1. Article 4A governs a method of payment in which the person making
payment (the "originator") directly transmits an instruction to a bank either
to make payment to the person receiving payment (the "beneficiary") or to
instruct some other bank to make payment to the beneficiary. The payment from
the originator to the beneficiary occurs when the bank that is to pay the
beneficiary becomes obligated to pay the beneficiary. There are two basic
definitions: "Payment order" stated in section 4A-103 and "funds transfer"
stated in section 4A-104. These definitions, other related definitions, and
the scope of article 4A can best be understood in the context of specific
fact situations. Consider the following cases:
Case #1. X, which has an account in Bank A, instructs that bank to pay $1,000,000 to Y's account in Bank A. Bank A carries out X's instruction by making a credit
of $1,000,000 to Y's account and notifying Y that the credit is available
for immediate withdrawal. The instruction by X to Bank A is a "payment order"
which was issued when it was sent to Bank A. Section 4A-103(a)(1) and (c).
X is the "sender" of the payment order and Bank A is the "receiving bank".
Section 4A-103(a)(4) and (a)(5). Y is the "beneficiary" of the payment order
and Bank A is the "beneficiary's bank". Section 4A-103(a)(2) and (a)(3). When
Bank A notified Y of receipt of the payment order, Bank A "accepted" the payment
order. Section 4A-209(b)(1). When Bank A accepted the order it incurred an
obligation to Y to pay the amount of the order. Section 4A-404(a). When Bank
A accepted X's order, X incurred an obligation to pay Bank A the amount of
the order. Section 4A-402(b). Payment from X to Bank A would normally be made
by a debit to X's account in Bank A. Section 4A-403(a)(3). At the time Bank
A incurred the obligation to pay Y, payment of $1,000,000 by X to Y was also
made. Section 4A-406(a). Bank A paid Y when it gave notice to Y of a withdrawable
credit of $1,000,000 to Y's account. Section 4A-405(a). The overall transaction,
which comprises the acts of X and Bank A, in which the payment by X to Y is
accomplished is referred to as the "funds transfer". Section 4A-104(a). In
this case only one payment order was involved in the funds transfer. A one-payment-order
funds transfer is usually referred to as a "book transfer" because the payment
is accomplished by the receiving bank's debiting the account of the sender
and crediting the account of the beneficiary in the same bank. X, in addition
to being the sender of the payment order to Bank A, is the "originator" of
the funds transfer. Section 4A-104(c). Bank A is the "originator's bank" in
the funds transfer as well as the beneficiary's bank. Section 4A-104(d).
Case #2. Assume the same facts as in Case #1 except that X instructs Bank A to
pay $1,000,000 to Y's account in Bank B. With respect to this payment order,
X is the sender, Y is the beneficiary, and Bank A is the receiving bank. Bank
A carries out X's order by instructing Bank B to pay $1,000,000 to Y's account.
This instruction is a payment order in which Bank A is the sender, Bank B
is the receiving bank, and Y is the beneficiary. When Bank A issued its payment
order to Bank B, Bank A "executed" X's order. Section 4A-301(a). In the funds
transfer, X is the originator, Bank A is the originator's bank, and Bank B
is the beneficiary's bank. When Bank A executed X's order, X incurred an obligation
to pay Bank A the amount of the order. Section 4A-402(c). When Bank B accepts
the payment order issued to it by Bank A, Bank B incurs an obligation to Y
to pay the amount of the order (section 4A-404(a)) and Bank A incurs an obligation
to pay Bank B. Section 4A-402(b). Acceptance by Bank B also results in payment
of $1,000,000 by X to Y. Section 4A-406(a). In this case two payment orders
are involved in the funds transfer.
Case #3. Assume the same facts as in Case #2 except that Bank A does not execute X's payment order by issuing a payment order to Bank B. One bank will not
normally act to carry out a funds transfer for another bank unless there is
a preexisting arrangement between the banks for transmittal of payment orders
and settlement of accounts. For example, if Bank B is a foreign bank with
which Bank A has no relationship, Bank A can utilize a bank that is a correspondent
of both Bank A and Bank B. Assume Bank A issues a payment order to Bank C
to pay $1,000,000 to Y's account in Bank B. With respect to this order, Bank
A is the sender, Bank C is the receiving bank, and Y is the beneficiary. Bank
C will execute the payment order of Bank A by issuing a payment order to Bank
B to pay $1,000,000 to Y's account in Bank B. With respect to Bank C's payment
order, Bank C is the sender, Bank B is the receiving bank, and Y is the beneficiary.
Payment of $1,000,000 by X to Y occurs when Bank B accepts the payment order
issued to it by Bank C. In this case the funds transfer involves three payment
orders. In the funds transfer, X is the originator, Bank A is the originator's
bank, Bank B is the beneficiary's bank, and Bank C is an "intermediary bank".
Section 4A-104(b). In some cases there may be more than one intermediary bank,
and in those cases each intermediary bank is treated like Bank C in Case #3.
As the three cases demonstrate, a payment under article 4A involves
an overall transaction, the funds transfer, in which the originator, X, is
making payment to the beneficiary, Y, but the funds transfer may encompass
a series of payment orders that are issued in order to effect the payment
initiated by the originator's payment order.
In some cases the originator and the beneficiary may be the same person.
This will occur, for example, when a corporation orders a bank to transfer
funds from an account of the corporation in that bank to another account of
the corporation in that bank or in some other bank. In some funds transfers
the first bank to issue a payment order is a bank that is executing a payment
order of a customer that is not a bank. In this case the customer is the originator.
In other cases, the first bank to issue a payment order is not acting for
a customer, but is making a payment for its own account. In that event the
first bank to issue a payment order is the originator as well as the originator's
2. "Payment order" is defined in section 4A-103(a)(1) as an instruction
to a bank to pay, or to cause another bank to pay, a fixed or determinable
amount of money. The bank to which the instruction is addressed is known as
the "receiving bank". Section 4A-103(a)(4). "Bank" is defined in section 4A-105(a)(2).
The effect of this definition is to limit article 4A to payments made through
the banking system. A transfer of funds made by an entity outside the banking
system is excluded. A transfer of funds through an entity other than a bank
is usually a consumer transaction involving relatively small amounts of money
and a single contract carried out by transfers of cash or a cash equivalent
such as a check. Typically, the transferor delivers cash or a check to the
company making the transfer, which agrees to pay a like amount to a person
designated by the transferor. Transactions covered by article 4A typically
involve very large amounts of money in which several transactions involving
several banks may be necessary to carry out the payment. Payments are normally
made by debits or credits to bank accounts. Originators and beneficiaries
are almost always business organizations and the transfers are usually made
to pay obligations. Moreover, these transactions are frequently done on the
basis of very short-term credit granted by the receiving bank to the sender
of the payment order. Wholesale wire transfers involve policy questions that
are distinct from those involved in consumer-based transactions by nonbanks.
3. Further limitations on the scope of article 4A are found in the three
requirements found in subparagraphs (i), (ii), and (iii) of section 4A-103(a)(1).
Subparagraph (i) states that the instruction to pay is a payment order only
if it "does not state a condition to payment to the beneficiary other than
time of payment". An instruction to pay a beneficiary sometimes is subject
to a requirement that the beneficiary perform some act such as delivery of
documents. For example, a New York bank may have issued a letter of credit
in favor of X, a California seller of goods to be shipped to the New York
bank's customer in New York. The terms of the letter of credit provide for
payment to X if documents are presented to prove shipment of the goods. Instead
of providing for presentment of the documents to the New York bank, the letter
of credit states that they may be presented to a California bank that acts
as an agent for payment. The New York bank sends an instruction to the California
bank to pay X upon presentation of the required documents. The instruction
is not covered by article 4A because payment to the beneficiary is conditional
upon receipt of shipping documents. The function of banks in a funds transfer
under article 4A is comparable to the role of banks in the collection and
payment of checks in that it is essentially mechanical in nature. The low
price and high speed that characterize funds transfers reflect this fact.
Conditions to payment by the California bank other than time of payment impose
responsibilities on that bank that go beyond those in article 4A funds transfers.
Although the payment by the New York bank to X under the letter of credit
is not covered by article 4A, if X is paid by the California bank, payment
of the obligation of the New York bank to reimburse the California bank could
be made by an article 4A funds transfer. In such a case there is a distinction
between the payment by the New York bank to X under the letter of credit and
the payment by the New York bank to the California bank. For example, if the
New York bank pays its reimbursement obligation to the California bank by
a Fedwire naming the California bank as beneficiary (see comment 1 to section
4A-107), payment is made to the California bank rather than to X. That payment
is governed by article 4A and it could be made either before or after payment
by the California bank to X. The payment by the New York bank to X under the
letter of credit is not governed by article 4A and it occurs when the California
bank, as agent of the New York bank, pays X. No payment order was involved
in that transaction. In this example, if the New York bank had erroneously
sent an instruction to the California bank unconditionally instructing payment
to X, the instruction would have been an article 4A payment order. If the
payment order was accepted (section 4A-209(b)) by the California bank, a payment
by the New York bank to X would have resulted (section 4A-406(a)). But article
4A would not prevent recovery of funds from X on the basis that X was not
entitled to retain the funds under the law of mistake and restitution, letter
of credit law, or other applicable law.
4. Transfers of funds made through the banking system are commonly referred
to as either "credit" transfers or "debit" transfers. In a credit transfer
the instruction to pay is given by the person making payment. In a debit transfer
the instruction to pay is given by the person receiving payment. The purpose
of subparagraph (ii) of subsection (a)(1) of section 4A-103 is to include
credit transfers in article 4A and to exclude debit transfers. All of the
instructions to pay in the three cases described in comment 1 fall within
subparagraph (ii). Take Case #2 as an example. With respect to X's instruction
given to Bank A, Bank A will be reimbursed by debiting X's account or otherwise
receiving payment from X. With respect to Bank A's instruction to Bank B,
Bank B will be reimbursed by receiving payment from Bank A. In a debit transfer,
a creditor, pursuant to authority from the debtor, is enabled to draw on the
debtor's bank account by issuing an instruction to pay to the debtor's bank.
If the debtor's bank pays, it will be reimbursed by the debtor rather than
by the person giving the instruction. For example, the holder of an insurance
policy may pay premiums by authorizing the insurance company to order the
policyholder's bank to pay the insurance company. The order to pay may be
in the form of a draft covered by article 3, or it might be an instruction
to pay that is not an instrument under that article. The bank receives reimbursement
by debiting the policyholder's account. Or, a subsidiary corporation may make
payments to its parent by authorizing the parent to order the subsidiary's
bank to pay the parent from the subsidiary's account. These transactions are
not covered by article 4A because subparagraph (2) is not satisfied. Article
4A is limited to transactions in which the account to be debited by the receiving
bank is that of the person in whose name the instruction is given.
If the beneficiary of a funds transfer is the originator of the transfer,
the transfer is governed by article 4A if it is a credit transfer in form.
If it is in the form of a debit transfer it is not governed by article 4A.
For example, Corporation has accounts in Bank A and Bank B. Corporation instructs
Bank A to pay to Corporation's account in Bank B. The funds transfer is governed
by article 4A. Sometimes, Corporation will authorize Bank B to draw on Corporation's
account in Bank A for the purpose of transferring funds into Corporation's
account in Bank B. If Corporation also makes an agreement with Bank A under
which Bank A is authorized to follow instructions of Bank B, as agent of Corporation,
to transfer funds from Customer's account in Bank A, the instruction of Bank
B is a payment order of Customer and is governed by article 4A. This kind
of transaction is known in the wire-transfer business as a "drawdown transfer".
If Corporation does not make such an agreement with Bank A and Bank B instructs
Bank A to make the transfer, the order is in form a debit transfer and is
not governed by article 4A. These debit transfers are normally automated clearinghouse
(ACH) transactions in which Bank A relies on Bank B's warranties pursuant
to ACH rules, including the warranty that the transfer is authorized.
5. The principal effect of subparagraph (iii) of subsection (a) of section
4A-103 is to exclude from article 4A payments made by check or credit card.
In those cases the instruction of the debtor to the bank on which the check
is drawn or to which the credit card slip is to be presented is contained
in the check or credit card slip signed by the debtor. The instruction is
not transmitted by the debtor directly to the debtor's bank. Rather, the instruction
is delivered or otherwise transmitted by the debtor to the creditor who then
presents it to the bank either directly or through bank collection channels.
These payments are governed by articles 3 and 4 and federal law. There are,
however, limited instances in which the paper on which a check is printed
can be used as the means of transmitting a payment order that is covered by
article 4A. Assume that Originator instructs Originator's bank to pay $10,000
to the account of Beneficiary in Beneficiary's bank. Since the amount of Originator's
payment order is small, if Originator's bank and Beneficiary's bank do not
have an account relationship, Originator's bank may execute Originator's order
by issuing a teller's check payable to Beneficiary's bank for $10,000 along
with instructions to credit Beneficiary's account in that amount. The instruction
to Beneficiary's bank to credit Beneficiary's account is a payment order.
The check is the means by which Originator's bank pays its obligation as sender
of the payment order. The instruction of Originator's bank to Beneficiary's
bank might be given in a letter accompanying the check or it may be written
on the check itself. In either case the instruction to Beneficiary's bank
is a payment order but the check itself (which is an order to pay addressed
to the drawee rather than to Beneficiary's bank) is an instrument under article
3 and is not a payment order. The check can be both the means by which Originator's
bank pays its obligation under section 4A-402(b) to Beneficiary's bank and
the means by which the instruction to Beneficiary's bank is transmitted.
6. Most payments covered by article 4A are commonly referred to as wire
transfers and usually involve some kind of electronic transmission, but the
applicability of article 4A does not depend upon the means used to transmit
the instruction of the sender. Transmission may be by letter or other written
communication, oral communication, or electronic communication. An oral communication
is normally given by telephone. Frequently the message is recorded by the
receiving bank to provide evidence of the transaction, but apart from problems
of proof there is no need to record the oral instruction. Transmission of
an instruction may be a direct communication between the sender and the receiving
bank or through an intermediary such as an agent of the sender, a communication
system such as international cable, or a funds-transfer system such as New
York Clearing House Interbank Payments Systems (CHIPS), SWIFT, or an automated