The impact of cybercrime on international trading operations was illustrated by a dispute which recently came before the Commercial Court on appeal from a Gafta Appeal Board.
As arbitration is confidential the judgment is reported only as K v A. The dispute concerned a contract between A as seller and K as buyer of 5,000 mt of Romanian sunflower meal on Gafta terms, providing for payment in cash to the sellers' bank upon presentation of scanned/fax copies of original documents, including a commercial invoice. The goods were shipped and A’s invoice was emailed to the intermediary broker (V) to be forwarded to K. The invoice contained details of A’s account at Citibank, New York, to which US$1,167,900 was to be paid. V’s email records showed that A's email was forwarded to K with the invoice attached. However, although K received an email which appeared to come from V, the invoice attached to it contained details of a different account in the name of A at Citibank’s London branch.
Identifying the fraudster
There wasn’t enough evidence to prove who was responsible, but it was clear that one or more email accounts had been hacked by a fraudster so the invoice received by K was fraudulent and designed to divert the funds to the fraudster's account. K instructed its bank to pay the funds to the fraudulent account, but the fraud was discovered before the funds left Citibank. A transfer was made into A's correct account, but there was a shortfall of approximately US$161,000, apparently due to the funds being converted into sterling and then back into dollars. The issue for the Gafta tribunal was whether A was entitled to recover the shortfall from K, even though the initial misdirection of the funds was due to fraud and not K’s fault.
Allocation of risk
The board of appeal proceeded on the basis that as it couldn’t confirm how the fraud occurred, the matter should be decided on the basis of the allocation of risk under the contract. The contract required K to transfer the price into the account nominated by A, which it failed to do. Accordingly, the balance of the price was still payable by K to A. The award was challenged by K, who argued that the relevant obligation was only to transfer the funds to A's bank (Citibank) and not to ensure that they were credited to A’s account.
The court rejected this argument, pointing out that it is commercially impossible to transfer funds to a customer’s bank, without identifying the beneficiary and the destination account. A payment to the bank which was accompanied by incorrect account details could not be treated as a payment to A.