Squirrell v NatWest – storing up trouble?

The courts consider letters of credit and certain other means of payment, notably CHAPS transfers, to be almost as good as cash. A bank’s obligation to pay or process payment is independent of any underlying trading between the bank’s customer and the payee, and can only be upset if there is clear evidence of fraud or illegality by the payee. But the Proceeds of Crime Act 2002 (POCA) requires the banks not only to report suspicious transactions, but to refuse to process them if there are reasonable grounds for suspicion. Paul Morris , a solicitor at Denton Wilde Sapte who specialises in financial services dispute resolution, examines a recent case that suggests the second principle will predominate in any conflict.

If there is one thing trade financiers learn at their mothers’ knees, it is the “doctrine of autonomy”, which is to say that the paying bank’s obligation to pay against compliant documents is sacred and inviolable. Only in two circumstances can the obligation be overturned. First, where there is fraud by the beneficiary, and secondly where the beneficiary is engaged in illegal activity.What is more, the paying bank must have “clear and compelling” evidence of underlying fraud or illegality at the time payment is due. And the principle is not restricted to letters of credit. The High Court recently ruled a CHAPS transfer will be irreversible in the absence of fraud or illegality. Although for CHAPS payments the requisite evidence can come to the paying bank’s attention after it has paid.