Law Regarding International Payments

Law Regarding International Payments

Neyan Madhavan_JudicateMe


This Blog is written by Neyan Madhavan from Symbiosis Law School, NoidaEdited by Ravikiran Shukre.



An International Payment is one, where at least two of the major players in the payment transaction are in different countries. In basic words, International Payment means the sender and the receiver of a specific amount of cash are situated in two different countries. People are no more restricted to local stores and shops but can take into account a worldwide audience. People can use a payment gateway in order to send or receive payments from any part of the world. In short, people who involve in an International Payment are the sender of the payment (payer) and the beneficiary of the payment (payee). In most of the cases, the payer and the payee utilize the services of the same institution, but generally, in case of International payments, people tend to prefer an institution based in their own country. International payment is affected by the change of the balances of the records the payer and the payee hold with their individual institutions. This is aided by at least one “settling” transaction between the institutions, likewise including the changes of account balances of those institutions with that of many other institutions (national banks).


Countries tend to make payments in settlement of business debt, for capital investment, and for different other purposes. Other transactions include exporters, merchants, MNC-s, or people wishing to send money to their family members. The purpose of making such payments, the techniques for making them, and making them accountable are matters of significance for financial analysts and the Central government. International payments play a major role in the development of both economies. Economic life doesn’t stop at national limits, yet flows to and fro across them. Economic life is defined as the duration of the period during which an asset remains helpful to the proprietor. The economic life of the said asset can be different when compared with that of its actual life. The currency which is used in one country, generally speaking, cannot be used in another which results in interruption of the flow of payments at national limits by exchange transactions where the national currency of one country is converted into another. These transactions serve to cover payments in as much as there is a balance between them; local currency can be exchanged against foreign currency only to that extent where there is a counterbalancing offer of foreign money in exchange. [1]


International payments depend vigorously upon the Law of Agency & Contracts. [2] The institutions act as an intermediary for their respective customers, following their customer’s decree in sending and receiving the payments. In Agency law in contracts, there exists a legal relationship between two persons and one person acts on behalf of another in business matters. The person who acts on behalf of another is called the agent and the person who gives directives to the agent is called the principal.

Payment facilities depend upon contracts to set out the rights and duties of each party. [3] This is valid for International payment facilities as well as for domestic payments. “The relationship between a bank and its customer, known as the banking relationship, is based on contracts.” [4] There is a general notion that a payment system is generally governed by three groups of contracts.

To begin with, there are contracts between the financial organization and the payer customers. These contracts set out the greater part of the rights and duties of the payer as the buyer of a ‘payment facility’ from the financial organization.

Secondly, there are contracts between the financial organization and the payee customers. These contracts set out the greater part of the rights and duties of the payee as a beneficiary of the payments under the system.

Lastly, there are contracts between financial organizations. There are some schemes which involve only one financial organization and there are many other schemes which involve more than one financial organization.

Agency Law & Mandate

Agency law likewise oversees the conduct of financial organizations towards its customers. “The relationship between the payer and the paying bank to which he delivers the money transfer order is that of principal and agent, the paying bank making payments on behalf of its principal, the payer” [5] In the process of an international fund transfer, each financial organization works as per the directives given by its customers (payer or payee). The instruction given by the customers to their respective financial organization is not a separate contract, but rather comes under the pre-existing contract.


International payments have a great impact on the economy of a country. One of the modes of International payments is online payment. There are numerous ways in which online payments drive towards economic growth. E-commerce builds profitability and lessens business costs by giving quicker and more cost-effective method of associating firms, advancing progressively for more efficient collaboration between part makers and constructing agents, and giving opportunities to new firms to enter the supply chain. In addition to this, E-commerce gives opportunities to more business partners, quicker turnovers, and smaller inventories. The development of online retail which is mainly supported by online payments has additionally determined a gradual increase in demand for internet-enabled gadgets, broadband, and ICT framework, as the extent of the use of these gadgets and the internet is attributable to internet shopping and another related retail browsing. In the UK alone, about 66% of the people who use smartphones tend to make online payments including bank transfers on their mobiles itself.

Online businesses need to list a huge amount of information on their website to permit customers to make informed purchase decisions without the benefit of seeing and enquiring about the products they are purchasing. This has encouraged the generation of an immense volume of price, product, and audit information. This information has driven advancement and competition around the online world through the improvement of price comparison websites, client surveys on E-commerce retailers’ sites, and chances to analyze and leverage consumer shopping preferences. Value-based information falls under this new classification of huge volume, significant information or ‘big data’. The accessibility of online payments is additionally helping governments to move a portion of their revenue collection activities online.


The law which controls International Payments in India is the Foreign Exchange Management Act. The Foreign Exchange Management Act, 1999 (FEMA) is an act which is passed by the Parliament of India, “to consolidate and amend the law relating to foreign exchange with the objective of facilitating trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.” [6]

Here is a small description of FERA, not like other laws, where everything is allowed unless otherwise specifically prohibited, under the Foreign Exchange Regulation Act, 1973 (FERA) {the act which used to regulate International payments before FEMA} everything was restricted except if explicitly allowed. Under FERA, a person was assumed guilty unless he proved himself innocent. FERA was in total contrast with all other prevalent acts. So, FERA did not succeed in restricting activities, the Parliament then decided to pass FEMA as a law which regulates International payments. FEMA is a regulatory mechanism that empowers the Reserve Bank of India to pass regulations and the Central Government of India to pass rules relating to foreign exchange. There are 49 sections in total.


Momm V Barclays Bank International [7]:

Herstatt Bank (who has been holding an account with Barclays) instructed Barclay to transfer ₤120,000 to Momm’s account (which was also with Barclays). Since it was an internal transaction, both the players held an account with Barclays. Herstatt’s account was said to be in overdraft (the bank allows the customers to withdraw money even though there is not sufficient money in the bank account) and without knowing this Barclays acknowledged the instructions and started the procedure for money transfer. After some time, Barclays went into liquidation (a situation where a firm has to stop all its business and use its assets to clear the debts). Barclays didn’t care about liquidation and funds were successfully transferred as per the instructions given by Herstatt bank. When Barclays became aware of the fact that Herstatt’s bank account was in overdraft, Barclays tried to reverse the transaction. Momm filed a complaint against Barclays stating that the payment was complete as soon as Barclays accepted unconditionally to transfer funds and that of any later attempt to reverse the transaction is null and void.

The main issue which arose here, when was the payment complete? And there were many other unanswered questions as to whether this is a case of a completed payment then reversed or a payment that was never completed. The Court held that Momm, “would have been able to draw against it [the payment] at once. If they had inquired whether the payment had been made, they would have been given an affirmative and not an equivocating answer…. No instructions would have been accepted from Herstatt to revoke the payment after the computerization processes had begun. To express the position in legal terms, I do not accept that this was merely a conditional transfer in the sense that whether or not it stood depended on what might or might not happen the following morning”. [8]


India’s advanced vision discusses data sovereignty and giving local firms a chance. Online transactions are one of the major ways through which International payments are done. The digital payments market, with more than 800 million versatile users of mobile phone out of which more than 430 million people have access to the internet, it is said that the economy will grow over $1 trillion by 2025. If India is serious about giving local firms an advantage, it should leverage this immense opportunity. With the right policy incentives, local firms could capture large shares of the digital payments market to become e-commerce players on a global scale. [9] Online payment system needs to be secured, and trust is completely important to guarantee acceptance from the customers. [10] Cashless transactions are growing at a faster pace and according to law-makers, cashless is considered to be exclusionary to those who cannot afford a bank account. According to a study report conducted by the University of Oxford, it is concluded that money is a transmission route for bacteria, up to 26,000 per banknote. It is expected that the number of users of the cashless mode of the transaction after the pandemic recovery will rise.


A transformative succession has been seen by payment techniques from money to cheques to credit cards and debit cards, to E-commerce and mobile banking (portable banking). In this blog, it is considered that online payment techniques are progressively being utilized for making day to day transactions as well as on-site purchases. Besides, the progression in technology supporting mobile transactions and making them progressively helpful and transparent tend to develop trust among customers who are becoming habitual of employing this mode of payment. This change in the conduct of customers indicating progress from the traditional to an advanced online mode of payment is obvious in retailing and banking. Future work might be co-ordinated towards the legalization of different elements that are responsible for contributing to the adequate selection of online payment systems all around the world.


[1] Encyclopaedia Britannica (Article) penned by Francis. S. Pierce –

[2] Brindle & Cox., Law of Bank Payments (3rd Edition, Sweet & Maxwell, 2004) at 107


[4] B Geva, Bank Collections and Payment Transactions – Comparative Study of Legal Aspects (Oxford University Press, USA, 2001), at 25

[5] Brindle and Cox, Law of Bank Payments (3rd edition, 2004), chapter 3, at 119

[6] The Foreign Exchange Management Act, 1999

[7] Momm V Barclays Bank International [(1977) QB 79]

[8] Case Mine

[9] The Hindu June 10th, 2016





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