Chapters 5 and 6 dealt with the interpretation of monetary obligations, and the difficulties which could arise if the money of account was uncertain at the time of the contract or became uncertain as a result of subsequent events. In some respects, those chapters were coloured by the application of Article 12(1)(a) of Rome I, at least in so far as obligations of a cross-border character were concerned. At the same time, those chapters considered such rules of municipal law as fell to be applied following the identification of the governing law.
In contrast, the present chapter is more directly concerned with Article 12(1)(b), read together with Article 12(2), of Rome I, although once again the relevant rules of domestic law will also be considered. The analysis in the previous chapters has examined whether or not a monetary obligation has actually come into existence, and has explained both the nature and scope of such an obligation and the identification of the currency in which it is expressed. The present chapter assumes that a valid and enforceable monetary obligation does indeed exist; it therefore seeks to determine whether the steps taken by the debtor have been sufficient to discharge that obligation.1 In other words, has the debtor satisfied his monetary obligation, or is he in breach of it?
In order to answer this general question, it is proposed to consider the following matters:
(a) the concept of payment and the performance of monetary obligations;
(b) the money of payment;
(c) payment in the context of private international law; and
(d) the performance of monetary obligations abroad.
The concept of payment is, of course, a fundamental aspect of the law of money.2 Payment in the legal sense must connote any act offered and accepted3 in performance of a monetary obligation without changing the essential nature of the original obligation.4 This approach is in some respects supported by remarks made in the Libyan Arab Bank case,5 where Staughton J stated, ‘in my view, every obligation in monetary terms is to be fulfilled, either by the delivery of cash or by some other operation which the creditor demands and which the debtor is either obliged to, or is content to perform’.6 It may be helpful to ask whether a transfer of funds has the effect of discharging a genuine liability and, if so, this may properly be regarded as a ‘payment’.7
Of course, in practice, the lawyer is less likely to be concerned with purely conceptual issues. He is more likely to confront problems of a more direct nature, for example, whether the steps offered by a debtor amounted to an adequate tender of payment in compliance with the contract at issue.8 The subject therefore requires discussion in some depth. For convenience, it is proposed to consider sterling and foreign currency obligations separately for these purposes. This treatment merely reflects the fact that, in the case of a foreign money obligation, a right of conversion into sterling may arise where the debt is payable in England; it does not detract from the general view that no material distinction should now be drawn between domestic and foreign money obligations.9 As will be seen, most of the relevant principles are applicable to both forms of obligations.
Before proceeding to the details, it is perhaps fair to note that the concept of payment cannot be defined in a single fashion for all legal systems. In France, Article L 133-3 of the Code Monétaire et Financier defines payment as ‘an action which consists in putting, transferring or withdrawing funds, independently of any underlying obligation between the debtor and the beneficiary, ordered either by the debtor or the beneficiary’. French writers have debated whether payment should be regarded as a legal fact or a legal act (fait juridique or acte juridique). One writer has argued that the extinction of an obligation through payment is always a legal fact because the extinction of the obligation in this way is mandated by law,10 but this view is not widely shared.11 The importance of the distinction lies in the fact that an acte juridique must be proved by reference to specific rules set out in the Civil Code, whereas a fait juridique can be proved by reference to any available evidential means. In a recent decision, the Cour de Cassation has held that proof of payment is a factual issue that can be proved by evidence.12
Returning to questions of English law, how is a debtor to perform an obligation payable in sterling and to be performed in England? It is necessary to explain at the outset that the present discussion is concerned with the performance of liquidated debts or obligations.13 In England, it is well established that a claim for an unliquidated sum cannot be discharged by payment alone—for how can one pay a sum of an indeterminate amount? An unliquidated obligation can only be discharged by accord and satisfaction—that is to say, (a) a contract between the parties which settles the amount to be paid (thus discharging the unliquidated obligation and substituting for it a liquidated amount); and (b) the payment of the consideration which makes the contract operative.14 In other words, a contract between the parties is required effectively to convert the unliquidated obligation into a liquidated debt, so that it can be discharged in accordance with the rules about to be discussed.
In contrast, the payment of a liquidated obligation presupposes the existence of a contract between the parties.15 No further agreement is therefore required either to fix or to discharge the obligation. However, when notes and coins are handed over to the creditor, or money is transferred in any other way, it seems that the purpose of the transfer must either be made clear to the creditor or it must otherwise be apparent from the circumstances. The debtor must intend to discharge his obligation by the payment in question. The point may seem obvious but difficulties can arise in particular cases. For example, if a company owes a series often debts of £1,000 each, which of those debts is discharged if it pays £2,000 to its creditor? The point may be important, especially where each debt carries a different rate of interest.16 Likewise, suppose that a father owes a debt of £1,000 to his son. Shortly before his death, the father hands £1,000 (or a larger sum) to his son in cash. Did the father intend to repay his debt, or did he intend to make a gift to his son in anticipation of the father’s death? In the latter case, the debt could be recovered from the father’s estate, whilst in the former case it plainly could not. Applying the rules discussed above, it seems that (in the absence of any intimation that the father intended to discharge his debt) the payment would probably fall to be treated as a gift.
If the intention of the debtor is important, then one is naturally driven to enquire as to the relevance of the intention of the creditor. The debtor will have undertaken to pay the creditor under the terms of the contract and (by necessary implication) the creditor must have agreed to accept it. Why, otherwise, has he entered into the contract at all? But in spite of this reasoning, it seems that no creditor is under any positive, legal duty to accept payment, nor can the debtor effectively force payment upon the creditor. If payment is to be made in a legal sense, then the consent of the creditor is necessarily required.17 If the creditor declines to accept the proffered funds—even though tendered in strict conformity with the terms of the contract—then payment does not occur in the legal sense, even thought the creditor’s refusal is apparently at odds with the terms of the contract.18 All the debtor can do is to tender payment, ie he may make an unconditional offer to pay in the agreed manner. In the event of non-acceptance, this places the creditor in default because he is responsible for the delay in performance.19 If the tender complies with the terms of the contract and the debtor thereafter remains ready and willing to pay in that manner, then any action brought against him will be dismissed with costs, provided that the money is paid into court immediately after service of the proceedings.20 Under English law, therefore, it is necessary to re-emphasize the distinction between tender and payment in accordance with the terms of the contract. Tender is a unilateral act of the debtor, whereby he takes all of the steps which are open to him, acting alone, to complete the payment in accordance with the terms of the contract. On the other hand, payment is a bilateral act requiring the consent both of the debtor and creditor.21 In addition, payment must clearly be made to the creditor or his duly authorized agent, for payment to some other third party clearly cannot discharge the obligation. This statement is obvious and some of the difficulties that may arise in the context of payment to an agent—including the scope of any actual/apparent authority—will be discussed later in this chapter. But, in rare cases, there may even be doubt or confusion about the identity of the creditor himself, and the debtor will clearly need to exercise care in such a case. This may occasionally occur in cases involving transactions with a group of companies where there is a lack of clarity as to the identity of the precise entity which is entitled to receive payment.22
In English law, therefore, the question of law is not how payment is to be made, for it may be made by any means agreed between the parties or which the creditor may otherwise choose to accept. Anything so agreed and accepted constitutes a payment provided that the creditor is put in a position freely to dispose of the money transferred to him, to the extent required by the terms of the contract.23 The correct question is—how is a valid and effective tender to be made, such that it will produce the legal consequences described above? In principle, the answer is that a valid tender is made by unconditionally24 proffering to the creditor the amount due in legal tender,25 or otherwise in compliance with the terms of the contract. This rule enjoys general recognition26 and is firmly established in England. In so far as the rule relates to cash, there exists a long line of decisions of the Court of Appeal which have expressed it in the clearest terms and occasionally in remarkable circumstances. At the end of the nineteenth century, the Court of Appeal held that £463—then a substantial amount—had to be proffered in legal tender. As a result, a solicitor had no authority on behalf of his client to accept another solicitor’s cheque, and accordingly such a cheque could not constitute a valid tender.27 A year later, the Court of Appeal likewise held that an auctioneer was entitled to insist upon a deposit being paid ‘in cash’, ie in legal tender rather than by cheque; and the rule was held still to be ‘strictly’ applicable even as late as 1974.28 Indeed, as recently as 2005, the Supreme Court of New Zealand was called upon to decide that a vendor of land was not obliged to accept the purchaser’s personal cheque as payment of the deposit on exchange of contracts.29 The rule is, however, in all respects subordinate to the terms of the contract and (in the light of modern commercial practice) the courts will be very astute to find that the obligation to pay in cash has been varied or waived.30
Where large amounts are involved, payment by legal tender is frequently unthinkable and cannot possibly be within the contemplation of the parties. Accordingly, whilst a contractual requirement for payment ‘in cash’ may in some cases connote a requirement to pay by means of legal tender,31 terms of this kind must always be interpreted against the background of modern commercial practice. Consequently a contractual requirement for ‘payment in cash’ was interpreted to indicate ‘any commercially recognised method of transferring the funds the result of which is to give the transferee the unconditional right to the use of the funds transferred’.32 The robust process of interpretation just described can only be further accelerated by the current (and strenuous) governmental efforts to prevent money laundering and to trace the proceeds of crime, and which thus render problematical the acceptance of physical cash in many cases.33 But the existence of such an implied term (or the existence of the creditor’s consent) was perhaps surprisingly denied in a case involving the repayment of some US$292 million, with the result that the debtor would have been required to pay that sum in cash.34
If it follows from this discussion that a creditor may often be compelled to accept a payment in the ‘commercial equivalent’ of cash (or, perhaps more accurately, the debtor may be entitled to make his tender by proffering such an equivalent), then it naturally becomes necessary to identify that which will amount to a commercial equivalent. Plainly, it would not include a cheque, for in the absence of his express or implied consent, the creditor cannot reasonably be expected to take the risks of countermand or dishonour; further, pending clearance, the effect of payment by cheque is to allow the debtor a few days’ continued use of the money.35 But if the creditor refuses to accept a banker’s draft issued by a reputable institution and insists on legal tender, then the Court should treat the creditor’s attitude as vexatious and uphold the validity of the tender. It may pray in aid the judgment of the US Supreme Court in support of its approach.36 Thus, an obligation to pay ‘in cash’ to the credit of an account at a particular bank may be performed by means of a bank transfer, for the net result for the creditor is the same in either case.37 Likewise, in some cases, it will be possible to infer from previous dealings that the creditor is prepared to accept payment in a particular manner, or a similar inference may be drawn from the conduct of the parties or the surrounding circumstances.38 If a creditor has agreed to accept payment by cheque, then the delivery of the cheque constitutes a valid tender, but the debt is still only discharged when the creditor accepts the cheque and, even then, this is conditional on subsequent payment of the instrument.39
It should not be overlooked that this process of interpretation is necessary in order to conclude that the creditor—whether expressly or impliedly—has waived his right to receive payment in cash.40 For the reasons just given, this type of interpretation will usually be reached with ease, but it must nevertheless be emphasized that the validity of any payment or tender otherwise than by legal tender does depend upon the express or implied consent of the creditor; whilst this may easily be inferred, it is not possible to dispense with it.41 Furthermore, it may be necessary in particular cases to consider the nature and extent of the consent which the creditor has given. For example, the debtor may happen to know that the creditor has several bank accounts; has the creditor consented to payment to any of these accounts, or merely to selected accounts? The point may be important if the recipient bank fails shortly following receipt of the payment and before the creditor has been notified of the funds transfer. If the payment was so made without the creditor’s (express or implied) consent, then it is difficult to see why the creditor should be saddled with the loss under such circumstances; if such a payment were treated as a valid discharge of the obligation, then the creditor would necessarily also lose the benefit of any guarantee or security which he might hold. So far as English law is concerned, it is now clear that payment to the account of the creditor with a particular bank will not discharge the obligation—nor will it even constitute a valid tender—in the absence of the creditor’s consent; the same principle appears to have been applied elsewhere.42 In other words, whilst ‘bank money’ may in general practice be accepted by creditors as a means of payment, it does not follow that they are legally bound to do so. Bank money and other non-cash forms of money can thus only function as money with the creditor’s consent but, as noted elsewhere,43 this does not in any sense disentitle them to their label as ‘money’.
It has been shown that a monetary obligation can be discharged by any means agreed between the parties or to which the creditor is prepared to consent. In most cases, of course, the creditor will be very willing to accept any reasonable form of payment tendered to him, even if it does not strictly conform to the express or implied terms of the original agreement.44 Creditors will accept payment by means of cheque, letter of credit, or other instruments. Instruments of this kind are regarded by the courts as ‘equivalent to cash’, so that, following dishonour, judgment for the face amount of the instrument will generally follow as a matter of course,45 although the payee does have the alternative of reviving the original cause of action.46 The drawer of the cheque cannot raise defences or counterclaims arising under the underlying commercial contract, at any rate in the absence of fraud.47 Of course, the mere acceptance of the cheque or other instrument by the creditor does not of itself constitute ‘payment’, for it does not have the immediate effect of making funds available to the creditor;48 such instruments only constitute payment if they are subsequently honoured, but if this happens then the date of payment is deemed to be the date on which the cheque, letter of credit, or other instrument is given.49 If the creditor has authorized the debtor to pay by cheque and send it through the post, then the creditor runs the risk that the cheque will be stolen and paid to a third party.50 By contrast, payment by means of a credit card will usually involve the unconditional and absolute discharge of the debtor, for the supplier of goods or services accepts the issuing company’s payment obligation in place of the customer’s liability. The customer thereupon assumes an obligation to make a corresponding payment to the card issuer.51
Important though the foregoing means of payment may be in daily life, it must be said that the most difficult types of dispute which may have arisen in recent years have centred on payment by means of bank transfers.52 No doubt this is because transfers of this kind are now viewed as both a secure and more rapid means of transferring funds, and because the higher values which may be involved create a greater incentive to litigation in the very few cases in which some difficulty occurs.53 In practical terms, most disputes have centred on the precise time and the date at which payment has been received. If payment was tendered later than the contractual date and time, then a number of consequences may ensue. First of all, the creditor may become entitled to interest or other damages in respect of the late payment. Alternatively, the creditor may be contractually entitled to reject the tender, to terminate the arrangements and, in a rising market, employ his assets more profitably elsewhere.54
The principal payment system for large value transfers in this country is the Clearing House Automated Payments System (CHAPS). This and many other systems used to operate on the basis that all transfers were settled on a ‘net’ basis at the end of the working day. However, in line with many other modern, high value systems,55 transactions are now settled on a real time, gross payments basis. Transactions are effected through the Bank of England via settlement accounts held by a group of banks56 with the central bank. Although generally used for higher value payments, there is no specific lower limit on payments through CHAPS and settlement can be almost immediate, in the sense that no period of prior notice is required for an instruction to be given. All payments through this system are made in sterling.57 In order to allow for the smooth operation of the system and to provide certainty of payments, CHAPS Rules require that payment instructions must be given on an unconditional basis and must be irrevocable. A bank that receives a payment within a set timescale is also required to credit its own customer’s account on a ‘same day value’ basis, in the sense that the amount must be at the immediate disposal of the payee.
Other payment systems in this country include the following:
(a) BACS (Bankers Automated Clearing Services) is commonly used for lower value but high volume business, including the collection and payment of direct debits and standing orders. Payments are processed over a three-day cycle.
(b) Faster Payments provides for the collection of electronic payments within a short timescale following the receipt of the instruction. Again, members must hold settlement accounts at the Bank of England.
It may be helpful at the outset to say a few words about the legal nature of a funds transfer through the banking system.58 First of all, it should be observed that—convenient though the terminology may be—nothing is, in fact, ‘transferred’ at all, at least in the literal sense of that word.59 The payer simply instructs his bank to reduce his own account balance and to create a credit in favour of the payee’s bank. The payee’s claim on his own bank is thereby correspondingly increased.60 There is no intention that the payee should acquire any rights as against the payer’s bank and, hence, no assignment can be involved. This analysis, although correct, gave rise to an unsatisfactory outcome in R v Preddy,61 where defendants who had fraudulently procured a bank transfer as part of a mortgage scheme could not be convicted of obtaining property ‘belonging to another’ for the purposes of the Theft Act 1968.
A series of questions may arise in relation to payment via this means. These may include:
(a) does payment through this means constitute a valid discharge of the debt;
(b) does the payment comply with the terms of the contract; and
(c) at what point of time will payment be complete?
First of all, does payment through the banking system amount to a discharge of the debtor’s payment obligation? On ordinary principles of agency law, a payment made on behalf of the debtor through the banking system to the creditor’s bank will discharge the debt if the recipient bank has actual or ostensible authority to receive it.62 The mere fact that the creditor is known to have an account with a particular bank does not of itself mean that such institution has authority to receive payments on behalf of the creditor for the purposes of the particular transaction at hand.63 Equally, a transfer to a bank account of the creditor will not discharge the obligation if it has been made clear to the debtor that payment will only be accepted by means of a funds transfer to the client account of the creditor’s legal advisers for, in such a case, the creditor’s own bank plainly has neither actual nor apparent authority to accept the transfer.64 Alternatively, and again on the basis of agency law, the payment will also discharge the debt if the creditor, having become aware of the transfer, elects to ratify the payment.65
The difficulties do not, however, end at this point. If payment is made to the creditor’s bank—or, for that matter, to any other agent of the creditor—a question may arise as to the precise scope of that authority. For example, does the agent have authority only to accept the tender, or does he have authority to accept the payment? This apparently fine distinction may have real consequences. Two decisions may helpfully be contrasted. In Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia,66 the charterer of a vessel was late in paying the hire, but funds were remitted to the owner’s bank on the next business day. Since the payment had been received by the owner’s bank, the charterer argued that this amounted to acceptance of the payment and, hence, a waiver of the breach on which the owner had relied to terminate the charter. That contention was rejected; the bank would have had no knowledge of the underlying transaction or the due dates under the charter. Whilst it had authority to receive the payment, it had no authority to accept it, with the result that the owner was entitled to reject the payment when it became aware of it and terminate the charter on the basis of late payment.67 As a result, payment to the creditor’s bank account of itself will not normally amount to the full discharge of the obligation concerned. The tender is only accepted when the creditor treats the funds as his own68 or where he fails to take steps to reject the funds within a reasonable time of becoming aware of the credit.69 In contrast, in Central Estates (Belgravia) Ltd v Woolgar (No 2),70 a managing agent of property received and accepted a payment of rent whilst a breach of the lease was subsisting. Since the agent had accepted the payment and, in the course of its business, was aware of the possibility of forfeiture proceedings, this amounted to an effective waiver of the breach. In other words, the agent (in contrast to the bank in Mardorf Peach) had authority not merely to receive the payment, but also to accept it.71
Whether or not a payment or tender by means of a bank transfer has complied with the terms of the contract between the creditor and the debtor inevitably involves (a) an analysis of the contract in order to ascertain what he was obliged to do; and (b) an analysis of the steps taken by him in the intended performance obligation. This statement of the obvious means that one must separately consider the contractual time of payment and the actual time of payment.
As to the first point, the time at which payment should be made (or, more accurately, tendered) is once again a matter of substance which must be ascertained by reference to the law applicable to the contract.72 Each case will thus depend upon the terms of the contract at issue. A few general points may however be noted in an English law context:
(a) If no time for payment is expressly stipulated, then it must be inferred from the terms of the contract. Where the contract involves the provision of services, payment will often be due once the work has been completed and the debtor has had an opportunity to confirm its completion to a proper standard.73
(b) The time of payment is not usually of the essence of the contract74 unless the express terms or the nature of the contract require a contrary conclusion or, following notice to perform given by the creditor, the debtor’s continuing delay becomes a matter which goes to the root of the contract breach.75
(c) The mere stipulation of a date for payment will not usually indicate that time is of the essence of the contract. But where time has been expressed to be of the essence, then the courts will be slow to find a waiver of that term. Thus, where a contract provides for ‘punctual’ payment on a Sunday, payment on Monday is too late.76 Where payment has to be made ‘on demand’, the debtor has to have it ready at a convenient place where he can get it within a reasonable time and without having to make time-consuming arrangements.77
Whilst the identification of the date on which payment is contractually due may occasionally be obscure, the time at which payment is in fact made can usually be determined without difficulty.78
Where the creditor is to receive or accept payment by means of a transfer of funds to his bank account, it is suggested that payment occurs only when the account has been unconditionally credited with the requisite amount.79 It is sufficient if the amount was credited intentionally and in good faith, and not as a result of error or fraud, and under circumstances that the credit is unconditional and cannot properly be reversed. Payment is deemed to be made at that point, because the bank has unconditionally recognized that the recipient has become a creditor of the bank to the extent of the amount so transferred.80 Notification to the creditor is not required in order to perfect or complete the payment, or to render it effective;81 nor is it even necessary that the creditor’s bank has actually received a corresponding payment from the debtor’s bank.82 It must be re-emphasized that the creditor must have complete, unconditional, and immediate access to the full amount of the funds concerned. Thus, if payment is due on 22 January and is credited to the creditor’s account on that date, but subject to the proviso that the ‘value date’ is 26 January, then payment is only deemed to be made on 26 January, for the creditor only has full access to the required funds on the latter date. This remains the case even though the creditor could access the funds on 22 January subject to minor interest or other charges, for the requirement for such deductions derogates from the full and complete unconditionality which is an essential feature of this form of payment.83
It may be argued that (as between the parties) payment should be treated as made when the requisite funds are received by the creditor’s bank, ie before they will actually have been allocated to the creditor’s own account. There is something to be said for this view, in that the debtor has done everything in his power to ensure payment and he should not be prejudiced by errors or delays within the creditor’s bank in ensuring proper allocation—the creditor must take all the risks associated with his own choice of bank. This appears to be the justification for the first instance decision in The Afovos,84 where payment was held to be complete at the point at which the receiving bank had received and tested the incoming telex from the paying bank. However, the decision was reversed and no firm views were expressed on the point in the House of Lords.85 In the United States, it has been held that payment is treated as made once the electronic transfer instructions to the receiver bank have become incapable of alteration or revocation—an actual credit to the creditor’s account was not a necessary part of the payment process.86 But in spite of these decisions, it is suggested that payment can only be deemed to be made when the necessary credit entry has been made to the creditor’s account, for it is only at that point that the creditor will acquire the immediate and unconditional use of his money which, as has been shown, is an essential ingredient of payment. Thus in The Brimnes87 the Court of Appeal noted that ‘the credit of the owner’s account so as to give them the unconditional right to the immediate use of the funds transferred was good payment’ and ‘“payment” is not achieved until the process has reached the stage at which the creditor has received cash or that which he is prepared to treat as the equivalent of cash or has a credit available on which, in the normal course of banking practice, he can draw, if he wishes, in the form of cash’. It is submitted that these statements are entitled to approval,88 and that accordingly, nothing short of a credit entry is sufficient to achieve payment under these circumstances.89
In this context, it is possible to draw a parallel with EU law on the late payment of commercial debts. Article 3(1)(c)(ii) of the relevant directive90