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Clearing Banks Relieved by CHAPS ruling

In a crucial decision for the business community in general, and the banking industry in particular, the Court of Appeal has analysed the workings of the Clearing House Automated Payments System (CHAPS), through which half of the nation’s gross domestic product flows.

A company had intended to pay more than £217,000 to a supplier via the CHAPS system. The relevant form had been filled in with the intended recipient’s name, but the sort code and account number were incorrect. As a result of that error, the money was transferred to an account unconnected to the supplier, from which it was withdrawn by a third party.

In those circumstances, an issue arose as to whether the bank was entitled to debit the company’s account for the sum remitted. On the basis that it was standard banking practice not to check that the payee’s name accorded with the sort code and account number, a judge entered summary judgment in the bank’s favour.

In dismissing the company’s appeal by a majority, the Court noted that imposing an obligation on clearing banks to perform further checks before performing CHAPS transfers would have serious economic consequences and undermine the automated nature of the system. Clients’ wishes to have their money transferred within less than two hours would also be frustrated. The company’s interpretation of the bank’s obligations was thus ‘unreasonable and made no business sense’.