Hogan Lovells Publications | Routledge Modise | 28 June 2013

Getting Your Own Back: EFTs and Mistaken Transfers

Effecting payment by way of electronic funds transfer (EFT) is the norm in today's commercial reality. On a day-to-day basis, trillions of dollars are transferred globally between bank accounts. The sheer multitude of transactions means that erroneous and mistaken payments occur frequently and are usually caused by human error either at bank-customer level or between banks.

The question of the position of a person who mistakenly pays money into a wrong account was solidified in South African law in Nissan South Africa (Pty) Ltd v Marrtitz 2005 (1) SA 441 (SCA). The facts of the case were that Nissan was a customer of FirstRand Bank Ltd (FNB). It instructed the hank to pay an amount of nearly R13m to one of its creditors, TSW, but mistakenly gave the FNB the incorrect account details. As a result of the mistake, the bank paid the amount in question to the incorrect payee who subsequently withdrew part of the funds and was, shortly thereafter, liquidated. Nissan applied to the high court for an order declaring that what was left in the payee's account did not form part of the insolvent's estate. The liquidator, as respondent, opposed this.

Financial law
The court dismissed the application and Nissan appealed to the SCA. The respondent submitted that once a bank unconditionally credits a customer's account with an amount received, it is obliged to pay the money to the customer on demand, even where it was received by fraud or theft.

Streicher JA dismissed this submission saying, "If stolen money is paid into a bank account to the credit of a thief, the thief has as little entitlement to the credit representing the money so paid into the bank account as he would have had in respect of the actual notes and coins paid into the hank account." Consequently, he held, because the payee had no claim to the money mistakenly paid to it, the liquidators of the insolvent estate had no claim to it either. He concluded that because the bank, and not the payee, was enriched, it had to release what was left in the account.

Most recently in The Trustees of the Insolvent Estate of Grahame Ernest John Whitehead v Dumas (323/12) [20131 ZASCA 19, the SCA was once again called upon to dissect this complex area of law. In this case Mr Dumas paid an amount of R3m into the ABSA Bank account of Mr Whitehead for what he believed to be an investment. In reality Whitehead was running a "Ponzi" or pyramid scheme and Dumas had been induced, by way of fraud and misrepresentation, to make the transfer. Whitehead was convicted on counts of fraud in the UK and sentenced to 10 years' imprisonment shortly thereafter. Upon learning of Whitehead's arrest, Dumas instructed his bank, FNB, to reverse the payment. FNB, on his instructions wrote to ABSA which subsequently froze Whitehead's accounts.

The rei vindicatio is the common law remedy for an owner seeking to recover his property. Dumas instituted a vindicatory application in the North Gauteng High Court for return of his money. His claim was had in law because, generally, when money is deposited into a hank account it mixes with other money and, by virtue of commixtio, becomes the property of the hank regardless of the circumstances in which or by whom the deposit was made and was, therefore, not available to Dumas. Upon realising this Dumas filed a supplementary replying affidavit and changed the nature of his claim to one of enrichment. He specifically pleaded the remedy of condictio oh turpem vel iniu stam causam available to a plaintiff who innocently transfers money to a defendant under an agreement which, to the knowledge of the defendant, is illegal.

The high court found in favour of Dumas hut the case went on appeal to the SCA. The SCA found that once ownership passes to a bank, it instantly incurs the obligation to account to its customer. The customer does not always acquire an enforceable personal right to the credit merely by virtue of the deposit. The hank can reverse a credit in the account-holder's hank account if it transpires that it was credited in error, the customer acquired the money by fraud or theft, the drawer's signature on a cheque was forged or the bank notes deposited were forgeries.

Dumas contended that because he was the victim of fraud or theft by Whitehead, the bank must reverse the credit in the trustees' account. The enquiry then became whether Whitehead acquired a personal right to the funds in his account. The court found that when a person transfers money from their bank account to that of another, no personal rights are transferred between them. The transferor's personal right against his bank is extinguished and now a new personal right is created in favour of the transferee between him and his bank.

Similarly, where the transferor was induced to enter into an agreement through the transferee's fraudulent misrepresentation, his personal right is extinguished. The transferor will then have a claim for delictual damages against the transferee for compensation but cannot claim a retransfer of the credit from the bank. Subsequently, if the transferee is sequestrated, the claim lies against the transferee's estate as an insolvent's personal right to a credit balance in his bank account forms part of his estate upon sequestration.

At first blush, the judgements in Nissan and Dumas appear to contradict each other. However, on closer analysis they are distinguishable. In Nissan the court dealt with funds paid into an incorrect bank account. There the payee withdrew the money from the account knowingly without claim to it and, in effect, stole the money. The bank acquired ownership of the money without a corresponding obligation to its customer and the customer had no contractual or other right to the funds. The transaction between Dumas and Whitehead, though tainted by fraud, constituted a causa for the payment. Dumas intended to make, and voluntarily made, payment into Whitehead's account.

That the payment was solicited through Whitehead's misrepresentation and fraud is irrelevant. Whitehead, a customer of ABSA, acquired a new enforceable right to the money in his account against the bank when ownership passed to it despite no valid underlying agreement being in force between Dumas and Whitehead. ABSA had both a duty to account and a corresponding liability to Whitehead and, on his subsequent sequestration, to the trustees of his insolvent estate.

Accordingly ABSA was not enriched and an enrichment action was not available. Dumas was left with a delictual claim against Whitehead due to his fraudulent misrepresentation, which induced him to transfer the money and upon the sequestration, a claim against the trustees.

Quite rightly the judge in Nissan was concerned that the usual remedies open to a creditor may not be adequate in the event of a debtor's insolvency in similar circumstances. He held that, "the law would be deficient if it did not provide a remedy for recovery of stolen money direct from the bank in those circumstances." Our courts are increasingly being called upon to deal with cases of a similar nature; it seems the position is becoming relatively crystalized. These decisions come as a warning to persons making use of electronic funds transfers and show that though factually they may have mistakenly transferred the money or were induced to do so by unlawful conduct, legally they may have no recourse to reclaim their money. Caveat traductor - transferor beware.

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