Latest APP fraud claim against receiving PSP: High Court refuses to strike out claim for unjust enrichment

In the latest in a series of claims against receiving banks arising out of authorised push payment (APP) fraud, the High Court has refused to strike out/give reverse summary judgment on a claim for unjust enrichment against a well-known electronic money institution: Terna Energy Trading DOO v Revolut Ltd [2024] EWHC 1419 (Comm).

Since the Supreme Court's decision in Philipp v Barclays Bank UK plc [2023] UKSC 25 (see our blog post) closed the door to private APP fraud claims against sending banks last year, there has been a flurry of claims (and judgments) considering actions against receiving payment service providers (PSPs): see for example here and here. The present claim is the first (recent) example of such a claim relying upon unjust enrichment as the primary cause of action.

As a reminder, in order for a claim in unjust enrichment to be made out, the orthodox view is that the claimant must establish that: (a) the defendant was enriched (ie has benefitted); (b) the defendant's enrichment was at the claimant's expense; (c) the enrichment was unjust; and (d) there is no available defence (as per Banque Financiere De La Cite v Parc (Battersea) Ltd and Others [1998] UKHL 7). Common battlegrounds are whether the defendant was "enriched" (particularly where the institution has paid away the money in accordance with its customer's instructions and without notice of the payer's claim – as was the case here) and whether that enrichment was "at the expense of the claimant".

In the present case, it was accepted that the PSP was entitled to reverse summary judgment/strike out, if it could show that (on facts assumed for the purpose of the application in the claimant's favour) the PSP was not enriched or that any enrichment was not at the expense of the claimant. The judge found that both points were at least sufficiently arguable to go to trial and accordingly refused the application. The court's findings on both of the key elements is controversial:

• It held that there was a real prospect of the claimant proving that the PSP was "enriched", even though the funds received from the claimant were matched by an immediate balancing liability/obligation on the receiving PSP to its own customer (and the account had been emptied in a matter of hours on receipt of funds). The court acknowledged that this fact pattern could amount to a defence, but said defences were not to be dealt with as part of the present summary judgment application.
• The judgment is also in direct conflict with the High Court's decision on whether enrichment was at the "expense of the claimant" in Tecnimont Arabia Ltd v National Westminster Bank plc [2022] EWHC 1172 (Comm) (see our blog post). The court held that it was not strictly bound by the decision in Tecnimont, with which it did not agree, and so did not follow it.

The volume of recent APP fraud-related private actions, coupled with the degree of conflicting (or at least contrasting) first instance authorities, is indicative of the current state of legal uncertainty in this area, elevating the litigation risks surrounding processing customer payments for financial institutions. Appellate guidance is much needed, and in good news for banks, the defendant in the present case has been granted permission to appeal. We will monitor the appeal closely and report on developments.

We consider the decision in more detail below.

Background

The claimant was the alleged victim of an APP fraud. It instructed its own bank (UniCredit Serbia) to pay €700,000 to an account held with the defendant PSP by a third party (Zdena Fashions Ltd), in the mistaken belief that it was satisfying a genuine invoice from one of its energy suppliers. Once the account was credited, it was entirely dissipated by a series of payments made over a number of hours.

The claimant brought a claim against the PSP for unjust enrichment (it did not bring claims against UniCredit Serbia or Zdena).

The PSP applied for reverse summary judgment/strike out on the basis that it had not been "enriched" and even if it had, the enrichment was not "at the expense of the claimant". 

Decision

The High Court dismissed the application. The key elements of the decision which are likely to be of interest to financial institutions are considered further below.

Was the PSP "enriched"?

The court considered whether the PSP was "enriched" for the purpose of the claim by looking at the precise payment mechanisms involved in the transaction (being a series of interbank transactions conducted by SWIFT messages):

• When the claimant instructed UniCredit Serbia to make the payment, UniCredit used a correspondent bank to process the transaction.
• The claimant's account with UniCredit was debited and the PSP's account with the correspondent bank was credited with the value of the payment.
• At the same time, the PSP credited Zdena's account, issuing electronic money to its customer, backed by the credit in the PSP's correspondent bank account.

The PSP argued that there was no enrichment, because the incoming credit to the PSP was balanced by the obligation it undertook to its customer (Zdena).

The court referred to a number of decisions of the Court of Appeal and House of Lords expressly confirming that a bank becoming the debtor of a customer is not an answer to a claim in unjust enrichment. While the court acknowledged that these cases were decided before modern authorities on unjust enrichment, it held that it was bound by those older English authorities.

The court cited Kerrison v Glyn, Mills, Currie & Co (1911) 81 LJKB 465 (among others), in which funds were credited to a third person's bank account by mistake and the payer sued the receiving bank to recover the mistaken payment. The bank had not yet paid away any funds to its customer and the claim succeeded. In the court's view, Kerrison confirmed that the bank was enriched, notwithstanding its liability to its own customer, because otherwise the claim would have failed. The court acknowledged that a receiving bank may have a defence where it has paid away the money in accordance with its customer's instructions and without notice of the payer's claim. However, it said defences were not to be dealt with as part of the present summary judgment application.

The court recognised that there were more recent statements of the law to the contrary, eg in Jeremy D Stone Consultants Ltd v National Westminster Bank plc [2013] EWHC 208 (Ch). In this case, the court said payments made by the claimants to the bank's customer's account resulted in an increase in the bank's assets, but this was matched by an immediate balancing liability, in the form of the debt owed by the bank to its customer. Accordingly, the receiving bank was not enriched by payments made by the claimants. Even if it was, various good defences were available to the bank (based on its contractual obligation to pay out sums in accordance with the instructions of its customer, good faith change of position and/or ministerial receipt).

However, in the court's view, the more recent authorities were first instance and obiter, and so it remained bound by the earlier authorities of the Court of Appeal and House and Lords.

The court also rejected the PSP's purported distinction between its position as an electronic money institution (EMI) and that of an ordinary bank. On the basis that an EMI can only make use of its customer's funds subject to additional restrictions/conditions, the PSP argued it could not be enriched by receipt of segregated money. Rejecting this distinction, the court referred to the fact that the PSP could have used the credit in secure, liquid, low-risk investments (as permitted by regulation 21 of the Electronic Money Regulations 2011), even though this was not in fact done and interest would have been minimal (it was common ground that the funds were dissipated within a day of receipt).

The court therefore refused to give reverse summary judgment or strike out the claim on the basis that the PSP had not been "enriched".

Was the PSP's enrichment "at the expense of the claimant"?

The court considered afresh the principles laid down by the Supreme Court in Investment Trust Companies v HMRC [2017] UKSC 29, outlining the test to prove that a defendant has been unjustly enriched at the claimant's expense, which divides cases broadly into two categories:

1. More typical cases where the parties have dealt directly with one another, or with one another's property; and
2. Cases where the parties have not dealt directly, but in which the defendant has nevertheless received a benefit from the claimant, and the claimant has incurred a loss through the provision of that benefit.

It was common ground that there was no direct transfer of funds between the parties, and so the present case fell within category (2). In the court's view, it would not have made a difference if this had been a domestic Clearing House Automated Payments System (CHAPS) payment, as both CHAPs payments and SWIFT transactions should be treated the same.

In respect of indirect transfers, the court noted that Investment Trust Companies says that they may nevertheless be treated as if they were direct transfers, either: (i) as a result of agency; or (ii) because they are a "set of coordinated transactions":

• Agency. Where the agent of one of the parties is interposed between them, ie the agent is the proxy of his principal, by virtue of the law of agency. The series of transactions between the claimant and the agent, and between the agent and the defendant, is therefore legally equivalent to a transaction directly between the claimant and the defendant. In the view of the court, the present case was a classic case of agency.

• Series of coordinated transactions. Where a set of coordinated transactions has been treated as forming a single scheme or transaction for the purpose of the "at the expense of" inquiry, on the basis that to consider each individual transaction separately would be unrealistic. The court said that the transactions in this case were coordinated and they formed a series.

In the court's judgment, on either of the bases outlined above, there ought to be a resolution of the claim only after full trial when the complete facts are known. Expressing its view on the facts before the court for the purpose of the summary application, the court suggested that this case involved an enrichment of the claimant at the expense of the respondent by indirect transfer, sufficient in principle to satisfy the doctrine of unjust enrichment (subject to questions of "unjustness" and any possible defences, which could be determined only at trial).

The court acknowledged that it was reaching a different conclusion to the High Court decision in Tecnimont, which also involved a claim against a receiving bank in the context of an APP fraud. In that case, when applying the test laid down by the Supreme Court in Investment Trust Companies, the court concluded that the bank could not be liable for unjust enrichment as the bank had not been enriched "at the claimant's expense". In Tecnimont, the court took a different approach on the indirect transfer question, finding that the relevant international interbank transactions did not form a single scheme and that the agency exception did not apply. The court concluded in Tecnimont that to treat the transfers as being "direct" would fail to recognise the established manner in which international bank transfers are made.

Returning to the present case, the court held that it was not strictly bound by the decision in Tecnimont, with which it did not agree, and accordingly refused the application.

Note: In June 2024, the High Court allowed Revolut's application for permission to appeal to the Court of Appeal.

In November 2024, it appears that Revolut withdrew its application from the Court of Appeal. 

In December 2024, the claimant was asked to apply to the High Court for a trial date between 1 December 2025 and 6 March 2026.