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: