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Commercial Transactions – Who Bears the Risk of Fraud?

Commercial transactions which involve transferring large sums of money through the banking system are sadly vulnerable to fraud. In a guideline decision in the context of a substantial commodities trade, the High Court considered where losses arising from such dishonesty should fall.

A buyer contracted to purchase a cargo of sunflower meal for almost $1.2 million. After the cargo was loaded on board a ship, the seller presented its invoice to the buyer’s agent by email. The relevant email account was, however, hacked and manipulated by a person or persons unknown and the wrong bank details were received by the buyer.

As a result, the payment was mistakenly made into a fraudulent account. Although the fraud was swiftly detected and most of the money recovered, there was a shortfall of about $160,000 due to fluctuations in currency exchange rates. Following arbitration proceedings, a panel found that the buyer was contractually bound to make good that deficit so that the seller received 100 per cent of the purchase price.

In ruling on the buyer’s challenge to that decision, the Court noted that there was insufficient evidence to reach any conclusion as to how, or where in the chain of emails, the fraud had occurred. However, the contract had stated in terms that the seller was entitled to be paid ‘100 per cent net cash’ for the goods.

The seller had satisfied its obligations by delivering the goods and it was the buyer who bore the risk that fraud would result in it receiving incorrect bank details. The buyer’s contractual duty was to make payment to the seller’s account and there was no authority for the proposition that a payment can be treated as made when accompanied by incorrect destination account details. In the circumstances, the panel reached the right legal conclusion on the nature of the payment obligation and was entitled to find on the facts that it had not been fulfilled.

The Court, however, found that a serious irregularity in the arbitration had occurred in that the buyer was not afforded the opportunity to argue that notifying its agent of the destination account details was not equivalent to notifying the buyer itself. That may have resulted in a substantial injustice to the buyer, which had, in effect, been required to pay more than the full contract price. That issue was remitted to the panel for consideration, but the buyer’s challenge was in all other respects dismissed.