Specific issues which do come up regularly are as follows. Imagine how many of us do ignore of this, I do. I do concern none of them, I am happy with the convenience I get. Never bothering with fundamental structures, for our safety concern, please learn…
The authenticity of the payment instruction
Most electronic funds transfer (EFT) documentation incorporates a clause which states that ‘the bank will treat as valid any message or instruction which purports to come from the customer‘, or that `the bank assumes no responsibility for the unauthorized use of the customer’s password’. As mentioned earlier, this reverses previous banking practice which places the responsibility for the detection of forgery or fraud on the bank. Is there anything that the corporate customer can do to oppose the banks on an issue about which all of them have remained intransigent? As this point has already been conceded by most major corporations, it is difficult to foresee any reversal by the banks in the face of objections by medium-size and small companies which have less individual influence on their banks.
Equal treatment
Where possible, the contract should treat the corporate client and the bank equally. It should cover areas such as:
- confidentiality of software, passwords or other information;
- responsibility for security of the system;
- responsibility for maintaining the hardware and software;
- notification of any fraud or unauthorized use;
- losses, especially consequential loss;
- any breach of the agreement by either side; and
- both sides having the right to the same length of notice to cancel the agreement.
Ideally the agreement, or any side letter, should incorporate a statement confirming equal treatment between the corporate client and its banker.
Consequential loss
This might arise when a loss occurs as consequence of one of the parties taking action (or failing to take action) in response to an instruction from the other. An example might be an investment manager instructing its bank to make a payment to exercise an option, but the bank not doing so for technical reasons. The loss recognized by the bank might be the amount of the payment or lost interest on the payment, but the loss to the manager would be the lost value of the exercised option, which might be several times the amount of the payment.
To add insult to potential injury, a bank will sometimes seek to hold the customer responsible for any consequential loss that it might suffer, while seeking to exempt itself from consequential losses suffered by the customer.
There is no hard and fast way of dealing with the issue, which is probably the greatest obstacle to electronic banking agreements and the most frequent reason for corporate dissatisfaction with such agreements. Large companies, whose business is valued by the banks may succeed in eliminating all references to consequential loss, but smaller companies may be less successful and have to accept assurances that the banks have never used the consequential loss clause against customers. Although this may be true, it is more likely that a bank might use it to put pressure on smaller customers, which are least well placed to bear any consequential loss claims presented by their banks.
A variant of consequential loss is ‘third party loss‘ which, again, banks seek to exclude. This is a loss or liability which might arise between the company and the recipient of a payment if it is inaccurate or incomplete, when the recipient will have no direct connection with the bank.
It is notable that under Uniform Commercial Code 4A (UCC4A), banks cannot exclude consequential liability.
Whether or not companies are able to satisfy their concerns about consequential loss, it is most important that they are aware of this issue and the associated risks.
