The Supreme Court's June decision not to review the, case of Wells Fargo Asia Ltd. v. Citibank was a step backward in international banking juris-prudence.

The court rejected not just a Citibank petition but also the recommendations of U.S. banking regulators and trade groups in a case that was fiercely litigated over eight years. The case has resulted in two federal district court opinions, two appellate decisions, and an earlier Supreme Court opinion.

The Singapore subsidiary of Wells Fargo & Co. sought repayment of two time deposits it placed with Citibank's Manila branch in 1983. Citibank claimed that certain Philippines central bank rulings restricting payment of U.S. dollar deposits excused or postponed its repayment obligation.

More broadly, Citibank raised a variety of arguments with which U.S. banks had sought over several decades to transfer to foreign depositors the risk of sovereign intercession at international branches. With the issue not definitively decided by courts, Citibank attempted - and failed - to make its dispute with Wells the case that would settle the rule for good on the side of the depository bank.

The last opinion of the Second Circuit Court of Appeals in this case will probably be cited to support the following:

* New York law governed the claim (not, as Citibank urged, Philippine law or federal common law).

* There was no agreement on where the debt could be "collected."

* In this circumstance, the debt could be collected in New York.

* The case might have turned out differently if Citibank had satisfied its "good faith obligation" to seek the Philippine government's consent to repay with assets located outside that country.

These are largely the wrong answers to the wrong questions. To understand why, basic principles should be applied.

A deposit is a contract, in particular one for the repayment of a borrowing. A contract has a governing law, which should be the same law that governs questions of discharge and excuse for nonperformance.

One of the regrettable aspects of Wells Fargo v. Citibank is that it departs from well-established law, both in the U.S. and other countries, that the law that governs rights and liabilities under the deposit contract is the law of the country where the, branch office is located. Philippine law could, at most, constitute a defense to the claim, not a basis for requiring payment at another location to which the interest of the Philippine government does not extend. But if it is a defense, it is a defense everywhere.

Why, after so much effort, did this case turn out as it did?

* The courts never took seriously Citibank's claim that federal regulatory policy mandated a ruling in its favor. Indeed while the bank regulators filed intelligent friend of the court briefs supporting Citibank, the actual regulatory authority supporting Citibank was rather thin. The New York Fed supported Citibank's position at trial and thought it would prevail, but it overestimated the U.S. District Court's grasp of the issues.

* The litigation became bogged down over issues of dubious significance. Chief among these were the remittance instructions which accompanied the confirmations the parties sent to each other, which designated New York accounts for payment. A full explanation of this aspect of the case requires more space than is available here. However, a branch designation - given banking practice and the choice-of-law rule mentioned above - is far more probative as to the parties' intentions regarding sovereign risk allocation than are remittance instructions.

* In the absence of definitive statutory or regulatory provisions, and given the lack of documentation between the parties, the courts apparently found it hard to accept that any important or fundamental principles were really at stake. All of the appellate opinions were perfunctory. That Citibank appeared to be seeking to break new ground - especially in the later stages of the case - contributed to its loss.

Perhaps this problem simply cannot be satisfactorily resolved by the courts. But the law remains unsatisfactory. Banks different from other business organizations in certain ways which bear on this issue, The large international banks generally operate more efficiently through branches than subsidiaries, making it much more difficult to control liability at the level of the local business unit.

Risk Allocation Essential

Also, since banks (like other financial businesses) are highly geared and losses quickly affect capital, precise measurement and allocation of risk are essential. The risk of sovereign intercession at a foreign branch office is a sensible one for banks to pass on to customers, who can withdraw deposits more quickly than banks can close branches. This is why the law in the other major banking nations is to shift this risk to depositors. If we diverge, our international banks will surely be disadvantaged, either through losses or through lessened organizational flexibility.

The next question is what to do. The instinctive reaction is better documentation, but there are real problems here. The market still resists all but the briefest "legend" on deposit confirmations, and something reasonably explicit is needed. The mechanical problems in making such provisions effective are considerable, at least in the absence of something like master agreements or interbank codes.

Finally, and most seriously, the U.S. case law gives little support as to the effectiveness of such legends. In the Trinh decision by the Sixth Circuit involving a deposit at Citibank's Saigon branch, a reasonably explicit disclaimer was overridden. The Supreme Court declined review of this decision. This result is more disturbing than Wells Fargo v. Citibank itself, at least freedom of contract should survive.

Legislative Attention Needed

Legislative solutions to the head office liability issue were proposed in the last session of Congress, but none survived. Admittedly, there were higher priorities. However, focus on this area should continue, since potentially all bank liability instruments are affected.

Moreover, the allocation of liability between branch and home office is closely related to branch liquidation and supervisory questions now under active study by regulators and others. At this time of concern with the structure and regulation of international banking, the need for a coordinated approach has never been greater.

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