Bankers' mandates - defence of breach

Westpac has taken to the highest court, without success, its appeal from lower court findings that it breached its banker’s mandate by declining to act on instructions from a customer to disburse funds: Westpac New Zealand Ltd v MAP & Associates Ltd (SC, 16/8/2011; Elias CJ, Blanchard, Tipping, McGrath and William Young JJ, [2011] NZSC 89 SC 98/2010, 30 paras).

Westpac’s defence was that it had good reason for concern that if it had paid in terms of MAP’s instructions, it would have been dishonestly assisting in the commission of a breach of trust. The background facts were a bit unusual. MAP, a NZ accountancy firm, had agreed to act as escrow agent for a $US50m transaction where shareholders in a small privately-owned Bolivian bank agreed to sell their shareholding to a Venezuelan state-owned bank (BIV). MAP opened a foreign currency account with Westpac in late 2006 but Westpac did not receive instructions to disburse the funds until late February 2008 during which time BIV had assigned its rights to another bank. By this time Westpac had become concerned about the transaction as most of the money was to be paid out to people or organisations who appeared not to be shareholders and Westpac was unaware of the basis upon which they were to receive payment. Although a week later, A, a person holding a power of attorney from the shareholders confirmed the instructions were in order Westpac was still unwilling to act on them and invited MAP to apply to the High Court (which held in MAP’s favour). Westpac appealed the interest and costs orders to the Court of Appeal which held interest should run from the later not earlier, instruction.

Justice Tipping, delivering the judgment for the Supreme Court, noted that the Court of Appeal’s focus was on whether it would have been dishonest for the bank to pay out until it received A’s communication. It did not appear to have been directed to the underlying issue of whether there would have been a breach of trust involved in the payment instructions. Thus it did not address specifically whether the bank could have a defence without an actual breach of trust (the situation here), or whether, as Westpac contended, some lesser standard based on reasonable belief or suspicion or concern that it would be dishonestly assisting a breach of trust, would suffice. While accepting that banks in the present kind of situation are in an awkward position, Justice Tipping emphasised that there is a policy issue involved. “Acceptance of the bank’s submission would leave the customer bearing the loss when there was in fact no problem with the customer’s instructions, but the bank, albeit reasonably, suspected or believed there was. Banks are in the business of receiving customers’ money and using it to their advantage”. The risks inherent in running this business are better managed by the bank than the customer and a “contrary conclusion would result in the bank having the best of both worlds: the benefit of a lesser standard for a defence but a higher standard for liability”.

Clarifying when suspicion amounts to dishonest assistance, the Court held that wilful blindness (shutting one’s eyes to the obvious) is required, rather than a reasonable apprehension by the bank it might be held liable. Here, as Westpac could not show any actual breach of trust if it had followed MAP’s instructions, it had no defence.