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The originator may cancel or amend its payment order, but only if notice of the amendment or cancellation is received in a time and in a manner that affords the bank a reasonable opportunity to act on it. Once the payment order has been executed by the originator’s bank, however, it cannot be canceled or amended except with the agreement of the bank.
If the bank accepts the originator’s payment order by executing the order, the bank incurs the duty to comply with the instructions contained in the order. If it breaches that duty, it becomes liable to the originator, but its liability is limited to
interest and interest losses, expenses in the funds transfer, and incidental expenses.
In addition to the bank’s acceptance giving rise to a duty of the bank to comply with the originator’s instructions, the bank’s acceptance of the originator’s payment order gives rise to an obligation of the originator to pay the originator’s bank the amount of the originator’s payment order. Important: The obligation of the originator to pay its bank is excused, however, if the funds transfer is not completed by the acceptance by the beneficiary’s bank of a payment order instructing payment to the beneficiary of the originator’s order.
The rules summarized in the preceding paragraphs are discussed in the following sections with an analysis of the resulting risks to the intended funds-transfer transaction.
Nonacceptance of Payment Orders
The receiving bank has both a passive right to take no action at all upon receiving a payment order and an affirmative right to reject the order by notice to the originator. By giving notice of rejection, the bank avoids incurring an interest obligation that it may otherwise incur for its failure to execute the order.
Bank’s Passive Bight Not to Execute Orders. U.C.C. Article 4A is very clear about the right of a bank to decline to execute a payment order. Unless the bank has become obligated to accept the order by an express agreement (such as a wire transfer agreement with the company) to do so, the receiving bank does not have
any duty to accept a payment order or, before acceptance, to take any action, or refrain from taking any action, with respect to the order.1
The payment order of the sender is treated under Article 4A as a request by the sender to the receiving bank to execute or pay the order and that request can be accepted or rejected by the receiving bank.2
Originator and Its Bank
Interest Penalty If the Bank Fails to Act or Notify. If the receiving bank fails to take any action upon receipt of the payment order, however, the bank may incur an interest obligation to the originator. The interest obligation is incurred when the bank fails to execute the order, the sender has not received notice of rejection of the order on the execution date, and on the execution date there is a withdrawable credit balance in an authorized account of the sender sufficient to cover the order.3 The execution date is the date on which the receiving bank may properly execute the order and is normally the day on which the order is received.4 In addition, the interest obligation is incurred only if the account is not an interest-bearing account, and the period for which the interest is payable cannot exceed five funds-transfer business days after the execution date—and if the originator learns of the bank’s failure to execute the order or receives notice of it prior to the expiration of the five-day period, the period terminates on that day.5 The interest is payable at the Federal Funds Rate of the Federal Reserve Bank of New York unless the parties have agreed to a different rate of interest.6
Bank’s Right to Reject Orders: Eliminate Interest Obligation
In addition to the passive right to ignore or do nothing at all upon its receipt of a payment order, a receiving bank has the right affirmatively to reject the payment order.7 By exercising that right, the bank avoids the liability that it may otherwise have had to pay interest for its failure to execute the order.8
The notice of rejection may be sent orally, electronically, or in writing and need not use any particular words. The rejection is effective when the notice is given if the transmission is by a reasonable means. The originator and the originator’s bank may agree upon the means of transmission. When they do so, the agreed-upon means is deemed reasonable, but note that the use of other means is not deemed unreasonable—unless a significant delay in receipt of the notice results.9
Rejected Funds-Transfer Request Risk Mitigation. It would be desirable, from the company’s point of view, if its wire transfer agreement with the bank required the bank to give reasonably timely notice when the bank rejects a payment order. The bank, however, may be understandably reluctant to agree to be liable for significant damages for its failure to give such notice. In any case, the company should have procedures in place to ensure that it monitors its time-sensitive payment orders. If the company has an obligation to pay a certain amount by wire transfer on a certain date, it should not send the order to the bank and “go out to lunch for the rest of the day.”