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OUTER HOUSE, COURT OF SESSION
[2007] CSOH 113
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A96/06
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OPINION OF LORD MALCOLM
in the cause
J S
CRUICKSHANK (FARMERS) LTD
Pursuers;
against
GORDON & INNES
LTD (IN RECEIVERSHIP) AND OTHERS
Defenders:
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Pursuers: Armstrong, Q.C., Upton; Russell Jones & Walker
Third Defenders: Connal, Q.C., Solicitor
Advocate; McGrigors
Non participating parties:
First and Second Defenders: Agents:
Burness
4 July 2007
[1] This
is one of several similar actions which have arisen out of the receivership of
the first defenders, Gordon & Innes Ltd (G & I). G & I acted on behalf of a number of
potato growers in the marketing and sale of potatoes in North East
Scotland. The second defenders are the
receivers of G & I. They were
appointed by the Royal Bank of Scotland
(the bank) who were G & I's bankers and are the third defenders. The potato growers, including the pursuers, J
S Cruickshank (Farmers) Ltd, relied upon G & I to sell their potatoes under
and in terms of two styles of agreement, termed respectively a "commercial"
contract and a "high grade" contract.
Apart from the type of potato, the main difference between the two agreements
was that under the commercial contract G & I obtained a percentage
commission on the sale proceeds, whereas under the high grade arrangement an
agreed sum per ton of potatoes sold was retained by the sellers. Also, with regard to commercial potatoes the
growers were paid an average of the prices paid for all potatoes over a season,
i.e. on a pooled basis. The growers
considered that the potatoes were sold by G & I as their agents and on
their behalf. G & I paid potato sale
receipts into a separate account held by them with the bank which, since October 1999,
was entitled "growers account." G & I
had other accounts with the bank. On G &
I's insolvency the bank combined all G & I's accounts, including the growers'
account. Some of G & I's accounts were
overdrawn. Thus the monies in the
growers' account were used by the bank to reduce G & I's overall
indebtedness to it. The pursuers and the
other growers claim that the bank was not entitled to do that. Rather it should have retained the funds in the
growers' account quite separately as monies belonging to the growers. They require the bank to account to them for
the monies in the growers' account. At a
procedure roll debate Mr Connal QC for the bank argued that the pursuers'
averments in support of this case are irrelevant and lacking in
specification. He invited me to take the
view that the action so far as directed against the bank should be dismissed.
[2] I
was informed that the various actions by the growers all involve the same
defenders and much the same issues. They
have been remitted to the ordinary roll from the Commercial
Court, and all, bar this action, are sisted
pending the outcome of this debate.
Before the remit, Lord Clarke heard a similar submission by the bank in
one of the other actions - see Devron
Potatoes Ltd v Gordon & Innes Ltd
& Others 2003 SCLR 101. In that
case the pursuers were a cooperative of potato growers. However the averments and the issues were
similar, and in many respects identical, to those in the present action. Indeed the pleadings in that case are
incorporated into the present record. I
refer to Lord Clarke's opinion for a full account of the averments and the
relevant background circumstances.
Having heard much the same arguments as those presented to me by Mr Connal
on behalf of the bank, Lord Clarke allowed a proof before answer. Subsequently the Devron action settled. However
there was no formal agreement that the procedure in the other actions would
follow that decided in the Devron case. The debate before me was, except in minor
respects, in effect a re-run of the hearing before Lord Clarke. Naturally Mr Armstrong for the pursuers
invited me to follow the earlier decision, albeit I am not bound by it. On the other hand Mr Connal observed
that there are differences in the Devron case,
particularly the existence of an express agency agreement between Devron and G & I. Also that action did not involve high grade
potatoes, but only commercial potatoes, which operated on a pooled basis. Nevertheless he invited me to take the view
that Lord Clarke had taken too narrow a view of the submissions for the
bank, and had fallen into error.
The pursuers' case on record
[3] Despite
Lord Clarke's opinion, it is appropriate for me to outline the case which the
pursuers offer to prove. The averments
are lengthy. What follows is a summary,
though I hope a fair one. Mr Armstrong
explained that the two written agreements are not a complete record of the
arrangements between G & I and the growers. In relation to the commercial contract, the
conduct of the parties and various communications between them demonstrate that
it was agreed that G & I would act as the pursuers' agent in
selling the goods; would not take title
to them; and would pay the sale receipts
into a special bank account, which, after deduction of G & I's
commission and expenses, would be remitted to the growers. By arrangement between G & I
and the bank, in October 1999 that account was renamed the "growers' account." There are lengthy averments detailing the
evidence relied upon for the above.
Further, G & I expressly described themselves as marketing
agents in their document headed "Terms of Payment for Season 1999/2000." Their terms and conditions were consistent
with the above arrangement. For example
clause 4 obliged G & I to "market the crop to best advantage." The risk of damage from the weather remained
with the grower until loading for delivery to the ultimate buyer. G & I were to be paid "on an
average pool price based on 85% ex farm price achieved for the relevant
variety, grade, size and tuber number."
G & I wrote to Devron
stating that "we are not obliged to pay growers until we have been paid by
customers." The same agency, commission,
and pooled basis of calculating due payments was applied consistently between G & I
and a large number of growers, all specified on record. G & I did not demur after
several pool growers wrote to G & I stating that potatoes grown
by them remained their property until they received payment. The pool system of calculating average
payments shared or spread the risk of (a) price fluctuations during the season
(b) of unsold potatoes, and (c) of bad debtors.
Interim payments were on the
basis of predictions of the total pool price.
G & I took no risk regarding unsold potatoes and
fluctuating prices. They had no
responsibility for the quality of the goods.
G & I referred to themselves as marketing "your crops"
when writing to growers. They
consistently described their role to purchasers as that of agents.
[4] The
high grade contract related to seed potatoes used for the purpose of growing
further seed potatoes. The terms and
conditions were similar to the other agreement, except that the price was not
calculated on a pooled basis. By acquiring
knowledge of growers' production plans G & I ensured that supply
and demand for high grade seed crop remained in balance, so that there were
purchasers for each grower's crop.
Planning ahead over a three year period allowed the parties to do
business on the basis that the growers would be paid only if the crop was sold
by G & I, consistently with G & I's role as agents,
but with the assurance that the crop would indeed be sold. Had G & I not been acting as
agents in respect of both types of crop they would have been exposed to an
unrealistic level of financial risk.
[5] The
issue of a separate bank account was discussed between G & I's financial
managers and Mr Dutch, the commercial manager of the bank's branch at Queens
Cross, Aberdeen. As a result of those
discussions Mr Dutch was aware that the account was to be operated as
condescended on by the pursuers. He
represented to G & I's managing director, Mr Ryan, that G & I
had the bank's approval to do this. The
pursuers aver that there is no reasonable explanation for the change of name of
the account to "growers' account" other than an intention to keep the proceeds
of potato sales separate from G & I's trading account, and
protected from their other creditors such as the bank. In this way the potato sale proceeds were
distinguished from the property of G & I.
It is averred that the growers asked for this arrangement as a safeguard
against the insolvency of G & I.
The account was dedicated to the fruits of the arrangement between the
growers and G & I. G & I's
director, Mr Stuart, represented to growers that G & I acted only
as agents, and that the separate growers' account meant that "their money was
entirely safe." Mr Ryan told growers
that their money was "ring-fenced" and separate from G & I's own
funds. Devron's minute to the bank's Mr Robinson on 30 June 2000 summarised how the legal
relationship between G & I and the growers had been represented
by G & I to Devron. On 2 August 2000 the sum at credit to the
account was г1.233 million. Of that some
г70,000 was owed by G & I to the pursuers. This was in respect of potatoes sold by G & I
on the pursuers' behalf, the bulk relating to high grade potatoes (though I was
informed that in the other actions the bulk of the claims relate to commercial
potatoes).
[6] The
specific case against the bank is set out in Condescendence 7 as
follows. The bank was aware that the
growers' account had been dedicated to the purpose of a separate account for
monies held for growers and from which sales expenses were taken. The bank was well aware of the widespread
practice of marketing agents being obliged to account to growers for their
sales of agricultural produce. Mr John
Robinson, the manager of the bank's specialised lending services, specifically
minuted in February 2000 that the growers operated on profit share and that G & I
acted as "sole marketing agents, receiving a commission of about 17%". A KPMG report to the bank recorded the profit
sharing arrangement. The business
relationship manager of the Huntly Branch was specifically advised of the
agency relationship, and that the proceeds of potato sales did not belong to G & I,
but were held by G & I as agents and could not be used to fund G & I's
operations. To the bank G & I
specifically referred to themselves as marketing agents who had a right in a
question with a grower to deduct costs before remitting sales proceeds to the
grower. In any event, in all the circumstances
the bank was put on inquiry in order to be in good faith in dealings with the
account. Any relevant inquiries would have
revealed the true position. In intromitting
with the monies in the growers' account the bank did not act in good faith. It knew enough to be aware of the fiduciary
nature of G & I's activities.
The bank had unjustly enriched itself and so should repay the relevant
share of the funds to the pursuers.
Alternatively the bank holds the monies as a constructive trustee for
the growers, and should account therefor to the growers.
The submissions made on behalf of the bank
[7] Mr
Connal's submissions for the bank can be summarised as follows. A bank is not obliged to inquire into the
nature of funds paid into a customer's account, nor as to whether they truly
belong to the customer. In the present
case the relevant account was not a designated trust account. The pleadings are inadequate to establish (a)
that the account was held in a fiduciary capacity (b) that if it was, that the
bank knew this, and (c) that the bank was in bad faith. Any case based on bad faith must be supported
by very clear and specific averments.
Bank accounts are merely book entries based on a purely contractual
relationship between the bank and its customer.
Once money is paid into an account it belongs to the bank, albeit it is subject
to an obligation upon the bank to repay an equivalent amount to the
customer. If a customer is in a position
of overall indebtedness to the bank, the bank can retain a sum in credit in one
of several accounts held by the customer in order to reduce that overall
indebtedness. The bank can do this up
until it receives notice that the monies do not belong to the customer or until
it becomes in bad faith. Simply to aver
that G & I sold as agents for the growers, and that the bank knew
this, is not enough to entitle the pursuers to a remedy against the bank. The above propositions were made under
reference to Thomson v Clydesdale Bank Ltd (1893) 20R (HL) 59; Royal
Bank of Scotland v Skinner [1931]
SLT 382; Clark v Ulster Bank [1950]
NI 132; and Style Financial Services Ltd v Bank
of Scotland 1996 SLT 421 (Second Division) and 1998 SLT 851, (Lord Gill).
[8] Mr
Connal submitted that it must be demonstrated that the bank knew that it would
be improper to treat the funds as belonging to G & I. Banks are entitled to assume that funds
lodged by a customer within an account held by the customer are his funds, even
if it is known that the customer regularly holds funds belonging to others, for
example an auctioneer or a stockbroker.
Again reference was made to the Irish case of Clark. It is not enough for the pursuers to prove that the bank knew
that G & I were selling potatoes for farmers and that the
proceeds were put into the said account.
This does not amount to knowledge of a fiduciary relationship between G & I
and the growers. It does not put the
bank on inquiry or otherwise mean that it acted in bad faith. Under reference to Lord Gill's opinion in Style Financial Services, it was
submitted that the pursuers' averments must offer to prove something "close to
dishonesty" on the part of the bank. At
one point Mr Connal's submission was to the effect that the bank was entitled
to act as it did even if it knew that the funds belonged to someone else. However, the main thrust of his submission
was that the pursuers' pleadings, even if established, would not demonstrate
what he described as the necessary bad faith
or dishonesty on the part of the bank, such as, for example, if it had been
given express notice of a trust relationship.
Reliance was placed upon Bank of
Scotland v MacLeod Paxton Woolard
& Co 1998 SLT 258, and also to Lord Nicholls of Birkenhead in Royal Brunei Airlines v Philip Tan Kok Ming [1995] 2 AC 378 at
392 G, all for the proposition that there has to be dishonesty or
improbity on the part of the bank.
Fairly read the pleadings do not meet this test, thus the case against
the bank is bound to fail and should be dismissed.
[9] Mr
Connal submitted that there are no specific references in any of the contracts
to trust monies, nor to a trust relationship.
Properly construed the high grade agreement is simply that of a contract
for the sale of potatoes by the growers to G & I. One should not go beyond the terms of the
agreements, thus the bulk of the pursuers' averments are irrelevant. In any event the references to broader
understandings and agreements are lacking in specification. Discussions which did not involve the bank
are irrelevant. There is no sound basis
for the proposition that there was a fiduciary obligation owed by G & I
to the growers. At most the pursuers
have a financial claim against G & I, but no preference to the
funds in the growers' account. The
growers had no separate interest in any identifiable fund. G & I could have used sale
receipts as they wished. The growers
took the risk of G & I's insolvency.
[10] Mr Connal submitted that the averments about a discussion with
the bank's Mr Dutch are insufficient, since it is not said that the bank
specifically agreed that the growers' account would be protected from the bank
itself. That is a necessary element -
"the key thing" - and cannot be left to inference. It should be specifically averred. The most that can be said is that the
pursuers offer to prove that the bank knew that this was to be a fund for the
proceeds of potato sales and for deduction therefrom of G & I's
expenses. It does not follow that the
bank agreed that the account would be protected from the bank's normal right to
combine accounts when assessing a customer's overall indebtedness to the
bank. With reference to the various
averments that Devron told the bank
of the intended position, Mr Connal's submission was that Devron's understanding was not a correct reflection of the true
position in law, namely that G & I were only agents, not
fiduciaries. In short there is nothing
to disturb the normal contractual relationship between G & I and
its bank. The averments do not support a
duty of inquiry on the part of the bank, nor that it was on notice of a trust
fund. In any event the authorities
suggest that dishonesty or something close to it is required, otherwise a bank
is under no general duty to investigate the true position.
[11] Both parties refer to constructive trust in their
pleadings. However Mr Connal
submitted that no separate issue arises under this heading. Constructive trust cannot provide a separate
or alternative route to recovery if the pursuers' averments are otherwise
irrelevant. Subsequently, for the
pursuers Mr Armstrong made a similar submission.
Submissions on behalf of the pursuers
[12] For the pursuers Mr
Armstrong observed that only the third defenders were seeking dismissal. In line with the cases against G & I
and the receivers, he submitted that the case against the bank should be remitted
to a proof before answer. He relied on
Lord Clarke's decision in the earlier Devron
case. Such distinctions as can be
identified in relation to the Devron case
make no real difference to the proper outcome.
Lord Clarke's decision was based on very similar averments. In many
major sections the averments are identical in both actions. Mr Armstrong accepted that, in general,
a bank is entitled to receive money from a customer, even one who commonly acts
on behalf of others, without inquiry, and on the basis that the customer is
free to lodge funds within his own account as his money. However, Mr Armstrong submitted that it is
different once the bank is on notice that the customer is or may be behaving
improperly. Reference was made to Thomson and to Lord Gill's opinion in Style Financial Services. The averments
are sufficient to support a fiduciary obligation on G & I towards
the growers. The case is similar to that
discussed in the Inner House decision in Style
Financial Services. The claim is
based on recompense. The bank is unjustly
enriched and should account to the growers.
It is not a matter of tracing specific funds. The ultimately unsuccessful outcome of the
claim in Style Financial Services was
based on specific features relating to the facts of that case. In particular there was an express agreement
excluding any fiduciary duty, and there was no separate or earmarked
account. In Style the agent had express authority to mix his money with the
pursuers' funds.
[13] Mr Armstrong submitted that if an agent is bound to hold his
principal's monies separately from his own, a fiduciary duty arises. The separate account, namely the "growers
account", is "the key indicator."
Reference was made to Bowstead of
Reynolds on Agency (2006 ed) pp181/91, and to Re Gross, ex parte Kingston (1871) L.R 6 Ch. App 632. The written contracts were not intended to be
comprehensive, for example as to arrangements for payment. The pleadings are relevant and sufficiently
specific in terms of (a) the broad picture as to clearly understood arrangements
between the pursuers and G & I, and (b) knowledge of those
arrangements on the part of the relevant bank officers. The only material difference between the two
types of contract was that, in respect of high grade potatoes, the marketing
agents' margin was fixed, whereas for commercial potatoes, which are potatoes
at the end of their life cycle and ready to be sold to the public, it was a
percentage of the average pooled price.
Even in respect of high grade potatoes there was no entitlement to
payment until G & I sold the product. There is no relevant distinction to be made
between the two types of potatoes in terms of agency and fiduciary obligation
for the balance of the sale proceeds.
With reference to Royal Brunei
Airlines, Mr Armstrong observed that the case dealt with a bank assisting
a customer in a fraud. Different
considerations can arise when a bank knowingly receives monies belonging to a
third party. The test for recovery may
well be less strict in such cases, where the approach is based more on it being
unconscionable that the bank should retain the funds, as opposed to any
requirement that the bank acted dishonestly.
Reference was made to BCCI v Akindele [2001] Ch 437.
[14] As to the attack on the specification in the pleadings, Mr Armstrong
submitted that this is not a case of fraud or criminal conduct on the part of
the bank, and thus the very high standard suggested by Mr Connal did not
arise. In any event, there was more than
sufficient detail in the averments to provide fair notice as to the case the
bank was required to meet at proof.
Discussion and Decision
[15] In
essence Mr Connal's submission was that the pursuers' averments are irrelevant because
of the absence of averments sufficient to establish what he described as the
necessary dishonesty (or "something close to dishonesty") on the part of the
bank. In this regard I consider it
important to note that the present case does not involve an allegation of
impropriety in the conduct of G & I. Many of the cases in this area of the law, including
most of those cited to me, are concerned with the improper lodging of money in
or withdrawing of money from an account with a bank. In such cases, in a question between a
disadvantaged third party and the bank, it is well established that the mere
fact that the wrongdoer was the bank's customer does not impose any reparation
or recompense obligation on the bank towards the third party. There is clear authority that banks are under
no general duty to make inquiries or check that a customer is acting properly
when lodging monies in or withdrawing monies from his own account. This is so even if the customer is known to
handle monies on behalf of other people.
Further, to make the bank liable on the basis of mere negligence, for
example by carelessly failing to identify and then stop a customer's wrongdoing, would render
banking an impracticable activity. As it
is sometimes put, a bank is not required to be an amateur detective. The cases show that much more than the bank's
negligence is required if a customer's wrongdoing is to result in it incurring
liability to a third party. Thus the
general rule is that the tension between the potentially conflicting interests
of, on the one hand, the bank's customer that his bank honour his instructions,
and that of third parties that a bank does not facilitate a fraud upon them,
will be resolved in favour of the bank, unless the bank is in some way
complicit in or associated with its customer's wrongdoing. In other words, a banker is entitled to
assume that all is well unless there is a good and clear reason to suspect the
contrary. However, as mentioned above,
the present case does not involve any allegation of wrongful conduct on the
part of G & I.
[16] Further,
in the context of the present action, and in assessing the submissions for the
bank, it is important to note that the cases principally relied upon by
Mr Connal, and the general principles laid down in them, relate to
circumstances where the relevant account is held in the name of the bank's
customer. In such cases the basic
premise of the arrangement between the bank and its customer is that the
customer owns and operates the account on his own behalf. In these circumstances it is understandable
and appropriate that the bank is entitled to proceed on the basis that, unless
and until it has good reason to suspect that something is amiss, the normal
rules apply, and the customer can intromit freely with the funds in the account. However, if the bank is on notice of a
potential fraud or a breach of trust, that is sufficient to overrule the normal
duty of the bank to honour the payment instructions from its customer. That normal duty must give way when the bank
is alerted to wrongdoing. Thus, if a
bank dishonestly assists wrongdoing, or receives money through a customers'
account which it knows it should not receive, it can be liable to those harmed
by these actions. That said, in my view
the difficulty for Mr Connal is that the present case is not in this line of
country, and thus many of the cases relied on by him for his attack on the
pursuers' pleadings are not in point.
There is no suggestion by the pursuers of any wrongdoing on the part of
G & I in lodging or withdrawing monies from the growers' account. The account was being operated in the manner
envisaged by the growers and their selling agents. The present action does not involve a bank
assisting in wrongful conduct, nor of a bank knowingly receiving money which is
the fruit of wrongdoing. Rather it is a
case concerning a bank appropriating for its own purposes monies lodged in an
account which the pursuers offer to prove was being operated for the ultimate
benefit of the principals of the bank's customer, and that this was known to
the bank. On the face of it, the
admitted name of the account, namely "growers account", is powerful prima facie evidence in support of this
position. In other words, this is a case
concerning an allegation that the bank simply took funds to which it was not
entitled, perhaps misguidedly, rather than from any dishonest intention or bad
faith. In unjust enrichment terms, the
pursuers' case could be regarded as based on the condictio sine causa.
However, the fundamental point is that the pursuers aver that (a) the
monies belonged to the pursuers, and (b) the bank had sufficient notice of that
fact. In such a case there is no need to
require the pursuers to aver dishonesty, nor some separate head of bad faith on
the part of the bank.
[17] In
discussion during the debate the submission for the bank ultimately came to be
that in the absence of averments that either the bank was specifically informed
that this was a trust account, or that it expressly agreed that the monies in
the account would be protected from the bank itself, the case against the bank is
irrelevant. I am satisfied that this is
too narrow and restrictive an approach.
An express trust account is a classic example of this kind of case, but
I was given no authority for the proposition that it is only in respect of a
designated trust account that an account can be dedicated to a third party and
thus removed from the reaches of the bank should its customer fall into overall
indebtedness towards the bank. Indeed
the authors of Wallace & McNeil "Banking Law" (10th ed) state at
page 11: "The name or heading of an account opened in a customer's name is
sufficient notice to the banker of the nature of the account".
[18] In Re Gross,ex parte Kingston James L J began his
judgment with the following arresting sentence: "This case has been argued with
a courage, a pertinacity, and a learning which it has been melancholy, in my
judgement, to see thrown away upon a case so utterly hopeless". So far as I am aware, history does not record
the reaction of the unnamed Ipswich County Court Judge who initially upheld the
"utterly hopeless case". However, for
present purposes it may be instructive to notice wherein the hopelessness
lay. James L J explained that a
county treasurer had an account with a bank, which was a separate account
headed "Police Account". He said "That was
as clear and distinct a statement that the monies paid into it were monies
belonging to the county, as if he had put the county monies into a strong box
labelled 'county monies' ". He concluded
that when the county treasurer absconded, the monies standing to the account
were as much county monies as if they had been kept in such a box. James L J stressed that the bankers knew that
it was a county account. Mellish L J
indicated that the name of the account showed that the bank was prepared to
treat it as a trust account, and that on the bankruptcy of the customer it
belonged to the trust. For these reasons
the claim of the bank to retain the monies was rejected in favour of the
county. On the face of it, it would be
open to the pursuers to approach the present case in exactly the same way. However, the question arises whether the case
principally relied upon by Mr Connal, namely Thomson v Clydesdale Bank, requires
a different outcome in Scots law. In
that case a stockbroker, whose bank account was overdrawn, paid into his account
a sum of money by endorsing a cheque received by him from another broker to
whom he had sold certain shares, on the instructions from a body of trustees to
sell the shares and then invest the price on deposit with certain colonial banks. Within a few days the broker absconded. The account remained in overdraft. The trustees sued the bank for the sum paid
in. There was no evidence that the bank
knew that the broker had improperly paid the money into his account. The House of Lords affirmed the judgement of
the Second Division that the bank was not bound to repay the money to the
trustees. It can immediately be noticed
that there was no question of the name of the account indicating that it was
being operated for the benefit of a third party. Rather the customer was operating his own
account in an improper manner, all to the damage of others. Thus the relevant circumstances in Thomson can be distinguished from those
in the present action. The trustees argued
that the bank had notice that the sum paid in did not belong to their customer,
but rather that he held it on behalf of others.
However, it was held that any such knowledge would not, in itself,
disable a bank from retaining the monies in satisfaction of the customer's debt
to the bank. The Lord Chancellor
(Herschell) said at 60
"No doubt if the person
receiving the money has reason to believe that the payment is being made in
fraud of a third person, and that the person making the payment is handing over
in discharge of his debt money which he has no right to hand over, then the
person taking such payment would not be entitled to retain the money, upon
ordinary principles which I need not dwell upon. But in the present case there appears to me to
be an absolute absence of any evidence of that kind."
[19] Mr
Connal claims support from this passage by noting that equally there is no offer
to prove "evidence of that kind" in the present case. However, in my view the pursuers are not
obliged to provide such evidence where the case does not depend upon the
improper conduct of a customer's account, but rather is based on an account specifically
designated as and set up for the benefit of third parties. In such a case, the fact that the payments
were made in the ordinary course of the customer's business does not mean that
the bank can ignore the interest of the third parties in the account funds, and
then use them to reduce their customer's indebtedness to the bank. In Thomson
the Lord Chancellor noted that it is common for persons such as stockbrokers
to act as principals for others, but that this does not, in itself, prevent
them from paying in monies received by them into their own accounts in
discharge of a liability incurred towards the bank. However, I consider that it is a very
different matter when the monies are paid into an account which the pursuers
offer to prove was specifically set up and designated as being for the benefit
of third parties, and that the bank knew that.
In such a case the preferential interest of the third party is not
dependent on proof of the bank having knowledge of wrongdoing by its customer, not
least since this type of claim does not presuppose any such wrongdoing. On the other hand, in the circumstances of Thomson, which dealt with an account in
the name of the alleged wrongdoer and which was operated for his own purposes,
it was entirely appropriate that the trustees required to establish more on the
part of the bank before they could succeed, such as specific knowledge that its
customer was defrauding the trustees.
The concern that, were it otherwise, the business of banking would be
burdened by an impracticable obligation of inquiry into the source of funds
paid into accounts, does not arise when the account is specifically dedicated
to the third party claimant. In Scots
law I consider that such cases are most naturally considered and determined in
the context of unjust enrichment, where the key feature is wrongful taking,
which may or may not involve dishonesty or dishonourable conduct.
[20] All of
this is consistent with recent English authority in which a distinction has
been drawn between (a) a bank assisting in wrongdoing, and (b) a bank
appropriating monies which it should not have taken. In the latter case dishonesty is not a pre-requisite
to an obligation on the bank to reimburse the true owner. In Royal
Brunei Airlines at 386 F Lord Nicholls commented that "Recipient liability
is restitution-based: accessory liability is not." In BCCI
v Akindele, Nourse L J discussed whether a banker's
knowledge of the interest of the claimant in the funds was such as to make it
"unconscionable" that the bank should retain the monies for its own
purposes. In that context, it was not
essential to prove impropriety on the part of the bank.
[21] For all
of these reasons I reject the main submission from Mr Connal. However, even if I am wrong in that, and
dishonesty or bad faith on the part of the bank is required, I would have
needed more persuading that the averments of the pursuers would not at least
entitle them to an inquiry on this matter, given the averments that the bank
officers were aware of the nature and purpose of the account. Neither Mr Connal nor Mr Armstrong considered
it necessary for me to dwell on whether the averments of constructive trust are
apposite. The other complaints on behalf
of the bank relate to more detailed issues of specification and lack of proper
notice. They did not impress me as being
of such a nature or significance as to justify the prevention of a proof before
answer on all of the pursuers' averments.
On the contrary I consider that there is more than sufficient notice of
a relevant case. In the event that I intended
to allow a proof before answer, Mr Connal suggested that it might be beneficial
to discuss certain procedural issues.
Thus, before remitting the case for a proof before answer on all the
averments, I shall put the case out By Order to hear parties.
