Stephenson Harwood's Sue Millar and Kyrsten Baker recently wrote on the subject of the recent decision of HHJ Paul Matthews in Terna Energy Trading ("Terna") v Revolut Ltd ("Revolut"). Just a few days earlier, Revolut was involved in another case involving a victim of an authorised push payment ("APP") fraud seeking to recover against it – Kenneth Larsson v Revolut. The two decisions present an interesting contrast.
By way of a reminder of the Terna case (Terna Energy Trading DOO v Revolut Ltd [2024] EWHC 1419 (Comm) (12 June 2024)), Terna, the claimant is a company which sells energy on both domestic and foreign markets. Revolut is authorised by the Financial Conduct Authority as an "electronic money institution" or "EMI", governed by the Electronic Money Regulations 2011 ("the EMRs").
In return for money paid by a third party to Revolut for the account of one of its customers, it provides "electronic money" to the customer, which can be used by the customer to make payments or purchase services.
In February 2022, Terna instructed its own bank, UniCredit, to pay €700,000 to an account with Revolut held by Zdena Fashions Ltd ("Zdena"), an English company. Terna's instruction to its bank to pay was induced by an APP fraud by third parties.
By a series of debits and credits, UniCredit appears to have instructed Barclays, Revolut's bank (i) to debit Unicredit's account with Barclays and (ii) to credit Revolut's account with Barclays. Barclays in its turn credited Revolut's account, and Revolut then credited Zdena's account with Revolut by issuing "electronic money" to Zdena. The credit to the account of Zdena was then entirely dissipated by a series of payments made over a number of hours.
As an EMI, Revolut was obliged under Regulation 20 of the EMRs to safeguard ("ringfence") the credit which it received from Barclays. It did so by segregating the credit in its euro bank account at Barclays in Frankfurt. Here it was protected against set-off by Barclays, and could not be mixed with other funds held by Revolut. However, the applicant's euro account with Barclays Frankfurt held not only this one credit destined for Zdena but many other euro credits destined for Revolut's customers. It is a commonly called a "mixed" account.
A further complication was that the credit was denominated in euros, but Zdena's outgoing payments were denominated in sterling. From time to time, therefore, Revolut's safeguarded euro account with Barclays was debited, and its safeguarded sterling account was credited with the equivalent in sterling. This did not happen transaction by transaction, but was done at times to suit Revolut's treasury operations in batches. As such, it appeared to be impossible directly to link (i) credits into the euro safeguarding account with (ii) specific transactions carried out by Zdena and the associated debits on its sterling account with Revolut.
Terna's claim against Revolut was for unjust enrichment.
The judge noted there were four elements to such a claim; (a) has the defendant been benefited, in the sense of being enriched? (b) was the enrichment at the claimant's expense? (c) was the enrichment unjust? (d) were there any defences? The judge indicated that if the matter went to trial, he anticipated that the trial will largely be concerned with the matters at (c) and (d). The application being considered, however, was only concerned with the matters at (a) and (b).
Revolut argued that although its account with Barclays was credited with the value of the payment, at the same time it credited Zdena's account, issuing electronic money to its customer, so that the incoming credit to the Revolut was balanced by the obligation undertaken to its customer. Revolut argued that this was sufficient to prevent enrichment for the purposes of the claim in unjust enrichment. Terna denied this but as a fall-back argued that Revolut nevertheless profited, because it would have the use of the money before it was used and could have earned a return on it. In this context, it was noted that Revolut's obligation to redeem the electronic money spent was a call obligation, operating 24/7, and not a term obligation, requiring repayment only at a known future date.
A further point arose from the fact that Revolut was an EMI and not a bank. Funds paid to a bank for the account of its customer pass and beneficially belong to the bank. They are not held on trust for the customer and the bank instead owes a debt to its customer. It is free to use the funds which have passed to it beneficially for its own purposes and benefit. On the other hand, an EMI is required by regulation 20 of the EMRs to safeguard the customer's "money", and did so in this case by keeping the funds paid to the account of its customer in a segregated account with an authorised credit institution.
Revolut argued that its position was distinguishable from a bank because the funds were not available for its general use - the position was analogous to that of a trust account. Just as money paid into a trust account does not belong in equity to the trustee, so money in the segregated account held by an EMI was not available to it for its own use.
The Judge followed binding English authorities which made clear that, "if by the time of the claim the agent has already accounted to or paid off the principal, without notice of the claim, the agent has a defence. But not otherwise. Where the agent has merely credited the principal, but not yet acted upon it, there is no reason why the agent should not repay (wiping out the credit to the principal)".
In each of the relevant authorities, funds were credited to a third person's bank account by mistake, and the payer sued the bank to recover the mistaken payment. In each case, the bank had not yet paid away any funds to its customer or on the customer's instructions. In each case the claim against the bank succeeded. Had there been no enrichment of the banks in question, because of the liabilities said to be incurred towards the banks' own customers, the claims would all have failed.
As to the further argument raised by Revolut that its position as an EMI was distinguishable from that of an ordinary bank because it could make use of its customer's funds. Revolut argued that as an EMI, it could do so only subject to additional restrictions or conditions, drawing an analogy with trust accounts. However, the judge indicated that an EMI account is not a trust account; the EMRs did not to create a trust for the benefit of customers holding electronic money: "mere segregation is insufficient to create a trust" (referring to Re Ipagoo LLP [2022] Bus LR 311, [64], CA).
Nevertheless, Revolut argued that an EMI cannot be enriched by receipt of the segregated money; by analogy, solicitors are not enriched by receipt into the firm's client account of client money, because they do not receive it for their own use and benefit, and so too an EMI is not enriched by receiving payments in its segregated account for the account of its customer, because it cannot use the money for its own use and benefit.
The judge rejected this argument, holding that if the account is held on trust, it is obvious that the trustee receiving a payment into it is not "enriched", but if the account is not a trust account, the beneficial interest in those funds must be in the EMI. The fact that the legal and beneficial owner of the money in the segregated account was required by law to safeguard it did not mean that it ceased to be the EMI's own money, or that it was not enriched. It had more beneficially owned assets after the payment than it had before. Moreover, it could properly profit from holding the money in several ways, including keeping any interest paid on the segregated account . There was no sufficient distinction to be drawn in the context of this claim between an ordinary bank and an EMI.
In relation to Terna's claim, it was also necessary to prove that the enrichment was "At the expense of the claimant".
This was not a case involving a direct transfer of value from Terna to Revolut. As such, to decide whether any enrichment was at the expense of Terna, it was necessary to consider whether either of two exceptional cases of indirect transfer submitted by Terna on the basis of earlier cases1 (agency and series of co-ordinated transactions) applied.
As to agency, Terna had instructed its own bank to make the transfer to a specific account with Revolut. It did not care how the bank did this. If it had thought about it, it would no doubt have supposed that a correspondent bank or banks would be involved. But those were matters for the bank to organise. That was what it paid the bank to do. The end result desired was the credit to the specific account in London, and that was all. The bank then organised it, and the end credit was made. The judge held this is a classic case of agency. The fact that the same banknotes were not passed from hand to hand was irrelevant; this was not a tracing case.
Revolut argued that it might be different if this had been a domestic CHAPS payment, where the payer's bank and the payee's bank both have accounts at the Bank of England, and settlement is affected by crediting and debiting their respective accounts with that bank. The judge disagreed, saying the mechanism is in principle the same as for SWIFT transactions, i.e., debiting and crediting accounts, just with fewer steps. So, the legal treatment should in principle be the same.
Terna's alternative submission was that this constituted a series of co-ordinated transactions. It instructed its own bank to make the transfer to a specific account with Revolut. The bank arranged for this to happen through its correspondent bank and indirectly through the correspondent's own correspondent. The transactions to achieve this end were co-ordinated and they formed a series. If any of them had failed, the end result would not have been produced. Revolut argued that "the funds at each stage came from multiple parties, not a single provider … depending on the other transactions processed by the banks on the same day". The judge held that could not be established without a trial, but even were it so established, the judge did not think it mattered given his conclusions as to agency.
Whether one looked at the case as one of agency or simply a series of co-ordinated transactions, either way it 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.
Notably, the judge declined to follow the earlier decision of HHJ Bird in Tecnimont Arabia Ltd v National Westminster Bank plc [2023] Bus LR 106, [2023] 1 All ER Comm 57 where that judge held the agency exception would not apply.
The decision in Terna followed hot on the heals of the decision in another case involving an APP fraud and the victim's claim against Revolut; Kenneth Larsson v Revolut Ltd [2024] EWHC 1287 (Ch) (04 June 2024)
Mr Larsson ("Larsson") was the victim of an APP fraud perpetrated by various persons or entities (the "Perpetrators"). The Perpetrators induced Larsson to transfer CHF 466,617.73 from an account with UBS to a number of "Destination Accounts" at Revolut purportedly as consideration for the purchase shares in an entity called "Starlink", which did not in fact exist.
Once the funds were credited in the Destination Accounts, the Perpetrators quickly transferred the funds out again, engaging, on a number of occasions, with Revolut via the "Live Chat" function. It was said that the Perpetrators provided pretextual reasons for the urgency of the payments out that were obviously suspicious, particularly when set against other red flags.
The causes of action pleaded against Revolut on the basis of the above core facts were:
Revolut applied to strike out (or sought summary judgment in respect of) each of these causes of action.
In relation to the claims at (1), while Revolut was an EMI, not a bank, it accepted for the purposes of the application that it owed materially the same duties as a bank.
The judge, Mr Justice Zacaroli, noted that Revolut was acting as a recipient payment services provider; At no stage was Revolut acting upon any orders or instructions from Larsson – the only instructions he gave were to UBS to make payment to the Destination Accounts. As recipient payment services provider, Revolut's customers were the holders of the Destination Accounts, which in each case was someone other than Mr Larsson. In causing payments to be made out of the Destination Accounts, Revolut was therefore obliged to act upon the instructions of the account holders, not Mr Larsson.
One case cited to the judge had considered the responsibility of a recipient bank: Abou-Rahmah v Abacha [2005] EWHC 2662 (QB). It was contended that a recipient bank owed a duty to the payer to pay moneys received only to the beneficiary identified in the payer's instructions. The judge in that case held that it did not, noting that no English authority had been cited to him, and Paget's Law of Banking suggested that no such duty was owed. In concluding that there was no such duty, the judge in that case took into account the following factors:
"(i) The claimants were not the defendant's customers. (ii) No special responsibility had been undertaken by the defendant to the claimants. (iii) Until the moneys were received by the defendant there had been no contact from the claimants - the moneys were simply paid by the claimants to the defendant's HSBC bank account. (iv) The defendant received the moneys as the agent of its customer to whom it owed duties arising from their contractual relationship. (v) A bank has a huge number of potential payers who can remit moneys without significant control by the bank. (vi) The imposition of a duty of care in relation to such persons (in the absence of special circumstances) would in practice impose very heavy burdens on banks and significantly hamper their efficiency."
It was held that any duty owed by Revolut as recipient bank was owed to the holders of the Destination Accounts, not Mr. Larsson.
In relation to the alleged duty of care in tort, the judge again held there was no such duty. Given the claimant's acceptance that no duty of care is owed generally to a third party payer, the judge could see no principled reason for imposing a duty simply because the payer happens also to be a customer of the bank (Larsson had submitted such a duty is owed by Bank A to the payer, where the payer also happens (coincidentally) to be a customer of Bank A).
The possibility of damage being suffered, if Revolut did not take reasonable care in dealing with incoming payments, was no more foreseeable because the payor happens to be a customer of the bank than if it was a third party. Any proximity between the bank and its customer derived from and related to the contract created by the account with the customer. The judge had already determined that there is no duty of care arising out of that contractual relationship.
In considering whether it would be fair, just and reasonable in all the circumstances to impose the duty of care contended for, it was important to recognise that the burden placed on banks would be materially the same as if such a duty was owed to all third-party payers – i.e. a duty Larsson's counsel had accepted did not exist.
The judge noted that international payments are made and received by reference to account numbers, not account names. It was common ground that there is no system currently in place in the UK in relation to international payments, whereby a recipient bank will check these details and confirm to the paying bank that they match. That contrasts with the "confirmation of payee" name-checking service recently introduced by some UK banks in relation to domestic payments. Whether or not any and, if so, what duty arose by reason of recently introduced initiatives in the UK in relation to domestic payments, it was not for the courts to develop the law by imposing such a duty on recipient banks in the context of international payments where no such initiatives exist.
The judge concluded there was no such duty in tort.
As to the claim in dishonest assistance in a breach of trust, the judge noted that this requires, in the first place, that there is a trust. The claimant contended that where a transfer of property was procured by fraud, the transferred funds would constitute trust property. The claimant relied in support on Westdeutsche Landesbank Girozentrale v London Borough of Islington [1996] AC 668, in which Lord Browne-Wilkinson had said at p.716:
"Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v. Wilson [1913] 2 KB 235, 244; R. Leslie Ltd. v. Sheill [1914] 3 KB 607. Moneys stolen from a bank account can be traced in equity: Bankers D Trust Co. v. Shapiro [1980] 1 W.L.R. 1274, 1282C-E: see also McCormick v. Grogan (1869) L.R. 4 H.L. 82, 97."
The judge also referred to authorities to the opposite effect. The judge was not prepared to find on this strike out application that there was no sufficiently arguable case that a constructive trust arose on the funds transferred to the Destination Accounts.
Accordingly, the judge struck out the claims in contract and tortious duty of care, but declined to strike out the claim in dishonest assistance in breach of trust. He also gave Mr Larsson the chance to remedy the pleading defects – for example, it did not in terms identify how the trust was said to have arisen, or what constituted the breach or breaches of trust, or how Revolut assisted in the breach or breaches.
The Larsson case was perhaps unsurprising in its result in terms of the dismissal of the claim pleaded in contract and in tort. That said, the judge left open to question whether the 'confirmation of payee' name-checking service recently introduced by some UK banks in relation to domestic payments might give rise to a duty towards payers.
The judge identified the significant uncertainty around the question of whether, when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient. He was not prepared to rule out the existence of such a trust being created and declined to strike out the claim that such an apparently important legal question remains unresolved is surprising.
While it was claimed that Revolut was liable to Mr Larsson in restitution for unjust enrichment, the judge does not appear to have in fact expressly considered that claim, which was the subject-matter of the later decision in Terna.
The Terna decision involved an unsuccessful reverse summary judgment/strike out application by Revolut, and the issues could be decided upon differently at a full trial. Nevertheless, it will serve as a warning to EMIs that they face such a potential liability particularly given the prevalence of APP fraud.
One might ask why, since Revolut had been instructed to and had apparently paid away the e-money before notice of the APP fraud, it did not argue in Terna that the enrichment was not unjust, or that Revolut had any other defences. However, since the application was to strike out/seek summary judgment was limited to whether the defendant been benefited, in the sense of being enriched, and whether the enrichment was at the claimant's expense, those other aspects were not in issue. The judge accepted "The binding English authorities referred to by Marcus Smith J make clear that, "if by the time of the claim the agent has already accounted to or paid off the principal, without notice of the claim, the agent has a defence. But not otherwise". If Revolut accounted to its client without notice, one might expect that it would have a good defence to the claim.
However, there also appears to be a potentially fundamental inconsistency between the two decisions. In Larsson, the Court allowed the potential claim to proceed to trial based on the creation of a trust of which Revolut was trustee. In Terna, the Court declined to hold that there was any such trust or that Revolut held monies as trustee in deciding that the EMI had been enriched. The former depends on a trust coming into existence, the latter upon there being no trust arrangement.
More generally, EMIs and PSPs will be interested to see how these two cases and the issues they raise will be resolved if they do go to trial.
1 Investment Trust Companies v HMRC [2018] AC 275. Lord Red stated " 47. There are, however, situations in which the parties have not dealt directly with one another, or with one another's property, 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. These are generally situations in which the difference from the direct provision of a benefit by the claimant to the defendant is more apparent than real.
48. One such situation is where the agent of one of the parties is interposed between them. In that situation, 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. … There have also been cases, discussed below, in which a set of co-ordinated 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. …"
