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CASE 6-7Libyan Arab Foreign Bank v. Bankers Trust Company

England, High Court of Justice, Queen's Bench Division, Commercial Court, 1987.Lloyd's Reports, vol. 1988, pt. 1, p. 259 (1988);International Legal Materials, vol. 26, p. 1600 (1987).

MAP 6.7The United States, the United Kingdom, and Libya (1988)

• On January 8, 1986, the Libyan Arab Foreign Bank (Libyan Bank)164had over $131.5 million deposited in a call account with the London branch of Bankers Trust Company (Bankers Trust), a New York corporation (and $161.4 million in a demand account in New York). On that day, effective 4:10P.M., the president of the United States froze all Libyan assets in the United States. According to New York law, but not according to English law, that included the Libyan Bank's London deposit. The Libyan Bank sued Bankers Trust in the United Kingdom for, among other claims, recovery of its deposit. Bankers Trust argued that it was not liable because (1) New York law governed the deposit arrangement and (2) New York law prohibited it from making transfers out of the London account. In particular, Bankers Trust points to an agreement between the parties made in December 1980 (the managed account arrangement) that provided for the New York office of Bankers Trust to oversee the Libyan bank's accounts in both New York and London as support for its argument that New York law applied.

Opinion by Justice Staughton

As a general rule the contract between a bank and its customer is governed by the law of the place where the account is kept, in the absence of agreement to the contrary.... [T]here was no challenge to that as a general rule....

That rule accords with the principle, to be found in the judgment of Lord Justice Atkin inN. Joachimson v. Swiss Bank Corporation,165and other authorities, that a bank's promise to repay is to repay at the branch of the bank where the account is kept.

In the age of the computer it may not be strictly accurate to speak of the branch where the account is kept. Banks no longer have books in which they write entries; they have terminals by which they give instructions; and the computer itself with its magnetic tape, floppy disc or some other device may be physically located elsewhere. Nevertheless it should not be difficult to decide where an account is kept for this purpose; and is not in the present case. The actual entries on the London account were, as I understand it, made in London, albeit on instructions from New York after December 1980. At all events I have no doubt that the London account was at all material times "kept" in London.

164The Libyan Arab Foreign Bank was a Libyan corporation wholly owned by the Central Bank of Libya. It carried on an offshore banking business and did not engage in domestic banking in Libya.

165Law Reports, King's Bench, vol. 1921, pt. 3, p. 110 at p. 127 (1921).

Mr. Sumption [the attorney representing Bankers Trust] was prepared to accept that the proper law governing the London account was English law from 1973 to December 1980. But he submitted that a fundamental change then took place, when the managed account arrangement was made. I agree that this was an important change, and demands reconsideration of the proper law from that date. That the proper law of a contract may be altered appears fromJames Mill & Partners, Ltd. v. Whitworth Street Estates, Ltd.166

Mr. Cresswell, for the Libyan Bank, submits that there then arose two separate contracts, of which one related to the London account and remained governed by English law; alternatively he says that there was one contract, again governed by English law; or that it had two proper laws, one English law and the other the law of New York. Mr. Sumption submits that there was from December 1980 one contract only, governed by New York law.

Each side has relied on a number of points in support of its contentions. I do not set them out, for they are fairly evenly balanced, and in my view do little or nothing to diminish the importance of the general rule, that the proper law of a bank's contract is the law of the place where the account is kept. Political risk must commonly be an important factor to those who deposit large sums of money with banks; the popularity of Swiss bank accounts with some people is due to the banking laws of the Cantons of Switzerland. And I have already found on the evidence of Bankers Trust, that the Iranian crisis was at the back of everyone's mind in 1980. Whatever considerations did or did not influence the parties to this case, I believe that banks generally and their customers normally intend the local law to apply. So I would require solid grounds for holding that the general rule does not apply, and there do not appear to me to be such grounds in this case.

I have, then, to choose between the first and third of Mr. Cresswell's argumentstwo separate contracts or one contract with two proper laws. It would be unfortunate if the result of this case depended on the seemingly unimportant point whether there was one contract or two. But if it matters, I find the notion of two separate contracts artificial and unattractive....

Mr. Sumption argues that difficulty and uncertainty would arise if one part of the contract was governed by English law and another by New York law. I do not see that this would be so, or that any difficulty which arose would be insuperable.

There is high authority that branches of banks should be treated as separate from the head office. See for exampleR. v. Grossman,167where Lord Denning, Master of the Rolls, said:

• The branch of Barclays Bank in Douglas, Isle of Man, should be considered as a different entity separate from the head office in London.

That notion, of course, has its limits. A judgment lawfully obtained in respect of the obligation of a branch would be enforceable in England against the assets of the head office. (That may not always be the case in America.) As with the theory that the premises of a diplomatic mission do not form part of the territory of the receiving state, I would say that it istrue for some purposesthat a branch office of a bank is treated as a separate entity from the head office.

This reasoning would support Mr. Cresswell's argument that there were two separate contracts, in respect of the London account and the New York account. It also lends some support to the conclusion that if, as is my preferred solution, there was only one contract, it was governed in part by English law and in part by New York law. I hold that the rights and obligations of the parties in respect of the London account were governed by English law.

The High Court allowed the Libyan Bank to recover the $131.5 million on deposit in the London branch of Bankers Trust as well as $161.4 million of the funds in the New York office because, according to the managed account arrangement, Bankers Trust was supposed to have transferred that sum from its New York office to its London branch on the morning prior to the presidential freeze, and it had no excuse for not having done so.

Casepoint

(1) The general rule is that a bank contract is governed by the law of the place where the account is kept. (2) For some purposes, a branch is treated as a separate entity from its home office. This rule has its limitsa home office is liable for the obligations of its branch.