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84-4a-202. Authorized and verified payment orders. (1) A payment order received by the receiving bank is the authorized order of the person identified as sender if that person authorized the order or is otherwise bound by it under the law of agency.

(2) If a bank and its customer have agreed that the authenticity of payment orders issued to the bank in the name of the customer as sender will be verified pursuant to a security procedure, a payment order received by the receiving bank is effective as the order of the customer, whether or not authorized, if: (i) the security procedure is a commercially reasonable method of providing security against unauthorized payment orders; and (ii) the bank proves that it accepted the payment order in good faith and in compliance with the security procedure and any written agreement or instruction of the customer restricting acceptance of payment orders issued in the name of the customer. The bank is not required to follow an instruction that violates a written agreement with the customer or notice of which is not received at a time and in a manner affording the bank a reasonable opportunity to act on it before the payment order is accepted.

(3) Commercial reasonableness of a security procedure is a question of law to be determined by considering the wishes of the customer expressed to the bank, the circumstances of the customer known to the bank, including the size, type, and frequency of payment orders normally issued by the customer to the bank, alternative security procedures offered to the customer, and security procedures in general use by customers and receiving banks similarly situated. A security procedure is deemed to be commercially reasonable if: (i) The security procedure was chosen by the customer after the bank offered, and the customer refused, a security procedure that was commercially reasonable for that customer; and (ii) the customer expressly agreed in writing to be bound by any payment order, whether or not authorized, issued in its name, and accepted by the bank in compliance with the security procedure chosen by the customer.

(4) The term "sender" in this article includes the customer in whose name a payment order is issued if the order is the authorized order of the customer under subsection (1), or it is effective as the order of the customer under subsection (2).

(5) This section applies to amendments and cancellations of payment orders to the same extent it applies to payment orders.

(6) Except as provided in this section and in subsection (2) of K.S.A. 84-4a-203, rights and obligations arising under this section or K.S.A. 84-4a-203 may not be varied by agreement.

History: L. 1990, ch. 367, ยง 10; January 1, 1991.

KANSAS COMMENT, 1996

This section is identical to the 1995 Official Text except that arabic numbers have been substituted for the lower case letters to denote subsections in this section, but not in the other sections. Cross references to 84-4a-202 in other sections refer to the lower case letters, as in the Official Text.

The terms of this section, 84-4a-202 and of 84-4a-203, may not be varied by agreement except as provided.

Subsection (1) defines a payment order as "authorized" if it is sent by the sender or an agent of the sender or other person who can bind the sender.

Subsection (2) defines a payment order as effective, even if not authorized, if the order meets the requirements to be a verified payment order. If the bank and the sender have entered into the security procedure described in 84-4a-201, and if the security procedure is determined to be a commercially reasonable security procedure, and if the bank proves that it followed the security procedure and was in good faith, the payment order is effective, whether or not it is authorized. The bank will therefore be protected if it follows a valid security procedure in good faith. The bank is not required to follow any instruction which is not in accord with the security procedure.

Subsection (3) provides the measures for determining if a security procedure is commercially reasonable for a particular customer. It offers a safe harbor where the customer has chosen the security procedure after the customer has rejected the bank's commercially reasonable security procedure, if the customer has explicitly agreed to be bound by the security procedure. If the bank and the customer adopt a commercially reasonable security procedure, the loss for fraudulent orders will generally fall on the customer under 84-4a-203.

Subsection (4) provides that if the payment order is authorized (subsection (1)), or enforceable (subsection (2)), the customer is the sender and 84-4a-402 provides that the sender is liable to pay the bank the amount of the order.


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