Bank Liability in Foreign Exchange Transactions: The Reyes v. Far East Bank Standard

The Supreme Court's 2001 ruling in Reyes v. Far East Bank and Trust Company (G.R. No. 118492) clarifies an important question in Philippine banking law: what standard of care applies when a bank issues a foreign exchange demand draft? The case arose from an embarrassing incident at an international conference in Sydney, where a couple was publicly humiliated when their bank draft was dishonored. The Court's decision draws a critical distinction between a bank's fiduciary duty to depositors and its role as a seller of financial instruments.

The Facts of the Case

In 1988, the Philippine Racing Club, Inc. (PRCI) needed to remit AU$1,610.00 to pay registration fees for four delegates to the 20th Asian Racing Conference in Sydney. PRCI's chief cashier applied for a foreign exchange demand draft at Far East Bank's Buendia Branch. The bank's assistant cashier explained that since the bank had no Australian dollar account in Sydney, it would draw the draft against Westpac Bank in Sydney and have Westpac reimburse itself from the bank's U.S. dollar account at Westpac's New York branch—a long-standing arrangement used since the 1960s.

The bank issued the draft on July 28, 1988. However, upon presentment on August 10, Westpac-Sydney dishonored it, stating "No account held with Westpac." Despite the bank's efforts to resolve the matter, the draft was dishonored a second time on September 14. When the delegates arrived in Sydney days later, they were publicly humiliated at the registration desk when told their fees had not been paid.

The Issue

The central question was whether the bank should be held liable for damages arising from the dishonor of the foreign exchange demand draft. Specifically, the petitioners argued that the bank should have exercised a higher degree of diligence than that of an ordinary prudent person, given the fiduciary nature of banking relationships.

The Ruling: Two Standards of Care

The Supreme Court denied the petition and affirmed the Court of Appeals' decision, holding that the bank was not negligent. In doing so, the Court drew a crucial distinction between two degrees of diligence:

First, citing Philippine Bank of Commerce v. Court of Appeals (269 SCRA 695, 1997), the Court reaffirmed that banks owe depositors "the highest degree of care" in handling deposit accounts. This heightened standard applies where the bank acts in its fiduciary capacity as a depositary.

Second, the Court held that this higher standard does not extend to commercial transactions outside the fiduciary relationship. In this case, the relationship between the bank and PRCI was that of buyer and seller—the bank sold a foreign exchange demand draft, and PRCI bought it. The transaction did not involve handling the petitioners' deposits.

Why the Bank Was Not Negligent

The Court found that the dishonor was caused by an employee of Westpac-Sydney who mistakenly decoded the bank's SWIFT cable message as "MT799" (a letter of credit format) instead of "MT199" (a demand draft format). The Court noted that the number "1" in the message could be distinctly seen and could not reasonably be construed as "7."

The bank had done everything within its power: it advised Westpac-New York to honor the reimbursement claim, re-confirmed the authority to debit its dollar account after the first dishonor, and sent additional cable messages inquiring why the draft was not honored. The erroneous decoding by a foreign bank's employee was not foreseeable.

Practical Takeaways

• Banks face two different standards of care. The highest degree of care applies to fiduciary relationships with depositors. For ordinary commercial transactions like selling foreign exchange drafts, the standard is that of a good father of a family—ordinary diligence under the circumstances.

• The buyer-seller relationship matters. When a bank sells a financial instrument, it acts as a seller, not as a fiduciary. Clients cannot automatically invoke the higher standard of care reserved for deposit relationships.

• Documentation is critical. The bank's thorough documentation of its cable messages and reimbursement instructions was key to proving it exercised due diligence.

• Foreign correspondent bank errors may not be the issuing bank's fault. Where a foreign bank misreads clear instructions, the issuing bank may not be held liable if it acted reasonably.

• Parties are bound by agreed arrangements. Clients who agree to a particular remittance procedure cannot later deny or question that arrangement.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.