Payment

PrinciplesOverview

Legal Acts1. UNCITRAL Model Law on International

Credit Transfers [Soft Law] 1992

2. Directive 2007/64/EC [Payment Services in the Internal Market]

3. Regulation 924/2009 [Cross-border payments in Euro]

4. Directive 98/26 [Settlement Finality in payment an securities settlement systems]

5. Directive 2002/47/EC [Financial Collateral Arrangements]

6. Directive 2009/110 [EMI institutions]

Basic Elements to Payment

Message – unconditional instruction given to a bank on order of the payor to make payment to a payee

Movement on accounts – series of debits and credits

Settlement – payment between banks involved in execution of payment message [order]

Illustration

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Pe

Bank

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Message to pay

Message - paid

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Message

Message

Message Settlement

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Illustration 3

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Settlement

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Message

London

Japan

NY

Legal Relationships Bank has obligation to carry out instruction of

customer, if authorized

Authorization allows bank to debit account of customer

The bank’s duty in carrying out payment instructions is to exercise reasonable care and skill in performance of the service

Interbank relationships often are governed by bi-lateral contractual agreements

Settlement systems are governed by multi-lateral contracts

Privity A funds transfer consists of a series of “orders”

General rule is that parties have rights and obligations against each other only if in privity of contract

Thus the payor will have rights against the payorbank but no rights against the correspondent bank that the payor bank selects to execute the payment order

Likewise payee has rights only against its bank the payee bank

Applicable Law Generally, in the absence of agreement, it is the

law applicable to each operation carried out in the credit transfer

There is no single legal regime covering the entire credit transfer, though the laws of individual jurisdictions may be converging

The UNCITRAL model law does not contain a choice of law clause

The commentary suggests that the law of the receiving bank would govern the rights and obligations arising out of the payment order sent to that bank

Non-Completion

Money back guarantee plus interest

No other damages allowed unless bank is

put on notice and acts recklessly or acts

with specific intent to cause loss

Otherwise remedies are exclusive

Switch

Credit

TransfersDirective 2007/64/EC

Application

Cross-border credit transfers in currencies of Member States

Up to equivalent of € 50,000

Executed by “credit institution”

Cross-border means from one MS to another MS

Hence does not apply to transfer from MS to third country

Information Pre-Transfer When order is given, time needed for transfer to

reach beneficiary’s institution

When order is received by that institution, time needed to credit beneficiary’s account

Manner of calculating commission fees and charges payable by the customer

Details of complaint and redress procedures

Indication of reference exchange rate used (if not euro to euro, see R 2560/2001/EC)

Above are found in Article 3

Information Post-Transfer

Record enabling customer to identify

cross-border transaction

Original amount of transfer

All charges and commission fees

A few other items see Article 4

Originator Bank: Obligations Tell how much time is needed for execution

Identify all charges and commissions

Bank must execute within time agreed, or if no time limit, within 5 days of date of acceptance

Where non-compliance, bank has duty to compensate - pay interest on amount of credit based upon reference rate -from date it was supposed to execute until date it executed

If failure is due to intermediary bank, that bank compensates originator bank

Beneficiary Bank: Obligation

That bank must credit within time limit as agreed or, if not time limit, at end of banking day following credit to account of that institution

Non-compliance entitles beneficiary to interest rate based on difference between date funds should have been and were actually credited to its account

The mandatory compensation does not exclude other remedies

The Process Article 7 require banks in the chain to execute the

transfer in the full amount as specified by the originator, that is, follow the instructions.

In other words, in the absence of consent, the banks can’t deduct charges as the credit moves though the system.

The originating bank can charge as provided in its transparent statement of fees; the beneficiary bank can charge an administration fee according to rules governing the account.

Beneficiary bank that wrongly executes is liable to credit the beneficiary for amount wrongly deducted.

Non-Execution Originator bank gives money back guarantee of

12,500 €, plus interest, plus charges

This remedy does not exclude other legal claims, for example, when sum exceeds “guaranteed” amount, originator can sue in contract or tort to recover “amount over” plus whatever national law allows

Refund must be made within 14 days of request

Similarly, each bank in the chain owes the same duty to refund to its predecessor in the chain.

If Credit Goes Outside EU Neither the Directive nor the subsequent

Regulation 924/2009/EC apply

Law that governs would be result of party choice or of the system through which the credit passes.

The most significant question is recovery of consequential damages.

The Directive is silent on the issue as is the Regulation, leaving it to Member State law.

If € to € and w/in EU

Regulation 2560/2001/EC applies

mandating same charge for internal as for

external transfers (Article 3)

But note Article 4, banks may impose fees

for exchanging currencies into and from

euro, but must tell customers the fees

Consequential Damages

Evra v. Swiss Bank Corporation, 673 F.2d.

951 (1982)

No UK cases and Directive and

Regulation do not address issue nor do

they apply above 50,000€ Threshold

Correspondent bank deemed in privity

with originator.

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Visa

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Privately owned NFP

Incorporated in US

Issue Cards

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MA

Six Regions

Credit Card Payment Merchant [selling goods/services] seeks authority from card issuer

through its “acquirer”

Acquirer seeks authorization through the Visa authorization Centre in the region where acquirer is located

When acquirer has approval, the Visa authorization Centre seeks approval from the corresponding Visa authorization Centre where the card issuer is located

The latter Visa authorization Centre has to seek approval from the card issuer – the bank

Card issuer’s account with Visa is debited for sum of transaction

Sum is credited to merchant through process described

If dispute, there is a process called chargeback and representment; in other words, a card issuer may charge back the transaction to the acquirer; if acquirer does not accept chargeback, it makes a representment; if dispute ultimately is not resolved through this process, then arbitration