The recent court rulings in Tidal Energy Limited v Bank of Scotland have highlighted the potential risk of sending payments through the Clearing Houses Automated Payment System (“CHAPS”).

As noted by the Court of Appeal in its judgment, CHAPS is “an electronic bank to bank same day payment scheme" operated by the CHAPS Clearing Company Limited. Most of the UK’s leading banks and financial institutions are members of the scheme.

At the core of the system (set up in 1984) is the fast movement of substantial funds from one bank account to another. CHAPS is popular because of the speed with which funds can be transferred – provided the instruction is received before 3pm the money can be transferred that same day.

Typically the organisation/person wishing to transfer funds does so by completing a CHAPS transfer form. It is the details (amount involved/sort code/relevant account numbers) on this form which constitute the instruction to transfer.

Tidal Energy Limited (“Tidal”) owed one of its suppliers, Design Craft Limited (“Design”) the sum of £217,781.57. Tidal instructed its own bank (the Bank of Scotland) to make this payment through the CHAPS system.

On the relevant CHAPS transfer form Tidal recorded what it thought were the correct sort code and account numbers for Design along with details of the Barclays branch which held Design’s account. Tidal also noted on the form that the intended recipient of those funds was Design. The form was received by Tidal’s bank at 9.38 on the 31st January 2012 and processed by its specialist department. Later that day, Tidal’s account was debited and the specified account at Barclay’s credited by £217.00, £781.57.

However on the 6th February 2012 Tidal realised the account details were incorrect and did not relate to Design but to an unconnected third party. Tidal asked its own bank, the Bank of Scotland, to retrieve the payment on the grounds it (Tidal) had been the victim of fraud. The bank immediately requested Barclays to place a stop on any withdrawal of funds from the Barclay’s account which had been credited with the payments. In the absence of any court order requiring them to do so, Barclays declined. Later that day the holder of the account which “received” the transfer, a company called “Childfreedom” withdrew the funds.

Tidal issued court proceedings against the Bank of Scotland on the basis its instruction to the bank was to pay Design.

The High Court rejected Tidal’s claim after hearing evidence from the Bank of Scotland as to how the CHAPS worked in practice. The bank’s witness explained that under the scheme funds were transferred by reference only to the account number and sort code as recorded by a CHAPS transfer form. Once a receiving bank (in this case Barclays) had confirmed that it held, at the branch in question, an account with the number and sort code quoted by the transfer form, it would credit that account. The witness confirmed it was not normal practice for any member of CHAPS scheme to further check that the account number and sort code actually matched an account held by any beneficiary named on the CHAPS transfer form. Such a check would substantially the delay the process and thus run counter to the whole principle of facilitating speedy payment.

In a majority decision the Court of Appeal rejected Tidal’s appeal from the High Court decision. The Court acknowledged that the CHAPS scheme did not contains rules as to how payments should be processed but that users of the CHAPS scheme were bound by standard banking practice.

From an academic perspective, the Court of Appeal ruling is interesting not just because this was a split decision but the importance placed by the majority on banking practice. The practice was that CHAPS operated on sort codes and account numbers not on the basis of the names of account holders.

From a practical perspective the case underlines how vital it is that those wishing to make payments using CHAPS ensure that they accurately state the account number and sort code of the account which is held by the person/organisation who the payer wants to pay. Hence CHAPS users will need systems and processes in place to counter the risk of either fraud or mistake.

"this article appeared in the September 2014 edition of Credit Collections and Risk.  For further information please contact Jeremy Bouchier, Senior Solicitor."

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