Banking law

Change of position

National Bank of Egypt International Ltd v Oman Housing Bank SAOC [2002] EWHC 1760 Comm, Mr Justice David Steel

In this case, the National Bank of Egypt International, the claimant, and Oman Housing Bank, the defendant, entered into an agreement for a short-term inter-bank money market deposit.

Under the terms of the placement, the claimant advanced the sum of $5 million to the defendant in an account held by the claimant in the defendant's name.

Following receipt of the $5 million, the defendant withdrew the total sum of the deposit by making five payments out of its account.

It transpired that the five payments were made as a result of a fraud against the defendant perpetrated by some employees of the bank.

The placement matured on 26 April 2000.

The claimant demanded repayment on the date of maturity and the defendant failed to repay.

The claimant claimed repayment of the money on three grounds.

Firstly, under the terms of the placement.

Secondly, as money advanced to the defendant on a current account and thirdly, by way of restitution.

The Omani courts had held that the agreement for the placement of the deposit was in fact ultra vires the defendant's powers.

After the rejection of an attempt to introduce expert evidence on Omani law, the claimant restricted its claim to that in restitution.

Only one of the five payments made was subject to dispute.

The defendant's defence to the restitutionary claim was that of change of position.

After a series of complicated interlocking transactions involving both the claimant, defendant and a third-party bank, the defendant claimed to be a mere intermediary passing money that was being transferred first by a third-party bank to the claimant and then back to the third-party bank by the claimant.

The defendant's case was that the transmission of money up and down the line of liability between the claimant and the third-party bank amounted to a change of position.

The court rejected the defendant's argument and ordered restitution of the sums claimed.

In so doing, the case provides further authority for the proposition that it is still possible to bring a claim in restitution to recover monies transferred as a consequence of an ultra vires transaction.

The decision also emphasises the point that the mere payment of money is not necessarily enough to establish a change-of-position defence.

To rely on this defence, it is necessary to establish that, in all the circumstances, a defendant's position has so changed that it would be inequitable to require restitution.

On the facts of the case, the judge found that it was not inequitable for the defendant to make repayment.

The defendant was not an agent and the evidence suggested that it was at all times acting as a principal.

Furthermore, no evidence was adduced as to the defendant's expectations or anticipations in regard to the transferred money.

It follows that if a bank wishes to protect its position against similar restitutionary claims, it should - when acting as a mere intermediary or conduit for the transmission of funds - act in the capacity of an agent or under an express obligation to account for the sums in question.

Duty of inquiry

Governor & Company of the Bank of Scotland v Linda Tudor [2002] EWCA Civ 1081

This case concerned the interpretation of a bank's duty of inquiry for mortgage transactions entered into prior to Royal Bank Scotland v Etridge (No 2) [2001] 3 WLR 1021.

The defendant, Linda Tudor, jointly owned property with her husband.

She claimed to have entered into a mortgage with the Bank of Scotland, the claimant, as a consequence of her husband's exercise of undue influence and duress.

Ms Tudor sought to resist the Bank of Scotland's mortgagee's possession action on the grounds that the bank had been put on notice that the transaction may have been improperly brought about and failed to take adequate steps to discharge the duty of inquiry imposed on it.This was a case in which the mortgage was entered into on 19 February 1997 and was thus a transaction entered into prior to the decision of the House of Lords in Etridge (No 2).

The test to be applied in relation to such past transactions was that the 'bank will ordinarily be regarded as having discharged its obligations if a solicitor who was acting for the wife in the transaction gave the bank confirmation to the effect that he had brought home to the wife the risks she was running'.

Ms Tudor instructed a firm of solicitors, who provided a report on standard form to Bank of Scotland.

Paragraph nine of the form stated that: 'We confirm that, where necessary, in accordance with the instructions to solicitors provided to us by the bank, all joint borrowers, joint owners and occupiers aged 18 or over have received legal advice independent from the bank and from any other person who signed the legal charge.

We hold a letter in the form prescribed by the bank signed by an independent solicitor confirming that such advice has been given.'

The question for the Court of Appeal was whether the receipt of the standard form report, and in particular paragraph nine, discharged the bank's duty.

The court found that the instructions to solicitors sent by the bank failed to address expressly the common case of joint owners who were husband and wife.

Nevertheless, the Court of Appeal held that on a construction of paragraph nine it was 'fanciful to suggest either that the solicitors might have come to the conclusion that independent advice for [Ms Tudor] was not necessary or that [the Bank of Scotland] might have thought it possible that the solicitors had come to that conclusion'.

The court found that the bank's duty of inquiry had been discharged, and dismissed an appeal against a decision striking out Ms Tudor's defence and counterclaim.

This case illustrates, in relation to transactions entered into prior to the decision of the House of Lords in Etridge, that banks will in general find it relatively easy to discharge the obligation of inquiry imposed on them.

The decision also emphasises that the courts are unlikely to impeach transactions as a consequence of fine distinctions and technical arguments on the form of wording used by solicitors when certificating the nature of the advice given to a mortgagor.

By Simon Sugar, barrister, 36 Bedford Row, London