena Fashions.

The defendant brought an application for reverse summary judgment or, alternatively, for an order to strike out the claim.

Issues

HHJ Paul Matthews set out the test for unjust enrichment which requires consideration of the following four questions:

(a) Has the defendant benefitted, in the sense of being enriched?

(b) Was the enrichment at the claimant’s expense?

(c) Was the enrichment unjust?

(d) Are there any defences?  

The application concerned only matters (a) and (b), with (c) and (d) to be dealt with at trial.

Question (a) – Has the defendant been enriched?

The “balancing liability” argument

The claimant relied primarily on a 2020 unjust enrichment case², which in turn referred to older, long-standing authorities, including at Court of Appeal and House of Lords level³, where funds had been credited to a third person’s bank account by mistake, and the payer sued the bank. In each case the bank had not yet paid away the funds, and in each case the claim against the bank succeeded.

The defendant relied on more recent authorities, particularly a 2013 High Court case⁴, to support its argument that the credit of money it received was matched by an immediate balancing liability of a debt owed to its customer (on the basis of the banker/customer relationship) and, hence, it was never enriched.

The judge observed that most of the authorities relied on by the defendant were at first instance (with one Supreme Court decision⁵) and, moreover, the specific passages relied on were obiter.  He also observed that these cases did not even mention, let alone deal with, relevant older English authorities – and two older authorities⁶ expressly addressed the argument being advanced by the defendant, holding that the bank becoming debtor to the customer is not an answer to the claim, at least unless and until it is proved the bank has paid away the money in accordance with the customer’s instructions and without notice of the payer’s claim. 

The judge said that he was bound to follow the decisions of the Court of Appeal and House of Lords, and to the extent there was conflict between those decisions and the obiter statements in the recent first instance and Supreme Court decisions, he must decline to follow the latter.  Moreover, he added: “Even if I were wrong, and the earlier decisions were not actual decisions binding on me, I nevertheless consider that they express the correct principle, and I prefer them” [para 64]. 

He said that the binding English authorities make clear that, if by the time of the claim the receiving bank has already accounted to or paid off its customer without notice of the claim, the bank has a defence. But not otherwise. Where the receiving bank has merely credited its customer, but not yet acted upon it, there is no reason why the bank should not repay (wiping out the credit to its customer), any more than there is any reason why the customer should not repay if it is sued instead of the bank.

The “EMI argument”

The defendant also tried to argue that its position as an electronic money institution (EMI) is distinguishable from that of an ordinary bank.  As an EMI, the defendant was obliged under Regulation 20 of the Electronic Money Regulations 2011 to safeguard the credit it received.  One way it can do this is by keeping the funds in a segregated account.  It argued that an EMI cannot be enriched by the receipt of money in a segregated account for its customer, because it cannot use the money for its own use and benefit.

The judge rejected this argument, saying that the defendant still beneficially owned the funds, in the same way that funds paid to a bank for the account of its customer beneficially belong to the bank.  The fact that the defendant is required by law to safeguard money in the segregated account does not mean that it ceases to be its own money (beneficially) or that it is not thereby enriched.  Put simply, it has more beneficially owned assets after payment than it had before.

Question (b) – Was the enrichment at the claimant’s expense?

To answer this question, the judge referred to Investment Trust Companies v HMRC (ITC)⁷, which laid down principles to determine if a payment has been made to the defendant “at the expense of the claimant”.  The case concerned a claim by ITC against HMRC for the repayment of overpaid tax, with the Supreme Court finding that, although HMRC had been enriched by the overpaid tax, the enrichment was not at the claimant’s expense.  

In ITC, Lord Reed noted that situations in which the defendant has received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit, usually arise where the parties have dealt directly with one another – which, it was agreed, was not what happened here.  However, Lord Reed acknowledged that there are situations in which the parties have not dealt directly with one another, but in which the defendant has nevertheless received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit. These two exceptions are:

1. where an agent of one of the parties is interposed between them (Agency exception); and

2. where a set of co-ordinated transactions has been treated as forming a single scheme or transaction, and to consider each individual transaction separately would be unrealistic (Series of co-ordinated transactions exception).

The defendant relied on HHJ Bird’s decision in Tecnimont Arabia Ltd v National Westminster Bank plc⁸ in support of its contention that the payment was not at the claimant’s expense.  That case also concerned an APP fraud and the payment mechanism was in principle the same as in the present case.  Applying ITC, in Tecnimont HHJ Bird decided that the payment fell into neither of Lord Reed’s two exceptions. The judge concluded that: (i) the agency exception did not apply, holding that while the exception allows the agent’s involvement to be ignored, it does not create a direct transfer where there is none - and (ii) he held it would be wrong to treat international interbank transactions as forming a single scheme or transaction as this would be applying an “oversimplified version of ‘economic reality’”; rather, it was necessary and realistic to treat individual transactions separately. Ultimately, therefore, HHJ Bird decided that the payment was not “at the expense of” the claimant, and to find otherwise would be contrary to the decision in ITC and would fail to recognise the established manner in which international bank transfers are made.

The judge in the present case disagreed with HHJ Bird’s reasoning in Tecnimont.  On his view, a decision that an international bank transfer fell within either of Lord Reed’s two exceptions would not be inconsistent with ITC. First, he distinguished ITC on its facts, pointing out that the case was concerned with the operation of the statutory scheme for charging, collecting and accounting for VAT, and had nothing to do with international (or domestic) bank transfers of funds. 

He then applied the principles of ITC afresh to the current case, specifically analysing whether either of Lord Reed’s two exceptions applied:

• Agency exception: The judge found this to be a classic case of agency, saying: “If A puts B in funds with a direction to pay C, intending no trust of the money, so that B is in the meantime entitled to use the specific payment for B's own purposes, and B then pays C out of B's own funds, no one can doubt that A has paid C by the agency of B… And it can make no difference how many agents are involved along the way” [para 90]. He added: “The mechanism is in principle the same as for SWIFT transactions, i.e. debiting and crediting accounts, just with fewer steps. So, the legal treatment should in principle be the same. This is not a case of "taking a broad view of economic reality"…It is one of looking at the only transaction intended by the [claimant], i.e. to transfer funds from its account with its bank in Serbia to that of Zdena Fashions with the [defendant] in the UK.” [para 91].

• Series of co-ordinated transactions exception: The judge said: “[The claimant] instructed its own bank to make the transfer to a specific account with [the defendant]. The bank arranged for this to happen through its correspondent bank and indirectly through the correspondent's own correspondent. The transactions to achieve this end were co-ordinated and they formed a series. If any of them had failed, the end result would not have been produced” [para 92].  He said it was no different to a domestic CHAPs payment: “The same idea of debiting and crediting accounts is being used in both cases. Inserting more steps in the chain does not make use of a different idea.  And, once again, this is not about a "broad view" of economic reality. It is about connecting the intermediate steps that lie between the debit at one end of the chain and the credit at the other. In my view they were both connected and co-ordinated” [para 93].

The judge recognised that he should follow Tecnimont for reasons of judicial comity unless convinced it was wrong – adding that he was so convinced, and declined to follow it.

In conclusion, the judge held that, irrespective of whether this case is viewed as one of agency or as a series of co-ordinated transactions, it involves an enrichment of the defendant at the expense of the claimant by indirect transfer sufficient in principle to satisfy the doctrine of unjust enrichment, subject to questions of “unjustness” and any possible defences, which can be determined only at trial. He therefore dismissed the defendant’s application, although at a subsequent consequentials hearing⁹ granted the defendant permission to appeal.

Commentary

This case is the most recent in a line of cases where victims of APP fraud have brought claims against the receiving bank to try and recover their losses.  Another similar case, Larsson v Revolut Ltd¹⁰, which was proceeding in parallel to this case, was paused pending the outcome in this case. (You can read our article on Larsson here).  

Terna is most interesting for the fact that the judge held that it is arguable that international bank transfers could potentially fall into Lord Reed’s exceptions to a direct transfer for the purposes of an unjust enrichment claim (subject to determining if the enrichment is unjust and to any defences of the bank), which was contrary to the decision in Tecnimont. 

The Payment Systems Regulator’s APP Fraud Mandatory Reimbursement Scheme, which is due to come into force in October 2024, seeks to provide that the vast majority of APP fraud losses are returned to victims, with liability for reimbursement split 50/50 between the paying and the receiving bank.  The Scheme, however, does not cover international transfers – but this case offers a potential avenue for recovery of money lost in an international APP fraud (which tends to be the nature of such frauds) in the form of an unjust enrichment claim.  We will be watching the progress of this case with interest.

If you would like to discuss any of the issues raised in this article, please get in touch with any of the contacts listed.