European Bank Ltd v Citibank Ltd

[2004] NSWCA 76

Reported Decision: 60 NSWLR 153

Court of Appeal

CITATION:	European Bank Ltd v Citibank Ltd [2004] NSWCA 76
HEARING DATE(S):	08/12/2003; 09/12/2003, 10/12/2003
JUDGMENT DATE:	25 March 2004
JUDGMENT OF:	Spigelman CJ at 1; Handley JA at 24; Santow JA at 84
DECISION:	1. Appeal allowed with costs.; 2. Orders 2 and 7 made by Palmer J on 4 April 2003 set aside.; 3. In lieu thereof order that judgment be entered for the cross-claimant European Bank Ltd for the debt sued for together with interest at a rate or rates appropriate for a debt in United States dollars.; 4. Order that interest accrue on the judgment at a rate appropriate for a debt in United States dollars.; 5. The cross-defendant Citibank Ltd is to pay the cross-claimant's costs of the proceedings before Palmer J.; 6. The parties are directed to bring in short minutes of the judgment to be entered pursuant to Order 3 and the order to be made pursuant to Order 4 before Handley JA on 8 April 2004 at 9.30 am unless agreed short minutes have previously been filed with the Registrar of this Court.
CATCHWORDS:	BANKING - foreign currency - US dollar account in Sydney - transactions on account effected through correspondent banks in New York - US dollar funds in Sydney account not attachable in New York - depositor has no proprietary interest in funds deposited with bank - EXECUTION - debt owed by bank on Sydney account - debt not attachable by process against debtor bank in New York - PRIVATE INTERNATIONAL LAW - debt owed by bank on Sydney account - situs of debt in New South Wales - discharge of debt governed by proper law - proper law that of New South Wales - debt not discharged by attachment in New York - D
CASES CITED:	Adams v National Bank of Greece [1961] AC 255 Arab Bank Ltd v Barclays Bank Ltd [1954] AC 495 Barcelo v Electrolytic Zinc Co of Australasia Ltd (1932) 48 CLR 391 C. Czarnikow Ltd v Centrala Handlu Zagranicznego Rolimpex [1979] AC 351 Citibank NA v Wells Fargo Asia Limited 495 US 660 (1990) Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Foley v Hill (1848) 11 HLC 28 [9 ER 1002] Foskett v McKeown [2001] 1 AC 102 Huntington v Attrill [1893] AC 150 Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 Manas y Pineiro v Chase Manhattan Bank NA 434 NYS 2d 868 (1980) New York Life Insurance Co v Public Trustee [1924] 2 Ch 101 CA Perez v Chase Manhattan Bank NA 463 NE 2nd 5 (1984) Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436 Societe Eram Shipping Co Ltd v Compagnie Internationale de Navigation [2003] 3 WLR 21 Tilley v Official Receiver in Bankruptcy (1960) 103 CLR 529 Tsakiroglou & Co Ltd v Noblee Thorl Gmbh [1962] AC 93 Wanganui Rangitikei Electric Power Board v The Australian Mutual Provident Society (1934) 50 CLR 581
PARTIES :	European Bank Ltd (Appellant) Citibank Ltd (Respondent)
FILE NUMBER(S):	CA 40331/03
COUNSEL:	T Bathurst QC/J Halley (Appellant) M Walton SC/E A Collins (Respondent)
SOLICITORS:	Baker & McKenzie (Appellant) Dibbs Barker Gosling (Respondent)

LOWER COURTJURISDICTION:	Supreme Court
LOWER COURT FILE NUMBER(S):	ED 4999/99
LOWER COURT JUDICIAL OFFICER :	Palmer J

CA40331/03

SPIGELMAN CJ
HANDLEY JA
SANTOW JA

25 MARCH 2004

EUROPEAN BANK LTD v CITIBANK LTD

CATCHWORDS

BANKING – foreign currency – US dollar account in Sydney – transactions on account effected through correspondent banks in New York – US dollar funds in Sydney account not attachable in New York – depositor has no proprietary interest in funds deposited with bank

EXECUTION – debt owed by bank on Sydney account – debt not attachable by process against debtor bank in New York

PRIVATE INTERNATIONAL LAW – debt owed by bank on Sydney account – situs of debt in New South Wales – discharge of debt governed by proper law – proper law that of New South Wales – debt not discharged by attachment in New York

FACTS

The appellant made a US dollar deposit with the respondent in Sydney. The funds were transferred to the respondent by the appellant’s correspondent bank in New York which made a payment to the respondent’s correspondent bank in New York. The contract between the appellant and the respondent for the US dollar deposit in Sydney contained a Force Majeure clause which protected the respondent if its performance of an obligation was prevented or hindered due to reasons beyond its reasonable control. A United States District Court warrant directed to the United States Marshal which purported to seize the appellant’s funds in the respondent’s account with its correspondent bank in New York was served in New York on the correspondent bank. The correspondent bank paid $US8,110,073.30 to the United States Marshal and debited the respondent’s account with this payment. When the appellant sued the respondent in Sydney to recover its deposit the respondent relied on the Force Majeure clause. The trial judge upheld this defence and dismissed the action. On appeal HELD: (1) The debt sued for was situated in Sydney and its discharge was governed by the law of New South Wales as the proper law of the contract. (2) The appellant ceased to have any interest in the relevant funds once they were deposited with the respondent and its only right was to the debt owed by the respondent. (3) The appellant did not acquire any interest in the funds transferred by its correspondent bank in New York to the respondent’s correspondent bank: Foley v Hill (1848) 9 ER 1002 and Foskett v McKeown [2001] 1 AC 102, 127-8 applied. (4) The debt owed by the respondent to the appellant in Sydney could not be attached by process served on the respondent’s correspondent bank in New York: Societe Eram Shipping Co Ltd v Compagnie Internationale de Navigation [2003] 3 WLR 21 HL applied. (5) The fact that the contemplated method of performance was affected by a Force Majeure event was not a defence if performance in accordance with the contract was still possible: Tsakiroglou & Co Ltd v Noblee Thorl Gmbh [1962] AC 93; C. Czarnikow Ltd v Centrala Handlu Zagranicznego Rolimpex [1979] AC 351 distinguished. (6) The Force Majeure clause was not a defence to the action. (7) The appeal should be allowed and judgment given for the appellant.

ORDERS

1. Appeal allowed with costs.

2. Orders 2 and 7 made by Palmer J on 4 April 2003 set aside.

3. In lieu thereof order that judgment be entered for the cross-claimant European Bank Ltd for the debt sued for together with interest at a rate or rates appropriate for a debt in United States dollars.

4. Order that interest accrue on the judgment at a rate appropriate for a debt in United States dollars.

5. The cross-defendant Citibank Ltd is to pay the cross-claimant’s costs of the proceedings before Palmer J.

6. The parties are directed to bring in short minutes of the judgment to be entered pursuant to Order 3 and the order to be made pursuant to Order 4 before Handley JA on 8 April 2004 at 9.30 am unless agreed short minutes have previously been filed with the Registrar of this Court.

CA40331/03

SPIGELMAN CJ
HANDLEY JA
SANTOW JA

25 MARCH 2004

EUROPEAN BANK LTD v CITIBANK LTD

Judgment

1 SPIGELMAN CJ: In this matter I have had the benefit of reading in draft the judgment of Handley JA. His Honour sets out the relevant contractual provisions and the issues that arise on the appeal. Subject to the following additional observations, I agree with the reasons of Handley JA.

2 Citibank Limited (“Citibank”) seeks to resist the demand for payment by the Appellant on the sole ground that it is excused from making the payment by clause 7.1 of the General Account Conditions. Incorporating within that clause the definition of “Force Majeure Event” in clause 12 produces a contractual provision in the following terms:

“Citibank will not be liable for any failure to perform any obligation in respect of an Account if the performance is prevented, hindered or delayed by … any event which occurs due to reasons beyond the reasonable control of Citibank so as to prevent the due performance of an obligation.”

3 The effect of clause 7.1 is to “suspend” the “relevant obligation” for so long as such an event “continues”.

4 This appeal turns on what, if any, significance for the proper interpretation of this clause arises from the practice of banks with respect to transactions in US dollar accounts.

5 On the basis of evidence that all interbank movements in US dollars are completed between banks in the United States, his Honour made the following finding:

[148] … As a matter of banking practice accepted throughout the world, European Bank could only make the Deposit if it could draw upon an account in US dollars with a bank in the United States which was in credit to the amount which was to be deposited; it could only make the deposit with Citibank Limited if Citibank Limited itself had an account with a bank in the United States which could be credited with the Deposit; the Deposit could only be effected by European Bank instructing its correspondent United States bank to debit European Bank’s account in favour of Citibank Limited’s account with Citibank Limited’s United States correspondent bank.”

6 This appeal proceeded on the basis that this finding reflected the common understanding of the parties. This understanding was relevant “background knowledge” of the character identified by Lord Hoffmann in a passage from Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 at 912, quoted with approval by the joint judgment of Gleeson CJ, Gummow and Hayne JJ, in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [11]:

“… the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

7 I am prepared to proceed on the basis that what constitutes “due performance” is sufficiently “ambiguous or susceptible of more than one meaning” (Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352) to entitle this Court to take into account the “background knowledge”. (See Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436 at [39].)

8 It may well be that “performance” of Citibank’s obligation to pay European Bank was expected to be effected by Citibank drawing down an equal amount from its account with Citibank NA. That does not, however, mean that this was the mode of “performance”, as the Respondent submitted, which both parties “intended”, so that the words “performance” or “due performance” in the force majeure clause should be so construed.

9 It is necessary to distinguish between mutual expectations and common intention. Merely because both parties expect a contract to lead to certain consequences or to involve particular events, does not mean that the words used in the contract should be construed in such a way that a failure of the expectation affects contractual rights and duties.

10 The background knowledge relied on in this case does not, in my opinion, determine the proper construction of clause 7.1 as set out above. The words “failure to perform any obligation” and “the due performance of an obligation”, found respectively in clause 7.1 and in the definition of “Force Majeure Event”, each refer to the payment of the relevant sum of US dollars in Sydney on the nominated date, drawing upon whatever US dollar funds Citibank had available in its account with its correspondent US bank at the time. This construction differs from Palmer J’s insofar as it does not require, as part of the Respondent’s obligations in respect of an account, that the sum to be paid be causally and transactionally linked to the original deposit.

11 It is one thing to say that the parties understood that bank accounts in US correspondent banks would be employed. It is another thing to impose a condition of performance requiring particular funds to be available for debit by the correspondent bank.

12 I agree with Handley JA that European Bank is not affected by the state of accounts between Citibank and Citibank NA in New York. This is manifest in the ongoing nature of the Respondent’s obligation to pay the Appellant even at those times, noted by Handley JA, when the Respondent’s account with Citibank NA was in overdraft. The conduct of Citibank’s account with Citibank NA does not suggest that any funds were specifically appropriated. It was conducted as a current account.

13 The Respondent relied on the construction of the force majeure clause by the House of Lords in C. Czarnikow Ltd v Centrala Handlu Zagranicznego Rolimpex [1979] AC 351. In that case the Polish Government had prohibited the export of sugar. This act was held to fall within a force majeure clause covering a failure to deliver caused by government intervention (361C-D).

14 The Respondent drew attention to the observations of Lord Wilberforce that:

“The contracts now in question were no doubt intended to be satisfied from the 1974 sugar crop in Poland.” [361H]

15 There was also a finding of fact by arbitrators that there was Polish sugar available but it was subject to the export ban, and:

“If there were insufficient quantities available, there was a market for the purchase and sale of other sugar of equivalent quality.” [362D]

16 The contract under consideration in Czarnikow was expressly concerned with Polish sugar for delivery f.o.b. at a Polish port [353B]. Plainly the export ban prevented performance of that contract in accordance with its terms.

17 Lord Wilberforce’s reference to the obligation being “satisfied” from a particular crop (equivalent it is suggested to the particular deposit with Citibank NA) played no part in his Lordship’s reasons. “Polish sugar” could not be delivered f.o.b. at a Polish port; irrespective of such particularity. His Lordship’s observations are not authority for the proposition that any force majeure clause should be construed to be concerned with the particular mode of performance contemplated at the time of contracting.

18 Similarly, the availability of sugar of equivalent quality (equivalent to the availability of US dollars from other sources than Citibank NA) did not prevent the application of the force majeure clause, because the contractual stipulation was to deliver “Polish sugar” f.o.b. at a Polish port. There is nothing of this express character in the present case.

19 On the contrary the General Account Conditions speak in general terms about the operations of an account including:

“2.1 Each Account will be in a currency agreed to by Citibank and except as otherwise agreed by Citibank, withdrawals from an Account will be made only in the currency of the Account.”

20 There is nothing which suggests that the obligation to make a payment is contingent on the accessibility of funds held by Citibank in any capacity. Even if it were concluded that both parties contemplated that repayment of the Sydney deposit would in fact coincide with the withdrawal of the funds from Citibank NA, there is nothing to indicate that that was an integral part of the intended mode of performance by Citibank of its obligation to pay European Bank.

21 The funds made available by the Appellant to the Respondent became, in accordance with long established principles of banking law, the property of the Respondent as part of the funds available to the Respondent to be deployed by it for its purposes. They were so treated.

22 Whether the Respondent decided to deposit directly with its correspondent bank, or indirectly via another bank which in turn had a direct relationship with a correspondent bank in New York, and for what periods of time and at what rates of interest was entirely a matter for the Respondent. Whether aspects of its transaction, e.g. the term of the deposit, matched precisely the terms and conditions of the deposit by the Appellant with the Respondent, was entirely a matter for the Respondent. That ultimately there would be a debit and a corresponding credit between two US-located accounts is not, of itself, such as to determine the content of the obligation assumed by the Respondent to the Appellant. That obligation was to pay an amount in US dollars pursuant to a debt located in Australia.

23 I agree with the orders proposed by Handley JA.

24 HANDLEY JA: European Bank Ltd of Vanuatu has appealed from the judgment of Palmer J who dismissed its cross-claim which sought recovery of its US dollar deposit of $8,118,600.90 with Citibank Ltd (referred to herein as Citibank) in Sydney which matured on 22 November 2000 (References to dollar amounts are to United States dollars).

25 The Judge held, following events in New York, that cl 7.1 of Citibank Ltd’s General Account Conditions barred recovery. A seizure warrant issued by the United States District Court, which purported to attach $7,593,532.48 and accrued interest in an account in New York of Citibank Ltd with its parent, Citibank NA, was served on the latter in New York on or about 20 November 2000. Citibank NA paid $8,110,073.30 to the United States Marshal in purported compliance with the warrant.

26 The General Account Conditions are headed “Australian Account”. Clause 1 dealt with Authority and Communications. Clause 2 dealt with Accounts and cl 2.1 provided:

“Each Account will be in a currency agreed to by Citibank and except as otherwise agreed by Citibank withdrawals from an Account will be made only in the currency of the Account.”

27 Clause 3 dealt with Credits, cl 4 with Debits, cl 5 with Statements, Advices and Records, cl 6 with Fees, Interest and Charges and cl 7 with Performance and Responsibility. Clause 7.1, the definition of Force Majeure Event in cl 12, and cl 7.2 were as follows:

“7.1 Citibank will not be liable for any failure to perform any obligation in respect of an Account if the performance is prevented, hindered or delayed by a Force Majeure Event. In such case the relevant obligations will be suspended for so long as the Force Majeure Event continues provided that this will not prevent the accrual of interest on a principal amount which would have been payable but for this provision.
12. … “Force Majeure Event” means any event which occurs due to reasons beyond the reasonable control of Citibank so as to prevent the due performance of an obligation. It includes … any requirement of governmental agency.
7.2 Citibank will not be liable for any failure to perform any of its obligations with respect to any Account if such performance would result in it being in breach of any law, regulation, requirement or provision of any government, government agency, banking or taxation authority in accordance with which it is required or expected to act.”

28 Clause 8 dealt with Set Off, cl 9 with Closure and cl 10 was headed General. Clause 10.5 provided:

“10.5 The service Citibank has agreed to provide is the opening, operation and closure of Accounts on these terms and conditions. Save as otherwise expressly agreed in writing by Citibank, there is no other service Citibank has agreed to provide to the Customer in relation to the Account.”

29 Clause 11 headed Jurisdiction provided:

“The rights and obligations of the Customer and Citibank in respect of an Account will be governed by, performed and construed in accordance with the laws of the State or Territory of Australia where the relevant branch of Citibank holds the Account.”

30 European Bank previously had an account with Citibank NA at its Overseas Banking Unit (OBU) in Sydney, under a separate contract (blue 1/71) and it also maintained a US dollar account with Citibank NA in New York (blue 1/64).

31 The history of the placement of the funds by European Bank with various banks in Sydney, including Citibank, is summarised in a table annexed to the affidavit of Sue Phelps, an executive vice president and director of European Bank (blue 1/26). On 18 October 1999 European Bank placed $7,593,532.48 with Citibank from 20 October using funds from account No 36125294 with Citibank NA OBU New York (blue 1/66).

32 The acknowledgment of this deposit was issued in error in the name of Citibank NA’s OBU in Sydney (1/82). The error was not noticed and on 17 November European Bank instructed Citibank to roll over the deposit (1/83). The new deposit was confirmed by Citibank NA on 19 November (1/84). On 9 December European Bank instructed Citibank to roll over this deposit (1/85).

33 On or shortly before 13 December Mr Moore, vice president of Citibank, telephoned European Bank at Port Vila to check on the intended repository of the funds. He was told that this was Citibank (1/68). Citibank NA OBU repaid the maturing deposit on 13 December (1/86) by transferring the funds to Citibank which acknowledged the new deposit the same day (1/87). The confirmation stated:

“This deposit or placement and its payment are governed by the laws in effect from time to time of the above mentioned state or the above mentioned territory and the Commonwealth of Australia.”

34 The context, including the address of Citibank in the confirmation, makes it clear that the “above mentioned state” was New South Wales.

35 The funds remained with Citibank in Sydney (1/26-7). The evidence includes the next rollover on 18 January 2000 (1/88-9), and the last before the attempted seizure on 20 November that year (1/3).

36 Sue Phelps said (1/16-7):

“When deposits are made in US dollars it is necessary for there to be an inter-bank transaction with a bank in the United States of America. All inter-bank movements in US dollars are done between banks in the United States … in order to facilitate inter-bank transactions banks set up correspondent banking relationships … European Bank had a correspondent banking relationship with Citibank Ltd in Sydney from 1996 until the end of 1999. Citibank Ltd had a correspondent banking relationship with Citibank NA in New York.” (emphasis supplied)

37 Mr Moore said (1/68):

“As the deposit was in US dollars it could not be held in bank accounts with Citibank Ltd or Citibank NA, Sydney branch in Australia. All US denominated deposits ultimately must be held in a bank account in the United States. Citibank Ltd has its US dollar bank accounts with Citibank NA in New York.” (emphasis supplied)

38 The evidence showed that the underlined statements were not literally accurate.

39 Although both Sue Phillips and Mr Moore stated that US dollar deposits must ultimately be held in a bank account in that currency in the United States this is not literally correct. European Bank had accounts in US dollars with Citibank and other banks in Sydney. It was not suggested that there was any legal obligation, under Australian law, which required Citibank to keep sufficient funds in a US dollar account in New York and as will appear [para 74] it did not do so.

40 Thus the necessity referred to was less than complete and was of a practical or business nature. A bank outside the United States which accepted a deposit in US dollars would expose itself to risks if it did not have banking arrangements in the United States which it could use to discharge its US dollar obligations outside the United States. There is, of course, nothing to prevent a bank from trading as a principal in foreign exchange and its derivatives, but it seems that in practice banks do not do this with their US dollar deposits.

41 Mr Moore described what occurred in New York when European Bank’s US dollar deposit was moved from Citibank NA OBU to Citibank on 13 December 1999 (1/68-9):

“On 13 December 1999 the deposit of $7,593,532.48 together with interest (an amount of $7,651,860.13) was rolled over and transferred from Citibank NA, Sydney branch, Offshore Banking Unit Account No 36125294 with Citibank NA, New York to Account No 3611-2688 in the name of Citibank Ltd, Offshore Banking Unit … The deposit was transferred directly from account No 36125294 to Account No 3611-2688 without being repaid to European Bank Ltd.”

42 A copy of the General Ledger Account 3913081365 in Citibank’s Australian books recording transactions in account 3611-2688 with Citibank NA, New York was in evidence (1/109 & foll). It records (1/110X) the remittance of $7,651,860.13 on 13 December 1999 from Citibank NA OBU’s account with Citibank NA to this account of Citibank with Citibank NA.

43 The evidence also includes statements for Account 3611-2688 which record (2/355) the receipt on 13 December 1999 of the $7,651,860.13.

44 The US warrant (1/98) recited that funds “now held by Citibank, Citigroup, or any of their affiliates and subsidiaries, which were credited on or about October 22 1999 to Account 36125294 on behalf of Citibank NA Sydney in the amount of $7,593,532.48 for European Bank Ltd of Vanuatu (Account 36121226) plus all accrued interest since the date of deposit” were subject to seizure and forfeiture under US law” (emphasis supplied). “Citibank, Citigroup and any of their affiliates and subsidiaries” served with the warrant were ordered to deliver the funds to the US Marshal. So far as the evidence reveals the warrant was only served on Citibank NA.

45 The subject matter of the warrant was funds “now held” which were deposited on or about 22 October 1999 in Account No 36125294 of Citibank NA, Sydney OBU with Citibank NA New York and accrued interest.

46 As at 20 November 2000 Citibank NA held no funds in that account for Citibank NA Sydney for its US dollar obligations to European Bank. The funds had been transferred on 13 December 1999 to Account 36112688 held by Citibank with Citibank NA New York.

47 The warrant was the second served on Citibank NA, and had been “revised” to overcome unknown difficulties with the first (1/97). Although the point was not argued, and does not directly arise, it is difficult to think of any reason why Citibank NA would pay $8,110,073.30 to the US Marshal in response to such a warrant when it no longer held any funds in the account referrable in any way to any obligation of Citibank NA Sydney OBU to European Bank. Moreover, although again the point was not argued, one would have thought that a banker’s implied obligation of confidence would have prevented Citibank NA from helping the US authorities frame a better warrant.

48 European Bank did not have any asset in New York when the US warrant was served. Citibank NA was not indebted to European Bank in New York or in Sydney. Although again the point was not argued it would appear that the revised warrant missed its target.

49 The party indebted to European Bank Ltd was Citibank and the debt was situated in Sydney. See New York Life Insurance Co v Public Trustee [1924] 2 Ch 101 CA; Arab Bank Ltd v Barclays Bank Ltd [1954] AC 495, 523, 531, 534; Societe Eram Shipping Co Ltd v Compagnie Internationale de Navigation [2003] 3 WLR 21 HL. The position appears to be the same under Federal and State law in New York. See Citibank NA v Wells Fargo Asia Limited 495 US 660 (1990), 467 per Kennedy J; Manas y Pineiro v Chase Manhattan Bank NA 434 NYS 2d 868 (1980), 871-2; Perez v Chase Manhattan Bank NA 463 NE 2nd 5 (1984), 8-9.

50 The debt owed to European Bank in Sydney, as an item of property, was governed by the lex situs. In the absence of express stipulation the law of New South Wales would have been the proper law of the contract but this was expressly provided for by cl 11 of the General Account Conditions [para 29], and the special condition of each deposit [para 32].

51 The discharge of a debt is governed by the proper law of the contract. See Adams v National Bank of Greece [1961] AC 255, 273, 274-5, 279-80; Barcelo v Electrolytic Zinc Co of Australasia Ltd (1932) 48 CLR 391, 425 per Dixon J; Wanganui Rangitikei Electric Power Board v The Australian Mutual Provident Society (1934) 50 CLR 581, 594-5 per Gavan Duffy CJ and Starke J, 601 per Dixon J. In the absence of some explicit provision it would be fanciful to think that the debt owed by Citibank to European Bank in Sydney could be discharged by a payment made in New York by someone other than the debtor pursuant to a warrant issued under a foreign penal law which is not enforceable internationally: Huntington v Attrill [1893] AC 150.

52 However Citibank contends, and Palmer J found, that under cl 7.1 service of the US warrant on Citibank NA excused Citibank from performing its obligation to repay European Bank in Sydney.

53 There is no doubt that the service of the US warrant was an act of a governmental agency beyond the reasonable control of Citibank. The critical question is whether that event “prevented” the “due performance” of the obligation of Citibank to European Bank.

54 The word “due” has various shades of meaning, as the trial Judge held, but in the present context it governs performance of a legal obligation by a bank to its customer. In such a context its meaning is clear. Due performance is performance when required, where required, and as required. Due performance of an obligation to pay a debt is payment of the debt when and where required.

55 Clause 7.1 refers to “any failure to perform any obligation in respect of an Account”. The obligation of Citibank to European Bank is an obligation in respect of an account. The judgment below, and the argument of Citibank, was based on the nature of US dollar deposits. In practice this US dollar deposit in Sydney would be repaid by a payment to European Bank’s correspondent bank in New York. The bank to bank payment in New York would operate as payment to European Bank in Sydney.

56 The mechanism which the parties contemplated would be used to make the repayment does not affect the situs of the debt, the proper law of the contract, or the fact that repayment to European Bank would occur in Sydney. The situation is not unusual. A Sydney debtor who delivers a cheque to his creditor makes a conditional payment which becomes unconditional when the creditor’s bank receives payment of the cheque from the debtor’s bank (Tilley v Official Receiver in Bankruptcy (1960) 103 CLR 529, 532-3 per Dixon CJ). The payment between banks completes a payment between their customers.

57 Payment between banks in Sydney is effected through the clearing house system when their accounts with the Reserve Bank are debited and credited. The collecting bank receives value at the Reserve Bank but the creditor receives value at the branch where he has his account.

58 If the deposit with Citibank was repaid by being credited to another US dollar account in Sydney held by European Bank, say with ANZ Bank, payment by Citibank to European Bank in Sydney would be effected by a payment in New York by Citibank’s correspondent bank to ANZ’s correspondent bank.

59 The suggestion that funds belonging to European Bank were being held in New York in Citibank’s account with Citibank NA because Citibank NA received payment in New York which completed European Bank’s deposit with Citibank in Sydney is contrary to basic principles of banking law.

60 Foley v Hill (1848) 11 HLC 28 [9 ER 1002] established that funds deposited with a bank become its legal and beneficial property. In return the customer acquires a debt payable by the bank in accordance with its contract. Lord Cottenham LC said (at 36-7) [1005-6]:

“Money, when paid into a bank, ceases altogether to be the money of the principal …; it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into the banker’s, is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker’s money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of banker’s in some places, or the principal and a small rate of interest, according to the custom of banker’s in other places. The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal, but he is of course answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.”

61 It is important to keep these principles in mind. People commonly speak of having money in the bank, but the use of this expression in judicial reasoning can lead to error. In Foskett v McKeown [2001] 1 AC 102, 127-8 Lord Millett said:

“We speak of money at the bank, and as money passing into and out of a bank account. But of course the account holder has no money at the bank. Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder. The bank gives value for it, and it is accordingly not usually possible to make the money itself the subject of an adverse claim. Instead a claimant normally sues the account holder rather than the bank and lays claim to the proceeds of the money in his hands. These consist of the debt or part of the debt due to him from the bank. We speak of tracing money into and out of the account, but there is no money in the account. There is merely a single debt of an amount equal to the final balance standing to the credit of the account holder. No money passes from paying bank to receiving bank or through the clearing system (where the money flows may be in the opposite direction). There are simply a series of debits and credits which are causally and transactionally linked.”

62 The payment by European Bank to Citibank to complete this deposit in Sydney was made in New York by Citibank NA transferring the funds to the account held with it by Citibank. The funds transferred in New York became the absolute legal and beneficial property of Citibank NA.

63 Clause 7.1 protects Citibank if performance of an obligation is prevented, hindered or delayed by a Force Majeure Event. The relevant obligation was to repay European Bank. Citibank would normally make the repayment by directing its correspondent bank in New York to transfer funds to the correspondent bank nominated by European Bank.

64 Citibank would not be excused from performance because its account with Citibank NA was overdrawn and it had no available line of credit (although this is unthinkable). Nor would Citibank be excused because Citibank NA stopped payment (also unthinkable). European Bank is not affected by the state of accounts between Citibank and Citibank NA in New York. The source of the funds used by Citibank to make the repayment is of no concern to European Bank. Regardless of what Citibank did with the funds European Bank caused to be transferred to it, in the words of Lord Cottenham LC in Foley v Hill, Citibank “is of course answerable for the amount, because [it] has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands” [para 60]. The state of some account held by Citibank in New York with Citibank NA could not excuse non-performance by Citibank of its obligation to European Bank in Sydney.

65 Clause 7.1 suspends performance of the obligations of Citibank. It protects the bank from Force Majeure Events which leave the debt intact but for the time being prevent, hinder or delay its repayment. However a compulsory payment by a bank pursuant to a valid order attaching a debt in one of its accounts operates as a complete discharge. Banks which have been validly garnisheed do not need the protection of clauses like cl 7.1.

66 The principles of private international law which apply to the garnishment of debts were considered by the House of Lords in Societe Eram Shipping Co Ltd v Compagnie Internationale de Navigation [2003] 3 WLR 21. An English judgment creditor attempted to attach a debt due to the judgment debtor in a bank account in Hong Kong by taking garnishee proceedings against a branch of the same bank in London. The attempt failed.

67 Lord Bingham said at 29:

“In a much-quoted passage … in Ellis v M’Henry (1871) LR 6 CP 228, 234 Bovill CJ … said:
‘… there is no doubt that a debt or liability arising in any country may be discharged by the laws of that country, and that such a discharge, if it extinguishes the debt or liability, and does not merely interfere with the remedies or course of procedure to enforce it, will be an effectual answer to the claim, not only in the Courts of this country, but in every other country … Secondly, as a general proposition, it is also true that the discharge of a debt or liability by the law of a country other than that in which the debt arises, does not relieve the debtor in any other country’
This statement remains good law. In Martin v Nadel(Dresdner Bank, Garnishees) [1906] 2 KB 26, where a garnishee order was sought in England against the London branch of a German bank to attach a balance owed to the judgment debtor by the Berlin branch of the bank, Vaughan Williams LJ said at p 29:
‘It appears to me to be clear that a garnishee order is of the nature of an execution, and is governed by lex fori; and by international law an execution which has been carried into effect in a foreign country under foreign law, and has taken away part of a man’s property, is not recognised as binding. There can be no doubt that under the rules of international law the Dresdner Bank could not set up, in an action in Berlin, the execution levied in this country in respect to this debt. If we consider the converse case it is clear, to my mind, that we should take that view of a similar transaction occurring abroad’.
Stirling LJ was of the same mind at p 31:
‘On the facts of this case the debt of the bank to Nadel would be properly recoverable in Germany. That being so, it must be taken that the order of this Court would not protect the bank from being called upon to pay the debt a second time’.”

68 Lord Bingham concluded at 33:

“A garnishee or third party debt order is a proprietary remedy which operates by way of attachment against the property of the judgment debtor. The property of the judgment debtor so attached is the chose in action represented by the debt of the third party or garnishee to the judgment debtor. On the making of the interim or nisi order that chose in action is … bound, frozen, attached or charged in the hands of the third party or garnishee … the third party is not entitled to deal with that chose in action by making payment to the judgment debtor or any other party at his request. When a final or absolute order is made the third party or garnishee is obliged … to make payment to the judgment creditor and not to the judgment debtor, but the debt of the third party to the judgment debtor is discharged pro tanto.”

69 Whatever effect the warrant might have under United States law, it is not entitled to recognition in this country and cannot effect the recovery of this debt in Sydney.

70 Because the United States warrant could not effect a debt in Sydney governed by Australian law payment by Citibank NA pursuant to the warrant does not protect Citibank and cl 7.1 cannot protect it either.

71 If the warrant validly seized the debt to European Bank payment under the warrant would have discharged the debt, and then there could be no question, in accordance with cl 7.1, of “suspending” the obligation of Citibank. Its debt would have been discharged and European Bank would have to pursue any claim against the United States Marshal.

72 The parties contemplated that repayment would be effected pursuant to a telegraphic transfer from Sydney causing an interbank transfer in New York. Under the general law a force majeure event which prevents performance of a contract in the manner contemplated by the parties does not frustrate the contract if other methods of performance remain available as the cases arising from the closure of the Suez Canal demonstrate: Tsakiroglou & Co Ltd v Noblee Thorl Gmbh [1962] AC 93.

73 Payment could have been effected to European Bank in Sydney by delivering a banker’s draft drawn on a New York bank (although this would have been inefficient). Delivery of the draft in Sydney would have operated as conditional payment subject to it being honoured on presentation (Tilley v Official Receiver in Bankruptcy above). Citibank was not bound to use Citibank NA as its correspondent bank, to use any particular account with Citibank NA, or even to keep sufficient funds in a US dollar account in New York to meet this obligation.

74 The statements for Citibank’s Account 36112688 with Citibank NA in evidence run from 1 October 1999 to 3 January 2000 (1/162 & foll). On 13 December 1999, when the funds were transferred (2/355), the account was already in credit but by 3 January 2000 the credit balance was only $173,013.38 (2/381). For a short time on 16 December 1999 the account was overdrawn $37,799,981.84 (2/362), and it was overdrawn at other times.

75 The existence of the overdraft on 16 December, after the payment on 13 December, would prevent any tracing of the funds of European Bank into that account after that date, even if that were otherwise possible.

76 The Court asked counsel whether there were any authorities in the United States which threw light on the genesis and purpose of cl 7.1. Counsel were unable to assist. After reserving judgment research in the Corpus Juris Secundum vol 9 “Banks and Banking” brought to light the decision in Citibank NA v Wells Fargo Asia 495 US 660 (1990) and the 1991 decision of the Second Circuit on remand in the same case: 936 F 2d 723. The decisions are relevant.

77 The plaintiff was a subsidiary of Wells Fargo NA. On 10 June 1983 it made a term deposit of $2 million with the Manila branch of Citibank NA. Later the Philippines imposed exchange controls which prevented repayment from Citibank’s Philippine assets. It refused to repay but continued to credit interest. The plaintiff sued in New York.

78 The Supreme Court said that “in the ordinary course a party who makes a deposit with a foreign branch of a bank can demand repayment of the deposit only at that branch” (see also Arab Bank Ltd v Barclays Bank Ltd [1954] AC 495, 523, 531, 534) but this rule had been altered by the confirmation slips which showed that repayment was to occur through wire transfers by the correspondent banks in New York (495 US at 689). The Supreme Court was not satisfied with the decision of the Second Circuit on this issue and remanded.

79 On remand the Circuit noted (936 F 2d 723, 726) that under New York law the parent was liable for the obligations of its foreign branch. New York law governed and the defendant was not excused from making repayment (727). The debt could be recovered in New York because the contract did not forbid recovery there (727-8).

80 It may reasonably be supposed that the General Account Conditions, which had not been used in Manila in 1983, owed something to this litigation as did the incorporation of Citibank in Australia. Clauses 7 and 11 and the incorporation of the Australian subsidiary addressed the problems revealed in that litigation. Both the parent and the subsidiary will be protected from the enforcement of obligations in respect of Sydney accounts if performance is prevented or suspended under Australian law.

81 The cases against Chase Manhattan [para 49] where customers failed in New York to recover their US dollar deposits in Cuba showed that Citibank NA did not need special protection against liability to its customers following the expropriation or seizure of their foreign deposits. See also Arab Bank Ltd v Barclays Bank Ltd [1954] AC 495. Clause 7.1 has no application where the debt has been discharged by a valid seizure or expropriation.

82 A decision in favour of Citibank would recognise an exorbitant jurisdiction in the United States to attach US dollar deposits outside that country and would permit the enforcement of US penal and tax laws against the depositors. However the established principles of banking law and private international law require a different result and the appeal must be allowed.

83 The following orders should be made:

1. Appeal allowed with costs.

2. Orders 2 and 7 made by Palmer J on 4 April 2003 set aside.

3. In lieu thereof order that judgment be entered for the cross-claimant European Bank Ltd for the debt sued for together with interest at a rate or rates appropriate for a debt in United States dollars.

4. Order that interest accrue on the judgment at a rate appropriate for a debt in United States dollars.

5. The cross-defendant Citibank Ltd is to pay the cross-claimant’s costs of the proceedings before Palmer J.

6. The parties are directed to bring in short minutes of the judgment to be entered pursuant to Order 3 and the order to be made pursuant to Order 4 before Handley JA on 8 April 2004 at 9.30 am unless agreed short minutes have previously been filed with the Registrar of this Court.

84 SANTOW JA: I have had the benefit of reading in draft the judgment of Handley JA and the further observations of Spigelman CJ. I agree with both Spigelman CJ and Handley JA.

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Last Modified: 03/26/2004