International banking, trade finance and tracing payment flows: will trusts assist?

First City Monument Bank plc v Zumax Nigeria Limited [2019] EWCA Civ 294

The Court of Appeal has held that 'correspondent bank' transfers do not create a trust over the monies transferred. This decision affirms long-established market practice. It will be welcome news to correspondent banks.

Facts

Zumax Nigeria Limited (Z) provided engineering and other services to oil companies. Z's main banker was IMB International Bank plc, now First City Monument Bank (F). In order to conduct its banking business, F held US dollar-denominated accounts at the London branch of Commerzbank. These were 'correspondent' accounts. As is typical, F used these accounts to facilitate foreign currency payments.

Z invoiced its customers in US dollars. It used a nominee, Redsear Limited (R), as part of its billing arrangements. Customers were told to pay R; R held an account with Chase Manhattan International in London, into which funds were paid. These US dollar-denominated funds were used to meet Z's US dollar business needs. The surplus was transferred to Nigeria.

The envisaged payment flow was as follows:

• the monies would leave R's account at Chase
• they would then be transferred to F's correspondent bank accounts held at Commerzbank
• F would then transfer them onwards to Z in Nigeria.

Ten transfers were made from R's account at Chase to F's Commerzbank accounts between May 2000 and April 2002, for 'further/final credit' to Z.

The transfers were never made. Z commenced proceedings in the High Court, alleging that F was liable to account as trustee for the transfers (amounting to approximately USD 211 million plus interest), and that Z held a proprietary interest in those funds.

Z applied for summary judgment and was successful; F appealed.

Creating a trust

The three requirements for an express trust are: certainty of intention; certainty of subject matter; and certainty of objects (see Knight v Knight [1840] 3 Beav 148).

A Quistclose trust arises when money or property is transferred to someone for a particular purpose and held at the free disposal of the transferee.

In Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, Quistclose lent money to Rolls Razor Limited to fund a dividend payment. The monies were placed in a segregated bank account at Barclays. Rolls Razor then went into liquidation without having paid the dividend. The Court determined that the monies in the bank account were held on trust for Quistclose, thus depriving Barclays of the opportunity to claim them by way of set-off.

Decision

The Court of Appeal allowed F's appeal, concluding that the transfers were not subject to a trust:

• The fact that the transfers were made for a particular purpose did not necessarily mean that they were subject to a trust. Similarly, advance payments for goods/services are made for a particular purpose, but generally do not entail the creation of a trust (see Twinsectra v Yardley [2002] UKHL12)
• Unlike the Quistclose situation, the funds were not segregated by placing them into a separate account
• The fact that book entries indicated Z's account should be credited did not mean that R intended to create a trust. It was routine practice for payers to identify the person to whom payment should be made
• The "basic banker-customer relationship is that of debtor and creditor". Monies placed in the custody of a banker are funds which are at his free disposal. It is possible for a banker to become a trustee, but this is unusual
• There were strong policy reasons for allowing the appeal – "Zumax's submissions, if accepted, could confuse and complicate the operation of correspondent accounts".

F's appeal was allowed.

Comment

This is a common sense decision from the Court of Appeal. It reaffirms the market's understanding of the role of correspondent banks and the nature of international money transfers, where speed and efficacy are paramount.