Bills of Exchange
Cases
Kazeminy & Ors v Siddiqi & Ors
[2009] EWHC 3207
Teare J
Inadmissibility of evidence as to the alleged oral agreement
There is long standing authority that a contemporaneous oral agreement cannot be set up to contradict the terms of a promissory note; see Chitty on Contracts 30th.ed. at para.12-101, Young v Austen (1868-69) LR 4 CP 553, New London Credit Syndicate Limited v Neale [1898] 2 QB 487 and Hitchings v Northern Leather Company [1914] 3 KB 907. It was submitted on behalf of the Claimants that the defence based upon the alleged overarching agreement is therefore inadmissible and would inevitably fail as a matter of law.
On behalf of the Defendants it was submitted that the reasoning in such cases was based on the parol evidence rule, that that rule has been subject to restrictions since the nineteenth century and that the courts are in fact prepared to admit extrinsic evidence if it is shown that the written instrument was not intended to express the entire agreement between the parties; see Chitty at paras. 12-096 – 12-100. It was further submitted that no special rule applied to bills of exchange or promissory notes. In the present case the Defendants will seek to use the evidence as to the alleged oral agreement in one or more different ways including a wider agreement going beyond the terms of the written notes, a collateral contract and an estoppel by convention.
Bills of exchange and promissory notes have always been treated as analogous to the payment of cash. Unliquidated cross-claims cannot be set-off against them. Such is the importance of bills of exchange and promissory notes as a means of payment in commerce that the courts are reluctant to allow “any erosion of the certainties of the application by our Courts of the law merchant relating to bills of exchange”; see Cebora SNC v SIP (Industrial Products) Ltd. [1976] 1 Lloyd’s Rep. 271 at p.278. It is to be expected therefore that the Defendants will encounter difficulty in persuading the Commercial Court that the long established principle relied upon by the Claimants is not what it seems and is subject to exceptions.
However, there is support for the proposition that the principle in question is based upon the parol evidence rule rather than upon any provision of the Bills of Exchange Act 1882; see New London Credit Syndicate Limited v Neale [1898] 2 QB 487 at p.490. There is also support for the proposition that the parol evidence rule does not prevent a party from adducing evidence to prove that a written document is not a complete record of the parties’ agreement; see Chitty at the paragraphs mentioned above. It is therefore arguable that the basis of the principle has been eroded and that the principle may not be as absolute as the cases suggest. I am told that no modern case has examined the application of the parol evidence rule to bills of exchange or promissory notes. In those circumstances there appears to me some scope for arguing that where there is evidence that the note does not contain the parties’ entire agreement extrinsic evidence is admissible to establish the parties’ entire agreement. The contrary argument is that the effect of the requirement in the Bills of Exchange Act 1882 that bills of exchange and promissory notes must be in writing is that they cannot be varied by an oral agreement; see Chitty at para.12-101. However, this was not said to be the basis of the principle in any of the cases to which reference has been made. Those cases suggest that the basis of the principle was the parol evidence rule. It is to be noted that in Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes 17th.ed. the following is stated at para.2-157:
“Exceptions to the parol evidence rule. There are a number of exceptions to the parol evidence rule, or, more accurately, situations where the parol evidence rule will not be applied. The dividing line between the rule and the “exceptions” is often subtle, and it is not particularly useful to try to reconcile apparently conflicting decisions. In the result, the scope of application of the rule is an area of difficulty and uncertainty for the practitioner. That difficulty and uncertainty is exacerbated by the fact that, in relation to bills and notes, the majority of the decisions on the application or non-application of the rule date from the nineteenth century and do not necessarily reflect the somewhat more relaxed approach which is adopted by the courts in respect of contracts generally.
Where the exceptions apply, even oral evidence may be admitted to qualify the ostensible contract of a party on the instrument. However, a person to whom a bill or note is negotiated or delivered is entitled to assume that each party’s promise is absolute and unqualified unless it is otherwise indicated on the instrument itself. In most cases, therefore, extrinsic evidence will be admissible only as between immediate parties, or as regard a remote party who took the instrument with knowledge of the qualification.”
The present dispute is between the immediate parties to the promissory notes. I find myself unable to dismiss the Defendants’ argument on the law as one which is bound to fail. This hearing is not the appropriate occasion on which to determine whether that argument is correct. If there are relevant exceptions to the principle relied upon by the Claimants they are likely to be fact sensitive. The appropriate time to decide this important question of law is at trial when the court has heard all the evidence. This is particularly so in the present case where, on the Defendants’ case, the terms of the promissory notes are affected by the provisions of the written agreements dated 20 September 2006 and 23 January 2007 which agreements are in turn said to be supplemented by an oral agreement.
Alternative basis of claim
Counsel for the Claimants stated in his oral submissions that the loans were repayable not only in accordance with the terms of the notes but also pursuant to a clause in the written agreement of 11 April 2007 which provided that loans were repayable in the event of a breach of that agreement.
This argument, as the basis of a claim for summary judgment, had not been set out in the Application Notice. That referred to Part A of the Particulars of Claim which contained the claim pursuant to the terms of the notes. The claim based on breach of the 11 April 2007 agreement was pleaded in Part B at paragraphs 51(h) and 55-56. Counsel for the Defendants objected to this alternative basis for summary judgment being put forward. It had not been put forward specifically as a basis for summary judgment in the skeleton argument of counsel for the Claimants though it was in fact mentioned at para.7.4.9 in response to a defence advanced by the First Defendant based on the 11 April 2007 agreement.
This is a claim for over US$25m. It is not appropriate that alternative bases for summary judgment not advanced in the application notice be introduced in oral submissions. It is apparent from the note of counsel for the Defendants put in on the second day of the hearing in response to this alternative basis of claim that neither the evidence adduced by First Defendant nor counsel’s skeleton argument had been prepared with this alternative basis of claim in mind. For this reason I do not consider it appropriate to permit the Claimants to rely upon this alternative basis of claim for seeking summary judgment.
Other defences
It is necessary briefly to mention these before considering the appropriate order to make on this application for summary judgment.
The First Defendant has stated that save where his signature was expressly stated to be on his own behalf he did not believe that he was assuming a personal liability to pay the loans. The First Claimant assured him that he would not be personally liable.
This assurance is not evidenced by or reflected in any contemporaneous or later document. The prospects of this defence succeeding are no greater than in the case of the primary defence.
The First Defendant also relied upon clause 7 of the April 2007 agreement which provided that he would be relieved of personal liability for the loans in the event that the First Claimant received a certificate for 10% of the stock of the holding company. However, his evidence is that the First Claimant was issued with 8% of the stock. Since there is no evidence that this condition for release from liability was satisfied I do not understand why this argument has any prospect of success.
Finally, the First Defendant has said that William Chia who signed certain of the promissory notes on behalf of the Defendant companies had no authority to bind them and that he signed the notes because the First Claimant explained that they were required for housekeeping purposes. A statement from Mr. Chia supports this evidence. However, the notes signed by Mr. Chia feature in the list of notes exhibited to the May 2007 agreement which records, by clause 1, that the borrowers are jointly and severally liable for the loans and that they are repayable in accordance with the payment terms set out in the promissory notes. The evidence of the First Defendant and Mr. Chia is therefore inconsistent with the May 2007 agreement. This argument has no greater prospect of success than the primary defence.
The appropriate order
The court’s powers on a summary judgment application are not limited to granting or dismissing the application. The court may make a conditional order where although it is possible that the defence will succeed it is improbable that it will do so. Such a conditional order may provide for judgment to be entered if the defendant does not pay into court a sum of money; see CPR Part 24 PD paragraphs 4 and 5 and Anglo-Eastern Trust Limited v Kermanshahchi [2002] EWCA 198.
I have concluded that whilst it is possible that the primary defence may succeed that is improbable. None of the other defences have any greater prospect of success. The present case is therefore one where the court has power to make a conditional order.
The Claimants gave notice to the Defendants on 13 November 2009 that they would be asking for a conditional order as an alternative to summary judgment. They have sought an order for payment of an amount equal to the claim, namely, a sum in excess of $25m.
The First Defendant dealt with this matter in his third witness statement dated 23 November 2009. He stated that he does not have the means to pay $25m. into court and that a minimum of £500,000 per month is required to keep the group companies as going concerns and to continue the development and launch of the Technology. He pointed out that the Second and Fourth Defendants were in liquidation and that although there was an application to take them out of liquidation they would not have the funds to pay the sum demanded by the Claimants. He said that the Third and Sixth Defendants had negative net assets. He said that the Seventh Defendant had net assets of £467,906 as at 30 June 2008. None of the Defendants, he said, was in a position to pay the sums claimed into court.
It is, however, plain that the First Defendant is a wealthy man, or at any rate has access to considerable sums of money. He said in his first witness statement dated 6 November 2009 that he and his family had provided £82m. by way of loans and investments to his group of companies as at the date of the statement. Since he refers to £66m. in loans and equity having been provided by himself and his family as at April 2007 it would appear to follow that he and his family continued to fund the companies to a very considerable extent between April 2007 and 6 November 2009, namely, a further £16m. in about two and half years. That is consistent with his third statement which refers to his funding of the day to day cash requirements of the Third and Sixth Defendants and to £500,000 being required per month.
I consider that it is appropriate, where it is improbable that the defence will succeed, to order a payment into court. A trial, which it is probable that the Claimants will win, will delay recovery by the Claimants of their loans and will be expensive. In such circumstances a court may order payment of the sum claimed into court. That is particularly appropriate in the context of claims on promissory notes. However, the sum ordered to be paid into court should not be one which the Defendants cannot pay either themselves or from resources available to them because that would have the effect of stifling the defence. The onus is upon the Defendants to put sufficient and proper evidence before the court and to make full and frank disclosure; see M.V.Yorke Motors v Edwards [1982] 1 WLR 444 at p.449 and Anglo-Eastern Trust Limited v Kermanshahchi [2002] EWCA 198.
The First Defendant has not given any details of his assets or of the resources available to him. He has not given full or frank disclosure. But what he has said enables the court to infer that he must have very considerable resources available to him. In the last two and half years he and his family have provided about £16m. to his companies and he expects to continue funding them at the rate of about £500,000 per month. In total he has provided some £82m. to his companies. The ability to provide such sums suggests that the Defendant has or has available to him very considerable assets. He has not volunteered what those assets are or what their value is.
In these circumstances, although the First Defendant has said that he is unable to pay $25m. into court, I am not able to accept that that is so. The history of his or his family’s loans to the companies and the fact that he is to continue funding the companies at about £500,000 per month suggests that a payment of $25m. may very well be within his abilities. I am therefore minded to make an order that the Defendants collectively pay into court the sum claimed of $25m. Since not each Defendant is alleged to owe that sum it will be necessary to structure the order so that no Defendant is ordered to pay more than the sum claimed against him or it. I shall ask counsel to prepare an order to that effect.
Although the corporate defendants are said to have no means themselves it seems plain on the evidence of the First Defendant that they have access to his resources. Their own lack of resources is therefore no bar to the making of a conditional order.
After the hearing of this application counsel for the Defendants requested an opportunity to adduce further evidence as to means. This was resisted by the Claimants. I have noted that in Anglo-Eastern Trust Limited v Kermanshahchi [2002] EWCA 198 Brooke LJ said, at para.70:
“What is important is that if a claimant is seeking a conditional order that is out of the ordinary if a summary judgment application fails – and an order that a defendant should pay £1 million into court falls into that category – the judge should not allow any order of that kind to be perfected immediately if the defendant seeks an opportunity to place evidence before him to the effect that the order will stifle its defence completely because it does not have the means to pay.”
Although notice of the application for a conditional order was given as a result of which some evidence as to means was tendered, unlike the position in Anglo-Eastern Trust Limited v Kermanshahchi, it seems to me that I should follow that guidance. The order I propose can fairly be regarded as out of the ordinary. The sum of $25m. is very large and the order I propose to make will stifle the defence if payment of such sum is beyond the means of the Defendants. Accordingly, if, after seeing this judgment in draft, the First Defendant considers that the order I propose to make is one which will stifle the defence and wishes to provide evidence of his assets and those available to him I will consider his application and evidence after formally handing down judgment. The conditional order I propose to make will not be made and perfected before any such application has been heard. If that application is granted and the further evidence makes clear that a lesser sum is the appropriate sum to be ordered to be paid into court then the conditional order will be made on the basis of that lesser sum.
T.E. Potterton Ltd v. Northern Bank Ltd
[1992] IEHC 3; [1993] IR 413
O’Hanlon J.
Plenary summons.
The plaintiff carries on business in auctioneering and livestock sales, with marts at Trim and Delvin, Co. Meath, and mart sales are held at Delvin on Thursday of each week. Liam McMahon, carrying on business through the medium of a limited liability company, Tansey Farms Limited, with farms at Roslea, Co. Fermanagh, and near Clones, Co. Monaghan, was a purchaser of cattle at the plaintiff’s marts for several years leading up to the year 1985 and throughout that year. At the relevant times, such purchases of cattle were paid for by means of cheques drawn upon the account of Tansey Farms Ltd. with Northern Bank Ltd., The Diamond, Clones, Co. Monaghan.
At a sale held by the plaintiff on the 28th November, 1985, the said Liam McMahon acting on behalf of his company, Tansey Farms Ltd., purchased cattle to the value of £39,983 and gave in payment therefore a post-dated cheque drawn on the defendant for that sum, and bearing the date of the 6th December, 1985.
The said cheque was presented for payment by the plaintiff to its own bank, Ulster Bank Ltd., on the 4th December, 1985, and was sent on for clearance to the defendant but was returned by the defendant on the 9th December, 1985, marked “Refer to Drawer Present Again Alteration req’s drawer’s conf.” (being shorthand for “Alteration requires drawer’s confirmation”).
The cheque was again presented for clearance on the plaintiff’s behalf by the plaintiff’s bank, Ulster Bank Ltd., without alteration and without seeking the drawer’s confirmation of any part of the writing on the cheque, on the 12th December, 1985, and on this occasion it was returned by the defendant bearing the original words, “Refer to drawer” and “Alteration req’s drawer’s conf.” but with a line drawn through the words “Present Again” which formed part of the original message when the cheque was first returned.
Mr. Edward Potterton, a director of the plaintiff company, said they were not too concerned when the cheque came back a second time. He contacted Mr. McLoughlin, manager of the Clones Branch of the defendant, and was told by him that he should go and see Mr. Liam McMahon. He did so, and was told by him that “there was a problem”. In the meantime a further consignment of cattle had been sold to Tansey Farms Limited on the 5th December and was paid for by cheque dated the 13th December, 1985, which was handed to the plaintiff on the 6th December, 1985. The amount involved in this case was £13,298 and on being presented for payment, the cheque was returned marked “Refer to Drawer”.
The plaintiff never received any payment on foot of either cheque. Proceedings were instituted against Tansey Farms Ltd. on the 23rd December, 1985, and judgment was obtained against them in May, 1986, but the company went into liquidation in July, 1986, and nothing was ever recovered on foot of the judgment. In this situation the present proceedings were commenced against the defendant, claiming that the loss which had been sustained by the plaintiff was attributable to negligence and breach of duty on the part of the defendant in the manner in which it had dealt with the cheque dated the 6th December, 1985, which was presented to it for payment on or about the 9th December, 1985, and arising out of its refusal or failure to clear same within a reasonable period of time.
The defendant denies that it was guilty of any negligence or breach of duty and denies that it owed any duty of care to the plaintiff in the circumstances of the present case. There is a plea that no loss or damage was caused to the plaintiff by the matters alleged against the defendant and a plea that even if there was negligence on the part of the defendant (which is denied), the plaintiff was guilty of contributory negligence.
Edward Potterton, in the course of his evidence, claimed that the defendant, during the critical period spanning the early weeks of December, 1985, actually paid out sums in the region of £80,000 on foot of cheques presented for payment against the Tansey Farms Ltd. account during that period.
Mr. McLoughlin, manager of the Clones branch of the defendant at the time, said that in 1985 Tansey Farms Ltd. had permission to overdraw their account up to a limit of £40,000. More latitude than this was allowed from time to time when the company was able to show that there were payments to come in which could be relied upon to arrive, such as V.A.T. and M.C.A. credits. Mr. McMahon had a practice of telephoning the bank on a weekly basis to ask what cheques had come in for payment and to inform the bank what was due to the company from the meat factories. “Depending on their assurances we would pay or send them back”, Mr. McLoughlin said.
He said that the cheque for £39,983 in favour of the plaintiff came in on Friday, the 6th December, 1985. Two other cheques came in on the same day (or on the previous day) – one for about £17,000 and one for about £3,000. As the account could not meet them all, they were held over until the following Monday. Two cheques which had come in on Thursday were held over and paid on the Friday.
The witness then said (contrary to his earlier evidence) that the cheques held over to Monday were four in number – for the following amounts – £39,983; £37,642; £3,956; £340. A decision was taken to pay the three smaller amounts and to return the largest cheque with two separate indorsements. He said that the indorsement “Refer to Drawer- Present Again” should have conveyed to the plaintiff that there were insufficient funds in the account to meet the cheque. By the time the cheque was again presented for payment around the 12th or 13th December, a flood of cheques had come in; funds were still insufficient; the words “Present Again” were struck out and the cheque was returned marked “Refer to Drawer Alteration req’s drawer’s conf.” He explained that the last part of the message referred to the fact that one of the words on the cheque, being the word “nine”, was written in block or printed letters whereas the other words were in ordinary script.
Mr. Anderson, who was assistant manager at the time, said that the cheque for £39,983 came in on the morning of Friday the 6th December, and if paid at that time would have put the account £9,000 beyond the permitted overdraft limit of £40,000. A decision was taken to pay the two smaller cheques, in accordance with normal banking practice.
A number of matters arise for consideration in relation to the issue of liability in the case. In the first place I have to consider whether there was any justification for returning the cheque uncashed on the basis that it contained an alteration which could reasonably be said to have required the drawer’s confirmation before it would be safe for the drawer’s bank to cash it.
In my opinion there was no justification for returning the cheque uncashed on this basis. The word “nine” is, in fact, written in block letters and the other words in ordinary script, but it has all the appearance of having been written at the same time, and with the same writing instrument, and by the same hand as all the rest of the writing on the cheque.
Furthermore, evidence was given by John Pearson, a farmer who dealt with Tansey Farms Ltd., and likewise by Liam McMahon, of Roscommon Co-Op. Marts Ltd., who also had dealings with that company, each of whom had received cheques from the company in which the same word, “nine” had been written in block letters with the remaining words in ordinary script, on earlier dates in 1985, and which had been cleared by the defendant without question, on being presented for payment.
I have come to the conclusion, on the evidence in the case, that the query raised by the defendant about an alteration requiring drawer’s confirmation was merely a device invented to extricate the defendant from an awkward situation where more cheques were coming in for payment than the account could meet yet they were unwilling to formally dishonour their customer’s cheques because of their belief, (based on previous experience) that they were likely to be put in funds if more time
I believe that Tansey Farms Ltd. had been allowed to operate their account in a rather flexible manner for a considerable period prior to the final collapse of the company but there was always a danger that the latitude given by the bank might ultimately result in prejudice to the creditors of the company.
I do not accept the proposition put forward by the bank witnesses that the words indorsed on the cheque when it was first returned should have conveyed to the plaintiff two different messages – that there were insufficient funds in the account to meet the cheque, and also that the writing on the cheque required confirmation by the drawer.
I am of opinion that the words written in when returning the cheque unpaid were calculated to, and did, lull the payee into a false sense of security and led the plaintiff to believe that payment was only being withheld for some technical reason having to do with the manner in which the cheque had been written. If this were, in fact, a cause of concern to the bank they could have cleared it up immediately by means of a simple one-minute telephone call to their own customer.
While a bank is generally considered not to owe any duty to someone who is not its customer when a cheque is presented for payment, I think this general rule must be subject to qualification if the bank deliberately embarks on a course of conduct for its own purposes which is calculated to deceive the payee of the cheque in a manner which may result in financial loss to such payee, and when there is no lawful justification for such action on the part of the bank.
The general rule that a paying bank owes no duty to the payee of a cheque was re-stated by the Supreme Court in the case of Dublin Port and Docks Board v. Bank of Ireland [1976] IR 118. Kenny J. said (at page 141 of the report):-
“With the exception of claims arising under s. 74 of the Bills of Exchange Act, 1882, or on specially crossed cheques (s. 79, sub-s. 2 of that Act) or on cheques marked good by the paying bank, the general principle is that a payee named in a cheque has no right of action against the bank on which the cheque is drawn if the cheque is dishonoured: Hart’s Law of Banking, 4th ed., page 340.”
The Court was there concerned with the obligation of the bank on which the cheque was drawn to make payment on foot of the cheque and as to the order in which cheques were to be paid when the total number presented for payment exceeded the funds available to meet them.
A different problem arises for resolution in the present case where the claim is based, not on the failure of the defendant to pay on foot of the cheque when presented, but rather on the message communicated by the defendant to the plaintiff’s bank as the presenting bank, and thereby to the plaintiff also, when declining to make payment on foot of the cheque. The plaintiff claims that this message giving the alleged reason why the cheque was then being dishonoured, amounted to a negligent misrepresentation of the true situation and induced the plaintiff to act to its detriment or to forbear from taking steps for its own protection which it would have taken had the true position been made known.
A banker is bound to pay cheques drawn on him by a customer in legal form provided he has in his hands at the time sufficient and available funds for the purpose, or provided the cheques arc within the limits of an agreed overdraft. He must either pay cheques or refuse payment at once; a request to re-present amounts to dishonour. (Halsbury, Laws of England, 4th ed., Vol. 2, para. 163; Bank of England v. Vagliano Bros, [1891] A.C. 107).
The situations in which liability in damages can arise in respect of negligent misrepresentation or otherwise in respect of negligent misstatement have been considered in a number of cases in recent decades, both here and in the United Kingdom.
In Bank of Ireland v. Smith [1966] I.R. 646, Mr. Justice Kenny, then sitting as a High Court Judge, was dealing with a situation where the vendors in a court sale acting through auctioneers as agents, published an advertisement for the lands to be sold which was erroneous in a material respect in the description given of the property. The learned judge held that the advertisement was a representation which was incorrect, although made innocently and honestly.
In these circumstances he held that it would be against conscience that the vendor in a court sale should not be bound by a representation made by his agent in connection with that sale, and further held that the purchaser was entitled to recover damages for breach of warranty against the vendors.
Mr. Justice Kenny also considered the alternative claim put forward that an auctioneer acting for a vendor should anticipate that any statements made by him about the property will be relied on by the purchaser and that he, therefore, owes a duty of care to the purchaser and is liable in damages to him if the statement was incorrect and was made carelessly. As he had already concluded that the auctioneers’ statement was made honestly and innocently and without negligence on their part, this part of his judgment must, in my opinion, be regarded as obiter dicta.
He said, at page 660:-
“In my opinion, the decision in Hedley Byrne & Co. Ltd. v Heller & Partners Ltd. [1964] AC 465 does not give any support to this startling proposition. It decides that, if a person seeks information from another in circumstances in which a reasonable man would know that his judgment is being relied on, the person giving the information must use reasonable care to ensure that his answer is correct, and if he does not do so, he is liable in damages: but the relationship between the person seeking the information and the person giving it, if not fiduciary or arising out of a contract for consideration, must be, to use the words of Lord Devlin, ‘equivalent to contract’ before any liability can arise … that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract.”
In Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. 465, referred to by Mr. Justice Kenny, the scope of liability for negligent misstatement is however, stated in a more ample manner in the speech of Lord Reid than in the passage taken from the speech of Lord Devlin. Lord Reid stated the position as follows, at page 483:-
“It seems to me that there is good sense behind our present law that in general an innocent but negligent misrepresentation gives no cause of action. There must be something more than the mere misstatement. I therefore turn to the authorities to see what more is required. The most natural requirement would be that expressly or by implication from the circumstances the speaker or writer has undertaken some responsibility, and that appears to me not to conflict with any authority which is binding on this House. Where there is a contract there is no difficulty as regards the contracting parties: the question is whether there is a warranty … Then there are cases where a person does not merely make a statement but performs a gratuitous service. I do not intend to examine the cases about that, but at least they show that in some cases that person owes a duty of care apart from any contract, and to that extent they pave the way to holding that there can be a duty of care in making a statement of fact or opinion which is independent of contract.”
Lord Reid then refers to a number of decided cases concluding with Lord Haldane’s judgment in Robinson v. National Bank of Scotland [1916] SC (HL) 154, and continues:
“This passage makes it clear that Lord Haldane did not think that a duty to take care must be limited to cases of fiduciary relationship in the narrow sense of relationships which had been recognised by the court of Chancery as being of a fiduciary character. He speaks of other special relationships, and I can see no logical stopping place short of all those relationships where it is plain that the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him. I say ‘ought to have known’ because in questions of negligence we now apply the objective standard of what the reasonable man would have done.
A reasonable man, knowing that he was being trusted or that his skill and judgment were being relied on, would, I think, have three courses open to him. He could keep silent or decline to give the information or advice sought; or he could give an answer with a clear qualification that he accepted no responsibility for it or that it was given without that reflection or inquiry which a careful answer would require; or he could simply answer without any such qualification. If he chooses to adopt the last course he must, I think, be held to have accepted some responsibility for his answer being given carefully, or to have accepted a relationship with the inquirer which requires him to exercise such care as the circumstances require.”
See also what was said by Lord Morris of Borth-y-Gest, with whose statement of the law Lord Hodson expressed agreement.
The question then arises in every case where negligent misrepresentation or negligent misstatement is put forward as the cause of action, whether there existed between the parties some relationship based on contract, express or implied, or some other special relationship of the type referred to by Lord Reid which can give rise to liability in damages for economic loss attributable to the fact that the plaintiff acted on the faith of the representation made by the defendant.
Significant developments in the law of negligence have taken place since Hedley Byrne & Co. Lid. v Heller & Partners Ltd. [1964] A.C. 465 was decided, and since its effect was interpreted by Mr. Justice Kenny in Bank of Ireland v Smith [1966] T.R. 646, not least in the present area of negligent misrepresentation and negligent misstatement, as noted in McMahon & Binchy, “Irish Law of Torts” and the casebook forming a companion volume to that excellent textbook.
If the vendors in Bank of Ireland v Smith [1966] I.R. 646 had left the jurisdiction for an unknown destination taking with them the entire proceeds of sale, and it was found that the auctioneers had indeed been guilty of negligence in the particulars they gave of the property to be sold, I do not think the court would any longer regard it as a “startling proposition” if the hapless purchaser sought to recover some of his loss as against the negligent auctioneers.
Turning to the present case, when the plaintiff through its own bank presented the cheque drawn on the Tansey Farms Ltd. account for payment to the defendant, the defendant had the ordinary banker’s obligation to pay the cheque forthwith if having at the, time sufficient and available funds for the purpose or provided the cheque was within the limits of the agreed overdraft. Otherwise there was an obligation on the defendant to refuse payment at once. If this had been done in an unqualified manner it would have had the effect of immediately alerting the plaintiff to the inability of the company which had drawn the cheque to meet its liabilities and the plaintiff would have been put in the position of having to take whatever steps were open to it to secure payment and to take any other measures that could be taken for its own protection. No liability would have attached to the defendant in such circumstances.
The defendant elected to go further, however, and took it upon itself to communicate to the plaintiff its reason for refusing to honour the cheque at that point in time. In doing this I consider that it assumed an obligation to act honestly and carefully and not to deceive the plaintiff by putting forward a reason which was not the true reason, but was a spurious reason (as alleged in the statement of claim in the case, and as supported by the evidence adduced on behalf of the plaintiff).
This, in my opinion, brings the case within the four walls of the type of situation envisaged in the last paragraphs quoted from the speech of Lord Reid in Hedley Byrne & Co. Ltd. v. Keller & Partners Ltd. [1964] AC. 465 (assuming it is still necessary to do so), where his lordship deals with the three options open to a reasonable man volunteering information or advice to another person in the knowledge that his skill and judgment were being relied on and that the other person was trusting him to exercise such a degree of care as the circumstances required.
If answering without qualification and without disclaimer of responsibility in such circumstances “he must … be held to have accepted some responsibility for his answer being given carefully, or to have accepted a relationship with the inquirer which requires him to exercise such care as the circumstances require.”
I hold that the defendant was in breach of the obligation which arose in the particular circumstances of this case to reply in a careful and honest manner once it took the course of indicating its reason for refusing payment on foot of the cheque, and that the plaintiff was thereby caused economic loss, and I decide the issue of liability in favour of the plaintiff and against the defendant.
This leaves for consideration the issue of damages, which is one fraught with difficulty. What would have been the outcome had the defendant “come clean” and sent back the cheque immediately with an indorsement conveying clearly that there were no funds to meet it?
Mr. McMahon of Tansey Farms Ltd. said that at times the bank had allowed him to overdraw up as far as £73,000 depending on how many stock he had on hand from time to time and that he had a lot on hand in November and December. He continued: “If Mr. Potterton’s cheque had been ‘bounced’ on the 10th or 11th December, I am sure he would make me fix up before he accepted another cheque… I would say some of his cattle were still there.”
Mr. Potterton said in evidence that “if there were no funds I would have asked McMahon for the cattle back – they were still ours until the cheque was cleared … We would have followed up the second cheque a lot quicker had we known this would not be met.”
The bank accounts for Tansey Farms Ltd. which were produced in evidence show that substantial credits came in up to the 17th December, 1985, and equally substantial payments were made out of the account up to and including that date, with the account ultimately being overdrawn up to a figure of £45,314.59 as of the 17th January, 1986. It was overdrawn up to a figure of £65,114.54 as of the 3rd December, 1985. Mr. McMahon said that when he was in a position to make lodgments, people came in and got paid.
This conveys to me that when individual creditors took an aggressive line with the debtor there were occasions when they would accompany Mr. McMahon to the bank when he was making a lodgment and make sure they got payment there and then, thus getting in ahead of the remaining body of creditors who were left without any remedy when the company finally went to the wall.
I am of opinion that had the critical state of Mr. McMahon’s affairs been brought home to the plaintiff as soon as might have been expected, had the defendant been frank and open in the way it dealt with the cheque when presented for payment, the plaintiff would have taken action immediately and applied the maximum pressure to Mr. McMahon to pay up, either by apportioning some of whatever moneys were still available to him to their claim, and/or by returning any of their stock which still remained in his possession.
By these means, while it is highly unlikely that the plaintiff would ever have recovered the full amount of their claim, I think it is likely that something substantial would in all probability have been salvaged from the wreck of Tansey Farms Ltd., and I assess that figure at £20,000. I am also having regard to what I regard as a probability that had the bank not availed of the device they made use of in order to postpone the day of reckoning in relation to the cheque drawn in favour of the plaintiff, they would have had second thoughts about paying out in full four other cheques presented contemporaneously and totalling in excess of £40,000 while leaving the plaintiff high and dry with no payment whatever.
On this basis I find the defendant is liable in negligence and breach of duty to the plaintiff on foot of the plaintiff’s claim in these proceedings with no finding of contributory negligence against the plaintiff and I assess damages in favour of the plaintiff in the aforementioned sum of £20,000. I also award the plaintiff interest on that sum pursuant to the provisions of the Courts Act, 1981, but as the plaintiff has not been very diligent in prosecuting its claim, I will direct that interest should run from the 21st October, 1989, being the date of expiry of the notice of intention to proceed dated the 21st September, 1989.
London Joint Stock Bank, Ltd v. Macmillan & Arthur
[1919] UKHL 367 (21 June 1919)
Finlay LC
The relation between banker and customer is that of debtor and creditor, with a super—added obligation on the part of the banker to honour the customer’s cheques if the account is in credit. A cheque drawn by a customer is in point of law a mandate to the banker to pay the amount according to the tenor of the cheque. It is beyond dispute that the customer is bound to exercise reasonable care in drawing the cheque to prevent the banker being misled. If he draws the cheque in a manner which facilitates fraud, he is guilty of a breach of duty as between himself and the banker, and he will be responsible to the banker for any loss sustained by the banker as a natural and direct consequence of this breach of duty. Whether what happened in this case can be considered a natural and direct consequence of the customer’s negligence in drawing the cheque is in controversy.
It has been often said that no one is bound to anticipate the commission of a crime, and that to take advantage of blank spaces left in a cheque for the purpose of increasing the amount is forgery which the customer is not bound to guard against. It has been suggested that the prevention of forgery must be left to the criminal law. I am unable to accept any such proposition without very great qualification. Every day experience shows that advantage is taken of negligence for the purpose of perpetrating frauds. A warehouseman is bound to take precautions against theft, and if he fails to do so he will be liable to the owner if the goods are stolen. It would be idle for him to contend that he had trusted to the terrors of the criminal law for the prevention of theft.
As the customer and the banker are under a contractual relation in this matter, it appears obvious that in drawing a cheque the customer is bound to take usual and reasonable precautions to prevent forgery. Crime is indeed a very serious matter, but everyone knows that crime is not uncommon. If the cheque is drawn in such a way as to facilitate or almost to invite an increase in the amount by forgery, if the cheque should get into the hands of a dishonest person forgery is not a remote but a very natural consequence of negligence of this description.
Young v. Grote was decided nearly 100 years ago. It has been often approved by many of our greatest judges, and with the exception of a recent case in the Privy Council, with which I shall deal later on, there has never been a decision inconsistent with it but for that now under appeal.
The facts in Young v. Grote are few and are stated in the award of the arbitrator on which the decision of the Court of Common Pleas was given. Mr Young when leaving home for some days, left with his wife five blank cheques signed by him, and desired her in his absence to have them filled up for such sums as the purposes of his business might require. Mrs Young wanted £50, 2s. 3d. to pay wages, and delivered one of her husband’s blank cheques to Worcester, a clerk of his, authorising him to fill it up for £50, 2s. 3d. What followed is best stated in the words of the award as set out in the report of the case in 4 Bing. 254, 255—“Worcester accordingly filled it up with that sum and showed it so filled up to Mrs Young and she desired him to get it cashed, but the cheque, when itwas so filled up and shown to Mrs Young, presented the following appearance:—The first line contained in print the names of the bankers;the second line contained the words ‘Pay wages or bearer,’ the word ‘wages’ only being in writing and the third line contained the words ‘fifty pounds’ and the figures ‘2s. 3d.’; but the word ‘fifty’ commenced in the middle of that third line, and with a small letter, so that ample space in that line was left for the insertion of other words before the word ‘fifty’; and there was at the bottom of the draft the figures ‘50. 2. 3.’, but the figure ‘5’ was at a sufficient distance from the letter ‘£’ to allow another figure to be inserted between it and the letter ‘£.’” Worcester afterwards fraudulently inserted the words “Three hundred and” before the word “fifty,” and the figure “3” before the figure “5.” The alterations were so made that they could not have been detected by any ordinary diligence, and the bank paid to Worcester £350, 2s. 3d. against the cheque, and debited the customer with the amount. He objected, alleging that his draft was only for £50, 2s. 3d. The award then proceeds as follows—“The arbitrator thought that it was his draft for that sum only, but he thought also that he had been guilty of gross negligence by causing his draft to be delivered to Worcester (in whose handwriting the body of it had been filled up) in such a state that the latter could and did, by the mere insertion of other words, make it appear to be the draft of Peter Young for the larger sum; and that as he, partly by his negligence, had caused the bankers to pay the larger sum, he was bound to make good to them the loss which by reason-of his negligence they had sustained by paying that sum. If the Court of Common Pleas should think that opinion wrong, then he awarded that Peter Young was entitled to receive from Grote & Company the sum of £300 and ordered accordingly.”
It is obvious that the award left to the Court the questions whether the arbitrator was right in thinking that Young had been guilty of gross negligence, and whether he was bound to make good to the bankers the larger sum which they had paid owing partly to his negligence. Best, C. J. (p. 259), pointed out the negligence in the manner in which the wife had the cheque filled up, and said that it was by the neglect of ordinary precautions that the bankers were induced to pay. He remarked that in the case of Hall v. Fuller, 5 B. & C. 750, which had been relied upon, that the cheque was properly drawn in the first instance, and the forgery consisted in expunging the words and figures and the insertion of others in their place. The Chief-Justice concluded his judgment by saying—“We decide here on the ground that the banker has been misled by want of proper caution on the part of his customer.” Park, J., said that he concurred in the opinion of the arbitrator that Young was guilty of negligence; Burrough, J., said that the blame was all on one side; and Gaselee, J., that there certainly was gross negligence on the part of Young, and therefore the rule must be discharged.
I have referred at some length to the way in which the Court in the case of Young v. Grote dealt with the question of negligence, for this reason—It has been argued on behalf of the respondents here that that case merely proceeded on the finding of fact by the arbitrator that there was gross negligence. This is not so. The opinion of the Court was invited and given on the question whether the arbitrator was right in finding negligence, as well as on the question whether Young was liable for the loss which ensued. The Court concurred with the arbitrator on both points.
Best, C.J., has been criticised for basing his judgment on the well-known passsage in Pothier (Traité du Contrat de Change, part 1, c. 4, sec. 99), which he quotes on p. 258 of the report as authority for the proposition that if it be by the fault of the customer that the banker pays more than he ought he cannot be called upon to pay again. The passage will be found at p. 61 of the Paris edition (1809) of Pothier’s Traité du Contrat de Change, with notes by Hutteau. It occurs in the course of a long criticism by Pothier of a passage of the Italian jurist Scacchia (quoted in extenso, 1896, A.C. 524 to 527), in which he discusses the question of the right of the drawee to be recouped by the drawer when by reason of a fraudulent alteration in the draft he has been led to pay more than the sum really drawn for. Pothier criticises (pp. 59 to 62, sup.) the view of Scacchia, and dissents from the wide terms in which the right of indemnity in such cases had been asserted by Scacchia. Pothier treats the question as one of the law of mandate. He cites some illustrations from the Digest xvii, tit. 1 (Mandati vel Contra), 1.26, par. 7, and Digest xlvii, tit. 2 (De Furtis), 1.61 (63), par. 5, and concludes with the passage in question—“Cependant, si c’était par la faute du tireur quele banquier eût été induit en erreur, le tireur n’ayant pas eu le soin d’écrire sa lettre de manière à prévenir les falsifications; putà, s’il avait écrit en chiffres la somme tirée par la lettre, et qu’on eût ajouté zéro, le tireur serait, en ce cas tenu d’indemniser le banquier de ce qu’il a souffert de la falsification de la lettre, à laquelle le tireur par sa faute a donné lieu; et c’est à ce cas qu’on doit restreindre la décision de Scacchia.” This passage appears to me to be strictly relevant to the case of banker and customer with which Best, C. J., was dealing, and to embody the principle of English as well as of the civil law. It is after citing this passage from Pothier that the Chief-Justice goes on to consider whether it was by the fault of Young that the payment was made.
It was upon this ground, and this ground alone, that Young v. Grote was decided by three of the four Judges of the Common Pleas. It is true that Park, J., while concurring in the finding of negligence, also says (p. 260)—“Can anyone say that the cheque signed by Young is not a genuine order? I say it is. The cheques left by him to be filled up by his wife when filled up by her became his genuine orders.” And this is the explanation of Young v. Grote adopted by Lord Mersey in the case of Union Credit Bank v. Mersey Docks and Harbour Board, 4 Com. C. 227, 1899, 2 Q.B. at pp. 210–211, while rejecting the reason given by the majority, on what I venture to think are insufficient grounds. It is true that Young left the cheques signed in blank with his wife to be filled up by her. She by the hand of the clerk filled one up with the correct amount, and the fraudulent alteration was afterwards made by the clerk with whom she had left the cheque merely to get payment of the correct amount. But the additional ground suggested by Park, J., and adopted by Lord Mersey, whether applicable or not to the facts in Young v. Grote, has, as I shall afterwards show, a most important bearing on the case now under appeal.
The sole ground upon which Young v. Grote wasdecided by the majority of the Court of Common Pleas was that Young was a customer of the bank, owing to the bank the duty of drawing his cheque with reasonable care that he had delegated the performance of this duty to his wife; that she had been guilty of gross negligence in having the cheque filled up in such a manner as to facilitate an increase of the amount; and that the fraudulent alteration of the cheque by the clerk to whom, after being filled up, it had been entrusted by her for the purpose of getting payment would not have taken place but for the careless manner in which the cheque was drawn. The duty which the customer owes to the bank is to draw the cheques with reasonable care to prevent forgery, and if, owing to neglect of this duty, forgery takes place, the customer is liable to the bank for the loss. This is the principle expressed in the passage from Pothier cited above. It may be put in various ways. Sometimes it has been said that an estoppel is created, and that as the negligence of the customer enabled the clerk to alter the amount to that which the banker paid, he is estopped from disputing the authority of the banker to pay. Sometimes it has been said that the payment must be allowed in account with the bank in order to avoid circuity of action, the customer being liable to the bank for his negligence, and this latter was the ground on which Cockburn, C.J., rested the decision in Young v. Grote—( Swan v. North British Australasian Company, 2 H. & C., at pp. 189, 190). In whichever of these ways it may be put, the ground is really one and the same—as the negligence of the customer caused the loss he must bear it. The fact that a crime was necessary to bring about the loss does not prevent its being the natural consequence of the carelessness. If the door of a warehouse is left unlocked at night the goods may be stolen, and if a cheque is drawn with neglect ofall usual precautions to prevent falsification the cheque may be falsified. The loss in each case is the result of the omission of ordinary and reasonable precaution. The whole matter is stated by Best, C.J., in two sentences (4 Bing., at p. 258). After stating that it is the rule that if a payment be made without authority the banker, not the customer, must suffer, he goes on to say—“But though that rule be perfectly well established, yet if it be the fault of the customer that the banker pays more than he ought, he cannot be called on to pay again,” and quotes Pothier’s doctrine that if it was by the fault of the drawer that the banker was misled in the matter, the drawer not having taken care to write the draft so as to prevent falsification, the drawer will be bound to indemnify the banker against loss from the falsification for which the drawer by his fault has given occasion. This is illustrated by what was said about the case of Young v. Grote in the curious case of Ingham v. Primrose, 1859, 7 C.B. (N.S.) 82, in which the acceptor of a bill of exchange, intending to cancel it, tore it in half and threw it into the street. The tearing had been done in such a way that the appearance of the bill was consistent with its having been divided for the purpose of safe transmission by the post. The finder of the two pieces pasted them together and put the bill into circulation. The acceptor was held liable at the suit of a bona fide holder. It had been argued on behalf of the defendants that the putting together of the two halves amounted to forgery, and on this point Williams, J., in delivering the judgment of the Court of Common Pleas, said (pp. 87–88) that even assuming that the act of reconstructing the bill was a forgery, yet, on the principle of Young v. Grote, this would be no answer to the plaintiff’s claim, because the defendant by abstaining from an effectual cancellation or destruction of the bill had led to the plaintiff taking the bill for value without notice. Apart from the merits of the decision in that particular case, this judgment is a recognition by a strong Court of the authority of Young v. Grote, and a ruling that the fact that forgery was necessary to take advantage of the negligence would afford no answer.
Of course the negligence must be in the transaction itself, that is, in the manner in which the cheque is drawn. It would be no defence to the banker if the forgery had been that of a clerk of a customer, that the latter had taken the clerk into his service without sufficient inquiry as to his character. Attempts have often been made to extend the principle of Young v. Grote beyond the case of negligence in the immediate transaction, but they have always failed.
The grounds of the decision in Young v. Grote were discussed in 1851, in 1854, and in 1861 by judges of great distinction—Parke, B., Pollock, C.B., and Lord Cranworth. Parke, B., in the well-known case of Robarts v. Tucker, 1851, 16 Q.B. 560, distinguished Young v. Grote from the case then under consideration. In the report ( 16 Q. B., pp. 579–580) Parke, B., is reported as putting the decision in Young v. Grote on the ground that the customer had signed a blank cheque, giving authority to anyone in whose hands it was to fill up the cheque in whatever way the blank permitted; while in 15 Jurist, O.S., at p. 988, he is reported as saying that in Young v. Grote there was negligence in the drawing of the cheque itself, which was the authority given by the drawer to the bank. Pollock, C.B., in delivering the judgment of the Court in Barker v. Sterne, 1854, 9 Ex., pp. 686–687, cites Young v. Grote, and says—“It was held that the loss must fall on the drawer as it was caused by his negligence. Now, whether the better ground for supporting that decision is that the drawer is responsible for his negligence which has enabled a fraud to be perpetrated, or whether it be considered that when a person issues a document of that kind the rest of the world must judge of the authority to fill it up by the paper itself, and not by any private instructions, it is unnecessary to inquire. I should prefer putting it on the latter ground.” Lord Cranworth in giving judgment in your Lordships’ Housein the Scottish case, Orr v. Union Bank of Scotland, 1854, 1 Macq. H.L., at p. 523, says of Young v. Grote—“The decision went on the ground that it was by the fault of the customer the bank had been deceived. Whether the conclusion in point of fact was in that case well warranted is not important to consider. The principle is a sound one, that where the customer’s neglect of due caution has caused his bankers to make a payment of a forged order, he should not set up against them the invalidity of a document which he has induced them to act on as genuine.” And in 1861 Lord Cranworth in another Scottish Case, British Linen Company v. Caledonian Insurance Company, 4 Macq. H.L. 107, again referred to Young v. Grote as a case in which there was negligence in circumstances that were the immediate cause of payment by the banker, and said the decision proceeded on the ground that negligence on the part of the drawer had afforded the opportunity for the fraud.
To what was said by the three Judges whom I have just quoted may be added the observations made by Cleasby, B., in delivering the judgment of the Court of Exchequer in Halifax Union v. Wheelwright, L.R., 10 Ex. 183. At p. 192, after referring to some variety in the reasons which had been given for the conclusions reached in Young v. Grote, he said—“It is perhaps only an application of one of those general principles which do not belong to the municipal law of any particular country, but which we cannot help giving effect to in the administration of justice, namely, that a man cannot take advantage of his own wrong. A man cannot complain of the consequences of his own fault against a person who was misled by that default without any fault of his own.”
Perhaps no case has been more frequently cited than Young v. Grote, and very largely by reason of repeated attempts to pray in aid its principle under circumstances to which it has no real relation.
The first case of this description was that of Bank of Ireland v. Evans’ Charities, 1855, 5 H.L.C. 389. In that case stock belonging to Evans’ Charities, registered in the Bank of Ireland, had been transferred under powers of attorney to which the seal of the trustees of the charities had been fraudulently affixed by the secretary. The jury found that the trustees had contributed to the loss by their negligence in allowing the secretary to have control of the seal, and it was decided by the House of Lords that this afforded no answer to the claim of the trustees to the stock. Young v. Grote was much discussed in the course of the argument in their Lordships’ House. Parke, B., delivering the opinion of all the Judges, says at pp. 409, 410, that negligent custody of the seal was not enough, and that the negligence which would deprive the plaintiff of his right to insist that the transfer was invalid must be negligence in or immediately connected with the transfer itself, and proceeded as follows:—“Such was the case of Young v. Grote, on which great reliance was placed in the argument at your Lordships’ Bar. In that case it was held to have been the fault of the drawer of the cheque that he misled the banker on whom it was drawn by want of proper caution in the mode of drawing the cheque, which admitted of easy interpolation, and consequently that the drawer, having thus caused the banker to pay the forged cheque by his own neglect in the mode of drawing the cheque itself, could not complain of that payment.” And at pp. 413, 414, Lord Cranworth, L.C., said—“Now the case of Young v. Grote went upon that ground (whether correctly arrived at in point of fact is immaterial) that the plaintiff there was estopped from saying that he did not sign the cheque for £350, and if the circumstances are such, whether arising from negligence or from any other cause, that as between the customer and his banker the customer is estopped from saying that he did not sign the cheque for a particular amount, that as between them is just the same as if he had signed it. Therefore, taking that view of the facts, the case may be well sustained, and appears to have been well decided.” This is another way of saying that the customer could not complain of the payment, having caused the banker to pay the forged cheque by his own neglect in the mode of drawing the cheque itself, to quote the language of Parke, B. Lord Brougham, at p. 415, cites Young v. Grote without disapproval, while he goes on to express doubts as to the decision in Coles v. Bank of England, 10 Ad. & Ell. 437.
A little later in the same year (1859) arose the case of Ex parte Swan, 7 C.B., N.S. 400. The question there arose on a rule nisi to enforce the claim of the applicant to be inserted in the register in respect of shares which had been transferred to third parties under transfers from the applicant which were forgeries. The claim was rested on the ground that the transfers had been executed by the applicant in blank and had been negligently left in the custody of his broker, who afterwards fraudulently filled them up and sold the shares. The Court was equally divided in opinion and the rule dropped. Young v. Grote was referred to with approval by all the four Judges, though they differed as to its applicability. Erie, C.J., quotes Young v. Grote as an authority, and says that it proceeded on the ground that the plaintiff was estopped from setting up against the defendant that the cheque was only £50, inasmuch as it was his negligence by his agent that enabled the fraudulent holder to cheat the banker (at p. 431). Keating, J., at p. 440, says it went on the ground that a cheque had been drawn so as to admit easily of alteration. At p. 445 Williams, J, says “The case of Young v. Grote has been recently recognised in this Court, and its authority cannot be disputed.” Willes, J., distinguished Young v. Grote as relating to a negotiable instrument.
Next year Mr Swan brought an action against the company to assert his title to these shares, and a case was stated for the opinion of the Court of Exchequer— Swan v. North British Australasian Company, Limited, 1862, 7 H. & N. 603. The four Judges before whom the hearing took place were agreed that negligence to operate as an estoppel must be the proximate cause of the loss, but differed in their opinion as to the particular case before them. No dissent from the doctrine of Young v. Grote was expressed by any of the judges, and Channell, B., referring to the fact that Young v. Grote had been strongly pressed upon the Courts, said that it must be considered as explained by Parke, B., in Robarts v. Tucker, 16 Q.B. 579, 580, and by the Judges in the House of Lords in Bank of Ireland v. Evans’ Charities, 1855, 5 H.L.C. 389. The case was taken to the Exchequer Chamber in 1863, 2 H. & C. 157, and it was held there, Keating, J., dissenting, that the plaintiff was entitled to the shares, the Court holding that negligence to operate as an estoppel must be the proximate cause of the loss. Three of the Seven Judges referred to Young v. Grote. Blackburn, J., while expressing disapproval of Coles v. Bank of England, expresses no disapproval of Young v. Grote, and on the contrary, after referring (at p. 182) to the manner in which Young v. Grote had been dealt with by Williams, J., in Ex parte Swan, 7 C.B., N.S. at p. 445, where it will be recollected Williams, J., had said that the authority of Young v. Grote could not be disputed, proceeds thus (at pp. 182, 183)—“It may be that that case” ( Young v. Grote) “is to be supported on some of the grounds there stated, or upon the broader ground, apparently supported by the authority of Pothier in the passage cited in Young v. Grote, that the person putting in circulation a bill of exchange does, by the law merchant, owe a duty to all parties to the bill to take reasonable precautions against the possibility of fraudulent alteration in it; it is not necessary in this case to inquire how that may be.” I may remark in passing that this last suggestion is too widely put, as was held by this House in Scholfield v. Earl of Londesborough, 1896 A.C. 514, but is quite correct as applied to the case of banker and customer with reference to cheques, as in Young v. Grote. Cockburn, C. J. (at pp. 189–190) says that Young v. Grote was not decided on estoppel, but on the ground that as the loss had been brought about by the negligence of the customer the latter must bear the loss sustained, and suggested that these facts were held to give a defence to avoid circuity of action. The other judge who refers to Young v. Grote is the dissenting judge, Keating, J., who relied upon its authority (p. 179). The authority of the case was disputed by no member of the Court, but the circumstances of the case then before the Court were entirely different.
The group of cases to which I have just referred, 1855 to 1863, recognise the authority of the decision of Young v. Grote, while establishing that it applies only to cases in which the negligence is in the transaction itself, and has no application to cases where the fraud has been merely facilitated by negligence in the custody of the seal of a corporation or of transfers in blank. The principle which underlies these decisions is further illustrated in the cases of Arnold v. Cheque Bank, Limited, 1 C.P.D. 578; Raxendale v. Bennett, 3 Q.B.D. 525; Mayor of the Staple of England v. Bank of England, 21 Q.B.D. 160; Lewes Sanitary Laundry Company v. Barclay, 11 Com. C. 255; and Kepitigalla Rubber Estates v. National Bank of India, 1909, 2 K.B. 1010.
In the case of Arnold v. Cheque Bank, evidence to prove that there had been negligence in the custody and transmission of a draft which had afforded facilities for its being stolen by one Hecht, who forged the endorsement of the plaintiffs and obtained payment, was rejected on the ground that the alleged negligence was collateral only to the transaction. The judgment of the Court (Lord Coleridge, C.J., and Archibald and Lindley, JJ.) refusing a new trial was delivered by Lord Coleridge, who (at pp. 586 to 588) discusses Young v. Grote and other authorities. He points out that one has only to look at the case itself to see that Young v. Grote proceeded on the fault of the drawer in the mode of drawing the cheque, “and is entirely consistent with the rule laid down and explained on fuller consideration in subsequent cases, namely, that negligence in order to estop must be in the transaction itself” (p. 587).
Baxendale v. Bennett was the case of an acceptance in blank without a drawer’s name being stolen from an unlocked drawer in which it was kept. Brett, L.J., was mistaken in saying (as he does at p. 534 in this case) that the decision of the House of Lords in Bank of Ireland v. Evans’ Charities had shaken the authority of Young v. Grote and Coles v. Bank of England,as it will be found on examination of the passage referred to that while it is true of Coles v. Bank of England, it is not clear of Young v. Grote. And in Mayor of the Staple of England v. Bank of England Lord Esher himself explains Young v. Grote as a case in which the negligence was in or immediately connected with that which happened, and said that the negligence must be approximately connected with the result (p. 172).
The case last mentioned was one in which the plaintiffs were held entitled to recover stock belonging to them which had been transferred under a transfer to which their seal had been fraudulently affixed by their clerk notwithstanding negligence on their part in the custody of the seal.
The principle was elaborately discussed by Kennedy, J., in Lewes Sanitary Laundry Company v. Barclay. This was a case of banker and customer. Cheques had been forged by the customer’s clerk, and the bank set up as a defence that the customer had been negligent in keeping a clerk in his employment knowing that on a previous occasion he had been convicted of forgery. This contention was rejected by Kennedy, J., on the ground that to make good such a defence the bank would have to show that it had been misled into making the payments by neglect on the part of the customer in or immediately connected with the forgery or uttering of the cheques, and that the fraud followed as a natural and ordinary result from the negligent conduct of the customer. These are exactly the conditions which existed in Young v. Grote.
So in Kepitigalla Rubber Estates v. National Bank of India, which was a case of forged cheques, Bray, J., laid down that it is the duty of the customer of a bank to use reasonable care in the issuing of mandates, citing Young v. Grote and other authorities, and went on to say—“I should come to the same conclusion apart from authority. It seems to me to be clearly the duty of a person giving a mandate to take reasonable care that he does not mislead the person to whom the mandate is given.” The learned Judge goes on to point out that to afford a defence to the banker the breach of duty must be, as in Young v. Grote, in connection with the drawing of the order or cheque, and that there is no obligation as between customer and bankerthat the person should take precautions in the general carrying on of his business or in examining and checking the pass-book.
The celebrated case of Bank of England v. Vagliano, [1891] A.C. 107, which arose out of the forgeries of a clerk named Glyka, came up to the House of Lords in 1891. The facts of the case are very different from those now before this House. No doubt was expressed by any of their Lordships who took part in the decision as to the authority of Young v. Grote. Lord Selborne refers to “the cases in which the drawer of a cheque has been held bound by fraudulent alterations for which the state of the paper afforded space,” and appears to rely upon them in support of his reasoning against the liability of the Bank of England. Lord Bramwell refers to Young v. Grote as an authority, and says that the result of the authorities is “that the conduct of the bank’s customer to enable the bank to charge the customer must be conduct directly causing the payment.” Lord Field says this—“Reliance was placed by the defendants on the case of Young v. Grote. That case, no doubt, must be considered as well decided, but various opinions have been expressed as to the real ground of the decision. But we have only to look at the case itself to see that it really proceeded on the authority of the extract from Pothier cited in the judgment of Best, C. J., which makes the inability to recover depend upon the fault of the drawer of the cheque in the mode of drawing it, and is entirely consistent with the rule laid down and explained on fuller consideration in subsequent cases, viz., negligence in order to estop must be negligence in the transaction itself—see per Blackburn, J., in Swan v. North British Australasian Company.
A very serious extension of the effect of the decision in Young v. Grote was attempted in the years 1894 to 1896 in the case of Scholfield v. Earl of Londesborough, decided in the first instance by Charles, J., whose decision was confirmed in the Court of Appeal and in your Lordships’ House, 1896 A.C. 514. In that case the defendant had accepted a bill of exchangefor £500 drawn upon him by one Saunders, and bearing a stamp sufficient to cover £4000. Before indorsement it was fraudulently altered by the drawer to £3500 by the insertion of the words “three thousand” before the words “five hundred” and the figure “3” before the figure “5.” The acceptor was sued on the bill by a holder for value.
It is necessary to state the course of this case somewhat fully in view of its bearing upon the subsequent case of Colonial Bank of Australasia v. Marshall. Charles, J., held that a person who signs a negotiable instrument with the intention that it should be delivered to a series of holders incurs a duty to those who take the instrument not to be guilty of negligence with reference to the form of the instrument, and that if he signs it negligently in such a shape as to render alterations easy, in the result he is responsible on the altered instrument. He applied to negotiable instruments generally the doctrine of Young v. Grote as to a cheque between banker and customer. He then went on to inquire whether the acceptor was guilty of negligence in accepting the bill and held that he was not. He referred to Young v. Grote, and said that a glance at the cheque there would have satisfied any careful person that it was in a state in which alteration was not merely a possible but a likely result, and then said—“Here I cannot see anything to warrant such a finding. The unaltered bill was complete in form, and upon inspection would not, in my judgment, have excited suspicion in the mind of a reasonably prudent man.” He therefore held that the acceptor was liable on the bill for £500 and no more. He pointed out that the question whether the defendant had been guilty of such negligence as would impose upon him a liability for the subsequent forgery was a question not of law but of fact, referring particularly to the case of La Société Générale v. Metropolitan Bank, 27 L.T.R. 849, 21 W.R. 335.
The defendant appealed, and in the Court of Appeal it was held by the majority, Lord Esher, M.R., and Rigby, L.J., that the acceptor of a bill incurs no such duty as Charles, J., had found. As Lord Esher points out, it would be a very dangerous doctrine if a draft could be refused acceptance on the ground that there were spaces in it and the bill were to be protested in consequence. He said that Young v. Grote, which he characterised as “the fount of bad argument,” had no application, as it was a question between banker and customer, and the person said to be negligent was the drawer of a cheque and not the acceptor of a bill of exchange. He added that the only ground on which Young v. Grote could be supported was that the customer signed a blank cheque. As to the finding by Charles, J., on the question of negligence Lord Esher says—“Suppose, however, there were a duty owing by the acceptor, it must be a duty not to accept the bill in such a form as to render a forged interpolation easy. The suggested neglect of that duty is that the acceptor ought to have anticipated that the billwould fall into the hands of a felonious person who might take advantage of the spaces, and that the acceptor should on that anticipation have put marks on the bill to fill up the spaces. Unless it can be laid down that the mere fact of leaving such spaces unfilled is conclusive evidence of negligence it might be that on a similar state of things different juries might take different views. That, again, would be a dangerous state of things. If, however, it is a question of fact for our decision I am of opinion that such evidence as was given in this case is no evidence of negligence;” and he added that even if there was negligence it was not the negligence but the subsequent forgery which was the immediate cause of the loss.
Rigby, L. J., on the question of negligence said that it was probable that the drawer had used some means to close the defendant’s eyes to the imperfections of the bill, and added—“The state of evidence makes it impossible to say that the plaintiff has proved negligence.
Lopes, L. J., differed, holding that the duty existed, and that there had been negligence so that the plaintiff was in his opinion entitled to recover on the bill altered to £3500.
It is obvious that the position of the acceptor of a bill of exchange with reference to subsequent holders is very different from that of a customer with reference to his banker in the case of a cheque. In the latter case there is a definite contractual relation involving the obligation to take reasonable precautions.
When Scholfield’s case came to the House of Lords, Lord Halsbury said of Young v. Grote—“That case has been pushed so far in argument that I think the time has come when it would be desirable for your Lordships to deal with it authoritatively, and to examine how far it ought to be quoted as an authority for anything.” And towards the close of his judgment Lord Halsbury refers to Adelphi Bank v. Edwards (not reported), a case as to a bill of exchange, and goes on to say—“I entirely concur with what Lindley, L.J., said in that case, that it was wrong to contend that it is negligence to sign a negotiable instrument so that somebody else can tamper with it; and the wider proposition of Bovill, C. J., in a former case, Société Générale v. Metropolitan Bank, that people are not supposed to commit forgery, and that the protection against forgery is not the vigilance of parties excluding the possibility of committing forgery but the law of the land.
The distinction between Young v. Grote and such a case as Scholfield was clearly pointed out by five of the peers who took part in the decision.
Lord Watson says—“In my opinion Young v. Grote can have no bearing upon the present case if it was decided upon the ground that the customer by signing a blank cheque had given implied authority to fill it up to any subsequent holder.
Whoever signs a cheque or accepts a bill in blank and then puts it into circulation must necessarily intend that either the person to whom he gives it or some future holder shall fill up the blank which he has left. No such inference would be reasonable in the case where the drawer or acceptor signs for a particular sum specified on the face of the document. If on the other hand the decision in Young v. Grote was based upon the ratio that the customer, in filling up the cheque through his wife, whom he had constituted his agent for that purpose, had failed in the duty which he owed to his banker by giving facilities for its fraudulent alteration, I am not prepared to affirm that it cannot be supported by authority. But it does not, in my opinion, necessarily follow that the same rule must be applied between the acceptor of a bill of exchange and a holder acquiring right to it after acceptance. The duty of the customer arises directly out of contractual relation existing at the time between him and the banker, who is his mandatory. There is no such connection between the drawer or acceptor and possible future indorsees of a bill of exchange. The duty which the appellant’s argument assigns to an acceptor is towards the public, or, what is much the same thing, towards those members of the public who may happen to acquire right to the bill after it has been criminally tampered with. Apart from authority I do not think the imposition of such a duty can be justified on sound legal principle.” He then reviews the authorities and shows that they lead to the same conclusion, and goes on—“The doctrine of Pothier, out of which the contention of the bill-holder in this and previous litigations has grown, is founded upon reasons which have no application to any question between a drawer or acceptor and a holder acquiring right to the bill after acceptance, and I know of no principle of law which would warrant its extension to that case.”
Lord Macnaghten says that on no view of Young v. Grote could it apply to such a case as that before the House, and (on pp. 545–546)—“Whatever may be the better ground for supporting the decision in Young v. Grote, it is obvious, on referring to the report in Bingham, that the Court went very much on the authority of the doctrine laid down by Pothier, that in cases of mandate generally, and particularly in the case of banker and customer, if the person who receives the mandate is misled through the fault of the person who gives it, the loss must fall exclusively on the giver. That is not unreasonable, but the doctrine has no application to the present case. There is no mandate as between the acceptor of a bill and a subsequent holder.”
Lord Morris says that in Young v. Grote the document was in blank, and adds—“Even if well decided on its particular facts, and a case between banker and customer, I fail to see how it governs this case, where the defendant accepted a regularly filled-up bill.”
Lord Shand says—“As to the case of Young v. Grote, I find nothing in the grounds of the judgment which supports the proposition that an indorsee of a bill of exchange for value has a legal claim against the acceptor against whom no want of bona fides can be alleged for a sum beyond the amount for which the acceptance was given, on the ground of negligence in his having given his acceptance to a bill in such a form and impressed with such a stamp as enabled the drawer to commit a forgery by enlarging the amount for which the acceptance was granted in such a way as to escape detection by the indorsee.” He then goes on to point out that on neither of the two grounds (negligence and signature of the cheques in blank), on which Young v. Grote had been supported, could it have application to the facts of the case under discussion.
Lord Davey expressed his entire agreement with Lord Watson’s judgment, and says—“I only desire to say that in my opinion our judgment in this case is outside the case of Young v. Grote. The doctrine of that case was one arising out of the relation of mandant and mandatory, which does not exist in the case of the acceptor and holder of a bill of exchange.”
The decision of the House of Lords in the Scholfield case therefore proceeded on the ground that the duty which Young v. Grote affirmed to exist as between banker and customer had no relation to any supposed duty on the part of the acceptor of a bill of exchange to those into whose possession the bill might pass. The decision of the House of Lords does not infringe upon the authority of Young v. Grote. On the contrary, I think it recognises it.
The last case which it is necessary to notice is that of the Colonial Bank of Australasia v. Marshall ( 1906 AC 559), which, though not binding on any English court, commands the most respectful consideration. This was an Australian case in which Marshall, Day, and one Myers were executors, and as such opened an account with the colonial bank on which cheques were to be drawn signed by the three. The cheques were drawn by Myers, who sent them for signature to Marshall and Day, and then added his own signature. Five cheques for small amounts were drawn by Myers and signed by Marshall and Day. Myers, before signing himself, added words and figures in the cheque as signed by Marshall and Day, and in this way greatly increased the apparent amounts of the cheques. Having signed the cheques himself he got them cashed for the increased amounts. The question was whether Marshall and Day could throw the loss on the bank. In the judgment of the Judicial Committee (Lord Halsbury, Lord Macnaghten, Sir Arthur Wilson, and Sir Alfred Wills) delivered by Sir Arthur Wilson, it is said that Scholfield v. Earl of Londesborough in the House of Lords is now the governing authority, and after stating the course of that case before Charles, J., it is pointed out that the Court of Appeal negatived the existence of the alleged duty and the allegation that, assuming it existed, there had been a violation of it, so that both propositions were before the House of Lords. Sir Arthur Wilson says that the existence of the duty was negatived by the House of Lords but that that did not affect the case then under appeal, as it was recognised that there is or may be a duty on the part of a drawer of a cheque towards his banker which does not exist on the part of the acceptor of a bill towards holders. He said that no attempt was made to define the extent of such obligation, and that it might be impossible to do so as the extent of the duty might depend on the course of dealing between the parties. The judgment then proceeds as follows—“But the duty which, according to the ruling of the learned Chief-Justice, subsists between customer and banker is substantially the same as that contended for in Scholfield v. Earl of Londesborough as existing between the acceptor and the holder of a bill. And as has been pointed out the House of Lords had before them on the appeal the question whether the Court of Appeal was right in ruling that thefacts found in that case (which included everything existing in the present case) did not amount to a breach of the obligation supposing that obligation to exist.
Not one of the members of their Lordships’ House appears to have expressed the slightest disapproval of that ruling, and most of their Lordships distinctly approved of it. The Lord Chancellor expressed his concurrence in the opinion of Lindley, L. J., that it was wrong to contend that it is negligence to sign a negotiable instrument so that somebody else can tamper with it, and the wider proposition of Bovill, C. J., in a former case, Société Générale v: Metropolitan Bank, that people are not supposed to commit forgery, and that the protection against forgery is not the vigilance of parties excluding the possibility of committing forgery but the law of the land.’ Lord Watson approved the same rulings. Lord Macnaghten expressed the same opinion, and Lord Davey concurred in the judgment of Lord Watson.
The principles there laid down appear to their Lordships to warrant the proposition that whatever the duty of a customer towards his banker may be with reference to the drawing of cheques, the mere fact that the cheque is drawn with spaces such that a forger can utilise them for the purpose of forgery is not by itself any violation of that obligation. Their Lordships therefore agree with the High Court of Australia in holding that there was no evidence proper to be left to the jury of negligence on the part of the respondents.”
The reasoning of the whole of this passage in the judgment in Colonial Bank of Australasia v. Marshall rests on the assumption that the standard as to negligence applicable in the case of banker and customer is the same as that which would be applicable in the case of the acceptor of a negotiable instrument if the duty to take care existed. It is, of course, difficult to define the extent of a duty where no duty at all exists, as is the case with an acceptor of a bill and subsequent holders. But on the hypothesis that there is some obligation to exercise care in the case of an acceptor of a bill as well as in the case of a customer with regard to his cheque the facts which would constitute negligence would be very different in the two cases. Charles, J., while finding the existence of the duty in Scholfield’s case, held that there had been no negligence, while he fully recognised the doctrine of Young v. Grote as to banker and customer where the negligence of leaving blank spaces in drawing a cheque is pointed out. The questions are essentially different. As pointed out by Lord Esher in Scholfield’s case, the consequences of refusing acceptance of a draft because there were blank spaces in it might be serious, and all this must be taken into account in determining whether in such a case the acceptance was given negligently as regards the supposed liability to subsequent holders. On the other hand, in the case of banker and customer, the manner in which the cheque is to be filled up is entirely in the hands of the customer, and if he leaves unusual blank spaces which facilitate forgery, according to Young v. Grote and on principle there is negligence as between him and the banker. The passages cited by Sir Arthur Wilson from the judgments in Scholfield’s case are rather directed to the negation of the existence of any duty as between the acceptor of a bill of exchange and holders. Without the existence of duty to take care there can be no negligence, and what was settled by Scholfield’s case is that no such duty exists as between acceptor and holders of a bill. With the greatest respect I do not think that these passages support the proposition that as between banker and customer there is no negligence in drawing a cheque with blank spaces which facilitate forgery. Indeed, such an interpretation of these passages is inconsistent with the manner in which Young v. Grote is treated by five out of the six peers who took part in the decision of Scholfield’s case. The dictum of Lindley, L.J., in the Adelphi Bank case, which is cited by Lord Halsbury, was laid down in a case in which the liability of the acceptor to holders was in question, not on a case of banker and customer, and the same observation applies to the judgment-of Bovill, C.J., in the Société Générale v. Metropolitan Bank. In the course of his judgment Bovill, C. J., is at pains to point out that the circumstances of Young v. Grote were entirely different from those of the case before him, where there was simply a blank in the printed form of the bill of exchange.
The question whether there was negligence as between banker and customer is a question of fact in each particular case, and can be decided only on a view of the cheque as issued by the drawer, with the help of any evidence available as to the course of dealings between the parties or otherwise. If the existence in a cheque of blank spaces of an unusual nature and such as to facilitate interpolation, is declared to be no evidence of a breach of duty as between customer and banker, the duty would have little left to operate upon. To recognise the duty of care by the customer in drawing cheques and then to lay downn as a matter of law that there is no breach of that duty by leaving such blank spaces in the cheque, is in effect to eviscerate the duty.
If Young v. Grote is right the judgment now appealed from is wrong. In my opinion the decision in Young v. Grote is sound in principle and supported by a great preponderance of authority, and must be treated as good law.
The ground on which Young v. Grote proceeded was, according to the judgment of three out of the four judges, simply this, that if a customer in drawing a cheque neglects reasonable precautions against forgery and forgery ensues, he is liable to make good the loss to the banker, and that the fact that a crime has to intervene to cause the loss does not make it too remote. Indeed, forgery is the very thing against which the customer is bound to take reasonable precaution. Leaving blank spaces in the cheque is the commonest way in which forgery is facilitated, and to lay down as a matter of law that it is no breach of duty would be a somewhat startling conclusion. In Young v. Grote there was the additional circumstances of the small “f” at the beginning of the word “fifty,” but I cannot doubt that without this the result would have been the same.
In the present case the customer neglected all precautions. He signed the cheque, leaving entirely blank the space where the amount should have been stated in words, and where it should have been stated in figures there was only the figure “2” with blank spaces on either side of it. In my judgment there was a clear breach of the duty which the customer owed to the banker. It is true that the customer implicitly trusted the clerk to whom he handed the document in this state to fill it up and to collect the amount, but his confidence in the clerk cannot excuse his neglect of his duty to the banker to use ordinary care as to the manner in which the cheque was drawn. He owes that duty to the banker as regards the cheque, and it is no excuse for neglecting it that he had absolute and, as it turned out, unfounded confidence in the clerk. The duty is not a duty to have clerks whom the customer believes to be honest. It is a specific duty as to the preparation of the order upon the banker. If the customer chooses to dispense with ordinary precautions because he has complete faith in his clerk’s honesty, he cannot claim to throw upon the banker the loss which results. No one can be certain of preventing forgery, but it is a very simple thing in drawing a cheque to take reasonable and ordinary precautions against forgery. If owing to the neglect of such precautions it is put into the power of any dishonest person to increase the amount by forgery, the customer must bear the loss as between himself and the banker.
But further, it is well settled law that if a customer signs a cheque in blank and leaves it to a clerk or other person to fill it up, he is bound by the instrument as filled up by the agent. This has been suggested as the real ground for the decision in Young v. Grote. For the reasons which I have already stated, I do not think that on the facts of that case it is the true ground of the decision. But the principle is thoroughly established, and it seems to me to apply to the facts of the present case. The customer signed the cheque in the condition which I have described, and handed it over to the clerk to be filled up by him. For all practical purposes the cheque was in blank, as the figure “2” in its isolated position afforded no security whatever against a fraudulent increase. The clerk had the authority of the customer to fill up the words denoting the amount in the body of the cheque, and to put other figures before and after the “2” was quite easy owing to its position. The examination of the facsimile of the cheque when filled up shows how impossible it was to detect the fraud. On such facts the customer is liable for the act of the clerk just as much as if the cheque had been completely in blank when he signed it and handed it to the clerk to fill it up. There was no apparent limitation on the authority of the clerk in filling up the cheque. On this ground also, which on my view of Young v. Grote is independent of that decision, I am of opinion that this appeal should be allowed.
For these reasons I think that judgment should be entered for the bank, with costs here and below.
North and South Wales Bank v. Irvine
[1908] UKHL 986
Lord Chancellor (Loreburn)—The reasons for deciding this case in favour of the plaintiff are stated so clearly in the judgments of Bray, J., and of the Court of Appeal, that I need not say much in moving your Lordships to dismiss the present appeal. The plaintiff was induced by the fraud of William White to draw a cheque for £11,250, in favour of one T. A. Kerr, or order. T. A. Kerr was an existing person, and when the plaintiff drew the cheque in his favour he intended that Kerr or his indorsee should receive the money. White obtained the cheque, forged Kerr’s indorsement, paid the cheque into his own account at the defendants’, the North and South Wales, Bank, and they, on presenting it to the plaintiff’s bank, received payment. It was not, in these circumstances, disputed that the defendants were liable to the plaintiff unless they could show that the payee of the cheque, T. A. Kerr, was a “fictitious” person within the meaning of the Bills of Exchange Act, sec. 7, sub-sec. 3. I adopt the language of Bray, J.—“It seems to me that when there is a real drawer who has designated an existing person as a payee, and intends that that person should be the payee, it is impossible that the payee can be fictitious.” If the argument for the appellants were to prevail—namely, that the payee was a fictitious person because White (who was himself no party to the cheque) did not intend the payee to receive the proceeds of the cheque—most serious consequences would ensue. It would follow, as it seems to me, that every cheque to order might be treated as a cheque to bearer if the drawer had been deceived, no matter by whom, into drawing it. To state such a proposition is to refute it. Yet nothing short of this could establish the appellant’s contention. As to authorities, I agree with the Court of Appeal in thinking that neither Bank of England v. Vagliano (1891) A. C. 107, nor Clutton v. Attenborough, (1897) A. C. 90, govern the present case. I will not discuss the former of those authorities beyond saying that it was not a case in which the drawer intended the payee to receive the proceeds of the bill, and in the latter authority the payee was a non-existent person whom no one either could or did mean to be the recipient of the proceeds of the cheque. That being so, I think that this appeal should be dismissed with costs.
Lord Robertson—We have been frequently told that the question before us is, What is the meaning of the word “fictitious”? It would be more accurate to say that the question is, What is the meaning of the words “fictitious person”? And I cannot help thinking that, at least in the present case, this has not been sufficiently attended to. Dr Johnson, it is true, gives “counterfeit, false, not genuine,” as one meaning of the word “fictitious”; but the illustration given—viz., “fame”—shows that this meaning is applicable to things; he gives another, “feigned, imaginary,” and the illustration given is “The human persons are as fictitious as the airy ones.” This last is the sense applicable to persons, and “person” is the word with which we have to deal. Now, I hope that I shall not be thought too crude if I say that the present question seems to me to be decided when once we know that T. A. Kerr, so far from being a “feigned or imaginary” person, was a living man, in business, known to the drawer of the cheque and intended by him to receive the proceeds. All that has been said against the cheque does not seem to me to touch this question. The argument, if good for anything, brings within this section all bills obtained by fraud, and credits the Legislature with expressing this by describing the payee as a fictitious person. I am unable to adopt this conclusion. The case of Vagliano is so entirely different in its facts as to be inapplicable to that before us.
Lord Collins concurred.
North and South Wales Bank v. Irvine.
Lord Chancellor (Loreburn)—In this appeal two points were raised by Mr Isaacs. The first is identical with that raised in the case of North and South Wales Bank v. Macbeth, and ought not in my opinion to prevail, for reasons which I have already stated. The second point made by the appellants is that, assuming the Court of Appeal to be right in giving judgment for the plaintiff, yet the damages ought not to be £2300, but only £120. Irvine, the plaintiff, was induced by the fraud of one White to sign a cheque for £2300, payable to John Davies or order. He intended that Davies, who was a real person well known to all concerned, should receive the money. White forged Davies’ name and procured his bankers, the defendants the North and South Wales Bank, to present it and obtain payment from the plaintiff’s bankers. For this the defendants are liable to the full extent of £2300, unless the following additional fact can in part relieve them. White advanced to the plaintiff £2180 to enable the plaintiff to meet this cheque for £2300. So the plaintiff, in fact, has only lost up to the present time the difference—namely, £120—and the defendants urge that he can recover from them nothing beyond this actual loss. I do not think so. I agree with Buckley, L. J., that the whole £2300 paid to the defendants was paid out of Irvine’s money at his own bankers. Where he got that money is irrelevant. He may have to account for £2180 of it to White’s trustees. I do not know whether it will be so or not, it will depend on the rights between the plaintiff and White’s trustees. But I see nothing that can entitle the defendants to stand in the shoes of White’s trustees and claim against the plaintiff what in effect is a set-off arising out of an indebtedness of the plaintiff, not to themselves, but to White. If any case could be cited in favour of the defendants’ contention it might be necessary to contrast it with other authorities, but I think there is no such case, and that the law is plain.
Lord Robertson and Lord Collins concurred.
Kay-El (Hong Kong) Ltd. v. Musgrave Ltd.
[2005] IEHC 418
Kelly J
The Kay-el Claims
I propose dealing with the Kay-el proceedings first, since one of them antedated the Musgrave claim and in any event both Kay-el claims are brought on foot of dishonoured bills of exchange.
The Bills of Exchange
Each bill of exchange was drawn by Kay-el on Musgrave and accepted by it. Each bill relates to contracts for the supply of goods.
Musgrave does not deny that it received the goods, the subject of each contract, nor does it deny liability in respect of each bill of exchange. Rather Musgrave contends a right of set off in respect of the sums due on foot of each bill.
Kay-el contends that there is no basis upon which Musgrave can seek to set off the liability due on foot of the dishonoured bills nor for the granting of any stay upon the execution of any judgment which may be granted in Kay-el’s favour.
The Law
The law on the enforcement of bills of exchange in this jurisdiction is authoritatively stated in the judgment of the Supreme Court in Walek and Co. v. Seafield Gentex [1978] I.R. 167. There the acceptor of a bill of exchange attempted to oppose the entry of judgment or alternatively sought a stay on execution on the basis of there being a cross claim for unliquidated damages. Henchy J. adopted the dictum of Lord Wilberforce in Nova (Jersey) Knit v. Kammgarn [1977] 2 All E.R. 463, where he said:-
“I take it to be clear law that unliquidated cross claims cannot be relied upon by way of extinguishing set off against a claim on a bill of exchange. As between the immediate parties, a partial failure of consideration may be relied upon as a pro tanto defence, but only when the amount involved is ascertained and liquidated.”
In the same case Griffin J. said:-
“Bills of exchange are international instruments for the payment of obligations and it is important in the interest of businessmen, whether they be exporters or importers, that the negotiability of such bills be maintained so that they are ‘equivalent to cash’.”
Both Supreme Court judges also approved of the views of Sir Eric Sachs in the case of Cebora v. SIP [1976] 1 Lloyds Reports 271 where he said:-
“Any erosion of the certainties of the application by our courts of the law merchant relating to bills of exchange is likely to work to the detriment of this country, which depends on international trade to a degree that needs no emphasis. For some generations one of those certainties has been that the bona fide holder for value of a bill of exchange is entitled, save in truly exceptional circumstances, on its maturity to have it treated as cash, so that in an action upon it the court will refuse to regard either as a defence or as grounds for a stay of execution any set off, legal or equitable, or any counterclaim, whether arising on the particular transaction upon which the bill of exchange came into existence or, a fortiori arising in any other way.”
Kenny J. delivered a concurring judgment in which he said:-
“It has been established by a line of cases… that an unliquidated claim for damages cannot be set off or be the subject of a counterclaim against a claim based upon a negotiable instrument. These authorities also establish that the existence of such an unliquidated claim is not a ground for staying execution on a judgment given on a negotiable instrument, even when it was given in connection with a transaction out of which the counterclaim arises.”
This decision is binding upon me and it identifies the very limited defences or entitlements to set off or stay which are available to a party that has dishonoured a bill. Bills are to be treated as the equivalent of cash. An unliquidated claim, whether for breach of the underlying contract or otherwise, cannot be relied upon as a defence to a claim on foot of the bill nor as a basis for obtaining a stay of either the proceedings or judgment granted on foot of them. The only exception which provides an answer is in circumstances where there is a total or partial failure of consideration of the underlying contract which results in a liquidated claim or where there has been fraud. There is no suggestion of any fraud in the present case. The claims must of course be as between the immediate parties to the bill and not as against a holder in due course.
If Musgrave has a defence by way of set off it is one which must arise under the underlying contract, giving rise to a total or partial failure of consideration and resulting in a liquidated claim.
Does Musgrave Fall Within the Requirements?
In coming to my conclusions on this question I have taken into consideration the voluminous affidavit evidence and the legal submissions which have been made. In the light of the decision which I have arrived at I do not think that anything will be achieved by rehearsing in extenso the disputed factual material since at this juncture I am precluded from making final or binding determinations on disputed facts. No cross examination took place on the affidavits which were exchanged.
If Musgrave fails to demonstrate the existence of any one of the three elements which I have identified it is not entitled to resist judgment on foot of the bills of exchange.
Whatever may have been the position beforehand it is clear that the parties in November, 2003, entered into an exclusive supply agreement. By that agreement Kay-el was appointed as the sole supplier to Musgrave for all products which were to be used for consumer promotions through its franchisee’s, SuperValu and Centra. It operated on the basis that individual sales contracts would be entered into in respect of goods to which the agreement applied.
It is said by Kay-el that the provisions of this exclusive supply agreement were incorporated into the individual and specific agreements (or in the alternative that the sale or return obligations in the specific agreements were conditional upon compliance by Musgrave with its obligations under the exclusive supply agreement). The assertion that the exclusive supply agreement governed individual sales contracts has not been denied. It seems to me that the terms of this exclusive supply agreement are not consistent with a right of set off of the type which is now relied upon by Musgrave.
This alone might be sufficient to dispose of the matter but lest I am wrong in the conclusion which I have come to I will proceed to consider what appears to me to be a difficult contention for Musgrave to support, namely, the assertion that their claim is one for liquidated damages.
The Musgrave summary summons of 24th June, 2005, seeks recovery of a total sum of €4,213,571.70. That sum is made up in respect of amounts allegedly due under what is described as the Gilmore drinks cabinets agreement, the Stanfield rocking chairs agreement, the Glendale chest of drawers agreement and the Hampton luggage sets agreement. The total sum claimed takes account of an alleged right of set off on the part of Musgrave in respect of other items.
The principal defence of Kay-el is that Musgrave was guilty of serious breaches of the exclusive supply agreement and it was thus relieved of any obligation to accept returns in respect of the goods in question. Kay-el contends that the sale or return provision of the agreements has not in the circumstances given rise to a debt currently due and owing and that any liability is one which sounds in damages. Kay-el furthermore points out that the goods remain in the possession of Musgrave and with the exception of the Glendale chest of drawers no invoice was received prior to the commencement of the proceedings. In addition it is said Kay-el has a substantial counterclaim for damages.
It seems to me that on any reasonable view of the affidavit evidence and despite the valiant efforts of counsel for Musgrave it cannot be said that its claim amounts to one for liquidated damages.
Rather it appears to me that the proceedings brought at the suit of Musgrave are ones where the court will to a very considerable extent have to involve itself in making an assessment of damages, particularly having regard to the issues in dispute which can be identified from the exchange of affidavits.
It is in these circumstances that I conclude that Musgrave has not demonstrated that it falls within at least two of the requirements which would be necessary in order to be able to stave off judgment in the Kay-el proceedings. In the light of that it isn’t necessary for me to consider any other aspects of the matter.
Conclusions
I am satisfied that Kay-el is entitled to judgment on foot of its bills of exchange for the full amount as sought in each of the summary summonses.
Having regard to the controverted matters which are dealt with in the affidavits in Musgrave’s proceedings I am satisfied that that action must be adjourned to plenary hearing and I will give directions as to the appropriate exchange of pleadings so as to ensure an expeditious disposal of that action.
As is clear, I am not satisfied that the cross action at the suit of Musgrave’s provides it with an entitlement to either resist judgment or to obtain a stay on judgment in respect of Kay-el’s proceedings.
There will therefore be judgment in favour of Kay-el on its summary summonses and the proceedings brought by Musgrave will be adjourned for plenary hearing.
Dextra Bank & Trust Company Ltd v. Bank of Jamaica (Jamaica)
[2001] UKPC 50
193 Lord Bingham
Dextra’s claim in conversion
The tort of conversion, with special reference to bills of exchange, was authoritatively described by Diplock LJ in Marfani & Co Ltd v Midland Bank Ltd [1968] 1 WLR 956 at 970-971 in a passage too well-known to require repetition. It cannot be doubted that the recipient of a cheque who indorses it and negotiates it to a third party exercises the rights of an owner. He treats it as his. That is what the BOJ did here. So the BOJ committed the tort of conversion, unless the cheque in law belonged to it. Put another way, Dextra was entitled to exercise the rights of an owner if it was the owner, but not if it was not. So the fate of Dextra’s claim in conversion must depend on whether in law the BOJ was or was not the owner of the cheque.
Bills of exchange are governed in Jamaica by the Bills of Exchange Act, which derives from an Act of 1893 and is in substance (although not in layout) indistinguishable from the British Bills of Exchange Act 1882. It is to the statute one must first look. Dextra’s cheque was an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it was addressed to pay on demand a sum certain in money to or to the order of a particular person. It was thus a bill of exchange within the terms of sections 3 and 73 of the 1882 Act, to which (for convenience) further references will relate, and the material provisions of the Act apply to it. Section 21 of the Act provides:
“(1) Every contract on a bill, whether it be the drawer’s, the acceptor’s, or an indorser’s, is incomplete and revocable, until delivery of the instrument in order to give effect thereto.
Provided that where an acceptance is written on a bill, and the drawee gives notice to or according to the directions of the person entitled to the bill that he has accepted it, the acceptance then becomes complete and irrevocable.
(2) As between immediate parties, and as regards a remote party other than a holder in due course, the delivery in order to be effectual –
(a) must be made either by or under the authority of the party drawing, accepting, or indorsing, as the case may be;
(b) may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill.
But if the bill be in the hands of a holder in due course a valid delivery of the bill by all parties prior to him so as to make them liable to him is conclusively presumed.
(3) Where a bill is no longer in the possession of a party who has signed it as drawer, acceptor, or indorser, a valid and unconditional delivery by him is presumed until the contrary is proved.”
Subsection (1) lays down the cardinal rule that title to a bill passes on delivery. This reflects the commercial reality that cheques are treated as the equivalent of cash. “Delivery” is defined in section 2 of the Act to mean “transfer of possession, actual or constructive, from one person to another”. There is no question of constructive possession here, since the BOJ acquired actual possession. Section 2 makes plain that a cheque is issued when it is first delivered, complete in form, to a person who takes it as a holder. “Holder” is defined to mean “the payee or indorsee of a bill or note who is in possession of it”.
Section 21(2) is of obvious relevance to this appeal. The dispute here arises between the immediate parties to the cheque and the BOJ was not a holder in due course: R E Jones Ltd v Waring & Gillow Ltd [1926] AC 670. It is clear that in using the term “conditional” subsection (2)(b) is referring not to the terms of the bill, which must be unconditional to satisfy the definition in section 3(1), but to the terms on which possession is transferred to the transferee. Such transfer may be on terms which make clear that the transferee is not to treat the bill as his own unless or until a further event occurs, as where a bill is delivered in escrow. It seems clear that any condition or special purpose must be communicated by the transferor to the transferee, since the commercial efficacy of the transaction depends on the transferee knowing that he may not, at least for the time being, present or negotiate the bill: see Equitable Securities Ltd v Neil [1987] 1 NZLR 233. There having been no such communication, it was accepted by Dextra that Beckford’s delivery of the cheque to Jones was not conditional.
Argument in the appeal focused on the requirement in subsection (2)(a) that delivery “to be effectual must be made either by or under the authority of the party drawing”. For Dextra it was strongly argued that delivery of its cheque to the BOJ was not made by it or under its authority as drawer because delivery was in fact made by Beckford who was not authorised by Dextra to make delivery. To this submission the BOJ countered that Phillips was authorised by Dextra to make delivery of the cheque to the BOJ, a task he was to undertake whether the transaction was one of loan (as Dextra thought) or purchase (as the BOJ thought): in either event the cheque was to be delivered and was to be immediately payable. The BOJ could not, it was said, be affected by any limitation on the authority of Phillips not disclosed to the BOJ. Nor did it make any difference that Phillips, as an agent authorised to make delivery, had chosen to employ Beckford as an intermediary. It was as if the cheque had been sent by post.
There is a surprising lack of authority on the construction of section 21(2)(a), and the Board’s attention was not drawn to any authority factually indistinguishable from the present. It is accordingly necessary to decide whether, on the facts of this case, there was an effectual delivery of the cheque to the BOJ so as to constitute the BOJ a holder entitled to sue on the cheque.
Dextra drew the cheque payable to the BOJ. The cheque was regular and complete on its face. Dextra entrusted this cheque to Phillips whom it authorised to deliver it to the BOJ. Such authority was circumscribed by conditions relating to the obtaining of a promissory note, but subject to those conditions delivery was authorised. It is plain (and not, as it is understood, contested) that if Phillips had personally delivered the cheque to the BOJ, although without observing or notifying to the BOJ the conditions to which his authority to deliver was subject, the BOJ would have acquired good title to the cheque provided it gave value and had no notice of Phillips’ limited authority. That is the effect of the decision in Watson v Russell (1862) 3 B&S 34; (1864) 5 B&S 968. The same result would follow if (as was the case here) Phillips had obtained the cheque from Dextra in fraud of Dextra, provided the BOJ had no notice of that fraud: Clutton v George Attenborough & Son [1897] AC 90; Talbot v Von Boris [1911] 1 KB 854; Hasan v Willson [1977] 1 Lloyd’s Rep 431.
Thus Dextra rested its conversion claim on a single point, the engagement by Phillips of Beckford to effect physical delivery of the cheque to Jones as the agent of the BOJ. The narrowness of this point can be demonstrated by considering varied factual hypotheses. Suppose Phillips had, as instructed, obtained a promissory note duly executed by the BOJ, had had it duly stamped and had returned it to Dextra by courier, and had then sent Dextra’s cheque to the BOJ through the post or via a messenger. Could Dextra have resisted a claim on the cheque by the BOJ on the ground that there had been no effectual delivery? Plainly not. Or suppose no condition had been imposed by Dextra on Phillips with regard to a promissory note, but he had been clearly instructed to hand over a cheque personally and had instead posted it to the BOJ. Could Dextra have resisted a claim by the BOJ on the cheque on the ground that there had been no effectual delivery? Again, plainly not. These examples show that section 21(2)(a) is concerned with authority to deliver and not with the precise mode of delivery which is authorised. This distinction makes good sense. If a cheque is drawn in favour of a named payee and is placed in, for example, a file, from which it is abstracted by a thief or mischief-maker by whom it is handed to the payee, it seems just that the drawer should not be liable since he has never authorised delivery at all. But if the drawer prescribes delivery by one method and physical transfer is effected by another, in circumstances where the payee gives value and does not (and ordinarily could not) know of the method of transfer prescribed by the drawer, it would seem neither just nor consistent with the objective of achieving maximum certainty in mercantile transactions to deny the transferee a right to recover. It was accepted that the BOJ gave value for the cheque.
Here, Phillips was Dextra’s agent with authority to hand over the cheque to the BOJ. He chose to do this through Beckford. It was not found, nor in view of the findings was it argued, that Beckford was the agent of the BOJ. It might well have been different if he had been, as it might well have been different in R E Jones Ltd v Waring & Gillow (above) if Bodenham had been the agent of Jones: see pp 695, 701. Beckford was a bailee of the cheque, with no right over it and no task in relation to it other than to carry it to the BOJ: he was aptly described as a “mere human conduit”. It would be anomalous if his adventitious interposition into the chain of delivery had the legal effect for which Dextra contended, and the Board is satisfied that it did not.
For these reasons, which derive some support from Midland Bank Plc v Brown Shipley & Co Ltd [1991] 1 Lloyd’s Rep 576 at 583 and Yan v Post Office Bank Ltd [1994] 1 NZLR 154, and which are essentially the grounds relied on by the Court of Appeal, Dextra’s claim in conversion was rightly rejected. This conclusion makes it unnecessary to review a number of other arguments ventilated before the Board and in the courts below (estoppel, negligence, the rule in Cocks v Masterman (1829) 9 B&C 902 and the rights of a bona fide holder for value). The BOJ acquired good title to the cheque and did not convert it.
Dextra’s Restitutionary Claim
Their Lordships turn to the second part of the appeal. This relates to the alternative claim which Dextra has advanced against the BOJ, that it is entitled to recover from the BOJ the sum of J$2,999,000, the amount of the cheque, as money paid under a mistake of fact, viz. the mistaken belief that the money was paid as a loan. The trial judge, Paul Harrison J, held that the money was paid under a mistake of fact; but he also held that the BOJ had changed its position in that the cheque was purchased by Jones and Mitchell, the BOJ’s authorised agents, in good faith, and the BOJ reimbursed their accounts to the full value of the cheque. In these circumstances, he held that the defence of change of position was available to the BOJ, and that Dextra’s claim on the ground of mistake must fail. His decision on this point was affirmed by Forte JA and Patterson JA in the Court of Appeal, on the ground that the BOJ acquired the cheque in good faith and for value in that the agents of the BOJ paid Beckford for the cheque by a number of cheques drawn on the BOJ which BOJ duly honoured, and that in these circumstances the BOJ was not unjustly enriched. The point does not appear to have been considered by Bingham JA.
This alternative claim is based upon the premise that the BOJ did acquire the title to the cheque (otherwise Dextra would have been able to recover in the tort of conversion); it is not a proprietary claim. It is a claim for money had and received as being money paid by Dextra to the BOJ under a mistake of fact. Dextra have therefore to establish that it was so paid. That is the first issue. The second relates to whether the BOJ have a defence to the claim on the ground of change of position. Their Lordships have had the benefit of well researched argument from counsel on both sides in relation to these two issues for which they are grateful. The particular facts of the present case have complicated the resolution of the issues. In relation to the question of mistake the salient feature is that Dextra mistakenly trusted their agents, in particular Phillips, to carry out their instructions and were let down by them. In relation to the question of change of position, the complicating feature is one of timing. Jones and Mitchell did not wait until after they had received the Dextra US dollar cheque from Beckford before handing over the Jamaican dollar cheques drawn in favour of the various persons Beckford had specified. What they did also enabled the payees of the Jamaican dollar cheques to present them and obtain the payment of them by the BOJ before Jones had the Dextra US dollar cheque in his hands. The essential acts of change of position on which the BOJ would seek to rely as providing a defence to the claim of Dextra occurred earlier in time than BOJ’s receipt of the Dextra cheque or its proceeds and in anticipation of such receipt.
Mistake of Fact
Their Lordships turn to Dextra’s claim to recover its money as having been paid to the BOJ under a mistake of fact. To succeed in an action to recover money on that ground, the plaintiff has to identify a payment by him to the defendant, a specific fact as to which the plaintiff was mistaken in making the payment, and a causal relationship between that mistake of fact and the payment of the money: see Barclays Bank Ltd. v W J Simms, Son and Cooke (Southern) Ltd. [1980] 1 QB 677, 694. In the opinion of their Lordships, there are difficulties with regard to the second and third of these elements in the present case.
Their Lordships turn then to the second element, viz. that Dextra must have paid the money to the BOJ under a mistake of fact. It is the contention of Dextra that the money was paid under a mistake, in that Dextra had intended to make a loan. The difficulty with this proposition is that this does not appear to have been a mistake as to a specific fact, like for example a mistake as to the identity of the defendant, but rather a misprediction as to the nature of the transaction which would come into existence when the Dextracheque was delivered to the BOJ, which is a very different matter: see Birks, Introduction to the Law of Restitution, pp. 147-8. In that passage, Professor Birks explains the rationale of this distinction in terms relevant to the present case, as follows:
“The reason is that restitution for mistake rests on the fact that the plaintiff’s judgment was vitiated in the matter of the transfer of wealth to the defendant. A mistake as to the future, a misprediction, does not show that the plaintiff’s judgment was vitiated, only that as things turned out it was incorrectly exercised. A prediction is an exercise of judgment. To act on the basis of a prediction is to accept the risk of disappointment. If you then complain of having been mistaken you are merely asking to be relieved of a risk knowingly run …
The safe course for one who does not want to bear the risk of disappointment which is inherent in predictions is to communicate with the recipient of the benefit in advance of finally committing it to him. He can then qualify his intent to give by imposing conditions, or sometimes by making a trust …”
Here, unfortunately, Dextra failed to communicate directly with the BOJ to make sure that the BOJ understood that the money was being offered as a loan. Instead, it left the communication of this vital matter to its agent, Phillips. Dextra’s misplaced reliance on Phillips led it to assume that a loan would result; and this prediction proved to be mistaken. But a misprediction does not, in their Lordships’ opinion, provide the basis for a claim to recover money as having been paid under a mistake of fact.
Dextra did however argue that it suffered under a mistake of fact when it was deceived by Wildish into believing that the BOJ had previously agreed to take a loan from Dextra.In fact, the BOJ had not so agreed. But, although this can be regarded as a mistake of fact on the part of Dextra, it cannot be said to have caused Dextra’s payment to the BOJ. This is because it was overtaken by the specific instructions given by Dextra to Phillips that the cheque was not to be handed over to the BOJ except against the delivery to him of a promissory note evidencing the loan and its terms. It was upon the compliance by Phillips with this instruction that Dextra relied to ensure that a loan was made upon the terms acceptable to it. The significance of the earlier deception by Wildish was only that it contributed to Dextra instructing Phillips to ensure that the cheque was handed over as a loan. Dextra’s payment was not however caused by any such mistake of fact as that now alleged by Dextra; it was caused by a misprediction by Dextra that Phillips would carry out his instructions and that a loan would eventuate.
Their Lordships have however considered whether Dextra could recover its money as having been paid under a mistake of fact not at the time of delivery of the cheque to the BOJ, but at the time of payment of the cheque, on the basis that, if Dextra had known what had happened, it would have stopped payment of the cheque by its bank, the Royal Bank of Canada; but, since it did not know the true facts, it did not do so. Their Lordships have however been driven to the conclusion that there are insuperable objections to any such conclusion.
Beckford delivered the cheque to the BOJ which gave value for it in good faith and without notice of any want of authority on the part of Beckford or his associates. The BOJ then negotiated the cheque by endorsement and delivery to its bank, Citibank, for the purpose of collecting payment from the drawees, the Royal Bank of Canada. Citibank itself indorsed the cheque and presented it to the Royal Bank of Canada for payment. The Royal Bank of Canada paid the cheque and debited Dextra’s account. The payment of the cheque was authorised by Dextra, and indeed the Royal Bank of Canada was under a duty to Dextra to honour the cheque, the payment of which discharged the liability of Dextra under the cheque. Furthermore the BOJ, having (in the opinion of their Lordships) acquired a good title to the cheque and having given value for it, would have succeeded if it had had to sue Dextra on the cheque. The same of course applies to Citibank, which was a holder in due course. In presenting the cheque for payment Citibank was asserting its own rights under the cheque and received payment on its own behalf.
It follows that Dextra cannot succeed against the BOJ on a claim for money had and received based upon what happened at the time of the payment of the cheque. It can only succeed, if at all, on the basis of the circumstances in which the BOJ acquired the cheque; and these disclose not a relevant mistake of fact but a misprediction.
Change of Position
Even so their Lordships propose to consider whether, against this background, the BOJ would, if necessary, have been able to rely on the defence of change of position. The submission of the BOJ has been that it would have been entitled to do so because the Dextra cheque was purchased by the BOJ’s authorised agents on its behalf in good faith and the BOJ reimbursed their accounts in full, and that this rendered it inequitable for Dextra thereafter to recover the money so received by the BOJ as having been paid under a mistake of fact. Dextra has responded that the actions so relied on by the BOJ as constituting a change of position were performed by the BOJ before it received the benefit in question, and so amounted to what has been called “anticipatory reliance” and as such could not amount to a change of position by the BOJ for the purposes of the law of restitution. Dextra’s argument is that, for the act of the defendant to amount to a change of position, it must have been performed by the defendant in reliance on the plaintiff’s payment, which cannot be the case if it was performed by him before he received the relevant benefit.
Anticipatory Reliance
The question whether anticipatory reliance of the kind just described can amount to an effective change of position has been much debated in the books. Their Lordships have studied the relevant material with interest and profit, and have also been much assisted by the arguments of counsel.
Their Lordships start with the broad statement of principle by Lord Goff of Chieveley in Lipkin Gorman v Karpnale Ltd. [1991] 2 AC 548 when he said, at p. 580:-
“At present I do not wish to state the principle any less broadly than this: that the defence [of change of position] is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full.”
Their Lordships add that, although the actual decision in that case does not provide any precise guidance on the question now under consideration, since it was based upon the peculiar nature of gaming transactions, nevertheless the Appellate Committee in that case appears to have adopted a broad approach based on practical justice, and to have avoided technicality: see in particular [1991] 2 AC at pp. 581-583, per Lord Goff of Chieveley.
The response by the BOJ to Dextra’s argument has been that it is no less inequitable to require a defendant to make restitution in full when he has bona fide changed his position in the expectation of receiving a benefit which he is fact receives, than it is when he has done so after having received that benefit. Of course, in all these cases the defendant will ex hypothesi have received the benefit, because the context is an action by the plaintiff seeking restitution in respect of that benefit. For those who support the distinction, however, their reply appears to be that, whereas change of position on the faith of an actual receipt should be protected because of the importance of upholding the security of receipts, the same is not true of a change of position in reliance on an expected payment, which does not merit protection beyond that conferred by the law of contract (including promissory estoppel).
Their Lordships confess that they find that reply unconvincing. Here what is in issue is the justice or injustice of enforcing a restitutionary claim in respect of a benefit conferred. In that context, it is difficult to see what relevant distinction can be drawn between (1) a case in which the defendant expends on some extraordinary expenditure all or part of a sum of money which he has received from the plaintiff, and (2) one in which the defendant incurs such expenditure in the expectation that he will receive the sum of money from the plaintiff, which he does in fact receive. Since ex hypothesi the defendant will in fact have received the expected payment, there is no question of the defendant using the defence of change of position to enforce, directly or indirectly, a claim to that money. It is surely no abuse of language to say, in the second case as in the first, that the defendant has incurred the expenditure in reliance on the plaintiff’s payment or, as is sometimes said, on the faith of the payment. It is true that, in the second case, the defendant relied on the payment being made to him in the future (as well as relying on such payment, when made, being a valid payment); but, provided that his change of position was in good faith, it should provide, pro tanto at least, a good defence because it would be inequitable to require the defendant to make restitution, or to make restitution in full. In particular it does not, in their Lordships’ opinion, assist to rationalise the defence of change of position as concerned to protect security of receipts and then to derive from that rationalisation a limitation on the defence. The defence should be regarded as founded on a principle of justice designed to protect the defendant from a claim to restitution in respect of a benefit received by him in circumstances in which it would be inequitable to pursue that claim, or to pursue it in full. In any event, since (as previously stated) the context of a restitutionary action requires that the expected payment has in any event been received by the defendant, giving effect to “anticipatory reliance” in that context will indeed operate to protect the security of an actual receipt.
Before leaving this topic their Lordships think it right to refer to the decision of Clarke J in South Tyneside B C v Svenska International [1955] 1 All ER 545. There the defendant bank had entered into ultra vires swap transactions with the plaintiff local authority, but the bank had also entered into hedging transactions which would substantially cancel out its potential liability to the local authority under the swap transactions. In the result the local authority was the net payer under the void swap transactions, and claimed repayment of the money so paid by it. The bank was held liable to make restitution, but claimed to be entitled to set off the losses incurred by it under the hedging transactions on the ground that it had changed its position in good faith in reliance on the validity of the original swap contract by committing itself to the hedging transactions and by maintaining them thereafter. The local authority submitted that the bank should not be entitled to set off those losses, because it changed its position before receiving the payments in question. Clarke J’s conclusion on this point was as follows (see p. 565d-g):-
“In my judgment in circumstances such as these the bank is not entitled to rely upon the underlying validity of the transaction either in support of a plea of estoppel or in support of a defence of change of position. That is because the transaction is ultra vires and void. It is for that reason that in a case of this kind, save perhaps in exceptional circumstances, the defence of change of position is in principle confined to changes which take place after receipt of the money. Otherwise the bankwould in effect be relying upon the supposed validity of a void transaction … It does not however follow that the defence of change of position can never succeed where the alleged change occurs before receipt of the money …”
It follows that the exclusion of anticipatory reliance in that case depended on the exceptional facts of the case; though it is right to record that the decision of Clarke J has been the subject of criticism – see, eg, Goff and Jones, Law of Restitution, 5th ed, 823-4.
The relevance of fault to the defence of change of position
It was a further submission of Dextra that, in cases in which the defendant invokes the defence of change of position, it is necessary to balance the respective faults of the two parties, because the object of the defence is to balance the equity of the party deprived with that of the party enriched.
Their Lordships approach this submission as follows. First, they cannot help observing that the courts below appear to have formed the view that the fault of Dextra greatly outweighed the fault, if any, of the BOJ. If that is right, this submission will, if successful, do little to advance Dextra’s case. Even so, their Lordships turn to consider the point as a matter of principle.
They take as their starting point the statement of the law in Lipkin Gorman v Karpnale Ltd. [1991] 2 AC 548, where it was explained by Lord Goff of Chieveley that, for a defendant to be able to rely on his own conduct as giving rise to a change of position, he must have changed his position in good faith – see [1991] 2 AC 548 at pp. 579F-G, and 580C. No mention was made by him of the relevance of fault. On the other hand Lord Goff was careful to state (see p. 580C) that “nothing should be said at that stage to inhibit the development of the defence of change of position on a case by case basis, in the normal way”, which left it open to the courts to consider matters such as the relevance of fault on a subsequent occasion. Their Lordships make the initial comment that, if fault is to be taken into account at all, it would surely be unjust to take into account the fault of one party (the defendant) but to ignore fault on the part of the other (the plaintiff). The question therefore is whether it should be relevant to take into account the relative fault of the two parties.
In support of its submission, Dextra was able to invoke the law in two common law jurisdictions. First, in the United States of America, the Restatement of Restitution provides, in paragraph 142(2), that:
“Change of circumstances may be a defense or a partial defense if the conduct of the recipient was not tortious and he was no more at fault for his receipt, retention or dealing with the subject matter than was the claimant.”
The Restatement of Restitution is a remarkable work, of which the Reporters were two much respected jurists, Professor Warren A Seavey and Professor Austin W Scott. It was however a pioneering work, and much water has flowed under the bridge since its publication in 1937. In particular another much respected American expert in the law of restitution, Professor J P Dawson, was later to express his regret at the inclusion in paragraph 142(2) of the provision relating to relative fault: see (1981) 61 Boston U L Review 565, 571 et seq., referred to by Professor Birks at page 41 of his account of Change of Position and Surviving Enrichment in The Limits of Restitutionary Claims: A Comparative Analysis, ed. by William Swadling. Professor Dawson’s comment on the relevant part of paragraph 142(2) of the Restatement is as follows:-
“The introduction of these complex themes would have been, I believe, a real disservice. Fortunately they have been disregarded in court decisions.”
Second, in New Zealand a defence of change of position was introduced by statute, in section 94B of the Judicature Act 1908, introduced into that statute in 1958. The statutory provision requires the court to have regard to all possible implications in respect of other persons when considering whether to deny relief, on the ground of change of position, in an action for the recovery of money paid under a mistake of law or fact. That provision was considered by the Court of Appeal of New Zealand in Thomas v Houston Corbett & Co [1969] NZLR 151, in which the Court held that it was entitled to look at the equities from both sides (see p. 164, lines 13-14, per North P) and, taking a number of matters into account including, it appears, matters going beyond “fault or neglect in the strict sense” on the part of the respondents (see p. 178, line 4, per McGregor J), held that the claim must be reduced. The quantum of the relief was treated as a matter of discretion on which opinions might differ (see p. 178, line 26, also per McGregor J). More recently, in National Bankof New Zealand Ltd v Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211 (on which see the valuable note by Professor Grantham and Professor Rickett in [1999] RLR 158) the Court of Appeal of New Zealand has given further consideration to section 94B. Following the decision of the Judicial Committee of the Privy Council in Goss vChilcott [1996] 3 NZLR 385, the Court of Appeal concluded that section 94B did not exclude the operation of the common law defence of change of position, but went on to conclude that the common law defence was, like the defence under section 94B, an “equitable” defence which required the court to undertake a “balancing of the equities” by assessing the relative fault of the parties and apportioning the loss accordingly.
Their Lordships are however most reluctant to recognise the propriety of introducing the concept of relative fault into this branch of the common law, and indeed decline to do so. They regard good faith on the part of the recipient as a sufficient requirement in this context. In forming this view, they are much influenced by the fact that, in actions for the recovery of money paid under a mistake of fact, which provide the usual context in which the defence of change of position is invoked, it has been well settled for over 150 years that the plaintiff may recover “however careless [he] may have been, in omitting to use due diligence”: see Kelly v Solari (1841) 9 M & W 54 at p. 59, per Parke B. It seems verystrange that, in such circumstances, the defendant should find his conduct examined to ascertain whether he had been negligent, and still more so that the plaintiff’s conduct should likewise be examined for the purposes of assessing the relative fault of the parties. Their Lordships find themselves to be in agreement with Professor Peter Birks who, in his article already cited on Change of Position and Surviving Enrichment at p. 41, rejected the adoption of the criterion of relative fault in forthright language. In particular he stated (citing Thomas v Houston Corbett & Co. [1969] NZLR 151) that the New Zealand courts have shown how hopelessly unstable the defence [of change of position] becomes when it is used to reflect relative fault. Certainly, in the case of Thomas, the reader has the impression of judges struggling manfully to control and to contain an alien concept.
For these reasons their Lordships are unable to accept the arguments advanced by Dextra in answer to the reliance by the BOJ on the defence of change of position.
Bona fide purchase
In the Court of Appeal, both Forte JA and Patterson JA dismissed Dextra’s appeal not on the ground of change of position by the BOJ, but on the ground that the BOJ was a bona fide purchaser of the Dextra cheque. It is commonly accepted that the defence of bona fide purchaser is only available to a third party, which includes an indirect recipient, ie a person who received the benefit from somebody other than the plaintiff or his authorised agent. Here the BOJ received the cheque from Beckford who was acting without authority from Dextra in selling the cheque to the BOJ, so that the BOJ can properly be described as an indirect recipient; and the BOJ, through its agents Jones and Mitchell, paid for the cheque in accordance with the directions of Beckford. In so doing, the agents of the BOJ acted in good faith. In agreement with the majority of the Court of Appeal, their Lordships can see no reason why the BOJ should not be entitled to invoke the defence of bona fide purchase in answer to Dextra’s restitutionary claim; though, on the view which their Lordships have taken of the case, it is not necessary for the BOJ to do so.
Conclusion
For the reasons they have given, their Lordships will humbly advise Her Majesty that the appeal of Dextra from the decision of the Court of Appeal of Jamaica should be dismissed with costs.
Price Meats Ltd v. Barclays Bank Plc
[1999] EWHC Ch 190 [2000] 2 All ER (Comm) 346
Mrs Justice Arden
1. This is an appeal against the order of Master Bragge dated 13 October 1999 insofar as he dismissed the claimant’s application to strike out paragraphs 2 to 7 of the defence. The application was made under CPR 3.4(2)(a) on the grounds that those paragraphs disclose no reasonable grounds of defence. In these circumstances the court has a discretion to strike out a defence (or part of it). The terms of the power recognise that it is sufficient for a defence that it discloses some reasonable ground of defence even though it cannot be said with certainty that it will succeed. The matter has to be determined on the pleadings on the assumption that the facts pleaded can be proved.
2. The facts can be simply put. The claimant sues for money had and received because the defendant bank paid cheques totalling £172,229.21, the signatures on which are said to have been forged. The cheques were paid between June 1993 and June 1996. There is an issue in the action as to whether the cheques were forged or not and I am not concerned with that issue. The application to strike out parts of the defence relates to a separate defence based on whether the claimant had constructive knowledge of the forgery. The position is that the claimant had discovered that in 1992 that its accounts clerk had misapplied petty cash. The bank did not know about this misappropriation but they independently warned the claimant to investigate its overdraft and the reason for the difference between its turnover and trading results in 1994 and thereafter. In addition, the Inland Revenue investigated the claimant’s affairs because of the apparent lack of profitability of the business at some date (currently unknown).
3. It is common ground that in circumstances of this kind if a customer is aware of a forgery he must inform the bank so that the bank can take steps to protect itself against further forgeries: Greenwood v. Martins Bank Ltd [1932] AC 51. A customer also has a duty to refrain from drawing a cheque in a manner which may facilitate fraud or forgery (London Joint Stock Bank Ltd v. MacMillan [1918] AC 777). There is no wider duty on a customer than this and in particular the Privy Council has held in Tai Hing Cotton Mill v.Liu Chong Hing Bank [1986] AC 80 that a customer does not have a duty to take reasonable precautions in the management of his business to prevent forged cheques being presented to the bank or to take such steps to check his periodic bank accounts as would a reasonable customer in his position to enable him to notify the bank of any debit items in his account which he has not authorised.
4. The bank relies on a passage from Paget’s Law of Banking (11 ed) (1986) at page 348 in a section dealing with customer’s duty to inform the bank of a known forgery:-
“Actual knowledge of the forgery is probably not essential. Lord Selborne in McKenzie v. British Linen Co, speaks of ‘reasonable grounds to believe’; a man must be treated as in possession of knowledge which, but for his own neglect, he could not have failed to acquire.”
5. The bank also relies on two only of the authorities cited by Paget namely McKenzie v. British Linen Co (1881) 6 App Cas 82 and Morison v. London County and Westminster Bank Ltd [1914] 2 KB 356. I will take the McKenzie case first. In that case the question was whether despite suspicious circumstances the appellant was to be believed when he said that he did not know that one Fraser, who had forged his signature to an earlier bill, told him that he had cleared that bill in cash and not renewed it. The case was not therefore a case between banker and customer but it is said that analogies are to be drawn between ratification and the duty of a customer to notify its bank of forgeries. Lord Selborne LC held that the onus was on the respondents and that:-
“If it is shewn that he then knew, or had reasonable grounds to believe, that a new bill, with his name upon it, had been given by John Fraser to the respondents, the conclusion (under all the circumstances) would be inevitable that he assented to, and became bound by, the use so made of his name.” (page 95)
On the facts Lord Selborne was not satisfied that the respondents had discharged this onus of proof. At the end of his judgment he said:-
“I do not say or think that the Appellant’s conduct, if it is to be thus explained, was commendable or satisfactory: it was not such as might have been expected from a scrupulous man with a strong sense of moral propriety; but it was, on the other hand, by no means such as to require, for its explanation, that he should have had in his mind any belief, or even suspicion, that another forgery of his name had taken place on that 14th of April, contrary to the positive assurances which he states he had received from John Fraser.”
Lord Blackburne considered that actual knowledge was necessary (see pages 99 and 101) and Lord Watson also thought that it was necessary to find knowledge (page 109). Accordingly, in the circumstances the dictum of Lord Selborne that the drawer of the bill of exchange had reasonable grounds to believe that it was forged was either merely obiter dictum or Lord Selborne was saying that, in the particular circumstances of the case, it should be inferred that the appellant had knowledge of the forgery of the second bill if he had reasonable grounds to believe that it had been renewed. I prefer the latter view. In his judgment Lord Selborne did not consider separately whether, if knowledge was not shown, there was alternatively reason to believe. Neither did Lord Blackburne or Lord Watson approach the matter in that way. Accordingly, in my judgment the case is not authority for the proposition that reason to believe is enough.
6. That conclusion is confirmed by two things. First, as a general principle, knowledge on the part of the principal is a necessary ingredient of ratification: see Chitty on Contracts, Vol 2 paragraph 32-029 (28 ed). Second, in a later case, Ogilvie v. West Australian Mortgage and Agency Corporation Ltd [1896] AC 257 at 269, the Privy Council said this of McKenzie, “and similar cases” (which were not mentioned by name):-
“The ground upon which the plea of estoppel rested in these cases was the fact that the customer, being in the exclusive knowledge of the forgery, withheld that knowledge from the bank until its chance of recovering from the forger had been materially prejudiced.”
The advice the Privy Council was given by Lord Watson who was a member of the House of Lords in the McKenzie case. In my judgment, the reference to “knowledge” here is to actual knowledge (see further the passage cited from Devlin J below). It does not include reason to know, which is not actual knowledge.
7. Miss Brown submitted that in the Ogilvie case the bank already knew of the forgery and so the question of reason to know did not arise. She submitted that the duty to speak also arose if the drawer had the means of knowledge. In my judgment that proposition does not follow from any of the authorities cited to me. Miss Brown also submitted that the Ogilvie case was also authority for the proposition that if a customer has reason to believe that an employee is acting in breach of his duty he has a duty to report the matter to the employer, and that it was not logical if the duty to report forgery did not arise in the same circumstances. But the knowledge required for the duty to report forgery in the type of situation that arises in this case depends on the conceptual basis for the duty. It is not the same as in the case of a duty to report an employee’s breach of duty: see the Greenwood case to which I now return.
8. In Greenwood, the respondent bank was held not liable for cheques paid out on the forged signature of the appellant husband because the husband knew that his wife had forged his name in the past and had not told the bank. Lord Tomlin (with whom Lord Thankerton and Lord Macmillan agreed) said:-
“The sole question is whether in the circumstances of this case the respondents are entitled to set up an estoppel.” (page 57)
Next he set out the three requirements of an estoppel: representation, reliance and detriment. He then said
“Mere silence cannot amount to a representation, but when there is a duty to disclose deliberate silence may become significant and amount to a representation.
The existence of a duty on the part of the customer of a bank to disclose to the bank his knowledge of such a forgery as the one in question in this case was rightly admitted.”
He then summarised the arguments on either side and continued:-
“Now the evidence of the respondents’ cashier, which was accepted by the learned Commissioner, was that the appellant after his wife’s death said to the respondents’ officials ‘that he had known about it since last October, that he did not wish to cause any bother and he did not want to give his wife away.’
The appellant’s silence, therefore, was deliberate and intended to produce the effect which it in fact produced—namely, the leaving of the respondents in ignorance of the true facts so that no action might be taken by them against the appellant’s wife. The deliberate abstention from speaking in those circumstances seems to me to amount to a representation to the respondents that the forged cheques were in fact in order, and assuming that detriment to the respondents followed there were, it seems to me, present all the elements essential to estoppel. Further, I do not think that it is any answer to say that if the respondents had not been negligent initially the detriment would not have occurred. The course of conduct relied upon as founding the estoppel was adopted in order to leave the respondents in the condition of ignorance in which the appellant knew they were. It was the duty of the appellant to remove that condition however caused. It is the existence of this duty, coupled with the appellant’s deliberate intention to maintain the respondents in their condition of ignorance, that gives its significance to the appellant’s silence.”
9. Accordingly, it is clear from Greenwood that for there to be a representation there has to be deliberate silence, that is a silence with knowledge of the material facts.
10. That brings me to the second of the two cases relied upon by the bank namely Morison v. London County and Westminster Bank Ltd [1914] 2 KB 356. This again concerns the question whether there had been ratification of the forgery in question. It was not an action between banker and customer but between the drawer of cheques and the collecting bank. What happened was that in 1908 an employee admitted that he had caused the plaintiff losses by his speculation and the plaintiff instructed its accountants to investigate the matter. Thereafter the matter was left in the hands of the accountants. The Court of Appeal held that the accountants could have discovered the extent of the forgery by rudimentary investigations. Lord Reading CJ held that since the accountants did not give evidence it must be assumed that they performed their task properly and that therefore they did discover the further forgeries and had knowledge of the employee’s wrongful dealings with the cheques. If the plaintiff did not know all the details of the dishonesty it was content to leave them with the accountants. In those circumstances it was appropriate to treat the plaintiff as having the relevant knowledge. Buckley LJ was satisfied that the plaintiff had by its conduct adopted the conduct of the employee. After discovery of the defalcations they affirmed the employee’s engagement. Phillimore LJ held that the principal had actual knowledge and that it was not necessary to decide whether means of knowledge was the same as knowledge. In those circumstances it is clear that this case concerned a plaintiff who had actual knowledge or to whom knowledge was to be imputed because it was held by its duly authorised agents, the accountants. Accordingly, in my judgment, this case does not support the proposition that constructive knowledge is enough.
11. There has been some discussion as to the meaning of constructive knowledge. Mr Chapman contended that to have constructive knowledge a party must owe a duty to the other party in question. Miss Brown disputes that. I will now refer to the description of the types of knowledge by Devlin J in Roper v. Taylors Central Garages (Exeter) Ltd [1951] 2 TLR 284, at 288-289 (Divisional Court)). (The case concerned an offence under the Road Traffic Act 1930). Devlin J analysed the different degrees of knowledge in what has become a classic statement. He said:-
“There are, I think, three degrees of knowledge which it may be relevant to consider in cases of this kind. The first is actual knowledge, which the justices may find because they infer it from the nature of the act done, for no man can prove the state of another man’s mind; and they may find it even if the defendant gives evidence to the contrary. They may say, ‘We do not believe him; we think that that was his state of mind.’ They may feel that the evidence falls short of that, and if they do they have then to consider what might be described as knowledge of the second degree; whether the defendant was, as it has been called, shutting his eyes to an obvious means of knowledge. Various expressions have been used to describe that state of mind. I do not think it necessary to look further, certainly not in cases of this type, than the phrase which Lord Hewart, C.J., used in a case under this section, Evans v. Dell ((1937) The Times L.R.310), where he said (at p. 313):
‘…the respondent deliberately refrained from making inquiries the results of which he might not care to have’
The third kind of knowledge is what is generally known in the law as constructive knowledge: it is what is encompassed by the words ‘ought to have known’ in the phrase ‘knew or ought to have known.’ It does not mean actual knowledge at all; it means that the defendant had in effect the means of knowledge. When, therefore, the case of the prosecution is that the defendant fails to make what they think were reasonable inquiries it is, I think, incumbent on them to make it plain which of the two things they are saying. There is a vast distinction between a state of mind which consists of deliberately refraining from making inquiries, the result of which the person does not care to have, and a state of mind which is merely neglecting to make such inquiries as a reasonable and prudent person would make. If that distinction is kept well in mind I think that justices will have less difficulty than this case appears to show they have had in determining what is the true position. The case of shutting the eyes is actual knowledge in the eyes of the law; the case of merely neglecting to make inquiries is not knowledge at all—it comes within the legal conception of constructive knowledge, a conception which, generally speaking, has no place in the criminal law.”
Accordingly, it is clear that constructive knowledge is not actual knowledge at all. Devlin J’s meaning of constructive knowledge accords more with that of Miss Brown than that of Mr Chapman.
12. It is constructive knowledge in the sense given by Devlin J on which the defence is based. It is not as I see it based on reason to know. Paragraph 2 of the defence states simply:-
“2. If which is not admitted the said cheques or any of them were forgeries, the claimant had constructive knowledge of the same.”
The particulars allege that the claimant was alerted to the need for enquiries into the reason why its overdraft was so large, that there could not have been any vouchers to support the forged cheques (though this is disputed by Mr Chapman ) and that the claimant failed to carry out investigations which would have revealed the forgery. Accordingly, in my judgment the present pleading does not support (as suggested by Miss Brown) an allegation that the claimant had reasonable grounds to believe that there had been a forgery, even if that were a good ground in law. Paragraphs 4 and 5 of the defence (apart from the first line of paragraph 5) in my judgment run counter to Tai Hing Cotton Mill in any event in that they allege some wider duty to take precautions and to remove the accounts clerk or to supervise her, and accordingly they should be struck out for that separate reason. Paragraphs 6 and 7 are merely consequential allegations, that is allegations consequential on paragraphs 2 to 5 and if paragraphs 2 to 5 cannot stand they too must be struck out.
13. Miss Brown argued on the basis of Maha Cook v. Thomas Cook Inc (Court of Appeal, 3 June 1987 unreported) that I should not exercise the court’s discretion to strike out the relevant paragraph of the defence because the facts ought to be investigated and are within the control of the claimant. A number of the facts necessary to support the plea of constructive knowledge are not in fact in the exclusive possession of the claimant (such as the publicly filed accounts). Irrespective, however, of that, it is clear that this part of the defence will involve substantial disclosure of documents and evidence. The present application raises a point of law which can be dealt with on this application, and in those circumstances I do not consider it would be appropriate to leave the allegations in question in the pleadings.
14. In conclusion, paragraphs 2 to 7 of the defence should in my judgment be struck out. As the learned Master refused the application, I allow the appeal.
Smith & Anor v Lloyds Bank TSB
[2000] EWCA Civ 240 [2001] 1 All ER 424, [2001] QB 541, [2000] 3 WLR 1725, [2000] 2 All ER (Comm) 693, [2000] Lloyd’s Rep Bank 334
Pill LJ
The Statute
Section 64(1) of the 1882 Act provides:
“Where a bill or acceptance is materially altered without the assent of all parties liable on the bill, the bill is avoided except as against a party who has himself made, authorised, or assented to the alteration, and subsequent endorsers.
Provided that,
Where a bill has been materially altered, but the alteration is not apparent, and the bill is in the hands of a holder in due course, such holder may avail himself of the bill as if it had not been altered, and may enforce payment of it according to its original tenour.”
By virtue of section 73 of the 1882 Act, a cheque is a bill of exchange drawn on a banker payable on demand. The 1882 Act, supplemented by the Cheques Act 1957 and the Cheques Act 1992, regulates the rights and liabilities of the parties to a cheque and of banks who collect and pay cheques. Section 80 of the 1882 Act protects a bank which in good faith and without negligence pays a crossed cheque drawn on it to another bank. Section 4 of the Cheques Act 1957 is the counterpart of section 80 and protects a collecting bank which acts in good faith and without negligence. Section 81A of the 1882 Act, inserted by the Cheques Act 1992, section 1, provides that where a cheque is crossed and bears across its face the words “account payee” or “a/c payee” either with or without the word “only”, the cheque shall not be transferable, but shall only be valid as between the parties thereto. Prior to its enactment, a person who stole a cheque which was a negotiable instrument could obtain the proceeds by forging an indorsement in the name of the true payee and paying the cheque into an account in the name of the endorsee or, in the case of a general indorsement, into any account. The effect of section 81A is to make a cheque crossed “account payee”, as the cheque in the Lloyds action was, not only not negotiable but also not transferable.
That fraud prevention measure, so described by Mr Hapgood QC on behalf of Lloyds, requiring the cheque to be paid into an account in the name of the payee, may be circumvented if a cheque is altered, the alteration not being apparent, by erasing the name of the true payee and substituting the name of a different payee in whose name an account has been opened. The name may of course be that of a rogue purporting to be the payee.
The common ground and the issues
The issues in these appeals are narrowed by the common ground which exists:
(1) Authority binding on this court establishes that both a collecting bank and a paying bank may in certain circumstances be liable in the tort of conversion by collecting or paying a cheque for or to someone other than the true owner.
(2) In both appeals, the banks accept that they converted the relevant piece of paper.
(3) Section 80 of the 1882 Act does not protect a bank which pays on a forged instrument, for example a cheque on which the signature of the drawer has been forged, or an instrument which was once valid but has been avoided by material alteration. The paying bank is not entitled to debit its customer and bears the loss itself.
(4) Both the alteration to the name of the payee on the cheque in the Lloyds action and the draft in the Woolwich action were “material alterations” within the meaning of section 64 of the 1882 Act.
(5) In these appeals, no party comes within the exception in or the proviso to section 64(1) of the 1882 Act.
(6) Neither alteration was apparent on the face of the document and the failure of the bank to recognise the change in name was not in either case negligent.
In each case, it was alleged that the bank had converted the claimant’s cheque. In the Lloyds action, the claim was also based on money had and received. Blofeld J recorded that it was accepted that no separate issue of law arose on that claim. At that stage the claim was kept open on the facts but the complainants now concede that, on the facts of this case, there is no claim for money had and received.
I accept Mr Hapgood’s formulation of the main issue in the appeals:
“Where a cheque or bankers draft is fraudulently altered by deleting the name of the true payee and substituting the name of a different payee, and the cheque or draft is then collected and paid, is the paying bank and/or the collecting bank liable in conversion for the full value of the instrument, or is the measure of damage nominal on the ground that the material alteration renders the instrument a nullity by virtue of section 64 of the 1882 Act?”
Conversion is an interference with goods inconsistent with the owner’s right to possession. Cheques are goods for this purpose. Both defendant banks admit that they converted the relevant piece of paper, the cheque form.
By a legal fiction, a valid cheque is deemed to have a value equal to its face amount. This rule was explained by Scrutton LJ in Lloyds Bank v The Chartered Bank of India, Australia and China [1929] 1 KB 40 at 55:
“Conversion primarily is conversion of chattels, and the relation of bank to customer is that of debtor and creditor. As no specific coins in a bank are the property of any specific customer there might be some difficulty in holding that a bank which paid part of what it owed its customer to some other person not authorised to receive it had converted its customer’s chattels: but a series of decisions … culminating in Morison’s case and Underwood’s case [1924] 1 KB 775, have surmounted the difficulty by treating the conversion as of the chattel, the piece of paper, the cheque under which the money was collected, and the value of the chattel converted as the money received under it: see the explanation of Phillimore LJ in Morison’s case …”.
In Morison v London County and Westminster Bank [1914] 3 KB 356, Phillimore LJ stated, at p 379:
“That the damages for such conversion are (at any rate where the drawer has sufficient funds to his credit and the drawee bank is solvent) the face value of the cheques is … so well established that it is not necessary to enquire into the principle which may underlie the authority. But the principle probably is that, though the plaintiff might at any moment destroy the cheques while they remained in his possession, they are potential instruments whereby the sums they represent may be drawn from his bankers, and, if they get into any other hands than his, he will be the loser to the extent of the sums which they represent. It may be also that anyone who has obtained its value by presenting a cheque is estopped from asserting that it has only a nominal value …”.
The submissions
For the claimants in the Lloyds action, Miss Simmons QC submits that, even if the materially altered instrument ceases to be valid as a cheque, it retains its face value for the purposes of a claim in conversion, as evidenced by the fact that Lloyds, the collecting bank, obtained that face value . No distinction should be drawn between the unauthorised drawing of a cheque and the forging of an indorsement on the one hand and the material alteration of a cheque on the other.
Alternatively, once a valid instrument is created, there should be no distinction between a subsequent abuse of authority by an agent (as in the Morison line of cases) and a fraudulent indorsement on the one hand and a material alteration on the other. A unifying principle is needed to cover those situations, it is submitted. The proceeds are diverted from the true payee and the collecting bank is liable to compensate for the loss.
Miss Simmons also submits that policy requires that the true owner of the cheque should be compensated where a wrongdoer has used it to the detriment of the true owner. The risk should be borne by the banks rather than the customer. It is insufficient protection that the drawer can claim against the paying bank. It may not be the drawer who suffers the loss, as for example in the case of the bankers draft in the Woolwich action, or the bank may become insolvent. Moreover, the law often recognises that a wronged party may have alternative remedies and that more than one party can be liable for the same loss.
It is submitted that section 64 of the 1882 Act was intended to protect the drawer of a cheque and should not be construed so as to deprive the true owner of compensation. Moreover the word “avoided” is used in the section by way of contrast with the words “nullity” or “discharged” used elsewhere in the Act. The instrument is “avoided” as against any party to it but, if payment is made upon a conversion, the value remains the face value. It is further submitted that Lloyds, having obtained the face value of the cheque, are estopped from asserting that the cheque has only a nominal value.
In the Woolwich action, Mr Slade adopts the submissions of Miss Simmons, adding that the relevant instruments, unlike those in the cases of forged cheque forms, represented genuine choses in action. He submits that it would be perverse to hold that the altered draft was a valueless piece of paper. Woolwich has accepted that, at any time before it converted the draft, it would have issued the claimants with a replacement draft in the same face value as the altered draft. Woolwich cannot in those circumstances be heard to say that the altered draft had no value to the claimants.
Mr Slade also submits that Judge Hallgarten QC was correct in finding that sections 69 and 70 of the 1882 Act were relevant. Those sections confer rights on the holder of an instrument which is lost. There is also a common law right to sue under a destroyed instrument. Those provisions support the principle that, had the claimants discovered the alteration prior to the conversion by Woolwich, they would have had a valuable instrument. Since it was only the conversion by Woolwich which deprived it of that value, the damages for such conversion should be the full amount of that value.
The parties are in dispute as to the effect of the decision of the Court of Appeal in Slingsby v District Bank Ltd [1932] 1 KB 544 but, before turning to that decision, I refer to the scheme of the 1882 Act, described in its short title as “an Act to codify the law relating to bills of exchange, cheques and promissory notes”. Mr Hapgood invites the court to consider the effect of section 64 in the context of the scheme of the Act. It imposes, he submits, an elaborate and complex allocation of risk where there has been dishonesty. Because there are potentially four affected parties with a single instrument, (drawer, paying bank, payee, collecting bank), there are many potential lines of liability. The impact of dishonest conduct depends on the nature of the dishonest act and the person who perpetrates it, as appears, for example, from section 23 to 25, dealing with signatures on bills. With respect to certain kinds of fraud, sections 60 and 80 provide protection for a paying bank and section 82, now section 4 of the Cheques Act 1957, for a collecting bank, as already mentioned..
Section 64 provides that an instrument which is materially altered is avoided in the sense that it avoids all rights to sue and discharges all liabilities to pay upon the instrument as from the moment of alteration. Thus, Mr Hapgood submits that the effect is that, before the instrument reached Lloyds, it was a worthless piece of paper, as found by Blofeld J. The fact that a payment was made under a mistake of fact does not render the instrument valid; its value has completely and irrevocably gone. That result provided protection for both drawer and payee. The risk of a material alteration was upon the paying bank. It cannot debit its customer’s account and the claimants in the Lloyds action had the right to have their account with the Bank of England credited. As between the parties, the instrument had no value at all, save as a piece of paper, and there were no contractual rights to sue upon it. The payee could go back to the drawer for a fresh instrument. The material alteration has the effect of avoiding all contracts then in existence upon the instrument.
No claim could be made against Lloyds upon an estoppel. Lloyds merely went through the process of collecting and presenting the instrument. By presenting it, Lloyds cannot be said to have represented it as valid. The possibility of an estoppel raised by Phillimore LJ in Morison has not been followed in subsequent cases.
In replying to the submissions of Mr Slade, Mr Wolfson, for Woolwich, submits that, by virtue of section 64, the bankers draft was avoided when materially altered. Reliance upon provisions for replacing lost or destroyed instruments depends upon there being a valid instrument in existence at the time of loss or destruction. The claimant could not be in a better position after destruction than he had been before destruction. It was by virtue of the material alteration that the instrument was avoided and not by virtue of the subsequent conversion. It did not follow from the fact that Woolwich would have provided a replacement draft, had the alteration been discovered before conversion, that the materially altered draft retained its face value.
Slingsby
Each side contends that an authoritative ruling in its favour emerges from the judgment of Scrutton LJ in Slingsby. That was the last of three actions by the executors of an estate who wished to invest £5,000 in war stock and employed a firm of stockbrokers John Prust and Co. The executors drew a cheque on their account at a branch of the District Bank, the payees being expressed to be “John Prust & Co or order”. It was duly signed by the executors and left with a solicitor Cumberbirch, a partner in the firm, Cumberbirch and Potts. Cumberbirch fraudulently added the words “per Cumberbirch and Potts” in the space between the words John Prust & Co and the words “or order”. He then endorsed the cheque “Cumberbirch and Potts” and paid it into the account, at a branch of Westminster Bank, of a company in which he had an interest. The cheque was dealt with in the usual way in that the account of the company with the Westminster Bank was credited and the account of the executors with the District Bank was debited.
The executors failed in their first action against the Westminster Bank ([1931] 1 KB 173), which is not material for present purposes, on the ground that the bank was protected by section 82 of the 1882 Act. They failed in a second action against Westminster Bank, the collecting bank, also heard by Finlay J ([1931] 2 KB 583), on the ground that there had been a material alteration by Cumberbirch of the cheque, which had therefore ceased to be a valid cheque and there had been no conversion of any money of the executors. An action against District Bank, the paying bank, succeeded, the Court of Appeal ([1932] 1 KB 544) upholding a decision of Wright J ([1931] 2 KB 588). The parties are in issue as to the grounds upon which the court found against District Bank and as to the effect of the court’s decision upon the judgment of Finlay J in the earlier action.
Finlay J stated that the facts were simple and not really in dispute. Both sides agreed that the alteration to the cheque was a material alteration with the result that, under section 64 of the Bills of Exchange Act 1882, the cheque was avoided. The judge accepted the submission that the cheque was by reason of the alteration a mere valueless piece of paper. He stated, at p 586:
“I have come to the conclusion that [the bank’s] submission is right and ought to prevail. It seems clear that the document, when it came into the hands of the defendant bank, was not a valid cheque at all. It had been avoided by the material alteration made in it. This being so, it seems to me that no action can be brought upon it against the defendants. They have not dealt either with a cheque or the money of the plaintiffs, and on this short ground I think this action must fail.”
Miss Simmons accepts that, if that is a correct statement of the law, the claim against Lloyds fails.
Finlay J twice stated in his judgment that, if that view was correct, the question of negligence did not arise but he nonetheless considered the conduct of the collecting bank in detail and concluded that there was no negligence and the bank was entitled to the protection of section 82 of the 1882 Act. There was nothing to suggest that further enquiry ought to have been made. It was not disputed that the indorsement was a proper one.
Wright J tried the action against the paying bank in the following year. In the District Bank action the validity of the indorsement was not admitted. Wright J held that the indorsement was an improper indorsement. Wright J went on to consider and reject several distinct claims that defences arose. Defences were claimed under section 60 of the 1882 Act, the proviso to section 64(1), section 80, as well as defences by reason of the conduct of the executors and by reason of the liability of Cumberbirch’s employers for his fraud. The effect of section 64 does not appear to have been in issue and was stated briefly by the judge. Having held that the alteration was a material alteration within the meaning of section 64(1) Wright J stated:
“But under the section just cited, the alteration avoids the cheque, subject to the proviso. The defendants cannot charge the plaintiffs with a payment made, however innocently, on a voidinstrument, or a payment for which they cannot show a mandate from the plaintiffs to pay; the only mandate by the plaintiffs was to pay John Prust & Co simpliciter, whereas the defendants paid on the simple indorsement of Cumberbirch & Potts, and in any case on an apparent mandate deviating in respect of the description of the payee.”
That view of the effect of section 64 is consistent with the view expressed by Finlay J in the earlier case.
Delivering the leading judgment in the Court of Appeal, Scrutton LJ considered three issues, whether Westminster Bank had been negligent, the effect of the indorsement and the effect of section 64. He dealt with them in that order, though it would appear that it was Finlay J who took the logical course of dealing with section 64 first because, if the cheque was a worthless piece of paper, the claim against Westminster Bank was bound to fail and that against District Bank, for debiting its customer’s account, was bound to succeed. Scrutton LJ expressed, in strong terms, his disagreement with the finding of Finlay J in the earlier action that Westminster Bank had not been negligent. It was when dealing with the second issue, that is whether the indorsement was a proper one, that Scrutton LJ cited in full the view of Finlay J on the effect of section 64. However, the statement by Finlay J had nothing to do with the point Scrutton LJ was then considering, the propriety of the indorsement. That point had not been in issue before Finlay J. Having cited the passage, Scrutton LJ stated at p 558:
“I cannot understand this. There are, of course, difficulties as to how in law you should deal with money claimed by a customer from a bank because the bank has collected it from the customer’s bank on a document which does not authorize such collection, but I thought that all those difficulties had been settled by the decision in Morison’s case, followed by this Court in Underwood’s case; in the Lloyds Bank case; and in Reckitt v Midland Bank, lately affirmed in the House of Lords (1932) 48 Times LR 271. Slingsby v Westminster Bank is, in my opinion, wrongly decided and should not be followed by any Court in preference to these decisions of the Court of Appeal.”
Only then did Scrutton LJ consider the effect of section 64. He stated at p 559:
“But the legal result of these facts begins earlier than indorsement. This cheque, having been signed by the executors in a form which gave Cumberbirch no rights, was fraudulently altered by Cumberbirch before it was issued and, it was not in dispute, altered in a material particular, by the addition of the words `per Cumberbirch & Potts.’ The cheque was thereby avoided under s. 64 of the Bills of Exchange Act. A holder in due course might not be affected by an alteration not apparent, such as this alteration. But counsel for the District Bank did not contend that the Westminster Bank were holders in due course, and I am clear they were not. They could not therefore justifiably claim on the District Bank, and the cheque when presented to the District Bank was invalid, avoided, a worthless bit of paper, which the District Bank was under no duty to pay. This invalidity comes before any question of indorsement.”
Scrutton LJ went on the repeat his conclusion that the cheque was not properly indorsed and concluded this section of his judgment, stating at p 559:
“The protection given by sections 80 and 82 is excluded in my opinion by the fact that the alteration has made the paper a null and void document, no longer a cheque.”
Scrutton LJ concluded his judgment by stating that he might have been content to adopt the careful judgment of Wright J, with which he substantially agreed.
Greer LJ also stated that “under the provisions of section 64 of the Act the cheque was rendered void except as therein stated”. The defect in the cheque which rendered it invalid was on the face of the cheque and not merely in the indorsement. Romer LJ listed the six questions which appeared to him to arise from the appeal and expressed his agreement with the conclusions of Wright J. I find it significant that Romer LJ did not identify the effect of section 64 as being an issue in the appeal.
Miss Simmons understandably relies strongly upon the apparent rejection by Scrutton LJ of Finlay J’s statement in the Westminster Bank case of the effect of section 64. However I have come to the conclusion that the apparent disapproval was based upon a wholly uncharacteristic and, with great respect, most unexpected misreading by Scrutton LJ of the judgment of Finlay J in the earlier action. Scrutton LJ expressed in strong terms his disagreement with Finlay J on the negligence issue. He then dealt with the indorsement issue, which had first been raised only in the District Bank case, but cited from Finlay J’s judgment in the Westminster case a passage dealing not with indorsement, but with section 64. That Scrutton LJ was dealing with the indorsement issue at that stage and not section 64 is illustrated by his reference to the Morison line of cases which deals with other types of dishonesty and not material alteration which is covered by section 64. When going on to deal specifically with the effect of section 64, Scrutton LJ expressed views entirely consistent with those of Finlay J.
It is submitted that, when stating at p 559 that Westminster Bank could not claim against District Bank, Scrutton LJ was distinguishing between the position of the banks as against each other and the position of the customer of the paying bank as against the collecting bank. It is also submitted that Judge Hallgarten QC was right to find that, underlying Scrutton LJ’s approach, was the feature that, so far as the claimants in the Woolwich action, as owners, were concerned, the cheque continued to have its face value. In my judgment Scrutton LJ’s reasoning upon section 64 is not susceptible to those interpretations.
The effect of section 64 was in my view not seriously in issue in the District Bank action. Wright J dealt with it briefly and in conformity with the view of Finlay J. All members of the Court of Appeal expressed agreement with Wright J, Greer LJ stating that under the provisions of section 64 the cheque was rendered void and Romer LJ setting out the questions arising upon the appeal without mentioning a question on section 64.
Conclusion
My conclusions can in the event be stated briefly. In my judgment the effect of the presence of the word “avoided” in section 64(1) of the 1882 Act is that the materially altered cheque or draft is, subject to the qualifications in the section, a worthless piece of paper. The words of Scrutton LJ when dealing with the legal effect of the material alteration of the cheque in that case are to be taken at face value. The piece of paper is no longer a cheque and no action can be brought upon it as a cheque. The cheque is invalidated and no distinction can be drawn between parties who, but for the material alteration, would have had contractual rights based on the cheque. No party can bring an action for damages in conversion for its face valuebecause it no longer represents a chose in action for that amount.
In the case of a cheque, the customer of the paying bank is protected because the bank, which bears the risk, cannot debit the customer’s account. In the case of a bankers draft, the customer’s account is debited when the draft is issued to him. He has the benefit of a bill drawn by the bank itself, which he may require to satisfy business requirements, but once he has it he assumes the relevant risk as he would assume the risk if he drew bank notes which are stolen. It does not follow from the fact that the paying bank will normally issue a replacement draft, if the invalidity is discovered before the collecting bank credits the wrong account, that the materially altered draft is valid. The paying bank will have suffered no loss and may issue a replacement draft as a matter of good business practice, or possibly contractual obligation. The likelihood of such action does not, however, render valid what section 64 has rendered invalid.
Moreover the consequence of invalidity cannot in my judgment be avoided by alleging an estoppel. The cheque is rendered invalid by section 64 and, by presenting it under normal banking arrangements, the collecting bank was not asserting its validity.
I would dismiss the appeal in the Lloyds action and allow the appeal in the Woolwich action.
Lomax Leisure Ltd v Miller & Anor
[2007] EWHC 2508 (Ch)
Cawson QC
The Present Claim
As to the claim for dishonour of the cheques, Lomax relies upon the principle that a cheque, at least when supported by consideration, should be treated as cash as explained in Nova (Jersey) Knit Ltd v. Kammgarn Spinnerei GmbH [1977] 1 WLR 713, per Lord Wilberforce at page 721.
Mr Collings QC, on behalf of Lomax, accepts that a cheque, to be capable of being sued on, requires to be supported by consideration, but says, correctly, that consideration is to be presumed – Section 30 of the Bills of Exchange Act 1882 (“the 1882 Act”). Further, Mr Collings QC argues that the cheques were, in the present case, supported by consideration. He formulated the consideration relied upon in the following terms, namely the Defendants…”being absolved from being forced to pay the dividend to which the cheques relate”. The Particulars of Claim had referred to the cheques being drawn “… in respect of the payment of the dividend”, so this was, perhaps, something of a development on the pleaded case.
Mr Collings QC points to the fact that consideration is, for the purposes of a bill of exchange or cheque, given an extended definition by Section 27 of the 1882 Act such that it extends not only to consideration sufficient to support a simple contract, but also extends to any antecedent debt or liability in respect of which the cheque is tendered.
Mr Salter QC referred me to a line of authorities to the effect that the antecedent debt or liability must be that of the party drawing the cheque and not some third-party – see Chalmers and Guest on Bills of Exchange, 16th edn (2005) at paragraph 4-023 referring to cases such Hasan v. Willson [1977] 1 Lloyd’s Rep 431 and MK International Development Co Ltd v. Housing Bank [1991] 1 Bank LR 74. However, Mr Collings QC, in response, referred me to the “robust” approach to consideration taken by Mr Jonathan Gaunt QC sitting as a Deputy Judge of this Court, in Autobiography Limited v. Byrne [2005] EWHC 213, referred to in Byles on Bills of Exchange, 28th edn (2007) at 19-011.
In this case a wife drew a cheque on a joint account with her husband to meet a debt of a company in which they were both shareholders, and of which the husband was a director. The cheque was held to be sufficiently supported by consideration because in the “commercial context” of the cheque not being intended to be a gift consideration had moved to the wife in that it was “unrealistic to suggest that no benefit was conferred on Mrs Byrne given her interest in the Company”. Mr Collings QC says, in short, that there was benefit to the Defendants in the dividend being paid because then they would be absolved from being forced to pay the same.
Further Mr Collings QC maintains that the cheques are not impeachable on the grounds of mistake, quite simply because, so he submits, there was no mistake involved in drawing the cheques. Giving IR 11.5 the construction that Mr Collings QC submits it ought to have, as the application appealing the rejection of Marpaul’s proof had not been served, there was no reason not to declare and pay the dividend in accordance with IR 11.5, and consequently, submits Mr Collings QC, no mistake was involved in paying it.
As to the construction and effect of IR 11.5, Mr Collings QC submits that the Rules relating to dividends in a liquidation taken as a whole point to an intention to achieve finality with the declaration of a dividend pursuant to IR 11.5(1). Consequently, so he submits, the liquidator’s power to postpone or cancel a dividend under IR 11.4 is superseded once a dividend is declared pursuant to IR 11.5(1), and the words “there is pending any application” in IR 11.5(2) should be construed as meaning that an application should not only have been issued, but served as well.
Consequently, it is argued by Mr Collings QC that, as Marpaul’s application had not been served, there was no “pending” application to appeal, and thus no good reason for the Defendants not to declare the dividend and cause the cheques to be paid.
It is then argued by Mr Collings QC that where rules such as IR provide for the making by an office holder of certain payments to creditors or a class of creditors, failure, contrary to the rules to effect the relevant payment will be actionable by the individual creditor or creditors in question. Mr Collings QC points to cases such as IRC v. Goldblatt [1972] 1 Ch 498 where a successful claim was brought against receivers by preferential creditors when a secured creditor had been wrongly paid to the loss of the preferential creditors.
Further Mr Collings QC relies upon a line of authorities going back to Pulsford v. Devenish [1903] 2 Ch 625, where the liquidator had negligently omitted to inform the company’s creditors of the liquidation, and distributed assets to contributories without regard to the creditors’ claims. Farwell J held that the creditors had a personal claim against the liquidator and Farwell J, at 633 observed:
“But the duty to pay the debts … is an absolute statutory duty … it is not necessary to resort to trusteeship or equitable doctrines”.
Mr Collings QC also referred me to A & J Fabrications Ltd v. Grant Thornton [1998] 2 BCLC 227, and the way that Jacob J, at 231, applied not only Pulsford v. Devenish, but also James Smith & Son (Norwood) Ltd v. Goodman [1936] Ch 216 where at 231 – 232 Lord Harworth MR had said this:
“The cases that we have looked at are sufficient to show that if a creditor has been injured by the failure of the liquidator to take the steps that he ought to have taken, and has suffered damage, he can “succeed on an action on the case” … in establishing a liability against a liquidator.”
Thus, as assignee of the relevant creditors, Lomax claims to be entitled to enforce the statutory duty that it say arose under Rule 11.5 to pay the dividend once it has been declared by seeking, to quote from the prayer to the Particulars of Claim:
“(2) Payment of, and/or damages or compensation in equity in respect of each of the dividends declared in favour of (and paid) to creditors in respect of which the creditor’s cause of action has been assigned”
The Defendants’ Case
The gist of Mr Salter QC’s submissions on behalf of the Defendant were as follows:
33.1 The declaration of a dividend under IR 11.5 does not give rise to a debt or a personal claim against the liquidator for payment, a creditor’s remedy to secure payment is under IR 4.182(3), or an analogous procedure in the case of a members’ voluntary liquidation whereby the Court can order the liquidator to make the payment. If the liquidator has paid away monies in the liquidation so that he is no longer able to do so, then the remedy, if any, is under Section 212 of the 1986 Act for misfeasance, but that is not Lomax’s case here and would, in any event, be a remedy to be pursued for the benefit of creditors as a whole.
33.2 On proper construction of IR 11.4 and 11.5, the Defendants were certainly entitled, if not also obliged, to stop the payments once they had notice of Marpaul’s appeal.
33.3 Even if this construction of IR in 11.4 and 11.5 is not correct, and once declared the dividend ought to have been paid notwithstanding the late notice of the appeal:
33.3.1 The liquidators owed no duty to individual creditors of Lomax, the recent decision of the Court of Appeal in Kyrris v. Oldham [2004] 1 BCLC 305 having overruled the Pulsford v. Devenish line of authorities, or at least confined them to the situation where the company had been dissolved, as well as providing authority for the proposition that a liquidator owes no general tortious duty of care to creditors.
33.3.2 If any duty was owed to creditors, then it was not a duty of strict liability, and given the concession that Mr Hunt would have acted in exactly the same way, it could not be said that the conduct of the Defendants fell below any required standard.
33.3.3 Further, even if the Defendants were in breach of some duty giving rise to a claim by individual creditors, the breach caused no loss as the monies were, by the Defendants acts complained of, preserved for the benefit of creditors, and no complaint is made in the present claim in relation to how the monies were subsequently dealt with.
33.4 As to the claim on the cheques:
33.4.1 They cannot be sued upon because they were not supported by consideration as the Defendants were under no personal liability to pay the dividend, even if it was not open to the Defendants, as a matter of true construction of IR 11.4 and/or 11.5, to postpone or cancel it;
33.4.2 Had the cheques been paid, it would have been open to the Defendants to recover the payments by way of a restitutionary claim on the grounds that they had been paid under a mistake, namely the mistaken belief that no creditor had in fact appealed a rejected proof at the time that the dividend was declared and the cheques issued. That being the case, in defence to an action on the cheques it was open to the Defendants to rely upon the principle that the Court ought not to permit circuity of action – as to which see eg. London Joint Stock Bank Ltd v. Macmillan and Arthur [1918] AC 777 at 818 per Viscount Haldane.
Decision
Liability to Pay or Compensate?
It is, to my mind, necessary to begin with a consideration of the nature of the obligation on the liquidator to pay a dividend out of realisations of the company’s assets once a dividend has been declared. The position is, as I see it, as follows:
34.1 IR 11.5 provides for the declaration of a dividend but does not, in terms, impose a duty to pay it over and above the overriding duty of a liquidator under IR 4.180(1), albeit that various modes for distribution or payment of the dividend are provided for in IR 11.6(3) and (4).
34.2 The liquidator is not personally liable to pay the dividend, and there is no relationship of debtor and creditor as between the liquidator and any creditor. This is made expressly clear in respect of liquidations other than a members’ voluntary liquidation by IR 4.182(3), and the specific reference to the fact that: “No action lies against the liquidator for a dividend”. Whilst, strictly, IR 4.182/(3) does not apply in the case of a members’ voluntary liquidation, the same principle plainly applies and there is no rationale explanation as to why IR do not, expressly, so provide.
34.3 A creditor’s remedy in the case that a dividend is not duly paid is IR 4.182(3), and applying to Court for an order directing the liquidator to pay the dividend. Again, although IR 4.182/3 does not strictly apply to a members’ voluntary liquidation, an analogous procedure is available.
34.4 If a liquidator, having declared a dividend, dissipates or pays away assets so as to defeat an application under IR 4.182(3) or the equivalent procedure in respect of a members’ voluntary liquidation, then a personal claim may lie against a liquidator depending on circumstances. However, on the authority of Kyrris v. Oldham, unless the company has been dissolved, the claim would ordinarily only be capable of being brought as a misfeasance claim under Section 212, with a view to recovering the monies dissipated or paid away for the benefit of the liquidation and creditors as a whole in the event of misfeasance- see Kyrris v. Oldham at 333e – 334h per Jonathan Parker LJ. Commenting on the judgment of Farwell J in Pulsford v. Devenish, Jonathan Parker LJ at 333, said this:
“As I read his judgment, Farwell J regarded the fact that the company had been dissolved as crucial to his decision. He concluded that the liquidator’s statutory duty to pay the company’s debts was an absolute duty, which continued after the company had first ceased to exist, and that thenceforth (see in contrast to the position pre-dissolution) that statutory duty was owed to creditors. Had dissolution not occurred, then as I read his judgment he would have concluded that the creditors could not have brought their claim. At all events, it does not follow from his decision that they could have done.”
34.5 It may well be that so long as it is not alleged that the liquidator has done or failed to do something that might have harmed creditors as a whole, there is scope for imposition of a duty of care to individual secured or preferential creditors not to misapply distributions so as to provide a remedy for creditors whose interests are damaged by a misapplied distribution, cf. IRC v. Goldblatt [1972] 1 Ch 498 and the claims that were not struck out in Kyrris v. Oldham. However, that is not the position here.
It follows from the above that Lomax’s claim for “payment … and/or damages or compensation in equity” must fail on the basis that the Defendants owed no personal obligation to the relevant creditors to pay the dividend, and those creditors have no personal claim to damages or equitable compensation for breach of any duty owed to them.
It may be that, if IR 11.5 is to be construed in the manner intended for by Lomax the creditors could, whilst the Defendants were still in funds, have applied to the Court for an analogous order to IR 4.182(3) requiring the dividend to be paid. But thereafter, any claim would in my judgement, have had to have been a misfeasance claim based upon the circumstances of the subsequent dissipation of assets, and that is beyond the scope of the present claim.
Further, even if, contrary to my above finding, the stopping of the payments did give rise to an actionable misfeasance under Section 212 of the 1986 Act, or a even if a claim for damages by individual creditors did lie based upon the non-payment of the dividend, I consider that it must be an answer thereto that no loss was occasioned thereby because the net effect of the actions complained of was that the liquidators retained the relevant funds. Consequently, any proper claim for damages must, as I see it, depend upon the circumstances of the subsequent application of those monies, and as to whether any misfeasance was involved, which is, as I have said, beyond the scope of the present proceedings.
IR 11.4 and 11.5
Mr Collings QC is correct that the provisions of IR that I have referred to above do provide for a scheme that seeks to achieve finality so far as payment of dividends is concerned, and I agree that there are good policy reasons why that should be the case.
However, it is also clear that emphasis is placed by IR upon seeking to protect the position of a creditor who has submitted a proof in time, including specifically in circumstances where that creditor appeals against the rejection by the liquidator of his proof – see IR 11.4 and 11.5(2).
Balancing these competing interests, common sense does, in my judgement suggest that a good reason for postponing finality is to await the result of an appeal against the rejection of a proof whatever the circumstances of that appeal are, so long as it is properly constituted and there is some merit in it.
The ordinary and natural meaning of “pending” in IR 11.5(2) is, as I see it, that an appeal against the rejection of a proof is on foot, without it being an additional requirement that, as contended by Lomax, the relevant application should have been served on the liquidator. Thus one must ask whether, in the present circumstances, there is good reason to displace this natural meaning?
In my view there is not. The requirement for finality does not, in my judgement, sufficiently outweigh the need to protect the position of a creditor such as Marpaul that has appealed in time the rejection of its proof. It is right that, in the present case, there may be an element of default on the part of Marpaul in that service was not effected more than 14 days prior to the first return day of 12/11/99. However the relevant originating application had only been issued on 20/10/99, and it is at least possible that there was some delay in the originating application being returned for service. Further, the present difficulty may well still have occurred without any fault on the part of Marpaul, eg. if the Court had, say, fixed a return day of 22/11/99, in which case there would have been no requirement to have served prior to 08/11/99. The correct answer cannot sensibly depend upon a distinction of this kind.
Further, as to the finality or otherwise of the act of declaring a dividend pursuant to IR 11.5(1), I consider that there is force in Mr Salter QC’s point that the fact that the provisions of IR do, in certain instances, specifically provide for finality in respect of a dividend or distribution, see eg. IR 4.182(2), 4.182A(4) and 11.8(1), does point to there being no general presumption as to finality from the mere fact of the declaration of a dividend.
Thus I consider that the proper construction of IR 11.5(1), applied to the facts of the present case, in that, because the Defendants, albeit unknown to themselves, at the time that the dividend was declared had cause to postpone or cancel the same pursuant to IR 11.4 as a result of Marpaul’s appeal, the Defendants were under no duty to declare the dividend, and, in fact, as a matter of true construction of IR 11.5(2), the dividend ought not to have been declared at all.
Further, I consider that, as a matter of true construction of IR 11.4, it was open to the Defendants to postpone or cancel the dividend, not least because it has not been validly declared pursuant to IR 11.5, and to do so certainly at any time prior to payment of monies into the hands of creditors, if not thereafter, so long as the postponement or cancellation takes place within the four month period provided IR 11.2.
On this further basis, I do not consider that it is open to seek “payment … and/or damages or equitable compensation” against the Defendants.
Claim on the Cheques
I am of the firm view that there was no consideration in the extended sense provided for by Section 27 of the Bills of Exchange Act 1882 sufficient to support the cheques. There plainly was no consideration of a kind sufficient to support a simple contract, and Mr Collings QC’s formulation of the consideration that he seeks to rely upon is, as I see it, reflective of this.
As to whether there is consideration as constituted by an antecedent debt or liability, it is, in my judgement, critical that the Defendants had no debt or liability to the creditors for the dividend, and thus, prima facie, the authorities cited by Mr Salter QC and referred to in paragraph 24 above apply.
The issue is, essentially, as to whether, in support of his suggested consideration of “being absolved from being forced to pay the dividend to which the cheques relate”, Mr Collings QC can successfully pray in aid the “robust” approach to consideration taken in Autobiography Ltd v. Byrne. In my judgement he cannot, the position in Autobiography Ltd v. Byrne being readily distinguishable. Given her interest in the relevant company, Mrs Byrne stood to gain from a commercial perspective from the payment of the company’s debt. The Defendants in the present case, were in a very different position. They did not stand to gain personally from the making of the payment, and the making of the payment simply represented what the Defendants reasonably considered to be the performance of their statutory functions. Further they were, at the relevant time, under no threat to make the payments.
Consequently, I consider that Lomax has failed to establish that the cheques were supported by consideration (in the extended sense). Whilst there is a presumption as to consideration, once I have found that the only form of consideration specifically alleged is insufficient, then it is open to me to find that there was no sufficient consideration to support the cheques. The effect thus is that the cheques merely amounted to revocable instructions to AIB to make the payments.
Even if there were sufficient consideration to support the cheques, I consider that Mr Salter QC’s submissions as to mistake are also well made out.
As to principle, Mr Salter QC refers me to Chitty on Contracts, 29th edn at paragraph 29-04 discussing the practical effect of the decision of the House of Lords in Kleinwort Benson Ltd v. Lincoln City Council [1999] 2 AC 349:
“It was held that the questions raised in a claim for restitution of money paid under a mistake of law are the same as those raised in a claim for restitution of money paid under a mistake of fact: was there are mistake: did the mistake cause the payment: and did the payee have a right to receive the sum which was paid to him? Retention of the money is prima facie unjust if the payer paid because he thought he was obliged to do so and it subsequently turns out that he was not … the suggestion that restitution is barred where the payee honestly believes that he was entitled to the money, which would exclude recovery in a large proportion of cases, was rejected”.
On the basis of my findings above, had the cheques been paid and the monies received by the creditors, and had a claim for recovery been advanced before any question of change of position had arisen, then a good claim for recovery on restitutionary grounds would, in my judgement, have arisen on the basis that:
53.1 The money would have been paid under a mistake of fact and law, namely that there was no outstanding appeal by Marpaul, and thus that the Defendants were entitled to declare and pay the dividend;
53.2 The mistake did cause the payment, in the sense that if the Defendants had known and appreciated the full position they would not have declared the dividend or made payment;
53.3 The creditors did not have a right to receive the relevant monies.
If the cheques had been paid and the relevant monies paid over to the creditors, then the Defendants, subject to change of position defences, would have had a good claim to recover the same on the basis that they were paid under a mistake of fact and/or law. Applying the rule against circuity of action, as the monies were not in fact paid, the creditors ought to be in no better position by having a claim on the cheques, and thus a liability to honour the cheques never properly arose.
Conclusion
It follows that Lomax’s claim, on each of the two bases upon which it has been brought, must fail.
I indicated when I reserved judgment that I do not require attendance at the hand down of this Judgment.
I understand it to be common ground between Counsel that costs should follow the event. I will thus provisionally order that Lomax pay the Defendants’ costs of the claim to be assessed on the standard basis in default of agreement. However, given that the question of costs was raised at the end of the hearing, and there has been no argument thereon, if either party wishes to make further submissions as to costs, then I will deal with the same at a telephone hearing to be arranged through the usual channels. However the provisional order as to costs indicated will stand if neither party contacts Chancery listing to arrange a telephone hearing by 4.00pm on 19/10/07.
As to permission to appeal, I will entertain any application at a telephone hearing. If Lomax wishes to seek permission to appeal, then its Solicitors should contact Chancery Listing to arrange the same no later than 4.00 pm on 19/10/07. I will thus adjourn consideration of the question of permission to appeal to such a telephone hearing, and extend time for appealing and for seeking my permission to appeal to such a telephone hearing provided that Lomax’s Solicitors, no later than 4.00 pm on 19/10/07, contact Chancery Listing to arrange the same.
I conclude by thanking Counsel for their assistance and helpful submissions.
Bassano v Toft & Ors
[2014] EWHC 377 (QB) [2014] Bus LR D9
Popplewell J
The claim by Mr Toft
The fact that the Chattel Mortgage is void, and that the covenant to repay which it contains is unenforceable, does not entitle Mrs Bassano simply to keep the money. There is in such cases an implied agreement to repay the money independently of the defective bill of sale: Davies v Rees (1886) 17 QBD 408 per Ld Esher MR at 411. In this case it is clear that there was an express agreement for loan on the terms set out in the Offer of Loan Finance document signed by the parties, and further evidenced by the terms of the Chattel Mortgage and by the payment by Mrs Bassano of interest at the agreed rate for each of the first ten months.
Such an agreement is a consumer credit agreement within the meaning of the Consumer Credit Act 1974, and is therefore only enforceable against Mrs Bassano to the extent permitted by the Act. Because s. 141 of the Act provides that actions to enforce agreements regulated under the Act may only be brought in the county court, I have sat additionally as a judge of the Central London County Court for that purpose.
On behalf of Mr Toft it was submitted that the Act is no bar to enforcement for the following reasons.
(1) The agreement is not a regulated agreement, being an exempt agreement by reason of s16B of the Act.
(2) Alternatively, if the agreement is a regulated agreement:
(a) it was not made by Mr Toft in the course of a consumer credit business, which removes any bar to enforceability arising from the fact that Mr Toft is unlicensed; and
(b) it is a non-commercial agreement, which removes any bar to enforceability arising from the fact that the agreement does not comply with the detailed requirements laid down in Part V of the Act and the regulations made thereunder.
(3) Alternatively the Court should exercise its discretion under sections 65 and 127 to enforce the agreement.
Exemption under s. 16B
Under section 8(3) of the Act, a consumer credit agreement is not a regulated agreement if it is an “exempt agreement” as specified in or under (amongst other sections) section 16B. Section 16B (1) provides that the Act does not regulate an agreement granting credit of more than £25,000 “if the agreement is entered into by the debtor ….wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by him”. Section 189(1) defines “business” as including a “profession or trade”.
Mr Allston submitted that the loan by Mr Toft was entered into wholly or predominantly for the purposes of her profession as a professional musician. I am unable to accept that submission. The only evidence on which it was based was the fact that Mrs Bassano was a professional viola player. But that is not of itself sufficient to give rise to the inference that the finance was predominantly required to enable her to continue to play professionally. Borrowers regularly take out finance for purposes other than their business trade or profession. The Offer of Loan Finance document recorded that the purpose of the loan was for “the private use of the Borrower”.
Moreover, although in Mrs Bassano’s case there is no direct evidence of the purpose of the loan from Mr Toft, the evidence reveals two instances of her borrowing money from others for purposes other than for her professional activities. Her witness statement suggests that the purpose of seeking finance from Peter Biddulph, some six months before Mr Toft was approached, was to discharge legal costs incurred in a long running dispute with builders who had carried out work on her home which had resulted in a second charge on the property. When it came to the loan from Borro in 2011, she told Ms Gibson that she needed the money to pay school fees. These examples demonstrate that it would be illegitimate to infer from no more than the fact of her profession that the predominant purpose of the loan by Mr Toft was to enable her to pursue that profession.
Agreement made in the course of a consumer credit business
Under section 21(1) of the Act, a licence is required to carry on a consumer credit business. Under s. 40 of the Act, regulated agreements by unlicensed creditors are unenforceable if made by the creditor “in the course of a consumer credit business” (unless retrospectively approved by the OFT). The term “consumer credit business” is defined in s. 189(1) of the Act as meaning “any business being carried on by a person so far as it comprises or relates to (a) the provision of credit by him, or (b) otherwise his being a creditor”.
Mr Toft’s business as a dealer in instruments does not ordinarily involve his making loans. His unchallenged evidence was that the loan to Mrs Bassano was the only occasion on which he had ever done so, and was therefore a one off.
The argument that Mr Toft falls foul of the licensing requirement is as follows. The loan and its repayment with interest would have been accounted for by Mr Toft through his business as a dealer. Moreover if Mr Toft had been able to realise the intended security for the loan and take possession of the viola, it would have become part of the stock of his business. Accordingly the loan was a business transaction, carried on as part and parcel of his business as a dealer in fine instruments. Although the dealer business was not consumer credit business as such, the loan was a business transaction, and to that extent he was carrying on consumer credit business which required a licence because consumer credit business is defined as meaning any business so far as it relates to or comprises the provision of credit.
It is clear from the authorities that such an argument is unsound. Transactions are not to be regarded as occurring “in the course of” a business unless they have some degree of regularity such that they form part of the normal practice of the business. In Davies v Sumner [1984] 1 WLR 1301 a self employed courier used his car almost exclusively for his business. He sold the car falsely stating that it had done 18,000 miles when its true mileage was 118,000 miles. His conviction for applying a false trade description to the vehicle “in the course of a trade or business” contrary to s. 1(1) Trade Descriptions Act 1968 was quashed by the Divisional Court whose decision was upheld by the House of Lords. Lord Keith said:
“Any disposal of a chattel held for the purposes of a business may, in a certain sense, be said to have been in the course of that business, irrespective of whether the chattel was acquired with a view to resale or for consumption or as a capital asset. But in my opinion section 1(1) of the Act is not intended to cast such a wide net as this. The expression “in the course of a trade or business” in the context of an Act having consumer protection as its primary purpose conveys the concept of some degree of regularity, and it is to be observed that the long title to the Act refers to misdescriptions of goods, services, accommodation and facilities provided in the course of trade. ……..”
The same principle was applied to the Consumer Credit Act licensing provisions by the Court of Appeal in Hare v Schurek [1993] CCLR 47 (1993) GCCR 1669. Section 40 in its then form rendered regulated agreements by unlicensed creditors unenforceable unless they were “non-commercial agreements” which bore the definition then, as now, in section 189(1) as meaning “a consumer credit agreement …….not made by the creditor or owner in the course of a business carried on by him” . The Court held that if the transaction between the parties was “one off” or “of a type only occasionally entered into by the applicant in the course of his motor trade business” or “unique or a manifestation of occasional transactions” it did not fall within the licensing requirements because it was not made in the course of a business. This conclusion was supported by s.189(2) which provides “A person is not to be treated as carrying on a particular type of business merely because occasionally he enters into transactions belonging to a business of that type.” Mann LJ observed that such a conclusion was consonant with the purpose of the Act which is to regulate those who carry on particular forms of business as a trade or profession. See also Goode: Consumer Credit Law & Practice Issue 41 para 23.141 which in my view correctly summarises the position and how the judgment of Mann LJ in Hare v Schurek is to be interpreted. An occasional or one off consumer credit transaction does not require the creditor to be licensed because it is not carried out in the course of any business, whether consumer credit business or any other business.
The loan agreement with Mr Toft was not therefore such as to require him to be licensed. As a one off transaction it was not made in the course of carrying on a consumer credit business, nor was it made in the course of his business as a dealer, or any business.
Non-commercial agreement
Under section 74(1) of the Act, Part V does not apply to a non commercial agreement, which is defined in s. 189(1) as meaning “a consumer credit agreement …….not made by the creditor or owner in the course of a business carried on by him” and is subject to s. 189(2) which provides “A person is not to be treated as carrying on a particular type of business merely because occasionally he enters into transactions belonging to a business of that type.”
For the reasons already given, the loan agreement with Mr Toft was not made in the course of a carrying on a consumer credit business, nor was it made in the course of his business as a dealer or any business. Accordingly it was a non commercial agreement and Part V has no relevant application.
That is sufficient to entitle Mr Toft to judgment for the loan, together with interest. If I had reached a different conclusion on whether it was a non commercial agreement, I would have exercised my discretion under sections 65 and 127 of the Act to enforce the loan in full against Mrs Bassano. She suffered no real prejudice from the fact that there was no formal document complying with the requirements of Part V and the Regulations made thereunder. The terms of the loan were simple and did not involve compounded interest. They were set out in writing in the Offer of Loan Finance and in the Chattel Mortgage in clear terms. There can be no doubt that Mrs Bassano understood them perfectly well at the time and had a clear and sufficient written record of them. There is little culpability attributable to Mr Toft for failure to comply with the requirements of form prescribed by the Act. It resulted from the failure on the part of his then solicitors to effect a timely registration of the Chattel Mortgage.
The claim by Borro
Two points arise in relation to Borro’s claim. The first is the argument previously advanced on behalf of Peter Biddulph which is adopted on behalf of Mrs Bassano, that the Borro Loan Agreement was not executed by her in a manner which complied with the Consumer Credit Act 1974 because she did not sign it. The second is that Borro lost any security interest in the viola (a) when it was delivered to Bishop or (b) when it was delivered by Bishop to Mr Dahler or (c) when it was delivered to Mr Ingles of Sotheby’s pursuant to the order of the Court that it should be sold.
Execution of the Borro Loan Agreement
Section 61(1)(a) of the Act provides that a regulated agreement is not properly executed unless a document in the prescribed form itself containing all the prescribed terms and conforming to regulations under section 60(1) is signed in the prescribed manner both by the debtor and by or on behalf of the creditor. The issue is whether the Borro Loan Agreement was “signed” by Mrs Bassano so as to fulfil this requirement.
The agreement was reached and documented as follows. Mrs Bassano was present at Borro’s offices in the company of a representative of Borro. All loans by Borro are made online. The customer has to create an account online with personal information, including his or her name, and choose a password. When the loan terms are agreed, as a first stage the customer is presented on screen with a pre contract agreement setting out the proposed terms of the loan. The customer then acknowledges and accepts this information, following which the formal loan agreement is presented on the screen. It includes amongst other things the name of the borrower as part of the agreement. The customer indicates acceptance of that loan agreement by clicking on an acceptance button marked “I Accept” which is in a defined field on the screen. The concluded agreement is then generated in PDF form, which is available to the customer at any stage by logging on to the customer account and using the chosen password; and is available to be printed as a PDF document. The agreement is incapable of being changed after the customer has clicked on the “I accept” button. The agreement so generated also operates as the pawn receipt required by s114 of the Act, as its terms make clear.
Mrs Bassano followed this procedure so as to bring into existence the Borro Loan Agreement. It recorded on the first page amongst other things her name and that of Borro Loan Ltd. In a box on the second page it stated:
“This is a credit agreement regulated by the Consumer Credit Act 1974
The client signed it by clicking “I Accept” in their account in the presence of a Borro representative and has agreed to be legally bound by its terms.
Date of signature 01/07/2011
Time of Signature: 14:05:41″
Generally speaking a signature is the writing or otherwise affixing of a person’s name, or a mark to represent his name, with the intention of authenticating the document as being that of, or binding on, the person whose name is so written or affixed. The signature may be affixed by the name being typed in an electronic communication such as an email: see Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd [2012] 2 All ER (Comm) 978 at [32]. Section 7 of the Electronic Communications Act 2000 recognises the validity of such an electronic signature by providing that an electronic signature is admissible as evidence of authenticity.
Section 61 of the Act requires the agreement to be signed “in the prescribed form”. The form prescribed at the time was that required by The Consumer Credit (Agreements) Regulations 2010 (SI 2010 No 1014). Regulation 4 governs signing. The only relevant prescription is in regulation 4(3)(a) which provides that the signature must be in a space indicated in the document for that purpose and dated. Regulation 4(5) recognises that a regulated agreement may be concluded electronically and that the document may contain “information about the process or means of providing, communicating or verifying the signature to be made by the debtor.” There is therefore nothing in the Consumer Credit Act 1974 to suggest that regulated agreements should not be capable of electronic signature; and I can see no reasons of policy why a signature should not be capable of being affixed and communicated electronically to an agreement regulated by the Act, just as it can for other documents which are required to be signed.
Mrs Bassano electronically communicated to Borro her agreement to be bound by the terms of the Borro Loan Agreement by clicking on the “I Accept” button and thereby generating a document sent to Borro bearing her typed name which authenticated the document and communicated her agreement to be bound by its terms. That constituted signing it so as to fulfil the requirements of s. 61 of the Act.
There arises a further question whether the location of such signature is in the form prescribed by Regulation 4(3)(a) which requires it to be in “the space in the document indicated for the purpose”. The words “I accept” appear in such a space, but Mrs Bassano’s name appears on the previous page. In my view the statutory regulation is fulfilled. A signature need not consist of a name, but may be of a letter by way of mark, even where the party executing the mark can write: Baker v Dening (1838) 8 Ad & E 93. The signature may consist of a description of the signatory if sufficiently unambiguous, such as “Your loving mother” (In re Cook [1960] 1 All ER 689) or “Servant to Mr Sperling” (In re Sperling (1863) 3 Sw & Tr 272). In the Borro Loan Agreement, the signature is made by the electronic communication of the words “I Accept” which are in the space designated for a signature. They constitute a good signature because the word “I” can be treated as being the mark which is unambiguously that of Mrs Bassano affixed for the purposes of authenticating and agreeing to be bound by the terms of the document. The signature is therefore in the designated space by reason of the words “I Accept” being in that space. The name on page one is of relevance because it is evidence that “I” is Mrs Bassano’s mark, if any were needed in addition to the evidence that it was she who clicked the button; but it is the words “I Accept” which constitute the signature, not the name on the previous page.
For completeness I should record that had I reached a different conclusion, I would have acceded to the invitation from Borro to exercise my discretion under s. 65 and 127 to enforce the agreement in full. If, contrary to my conclusions, the means by which the agreement was concluded and generated did not involve a signature complying with the prescribed form, the defect was purely technical and Mrs Bassano suffered no prejudice as a result. There can be no doubt that she deliberately indicated her consent to be bound by the terms of the document, a copy of which she had as a pawn receipt. It contained all the matters prescribed by the Act and the regulations thereunder in the prescribed form. It was her pleaded case in a verified statement of case (P/Claim paragraphs 21 to 23) that she had entered into and executed the agreement, and the signature point was only subsequently adopted because it had been advanced (but not pursued) on behalf of Peter Biddulph. No significant culpability would attach to Borro for such technical defect, if defect it were. I was told that the form and means of concluding this agreement was the standard form recommended by The National Association of Pawnbrokers.
Loss of security interest by loss of possession.
A pledge is a common law security interest created by bailment of property as security for the performance of an obligation, most usually payment of a debt. Pawn is the term often used for pledges of chattels for short term loans to consumers. The pledgee’s interest carries with it a right to possession so far as is necessary to secure the debt and an implied right to sell the chattel for such purpose. Pledge agreements with consumers are regulated under the Consumer Credit Act 1974 and regulations made thereunder. Section 120 of the Act confers on the pledgee an express right to sell the goods after the time allowed to the pledgor to redeem has expired.
Mrs Bassano adopted the submission articulated in the skeleton argument served on behalf of Peter Biddulph that Borro’s security interest in the viola was lost when Borro parted with possession. The submission was that it was the parting with physical possession which destroyed the security interest.
The exact nature of the pledgee’s interest in the pledged goods is not settled. It is variously described in the authorities as a “special interest” or a “special property”. The latter description was criticised by the Privy Council in The Odessa [1916] 1 AC 145 at 158-9, in which it was said that the pledgee has no proprietary interest in rem in the pledged chattel, but merely a personal right, conferred by the pledgor as owner of the property, to detain and sell the chattel for the benefit of both parties, such that the right is indistinguishable from the right of lien save for the power of sale. But in other cases the pledgee’s interest has been treated as a proprietary interest which is capable of assignment and transfer, unlike a lien which is merely a right of possession: see Coggs v Bernard (1703) 2 Ld Raym 909 per Holt CJ at 916, and Donald v Suckling (1866) LR 1 QB 585 per Blackburn J at 614. It is not necessary for the purpose of this case to determine the extent to which the interest is properly called proprietary, as to which see Beale on The Law of Security and Title-Based Financing 2nd Ed at 5.03-5.05.
Although it is necessary for a pledgee to take actual or constructive possession of the chattel (or document of title) in order to vest his special interest in the first place, it is clear from a number of authorities that it is not every parting of possession which is sufficient to defeat his interest.
In Donald v Suckling (1866) LR 1 QB 585 it was held that a sub pledge by the pledgee does not destroy the pledge or the pledgee’s special interest.
In Babcock v Lawson (1880) 5 QBD 284, the Court of Appeal held that a pledgee did not lose his special interest when he surrendered the goods back to the pledgor pursuant to a fraudulent representation that the pledgor had secured a sale and would account to the pledgee for the proceeds. In such circumstances whilst the goods remained in the hands of the pledgor, the pledgee was entitled to their return; but once the pledgor had surrendered the goods to a bona fide third party for value, the latter acquired priority in the goods.
In the Scottish appeal in North Western Bank v Poynter [1895] AC 56 (HL), Lord Herschell LC made clear at p. 67-68 that it was beyond argument that the law of England was that if a pledgor surrendered his possession to an agent for the particular purpose of effecting a sale, he did not thereby lose his security, even if the surrender was to the pledgor. This principle was applied in In Re David Allester Ltd [1922] 2 Ch 211, 216. This is because the surrender is not of possession in the legal sense, but merely of custody: see Official Assignee of Madras v Mercantile Bank of India Ltd [1935] AC 53 (PC) at per Lord Wright at 64 and Reeves v Capper below.
In Reeves v Capper (1838) 5 Bing (NC) 136 a ship’s master, Captain Wilson, pledged a chronometer to his owners, Messrs Capper, in return for an advance. The shipowners permitted him to retake possession in order to use it on a voyage. After the voyage the captain returned the chronometer to the makers to be held by them for him. He subsequently purported to grant the property in it to an attorney pursuant to a transaction settling a threatened execution of a writ of fieri facias. The attorney took possession and returned it to the makers to hold for him. In the Court of Common Pleas Tyndal CJ held that the Defendant shipowners retained their security interest in the chronometer in priority to the attorney, and had not lost it either by parting with possession to the captain for the purposes of the voyage, or when the captain had delivered it to the makers thereafter:
“And as to the second point, we agree entirely with the doctrine laid down in Ryall v Rolle (1 Atk. 165), that in the case of a simple pawn of a personal chattel, if the creditor parts with the possession he loses his property in the pledge: but we think the delivery of the chronometer to Wilson under the terms of the agreement itself was not a parting with the possession, but that the possession of Captain Wilson was still the possession of Messrs. Capper. The terms of the agreement were that “they would allow him the use of it for the voyage:” words that gave him no interest in the chronometer, but only a licence or permission to use it, for a limited time, whilst he continued as their servant, and employed it for the purpose of navigating their ship. During the continuance of the voyage, and when the voyage terminated, the possession of Captain Wilson was the possession of Messrs. Capper; just as the possession of plate by a butler is the possession of the master; and the delivery over to the Plaintiff was, as between Captain Wilson and the Defendants a wrongful act, just as the delivery over of the plate by the butler to a stranger would have been; and could give no more right to the bailee than Captain Wilson had himself. We therefore think the property belonged to the Defendants, and that the rule must be made absolute for entering the verdict for the Defendants.”
This case therefore supports the further proposition that if a pledgee surrenders custody to an agent for a limited purpose consistent with retention of his interest as pledge, he does not thereby lose such interest if the agent parts with possession without his consent or authority. In Donald v Suckling (sup) Blackburn J identified this as a difference between pledge and lien, the latter being lost by unauthorised transfer of possession (see p. 612).
These cases make clear that a pledgee does not lose his special interest merely by parting with physical possession. He will not do so merely because:
(1) he loses possession as a result of theft or fraud (Babcock v Lawson);
(2) he delivers up the goods to an agent to be sold on his behalf (North Western Bank v Poynter) or to be retained by the agent for a specific purpose (Reeves v Capper);
(3) such agent makes an unauthorised delivery of possession to a third party (Reeves v Capper, Donald v Suckling);
(4) he sub pledges the goods, at least in circumstances where he retains the ability to redeem the subpledge if the pledgor seeks to redeem the pledge (Donald v Suckling).
I consider the relevant principle to be this. The pledgee’s special interest, whether or not properly described as proprietary in nature, may be defeated by a superior property interest held by someone other than the pledgor, such as that of a true owner from whom the pledgor had derived no good title, or a subsequent bona fide purchaser for value without notice of the pledge (see Babcock v Lawson (1880) 5 QBD 284 per Bramwell LJ at 286). But in the absence of a superior property claim by a third party, the pledgee’s special interest is not lost by parting with possession of the chattel unless he does so in circumstances which constitute a voluntary surrender of his interest. What is required is a voluntary surrender of his special interest as pledgee, rather than simply a surrender of physical possession. The voluntary surrender of possession will not be treated as a surrender of his special interest as pledgee unless the circumstances of such surrender are inconsistent with the preservation of that special interest. If the loss of possession is involuntary, or where voluntary, consistent with an intention to preserve his special interest, such interest is not thereby lost.
Applying such principles to Borro’s dealing with the viola in this case, it is clear that there was no loss of its special interest as pledgee:
(1) Delivery by Borro to Bishop was delivery by Borrro to its agent for the purposes of safe keeping and demonstration to potential purchasers, in order to enable it to be sold and the proceeds used to repay the loan. There was no surrender of possession in the legal sense, merely surrender of custody. The transfer of custody was not inconsistent with preserving the special interest of Borro as pledgee; on the contrary it was for the purposes of protecting that interest. This conclusion is unaffected by the error in naming Borro Loan 2 Ltd in the written tripartite agreement. The bailment to Bishop was a bailment on the terms of the agreement and clearly understood by both Borro Loan Ltd and Bishop to have been such. The document evidenced the terms orally agreed on which Bishop was to take possession of the Viola from Borro as bailee.
(2) Delivery by Bishop to Mr Dahler was unauthorised by Borro. It was contrary to the terms on which it was agreed that Borro would hold the viola. It was not a voluntary surrender by Borro of its special interest so as to defeat it, just as the owners’ special interest in Reeves v Capper was not destroyed by the master’s unauthorised transfer to the attorney by means of the attornment by the makers in that case. It was not a voluntary surrender of possession by Borro at all.
(3) The delivery of the viola to Mr Ingles of Sotheby’s pursuant to the order of the court, to which Borro consented, was a transfer of custody to an agent for the purposes of sale. Again there was no surrender of possession in the legal sense, merely surrender of custody. It was not inconsistent with Borro preserving the special interest as pledgee; on the contrary it was for the purposes of protecting that interest by realising the security by selling the viola.
Conclusion
Mr Toft’s claim for £100,000 and contractual interests at the rate of £2,500 per month (uncompounded) succeeds. Borro Loan Ltd’s claim for £130,000 and interest at the contractual rate succeeds. Borro Loan Ltd is entitled to be paid such sum from the proceeds of sale of the viola in Court in priority to Mr Toft.