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You are here: BAILII >> Databases >> Scottish Sheriff Court Decisions >> Nimmo & Anor v. The Bank of Scotland [2005] ScotSC 17 (20 April 2005) URL: http://www.bailii.org/scot/cases/ScotSC/2005/17.html Cite as: [2005] ScotSC 17

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A278/2004

JUDGEMENT OF SHERIFF G J EVANS

IN CAUSA

BLAIR CARNEGIE NIMMO and NEIL ANTHONY ARMOUR,

as Joint Receivers of Crube International Limited,

a Company registered under the Companies Act with the number SC184089 and having their Registered Office at 13 Marshall Place, Perth

PURSUERS

against

THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND

having a place of business at

Queens Gardens Branch

1 Queens Gardens

St Andrews

Fife

DEFENDERS

CUPAR, April 2005.

The Sheriff, having heard parties' procurators in debate and having resumed consideration of the cause, Repels the Defenders' first plea-in-law in so far as preliminary, reserving its effect on the merits; Allows parties thereafter a Proof Before Answer of their respective averments on a date to be hereinafter assigned; Reserves meantime the question of expenses occasioned by the debate and Fixes a hearing thereon on 30 May 2005 at 10.00am.

Sheriff

NOTE:-

This is an action by the Joint Receivers of Crube International Limited against the Bank of Scotland for payment of the sum of £50,000. Both parties have preliminary pleas justified by Rule 22 Notes and the matter came before me for debate on the Defenders' preliminary plea on 11 March 2005. The Pursuers were content to have the matter go to a Proof Before Answer. The Pursuers were represented by Mr MacGregor, Solicitor, Peterhead and the Defenders by Mr MacNeil, Solicitor, Edinburgh.

The sum at stake was initially a further advance made to a particular company, viz Crube International Limited by their existing lenders, who held a security over heritable property belonging to the company. The Defenders had no knowledge of this particular company, who were not customers of this particular bank and had no account with them. The wife of the director who obtained the advance for the company did have an account with one of the Defenders' branches in St Andrews, but in name of "Crube Limited trading as Glen Urquhart House Hotel", of which she and her husband were co-directors with authority to operate the account. That particular company had, however, been dissolved some 21/2 years previously but the account in their name had not been closed when it was dissolved and neither of the directors had informed the Defenders of the position. The cheque received on 14 January 2000 from the lenders for the advance was crossed and made payable by the lenders to the payee only, viz Crube International Limited. The director's wife presented the cheque for collection to the credit of Crube Limited that same day. The Defenders accepted the cheque, duly collected the funds represented thereby and applied them to the credit of the defunct company's account. A week later the Defenders were instructed to transfer £45,000 from that account to the account of MacLay, Murray and Spens, Solicitors, Glasgow and that money was used subsequently to purchase a property in name of the director's wife.

The Pursuers aver that the Defenders acted negligently in allowing the cheque to be cleared through an account into which it should never have been paid and for not being aware that Crube Limited was by then a defunct company. The Defenders aver that they acted throughout in good faith and were not negligent. They incurred no liability by virtue of their protection afforded to them under Section 4(as amended) of the Cheques Act 1957. It is accepted by both parties that the co-directors of the defunct company committed a fraud on Crube International Limited and the Defenders. That is a brief summary of the issues on record, the position in the pleadings being somewhat more complicated. Those issues are further narrowed however by the Joint Minute of Admissions into which parties had entered at the outset of the debate (vide No 13 of Process). This provides as follows:-

1. "No relevant duty lay on the Defenders in terms of the Cheques Act 1992, Section 1 amending Bills of Exchange Act 1882 by inserting Section 81A therein.
2. Pursuers do not maintain Defenders were in bad faith in the transaction referred to on Record.
3. Pursuers do not maintain that Defenders benefited from the transaction referred to on Record, and accept that the transaction was for value."

Mr MacNeil for the Defenders, in opening the debate, drew my attention to the terms of Section 4(as amended) of the Cheques Act 1957 and submitted that, while the necessity for the protection of the Act was clear in English Law, which recognised the tort of conversion as making a collecting bank strictly liable to the true owners of a misappropriated cheque even where the bank had acted in good faith and without gain, its purpose in Scots Law was questionable, as Scots Law did not recognise such a tort. Unless there was some element of unjust enrichment requiring restitution or recompense, the collecting bank would not be found liable for the true owners' losses. While no-one might be allowed to profit gratuitously from another persons' wrong or breach of trust, there was no reason why the recipient of misapplied funds, who had acted in good faith and given value for the funds, should be found liable to the true owner. Mr MacNeil relied on the Outer House case of Bank of Scotland v MacLeod, Paxton, Woolard and Co 1998 SLT 258 and its analysis of the earlier case of Thomson v Clydesdale Bank 20R(HL) 59. Lord Coulsfield, the Lord Ordinary in 'Bank of Scotland v MacLeod etc' supra had considered the latter case as establishing that:-

The Joint Minute of Admissions showed that the Pursuers were not maintaining that the Defenders were in bad faith in the transactions from which it is admitted that they did not benefit and that they gave value. The action was accordingly irrelevant.

In reply, Mr MacGregor submitted that the cases relied upon by Mr MacNeil were distinguishable. 'Thomson' pre-dated the 1957 Act. Lord Coulsfield's case had not been founded on a claim by the true owners that the bank had acted with negligence. It was an action of multiplepoinding brought by the bank to ascertain what should happen to the proceeds of an international fraud which were still in the hands of the bank. I was referred to paragraph 359 of Reissue 2 of the Stair Encyclopedia, in the chapter dealing with Banking, Money and Commercial Paper:-

The Pursuers were entitled to rely on the express terms of Section 4 which, by laying down the ambit of protection afforded to a bank, thus also made clear where a remedy would lie viz. where the bank made payment in a way that showed either bad faith or negligence. A bank in default in either of those specified respects did not have the protection of the Act. It would be a matter for proof whether or not the Pursuers could show that the Defenders had been negligent in allowing the wrong company to be credited with the amount of the further advance made to an entirely different company. The Defenders admitted themselves (at page 6 of the Closed Record, No 12 of Process) that the Director's wife, as a Director of Crube Limited until its dissolution:-

It was a rather silly teller that carried out such a transaction, that all being a matter for proof, but ex facie it was a cheque that had been negligently mishandled by the Defenders. An additional plank of the Pursuers' case based on negligence was the failure of the Defenders to take adequate steps to ensure the continuing existence of its customers. The dissolution of a company was a matter of public knowledge through publication in the Edinburgh Gazette. It was no part of the Pursuers' case that the Defenders had held onto the funds. The case was that the Defenders had passed on the funds but they should not have done so and they were thereby in default, but not through having acted in any way "dishonestly" (cf Lord Coulsfield's opinion supra at page 275H). The claim was that the Defenders had acted negligently and if the Pursuers could establish that, then the Defenders would owe them the money advanced to Crube International Limited by the lenders.

In reply, Mr MacNeil disputed that Lord Coulsfield's case was in any way distinguishable. The factor present in that case was not that the bank were simply neutral holders of the misappropriated funds. There was no dispute that the true owners were entitled to return of funds in that position. A significant amount of the funds had however been paid away by the bank between the date of their receipt of them and the date by which their suspicion arose about the fraudulent nature of the transactions. The bank had issued a number of drafts some of which had been paid out by the bank when instructed so to do and some of which were outstanding. The bank were found entitled to take credit for the sums paid out and entitled to retain the sums not paid out until such time as the drafts were presented for payment during the prescriptive period. The matter was focused at page 277Dff of Lord Coulsfield's opinion.

The answer to the question: "Who requires protection under Section 4 of the Cheques Act 1957?" was different in Scots and English Law. It was necessary in English Law for the collecting bank which would otherwise commit conversion. If there was any liability on the collecting bank under Scots Law for making payment to the person who was not the true payee in circumstances where the bank was not required to make restitution or recompense, then it might be that Section 4 would provide some protection to the bank. He had not been able to find any such liability other than that laid down in the older cases from the House of Lords and as explicated in the Lord Ordinary's Opinion. As was apparent from paragraph 358 of Re-issue 2 supra, there was academic opinion to the effect that Section 4 was not necessary in Scots Law. As was stated there,

The only case in which it was sought to establish the same type of delictual duty as was claimed here was that of First National Bank plc v Bank of Scotland 1999 SLT(Sh.Ct) 10, which was mentioned in paragraph 358ff of Re-issue 2 but had not been cited by him in his list of authorities. He had taken the view that it was different on its facts. The issue was whether the collecting bank had a duty of care to the issuing bank in the way of taking care to see that the interests of the issuing bank were not prejudiced by the fraudulent use of a draft and to check that all four of the named payees, where the draft had been presented for payment by two out of the four, were aware of and consented to the payment. The case did not concern the possible duty of care by the collecting bank to the true owners of the money represented on the cheque.

Mr MacNeil also criticised the way that the Pursuers' first plea-in-law had been framed. It stated:-

Such a vacuous way of stating a plea did not identify the root of the requirement to repay the money.

He then turned to consider the sufficiency of the averments of negligence, should it be held that they were in fact relevant. He submitted that they failed to give adequate notice of the Pursuers' case. It was averred that the Defenders acted negligently in allowing the cheque to be cleared through an account into which it should not have been paid and failing to be aware that the defunct company had been dissolved (vide condescendence 2, pages 2 and 3 of No 12 of Process). Such averments failed to state the criteria for professional negligence as set out in Hunter v Hanley 1955 SLT213. The Pursuers had not set out what the usual and normal practice of bankers would be in the instant case and their proof would be hampered accordingly. The Pursuers could not argue that as the Defenders were relying on the protection offered under Section 4, the onus of proving a lack of negligence would fall on the Defenders. As was agreed in terms of the Joint Minute of Admissions, the Defenders had acted in good faith and for value and did not require the protection of the Section.

If, contrary to that submission, I allowed the Pursuers' case to proceed against the Defenders, the further submission was made that by neglecting to recoup their losses directly from the fraudsters, the Pursuers had failed to minimise their loss. They averred that:-

The Pursuers had not answered the Defenders' call to specify the basis for their determination and that was a strange situation given the averment that "the funds were then removed by direct transfer to a firm of Glasgow solicitors where £45,000 was utilised to purchase a property in the name of Mrs J Abernethy." (vide condescendence 2 at page 2 of No 12 of Process). That, surely, was prima facie a recoverable asset which the Pursuers had deliberately overlooked. The absence of specification here was sufficient to justify my dismissing the action.

In brief reply, Mr MacGregor for the Pursuers submitted that the Defenders could not circumvent Section 4 of the Cheques Act 1957 which was part of Scots Law and the onus would be on the Defenders to show that they had not acted negligently. As to the specific averments of negligence made by the Pursuers, they disclosed such ex facie blatant negligence as to not require tying down to any professional standards. The Pursuers' averments on negligence could not be more specific as regards the mode of negligence. He sought to clarify his first plea-in-law by moving to amend at the Bar by inserting "and under a duty owed in terms of Section 4 of the 1957 Cheques Act." He renewed his motion for a Proof Before Answer.

Mr MacNeil for the Pursuers submitted, however, that the proposed amendment did not focus the issue. Section 4 as such did not lay down any duty but merely afforded a statutory protection to the collecting bank. He submitted that Mr MacGregor had still not disclosed where the root of the Defenders' duty came from, whether it was in restitution or recompense or something else.

Both agents were content that I should reserve any question of expenses occasioned by the debate to a later hearing.

The issues in this case have been considerably focused by the Joint Minute of Admissions and they raise the stark question: Where it has acted in good faith and given value, what liability does the collecting bank have to the party who should have received the benefit of the funds on a cheque that bore not to be transferable and valid only between the parties to it? As a matter of principle, it must surely be the case that the collecting bank has a duty of care to ensure that cheques are collected only for those entitled to receive payment under them. As is clear from the discussion on the Jack Report in Re-issue 2 of the Stair Encyclopedia at para 339, the purpose behind having a cheque that was not transferable and only payable to the named payee was to reduce the possibility of fraud and it might be supposed that the collecting bank must have a part in preventing such fraud.

I accept that the purpose behind Section 4 of the Cheques Act 1957 was to deal with a speciality of English Law, viz the tort of conversion. As is stated in Bowstead and Reynolds on Agency (17^th Edition) at para 9-127:-

(cf Wilson on Debt (2^nd Edition) at para 6.13)

The position is clearly explained by Lord Justice Diplock in Marfani and Co Ltd v Midland Bank Ltd (1968) 1WLR956 at 970:-

If, however, Scots Law does not recognise any such strict liability in the collecting banker, then the Section is superfluous here and without any meaningful content. Section 4(1) of the Cheques Act 1957 provides as follows:-

1. receives payment for a customer of an instrument to which this Section applies; or
2. having credited a customer's account with the amount of such an instrument, receives payment thereof for himself;

It therefore protects the collecting bank from liability arising "by reason only of having received payment" on a cheque. There is no such liability in Scots Law and thus no requirement for the Section. It does not follow from that that the collecting bank has no liability whatsoever, as long as they have acted in good faith and given value.

I do not consider that the cases cited by Mr MacNeil justify him in arriving at that position. I refer to the following passage in Lord Coulsfield's opinion at page 266E-F:-

This is further underlined by the passage at page 268J-K which states:-

The point therefore was not argued and did not arise in that particular case. The older authority analysed by Lord Coulsfield does not appear to me to discount negligence as a possible ground of liability against the collecting bank, as it was very special on its own facts. The position in Thomson v Clydesdale Bank supra was that trustees instructed a stockbroker to sell certain shares and invest the proceeds on deposit with certain colonial banks. When the stockbroker received the proceeds of the sale in the form of a cheque from the purchasing stockbroker, he endorsed it and paid it into his own overdrawn bank account, which remained overdrawn. He thereafter failed to reinvest the proceeds and simply absconded. The trustees sued his bank for return of the proceeds. The bank's response was that they believed the proceeds had come into the hands of the stockbroker in the ordinary course of his business and there was no way they could tell he had done anything improper by lodging the funds in the first instance into his own bank account. The ordinary course of business in the stock exchange was that the selling broker received the buying broker's cheque and made payment direct to the client either by issuing his own cheque or by delivery of the new investments that he was instructed to purchase. It was held by the House of Lords that in those circumstances the bank was not bound to repay the money to the trustees.

It is clear from this narrative that the bank was dealing with a transaction done in the ordinary course of business and which could not possibly cause them to be put to their inquiry in any meaningful way. The only detectable sign of fraud was the stockbroker's act of absconding, which occurred after the bank had used the money to reduce his overdraft. There was no way that this particular fraud could have occurred owing to the negligence of the bankers and no way that it could have been prevented owing to their vigilance because at that point there was nothing whatsoever untoward to observe or detect. The issue of negligence in this case was therefore factually irrelevant. I consider that it is in that context that the opinions of their Lordships have to be understood. According to the Lord Chancellor's opinion, where it was clear that there might well be cases in which a stockbroker with an overdrawn account might properly pay monies received on behalf of a client into that account, the bank would not be liable to the client unless the client could show that the bank knew that on that particular occasion the bank had known that the stockbroker was not justified in paying the money into his own account. (vide page 61). He went on to state:-

Lord Shand had the same opinion as is clear from page 63 (at the foot) where he states:-

The opinion of Lord Watson is prima facie more in favour of the Defenders where he states at page 61:-

The only reason that proof of negligence would not be enough, however, is because, as I have already explained, its presence (or absence) was factually irrelevant to the detection of that particular fraud. It is readily understandable that in those circumstances liability on the bank could only be founded on some kind of positive connivance on their part about the commission of the fraud.

The facts in the instant case are entirely different. Vigilance on the part of the Defenders could have detected or prevented the fraud. The question of their negligence therefore is not factually irrelevant and in my view it is not legally irrelevant either. I see no reason in principle why a collecting bank should not owe a legal duty of care to the owner of the misappropriated cheque to avoid causing them economic loss by their way of dealing with the cheque. The collecting bank is in the unique position of being able to spot whether or not the cheque is being collected on behalf of the person entitled on the face of it to receive payment. If there was no duty to exercise reasonable care in dealing with such a cheque, the collecting bank would be at liberty to never examine or look at any such cheque to ascertain who was entitled to payment under it. There are therefore good reasons of public policy, in so far as the prevention of fraud is in the public interest, in recognising such a duty. I agree with what is stated in Charlesworth and Percy on Negligence (10^th Edition) at para 8-77:-

Sheriff Robertson in 'First National Bank plc' supra did not exclude the possibility of it being "fair, just and reasonable" to impose liability in the situation she was faced with but was unwilling to do so "on the basis of the facts of the present case where the Pursuers are averred to have been involved with the four payees in a complex loan transaction of which no averments are made as to knowledge by the Defenders or of facts from which knowledge could be inferred." (vide page 15G-H).

The facts in the instant case are much less complex and the Pursuer has a much better chance of establishing such a duty here. My understanding of the position in Scots Law is: where a fraud is undetectable by a bank, no matter how vigilant or slack they might be and they have acted in good face throughout and have not benefited from the fraud to any extent, then the bank will not be liable to any party who has suffered from the commission of the fraud. Where, however, a fraud is detectable by a bank exercising ordinary professional or reasonable care, then they may be liable to the party who has suffered from the commission of the fraud even if the bank itself has acted in good faith and has not benefited from the fraud. Whether or not there was negligence is something that should be established by way of a Proof Before Answer.

There remains the question whether the delictual duty that I have recognised has been sufficiently pled by the Pursuers. The case cited by Mr MacNeil for the Defenders dealt with the imprecise and unclear realm of diagnosis and treatment where:-

That is hardly the same line of country as the actions of a bank teller in collecting a cheque. No doubt it still all boils down to the injured party having to aver what the ordinary practice of the ordinary prudent bank teller would have been - all with a view to showing however how the party in default could have taken reasonable care. There is some force in the contention of Mr MacGregor that for the collecting bank to make payment without inquiry to anyone other than the named payee shows, on the face of it, such a blatant lack of care as not to require further description. This is in effect harking back to the Dunedin test of a "folly to omit precautions" in the context of injuries at work. Likewise, in the Hunter v Hanley situation, the surgeon who operates on the wrong leg could hardly claim that he was acting with ordinary care and the patient who sued him would not have to aver what the reasonably competent professional man would have done in that situation - it would be blatantly obvious. To adopt what Lord Keith said in the case of Cavanagh v Ulster Weaving Company Limited (1960) AC145 at 165, the ruling principle is that the collecting bank is bound to take reasonable care towards customers, shareholders and the ultimate owners of the funds being transacted so as to avoid loss or fraud and all other rules or formulas must be taken subject to this principle. Despite the absence of any averments of usual practices, the Pursuers are in the particular circumstances of this case entitled to a Proof Before Answer.

The question of onus would then arise and I agree with Mr MacNeil's submission that the onus would not be on the Defenders to disprove negligence. The rule to the contrary in English Law stems again from the speciality of the tort of conversion. The judge of first instance in 'Marfani' supra, Nield J., whose decision on this particular aspect was not overturned, held that it was very clearly recognised that the onus is upon the bank to show that they acted without negligence. He justified that by reference to the dicta of Lord Wright in Lloyds Bank Limited v Savoury and Co (1933) AC201 at 229:-

As Scots Law has no tort of conversion, there is no such rationale for placing the onus on the collecting banker to disprove negligence. The onus of proof rests in the instant case on the Pursuers.

The only other matter that I have to deal with in relation to the question of liability is the terms of the Pursuers' first plea-in-law. There is no point in allowing Mr MacGregor's proposed amendment to this plea as Section 4 of the Cheques Act 1957 does not apply in Scotland and creates no positive duty on the collecting banker. As it is agreed that the Defenders had given value for the cheque in question, ie had not been enriched thereby, the only possible remedy that the Pursuers have against the Defenders is by establishing a case of negligence at common law against them rather than some form of unjustified enrichment. The import of the Pursuers' existing pleadings quite clearly demonstrates reliance on such a case. I refer in particular to their averments at pages 2 and 3 of No 12 of Process. A similar issue arose in the case of Style Financial Services Limited v Bank of Scotland 1996 SLT421. The plea-in-law for the Pursuers in that case was in similar loose terms. The Lord Justice-Clerk (Ross) commented:-

That did not prevent the Inner House, having decided that there were no relevant averments to cover a tracing case, from deciding that there was just sufficient to allow the case on recompense to go to a Proof Before Answer. The Pursuers' first plea-in-law in the instant case, although loosely expressed, is in my view, in light of the Inner House case, "habile to cover" a case based on negligence, although it would have been better practice to have focused the question of negligence in the plea.

(ii) DAMAGES

"In actions for the conversion of negotiable instruments, such as bills and notes, the amount of the instrument is prima facie the measure of damages." (vide MacGregor on Damages (17^th Edition) at para 33-041). As Scots Law has no such action, it is not immediately clear what the true measure of damages is in the instant case. I asked Mr MacGregor for the Pursuers what the position of the secured lenders was in the case and he informed me that they had come to an accommodation with the Pursuers. One would imagine otherwise that any sum recovered by the Pursuers would be immediately repayable to the lenders as it was their advance. If this was an action based on unjustified enrichment, one can see why it would be the sum on the cheque that was sought return of as that would be the extent to which the party in default had been enriched. The loss suffered by the company now represented by the Pursuers might include the loss of opportunity to use the loan over the period advanced to further the interests of the company business. It is certainly mentioned in the pleadings by the Pursuers that it was partially as a result of the fraud that the company had gone into receivership. That is not necessarily the same as the sum on the cheque, although it might be further argued that the fraud also resulted in the loss of the Pursuers' ability to repay the full amount of the loan on demand and the measure of that would be the full sum on the cheque. This matter was not really explored at the debate and I am content to say that the Pursuers have a colourable case for the return of the full amount on the cheque as a measure of damages in delict. I accept that there is some force to Mr MacNeil's contention that the Pursuers have not specified the considerations that weighed on them so as not to raise an action against the fraudsters, one of whom had purchased heritage with the bulk of the money. That deficiency, however, should not prevent the matter going to proof, although it may hamper the ability of the Pursuers to lead other than general evidence on this matter and that may go against them in the long run. It should be borne in mind, however, that the onus of proof rests on the party alleging the failure to mitigate (cf Stair Encyclopedia, Volume 15, para 925). Thus a lack of specification on the part of the Pursuers is not necessarily fatal to their case on a matter that has to be established by the Defenders.

In all the circumstances, I am prepared to allow the case to go to a Proof Before Answer. As requested, I have reserved the question of expenses of the debate to a future hearing.