Evra Corp. v. Swiss Bank Corp.
673 F.2d 951 (1982)
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Rule of Law:
A financial intermediary is not liable for consequential damages resulting from its negligent failure to complete an electronic funds transfer unless it was on notice of the special circumstances and particular risks that would give rise to such damages.
Facts:
- In 1972, Hyman-Michaels Company chartered a ship, the Pandora, at low market rates under a two-year contract.
- The charter agreement required Hyman-Michaels to make semi-monthly payments in advance to the ship owner's account in a Geneva bank.
- The agreement stipulated that if a payment was not made on time, the ship's owner had the right to cancel the charter.
- Following the agreement, market charter rates rose dramatically, making the charter highly profitable for Hyman-Michaels and creating an incentive for the owner to find a reason to cancel.
- After an earlier payment dispute was resolved in its favor by arbitrators, Hyman-Michaels was on notice that the owner would strictly enforce the payment terms.
- On April 25, 1973, for a payment due by April 26, Hyman-Michaels instructed its Chicago bank, Continental, to wire transfer $27,000 to the owner's account.
- Continental relayed the telex instruction to Swiss Bank Corporation in Geneva to make the final deposit, but due to an internal error at Swiss Bank, the telex was lost and the transfer was never completed.
- On April 27, the ship's owner notified Hyman-Michaels that the charter was canceled for non-payment. Hyman-Michaels did not immediately arrange for a duplicate payment by other means.
Procedural Posture:
- After the ship owner canceled the charter, the dispute was submitted to an arbitration panel.
- The arbitration panel ruled that the owner was entitled to cancel the charter.
- The arbitration decision was confirmed by a federal district court in New York.
- Hyman-Michaels (now EVRA Corp.) filed a diversity action against Swiss Bank in the U.S. District Court for the Northern District of Illinois, seeking its lost profits as damages.
- Swiss Bank impleaded Continental Bank as a third-party defendant, seeking indemnification.
- Continental Bank filed a cross-claim against Hyman-Michaels.
- Hyman-Michaels filed a counterclaim against Continental Bank for negligence and breach of contract.
- The district court judge found Swiss Bank negligent and liable to Hyman-Michaels for $2.1 million in consequential damages, while dismissing all other claims.
- Swiss Bank appealed the judgment against it to the U.S. Court of Appeals for the Seventh Circuit, and Hyman-Michaels appealed the dismissal of its counterclaim against Continental.
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Issue:
Is a correspondent bank that negligently fails to complete an electronic funds transfer liable for consequential damages, such as lost profits, when it had no specific notice of the special circumstances and high stakes that could result from such a failure?
Opinions:
Majority - Posner, J.
No. A bank that negligently fails to complete a wire transfer is not liable for consequential damages unless it was on notice of the special circumstances that could lead to such a loss. The court extended the common law contract principle from Hadley v. Baxendale, which limits damages to those foreseeable at the time of contracting, to this tort case. Swiss Bank knew it was transferring $27,000 for a ship charter, but it had no knowledge of the underlying contract's terms, the volatility of the charter market, the owner's eagerness to cancel, or the magnitude of the potential loss to Hyman-Michaels. Therefore, the $2.1 million in lost profits was not a foreseeable consequence of its negligence. Furthermore, the court applied the tort doctrine of 'avoidable consequences,' reasoning that the costs of the loss should be borne by the party who could have averted it at the least cost. Hyman-Michaels, knowing the risks, acted imprudently by waiting until the last minute to initiate the payment and by failing to take immediate remedial action, like sending a duplicate payment, after learning of the failure. Swiss Bank could not be expected to take precautions against a harm it could not measure when Hyman-Michaels, which knew the risk precisely, could have easily averted it.
Analysis:
This landmark decision applied the 19th-century contract damages rule from Hadley v. Baxendale to the modern context of electronic funds transfers, effectively limiting the liability of intermediary banks in tort. The court's analysis, heavily influenced by law and economics, established the 'least-cost avoider' principle as a key factor in allocating loss, placing the primary duty of care on the party with the most information about the risks of a transaction. This ruling shaped the legal landscape for wire transfers for years and was influential in the drafting of Uniform Commercial Code Article 4A, which later codified similar rules limiting consequential damages for banks absent a specific agreement to the contrary.
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