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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Smith & Anor v Lloyds Bank TSB [2000] EWCA Civ 240 (27 July 2000)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/240.html
Cite as: [2000] EWCA Civ 240, [2000] 2 All ER (Comm) 693, [2000] 3 WLR 1725, [2000] Lloyd's Rep Bank 334, [2001] 1 All ER 424, [2001] QB 541
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IN THE SUPREME COURT OF JUDICATURE 1999/0975/B2
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEENS BENCH DIVISION
(MR JUSTICE BLOEFELD)
& CENTRAL LONDON COUNTY COURT
(HIS HONOUR JUDGE HALLGARTEN)
Royal Courts of Justice
Strand
London
WC2A 2LL
27 July 2000
LORD JUSTICE PILL
LORD JUSTICE POTTER
and
SIR MURRAY STUART-SMITH
__________________________
1.
2. Christopher Timothy Esmond Hayward
Appellants
Lloyds Bank TSB
Respondent
Appellant
Woolwich plc
Respondent
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
_________________________
Ms. M Simmons QC and Ms S Tolaney (instructed by Messrs Berrymans Lace Mawer, London EC2) appeared for the Appellants Roger Smith & Christopher Hayward
Mr M Hopgood QC and Mr A Pelling (instructed by Messrs Dibb Lupton Alsop, London EC2) appeared for Lloyds TSB Bank plc
Mr D Wolfson (ionstructed by Messrs Thomas Eggar Church Adams, London WC1) appeared for Woolwich plc
Mr R Slade (instructed by Messrs Gersten & Nixon, London W1) appeared for Harvey Jones Ltd
Judgment
As Approved by the Court
Crown Copyright ©
Pill LJ:
These appeals raise questions as to the possible liabilities in conversion of a bank to the true owner of a cheque or bankers draft for the full value of the instrument where the instrument has been fraudulently altered by the deletion of the name of the true payee and substitution of the name of a false payee prior to collection and payment. In Smith v Lloyds TSB Bank plc ("the Lloyds action"), the claimants appeal against the decision of Mr Justice Blofeld, dated 29 June 1999, whereby it was ordered, following the hearing of a preliminary issue of law, that the claimant was entitled to no more than nominal damages for the conversion by Lloyds, as the collecting bank, of a cheque which had been fraudulently altered. In Harvey Jones Ltd v Woolwich plc ("the Woolwich action"), the bank appeal against a decision of His Honour Judge Hallgarten QC, dated 8 June 1999, whereby it was ordered that the true owner of a bankers draft was entitled to damages in conversion for the full face value of a fraudulently altered draft which had been converted by them as paying bank. In each case, the bank relied upon section 64 of the Bills of Exchange Act 1882 ("the 1882 Act").
The Lloyds action
The claimants are Joint Liquidators of ILG Travel Limited, a company in
creditors' voluntary winding up. By the Insolvency Regulations 1994, monies
received or paid out in the course of a creditor's voluntary liquidation are
routed through the Insolvency Services Account ("The Account") held by the
Department of Trade and Industry ("DTI") with the Bank of England. Monies in
the account are held by the DTI as trustees for those entitled to them,
including the Liquidator and unsecured creditors. In the case of a voluntary
winding up, where the Liquidator requires to make a payment in respect of the
expenses of the winding-up, he may apply to the Secretary of the State, who may
authorise payment to the Liquidator or direct the issue to the Liquidator of a
payment instrument for delivery to the person to whom the payment is made. On
19 September 1996 the claimants applied to the Insolvency Service for the issue
of a cheque for £127,240.30 payable to the Inland Revenue. On 23 September
1996 there was drawn on the Account a cheque dated 26 September 1996 in that
sum payable to the Inland Revenue. The cheque was crossed "A/C Payee Only" and
the claimants received it on 25 September 1996. Shortly afterwards the cheque
was stolen from the claimants' offices and the name of the payee was
fraudulently altered by deleting the words "Inland Revenue" and inserting the
name "Joseph Smitherman". The cheque was then fraudulently paid into an account
in the name Smitherman at Lloyds' Southsea Branch and was cleared on 17
October 1996, before the claimants discovered the loss of the cheque. When the
Insolvency Service was informed of the loss, payment had already been made by
the Bank of England. The claimants sue Lloyds, the collecting bank.
The Woolwich action
The claimants, who were manufacturers and suppliers of kitchen units, were the
holders and payees of a draft dated 9 August 1996 issued by Woolwich and drawn
on their corporate account in the sum of £7,222.80. It was issued by
Woolwich at the request of their customers, Brian Easter and Jane Tucker, in
order to meet a debt owed to the claimants for kitchen units, the customers'
account being debited accordingly. On or about 14 August 1996 the draft was
stolen from the claimants' premises and presented by an unknown third party to
the Kennington Branch of National Westminster Bank Plc ("Nat West") with the
claimants' name altered to "Edmund C.A. Owusu-Sekyere", such presentation being
made for collection to an account in that name. Nat West presented the altered
draft to Woolwich for payment to that account. Woolwich took possession of it
and paid £7,222.80 to Nat West in purported discharge of the draft. Prior
to that act, Woolwich would at the request either of the claimants or of Brian
Easter and Jane Tucker, have supplied the claimants with a replacement draft in
the sum of £7,222.80. The claimants sue Woolwich, the paying bank.
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 void instrument, 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 value because 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.
Potter LJ:
I agree with the judgment of Pill LJ and there is little I can usefully
add.
I too have had difficulty in understanding that part of the judgment of
Scrutton LJ in Slingsby -v- District Bank Limited at p.558 in which he
asserted that he could not understand a passage which he had quoted from the
judgment of Finlay J in Slingsby -v- Westminster Bank, which Scrutton LJ
appeared to regard as invalidated by the decision in Morison's case and
the subsequent line of authority stemming from it. It may be that, in
expressing himself as he did, Scrutton LJ had fastened upon the last sentence
which he quoted from the judgment of Finlay J to the effect that:
"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."
Taken alone, that sentence might have appeared inconsistent with
Morison's case by not recognising the legal fiction which equates the
value of the cheque as a chattel or piece of paper with its face value as
representing the monies due and/or received under it for the purpose of a claim
for damages in conversion.
Whether or not that is so, it is plain, as Pill LJ has pointed out, that
Scrutton LJ was in no doubt as to the effect of a material alteration rendering
a cheque a `worthless' and `null and void' piece of paper, to which the fiction
as to value for the purposes of a claim in conversion would be inappropriate
and inapplicable (c.f. the view expressed in Brindle & Cox: the Law of
Bank Payments (2nd ed.) at paras 7-200).
In my view, the arguments of Miss Simmons and the reasoning adopted by HH Judge
Hallgarten QC in order to avoid this otherwise insuperable difficulty are not
effective for that purpose. The judge held that, had the claimants immediately
realised that the draft had been stolen and notified Woolwich accordingly, they
would have had the right to make claims against Woolwich under sections 69 and
70 of the 1882 Act. S.69 allows the holder of a bill which has been lost
before it is overdue to apply to the drawer to give him another bill of the
same tenor, giving security to the drawer if required to indemnify him against
all persons in case the bill is found again. If the drawer refuses to give
such a duplicate bill he may be compelled to do so. S.70 provides that in any
action upon a bill, the court may order that the loss of the instrument shall
not be set up, provided an indemnity is given to the satisfaction of the court
against the claims of any other person upon the instrument in question.
The judge observed that, in those circumstances, it struck him as perverse to
say that the draft had no value save as a piece of paper and that the only
thing which might be said to have served to destroy the draft's value was the
defendant's own conduct in purporting to discharge it by paying such value to
Nat West Bank i.e. the very act of conversion relied on. However, this does
not seem to me to meet the point that the claim for conversion was in respect
of a specific cheque or draft which at the date of conversion (which is the
relevant date at which to assess the value of the chattel) had no value as a
piece of paper and no value as a chose in action, because it had earlier been
robbed of such value as at the date it was materially altered. The fact that,
at any time before the draft was presented to and converted by the Woolwich,
the plaintiffs might have had a legal or moral right to its replacement by a
new draft did not render the altered draft of value in the sense appropriate to
a claim in conversion, the damages for which conventionally relate to the
intrinsic value of the specific chattel converted.
I too would allow the appeal in the Woolwich action and dismiss the appeal
in the Lloyds action.
Sir Murray Stuart-Smith:
I agree.
Order: appeal dismissed in the case of Smith & Hayward with costs;
appeal allowed in the case of Harvey Jones Ltd v Woolwich plc with costs here
and below, without reduction.
(Order does not form part of approved judgment.)