Liability for failure to stop payment of preauthorized transfers: Overview, definition, and example
What is liability for failure to stop payment of preauthorized transfers?
Liability for failure to stop payment of preauthorized transfers refers to the financial responsibility that a party (typically a bank or financial institution) may face if they do not properly halt or prevent a preauthorized electronic payment or transfer after being instructed to do so. Preauthorized transfers are payments or withdrawals that are authorized in advance, such as automatic bill payments or subscription services, where the payer allows a company to withdraw funds from their account on a regular basis.
If a party (such as a bank) fails to stop a preauthorized transfer after receiving a valid request to do so, they may be held liable for any financial losses that result from the continued payment. This liability ensures that consumers and account holders have control over their financial accounts and that unauthorized or improperly processed payments are rectified.
Why is liability for failure to stop payment of preauthorized transfers important?
This liability is important because it protects consumers from unauthorized withdrawals or payments that may otherwise result in financial hardship. Without this legal protection, consumers could find themselves out of pocket for payments that were mistakenly or fraudulently processed after they had asked for them to be stopped. It also incentivizes financial institutions and businesses to act promptly and correctly when consumers request to stop preauthorized transfers, ensuring that the systems used for payment processing are secure and efficient.
Understanding liability for failure to stop payment of preauthorized transfers through an example
Let’s say an individual has set up automatic payments for their gym membership, which is withdrawn from their checking account monthly. After a few months, the individual decides to cancel the membership and instructs their bank to stop the preauthorized payments. However, due to an error on the part of the bank, the payment for the following month is still processed and withdrawn from the individual's account.
In this case, the bank may be held liable for the failure to stop the payment, as the individual provided clear instructions to halt the payment. The individual could seek reimbursement from the bank for the unauthorized transfer, and the bank would be responsible for covering the costs and any potential financial harm caused by the mistake.
In another example, a person subscribes to a digital service and sets up preauthorized monthly payments. After a few months, they decide to cancel the subscription and request that the service provider stop billing them. If the service provider fails to stop the payments and continues to charge the individual, the service provider may be liable for any extra charges that were applied after the cancellation request.
An example of a liability for failure to stop payment of preauthorized transfers clause
Here’s how a clause related to liability for failure to stop payment might appear in a contract or bank agreement:
"If the Customer notifies the Bank in writing to stop payment of any preauthorized transfer, the Bank shall process the request in a timely manner. If the Bank fails to stop the payment as instructed, the Bank shall be liable for any damages, including but not limited to the amount of the unauthorized payment and any associated fees or charges incurred by the Customer."
Conclusion
Liability for failure to stop payment of preauthorized transfers is a critical concept that ensures consumers have control over their financial transactions. By holding financial institutions accountable for processing stop-payment requests, this liability helps protect individuals from unauthorized charges and reduces the risk of financial loss. Understanding the importance of stopping preauthorized payments promptly and ensuring that institutions are held responsible for failure to do so is essential for maintaining consumer confidence in financial systems and promoting fair practices.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.