“Trusts over money transfers? Don’t bank on it” - Court of Appeal rejects imposition of trust in international banking dispute - Poonam Melwani QC & Paul Henton

Fri, 01 March, 2019

On 1 March 2019 the Court of Appeal handed down judgment in First City Monument Bank Plc v Zumax Nigeria Ltd [2019] EWCA Civ 294, a decision which will provide welcome clarity to those engaged in international banking and the financing of international trade. 

Poonam Melwani QC and Paul Henton (neither of whom appeared below), instructed by Andrew Preston and Harriet Thornton of Clyde & Co LLP, comprised the fresh legal team instructed on behalf of the successful appellant bank - itself a successor entity to IMB, a former Nigerian bank for whose historic business activities the bank had recently assumed responsibility.

The case involved a number of international bank transfers involving IMB.  The transactions were performed via correspondent accounts, the likes of which are an everyday feature of international commercial life.  Correspondent banks provide services for other financial institutions, and are used in particular to service transactions originating in a foreign country in which it does not have a physical presence.  Transfer instructions such as SWIFT messages or similar will be used to identify the ultimate recipient of the funds.

Unusually if not uniquely in an international funds transfer case of this sort, the Judge at first instance had held that such arrangements gave rise to an express trust or alternatively a “Quistclose” trust in favour of the intended recipient of the transfers.  This analysis was comprehensively rejected and overturned on appeal.

The facts and decision below

The transfers in question represented payment for engineering and other services provided by a Nigerian company (Zumax) to oil companies and other international clients invoiced in dollars.  Zumax had accounts denominated in Naira with IMB in Nigeria but did not hold bank accounts denominated in US Dollars. For US Dollars, Zumax  instead used a nominee company incorporated in the Isle of Man (“Redsear”) to receive the dollar payments into an account held in London. When funds were to be transferred from the Redsear Account back to Nigeria, the mechanism used was that Redsear would instruct its London bank (Chase), to transfer the relevant amount to one of three correspondent accounts held by IMB with Commerzbank in London, for IMB to then account to Zumax in respect thereof in Nigeria.  In each case, Redsear gave manuscript transfer instructions to its bank, Chase, to effect the relevant transfer from the Redsear Account into the relevant IMB Commerzbank Account.  The wording of the manuscript instructions varied but usually included words identifying the intended eventual recipient such as “for further credit to Zumax”- words similar to those found on SWIFT payment messages or other transfer instructions which are again a routine feature of international commercial finance. 

Whilst there was no evidence of what passed between Chase and Commerzbank, it was common ground that the manuscript transfer instructions were acted upon by Chase, and the relevant amounts were remitted into the IMB Commerzbank Accounts as instructed.   The Commerzbank account statements contained entries which in most (but not all) cases reflected the substance of the manuscript instructions which initiated the transactions.

So far so unremarkable.  However, as above, the first instance Judge concluded that such arrangements gave rise to either an express trust in favour of Zumax; or else a Quistclose trust (i.e., a trust of the sort found in Barclays Bank v Quistclose [1970] AC 567), whereby IMB held the funds on trust for Redsear with a power to apply them for the stated purpose of crediting Zumax, failing which they would be returnable to Redsear. 

This “trust” analysis had been advanced for two main reasons:

  1. First, to circumvent the Bank’s inevitable limitation defence in circumstances where the transfers dated back to 2000 – 2002.  Per s. 21 of the Limitation Act 1980, no period of limitation prescribed by the Act applies to claims to recover trust property.  An ordinary claim in breach of mandate would not benefit from this exclusion.
  2. Second, because Zumax were claiming an account of profits which they pleaded at some US$211 million as at January 2017 (on a principal claim of around US$3.5 million)- a figure which dwarfed the amounts usually claimable as simple interest on an ordinary contractual or debt claim.

The Court of Appeal’s decision

Accepting the submissions of Miss Melwani QC and Mr Henton, the Court of Appeal has comprehensively rejected the “trust” analysis, in a decision which will be seen as a welcome return to the status quo in international banking and trade finance.

For the imposition of an express trust, the Judge needed to find that each of the so-called “three certainties” were met: that is- certainty of objects, subject matter, and crucially certainty of words/intention to create a trust. 

For a “Quistclose” trust on terms described above, the Judge needed to be satisfied amongst other things that it was objectively intended by both the paying party (Redsear) and the recipient (IMB) that the money passing between them was not to be at the free disposal of the recipient on receipt.  The Judge would also need to be satisfied that Zumax somehow acquired the right to enforce any such trust instead of Redsear (i.e., the party advancing the funds for the stated purpose, and thus the obvious “beneficiary” if the Quistclose analysis were to work).

The relevant thresholds for the imposition of such trust were not met.  As the leading judgment of Lord Justice Newey explained at [47]: “…having accepted the various transfers that had been made for the credit of one of its customers (viz. Zumax), IMB was obligated to credit Zumax with them, either through Zumax’s Naira account in Lagos or… potentially in some other way… I do not, however, consider that IMB became a trustee.  Its obligations were personal”.

Various factors were cited in support of this conclusion, both by Newey LJ and in the further supporting judgment of Lewison LJ (with both of whom Lord Justice Males agreed), including in particular:-

  1. The fact that a particular bank transfer might have been made for a particular purpose or to credit a particular ultimate recipient does not of itself mean that it was intended to be the subject of a trust
  2. The Redsear instructions and the entries in the Commerzbank statements (only the latter reached IMB) did not manifest an intention that the funds should not be at IMB’s free disposal.  It was necessary to identify the entity for whose benefit the transfers were made simply as a matter of book-keeping and to facilitate the transfers.  As Newey LJ explained: “Payers must routinely seek to identify to whom a payment is to be credited without any trust being intended” [34]
  3. Unlike in the Quistclose line of cases, the funds could not be said to have been “segregated” in any meaningful way.  On arrival into the IMB Commerzbank accounts the transfers were mingled with other money transferred from numerous sources for the ultimate credit of a range of recipients, and with funds that on any view were IMB’s alone.
  4. It was necessary to consider “the structure of the arrangements and the contractual mechanisms involved” [36] (citing Patten LJ in Bieber v Teathers Ltd [2012] EWCA 1466): all of which suggested there was to be no trust.  In this regard both Judgments emphasised the fundamental principle that money placed in the custody of a banker is, to all intents and purposes, that of the bank to do as it pleases.  As Lewison LJ points out at [76]: “In point of law, the payment instruction is an instruction to the bank to debit the customer’s account in the amount of the payment; and to credit (or procure the credit) of the payee’s account with a credit in the equivalent amount”.  It is not an instruction to hold a segregated fund on trust.
  5. Their lordships also emphasised the well-rehearsed warnings in the leading cases against “the wholesale importation into commercial law of equitable principles inconsistent with the certainty and speed which are essential requirements for the orderly conduct of business affairs” (per Lord Browne-Wilkinson in Westdeutsche Landesbank v Islington LBC  [1996] AC 669).
  6. Other factors relied upon by the Judge in support of his conclusion, such as documents referring to account balances “belonging to” Zumax or similar, amounted to the sort of loose parlance which is commonly adopted (e.g. “your bank account contains £xx”) but which is not intended to describe the legal arrangements involved in any meaningful way.

This conclusion will provide welcome certainty and a return to the status quo for those engaged in international banking.  If a trust was created in the present case then it was difficult to see why it was not created in almost every other international funds transfer case involving correspondent banks, or indeed every bank transfer involving a bank-to-bank stage coupled with some sort of transfer instruction identifying the ultimate recipient. 

As the ramifications in this case show (in terms of limitation and account of profits, as explained above), the obligations of a trustee are something which those handling the transfer instructions neither want or expect or need.  Equally it would be impossible to justify affording “super claimant” priority status to transferees whose funds were still in the banking system at the time of an insolvency, as compared with the simple debtor/creditor relationship applicable to those whose transfers had been completed (e.g. once the funds show as balance in the transferee’s account).

In view of their lordships’ conclusions on trust, the title to sue point did not arise- although Newey LJ (with whom the others agreed) made clear that he would not wish to be taken to have endorsed the Judge’s analysis on this point either [50]. 

Finally, the Court of Appeal also held that, if Zumax were able to amend its pleaded case to formulate a cause of action against the Bank which was not limitation barred, then the Bank had shown a reasonable prospect of successfully establishing at trial that all bar one of the transfers had indeed been paid to Zumax or otherwise accounted for. 

A copy of the judgment can be found here. 

Poonam Melwani QC

 

Poonam Melwani QC is a commercial silk who practises across the full spectrum of commercial, insurance, energy and shipping law, providing advisory and advocacy services. Praised as "...always in demand, she is as good on her feet as she is adept at mastering complex legal, factual and expert material...." (Chambers UK) Poonam has been ranked as a 'Leading Silk' over many years by the Legal Directories. She represents clients in a wide variety of jurisdictions and arbitral regimes including ICC, LCIA, LMAA and ad hoc, as well as English High Court Litigation, mainly in the Commercial Court and the Appellate Courts.

Poonam’s clients want her for their “difficult cases” where innovative thinking and oversight of a large team, complex issues and mult-strands are necessary. In Commerzbank v Pauline Shipping [2017] 1 WLR 3497 Poonam successfully argued that asymmetrical jurisdiction clauses, prevalent in banking agreements, are exclusive jurisdiction clauses for the purposes of Brussels 1 Recast, an issue and judgment which has attracted widespread attention. She concluded the CSAV v Hin Pro Litigation [2015] 2 Lloyds Rep 1 (Court of Appeal) and [2015] 1 Lloyds Rep 301 where a new approach to damages for breach of exclusive jurisdiction clause was adopted.  Poonam recently concluded Latin American Investments v Maroil Trading involving joint venture shareholders of a fleet of vessels and complex allegations of breach of fiduciary duty, secret profits and fraud and where Poonam successfully obtained a WWFO of over US$60 million.  She currently leads an entirely new team in the action of Zumax v FCMB where Poonam is seeking to appeal a summary judgment finding of breach of trust and fraud and resisting a claim for an account of profits of over US$200 million.

To viel Poonam's full profile, click here.

poonam.melwani@quadrantchambers.com

Paul Henton

Paul has a broad commercial practice with an emphasis on international trade and commodities, energy, shipbuilding, charterparty disputes, banking, aviation, and insurance related issues.

For several years he has been recommended as a leading practitioner in the leading independent guides to the market.  The fields in which Paul holds recommendations are Shipping & Commodities (Chambers UK); Shipping, Commodities and Aviation (Legal 500); and International Trade & Commodities (Who’s Who Legal).  Over the years he has been variously described as “a highly regarded junior praised for his advocacy skills”, "personable and commercially minded", "phenomenally hard-working, phenomenally bright and phenomenally nice", “a standout junior”, “[having] brainpower and knowledge way ahead of his experience or years", who is "unstinting in his energy and intellectually rigorous in his approach".  

Paul appears led and unled, or as part of a team where he leads a more junior barrister. In recent years he has increasingly appeared unled against silks, including in final hearings and appeals. 

To view Paul's full profile, click here.

paul.henton@quadrantchambers.com