England and Wales High Court (Chancery Division) Decisions

Price Meats Ltd v. Barclays Bank Plc [1999] EWHC Ch 190 (30th November, 1999)

1. This is an appeal against the order of Master Bragge dated 13 October 1999 insofar as he dismissed the claimant's application to strike out paragraphs 2 to 7 of the defence. The application was made under CPR 3.4(2)(a) on the grounds that those paragraphs disclose no reasonable grounds of defence. In these circumstances the court has a discretion to strike out a defence (or part of it). The terms of the power recognise that it is sufficient for a defence that it discloses some reasonable ground of defence even though it cannot be said with certainty that it will succeed. The matter has to be determined on the pleadings on the assumption that the facts pleaded can be proved.

2. The facts can be simply put. The claimant sues for money had and received because the defendant bank paid cheques totalling £172,229.21, the signatures on which are said to have been forged. The cheques were paid between June 1993 and June 1996. There is an issue in the action as to whether the cheques were forged or not and I am not concerned with that issue. The application to strike out parts of the defence relates to a separate defence based on whether the claimant had constructive knowledge of the forgery. The position is that the claimant had discovered that in 1992 that its accounts clerk had misapplied petty cash. The bank did not know about this misappropriation but they independently warned the claimant to investigate its overdraft and the reason for the difference between its turnover and trading results in 1994 and thereafter. In addition, the Inland Revenue investigated the claimant's affairs because of the apparent lack of profitability of the business at some date (currently unknown).

3. It is common ground that in circumstances of this kind if a customer is aware of a forgery he must inform the bank so that the bank can take steps to protect itself against further forgeries: Greenwood v. Martins Bank Ltd [1932] AC 51. A customer also has a duty to refrain from drawing a cheque in a manner which may facilitate fraud or forgery (London Joint Stock Bank Ltd v. MacMillan [1918] AC 777). There is no wider duty on a customer than this and in particular the Privy Council has held in Tai Hing Cotton Mill v. Liu Chong Hing Bank [1986] AC 80 that a customer does not have a duty to take reasonable precautions in the management of his business to prevent forged cheques being presented to the bank or to take such steps to check his periodic bank accounts as would a reasonable customer in his position to enable him to notify the bank of any debit items in his account which he has not authorised.

4. The bank relies on a passage from Paget's Law of Banking (11 ed) (1986) at page 348 in a section dealing with customer's duty to inform the bank of a known forgery:-

5. The bank also relies on two only of the authorities cited by Paget namely McKenzie v. British Linen Co (1881) 6 App Cas 82 and Morison v. London County and Westminster Bank Ltd [1914] 2 KB 356. I will take the McKenzie case first. In that case the question was whether despite suspicious circumstances the appellant was to be believed when he said that he did not know that one Fraser, who had forged his signature to an earlier bill, told him that he had cleared that bill in cash and not renewed it. The case was not therefore a case between banker and customer but it is said that analogies are to be drawn between ratification and the duty of a customer to notify its bank of forgeries. Lord Selborne LC held that the onus was on the respondents and that:-

On the facts Lord Selborne was not satisfied that the respondents had discharged this onus of proof. At the end of his judgment he said:-

Lord Blackburne considered that actual knowledge was necessary (see pages 99 and 101) and Lord Watson also thought that it was necessary to find knowledge (page 109). Accordingly, in the circumstances the dictum of Lord Selborne that the drawer of the bill of exchange had reasonable grounds to believe that it was forged was either merely obiter dictum or Lord Selborne was saying that, in the particular circumstances of the case, it should be inferred that the appellant had knowledge of the forgery of the second bill if he had reasonable grounds to believe that it had been renewed. I prefer the latter view. In his judgment Lord Selborne did not consider separately whether, if knowledge was not shown, there was alternatively reason to believe. Neither did Lord Blackburne or Lord Watson approach the matter in that way. Accordingly, in my judgment the case is not authority for the proposition that reason to believe is enough.

6. That conclusion is confirmed by two things. First, as a general principle, knowledge on the part of the principal is a necessary ingredient of ratification: see Chitty on Contracts, Vol 2 paragraph 32-029 (28 ed). Second, in a later case, Ogilvie v. West Australian Mortgage and Agency Corporation Ltd [1896] AC 257 at 269, the Privy Council said this of McKenzie, "and similar cases" (which were not mentioned by name):-

The advice the Privy Council was given by Lord Watson who was a member of the House of Lords in the McKenzie case. In my judgment, the reference to "knowledge" here is to actual knowledge (see further the passage cited from Devlin J below). It does not include reason to know, which is not actual knowledge.

7. Miss Brown submitted that in the Ogilvie case the bank already knew of the forgery and so the question of reason to know did not arise. She submitted that the duty to speak also arose if the drawer had the means of knowledge. In my judgment that proposition does not follow from any of the authorities cited to me. Miss Brown also submitted that the Ogilvie case was also authority for the proposition that if a customer has reason to believe that an employee is acting in breach of his duty he has a duty to report the matter to the employer, and that it was not logical if the duty to report forgery did not arise in the same circumstances. But the knowledge required for the duty to report forgery in the type of situation that arises in this case depends on the conceptual basis for the duty. It is not the same as in the case of a duty to report an employee's breach of duty: see the Greenwood case to which I now return.

8. In Greenwood, the respondent bank was held not liable for cheques paid out on the forged signature of the appellant husband because the husband knew that his wife had forged his name in the past and had not told the bank. Lord Tomlin (with whom Lord Thankerton and Lord Macmillan agreed) said:-

Next he set out the three requirements of an estoppel: representation, reliance and detriment. He then said

He then summarised the arguments on either side and continued:-

9. Accordingly, it is clear from Greenwood that for there to be a representation there has to be deliberate silence, that is a silence with knowledge of the material facts.

10. That brings me to the second of the two cases relied upon by the bank namely Morison v. London County and Westminster Bank Ltd [1914] 2 KB 356. This again concerns the question whether there had been ratification of the forgery in question. It was not an action between banker and customer but between the drawer of cheques and the collecting bank. What happened was that in 1908 an employee admitted that he had caused the plaintiff losses by his speculation and the plaintiff instructed its accountants to investigate the matter. Thereafter the matter was left in the hands of the accountants. The Court of Appeal held that the accountants could have discovered the extent of the forgery by rudimentary investigations. Lord Reading CJ held that since the accountants did not give evidence it must be assumed that they performed their task properly and that therefore they did discover the further forgeries and had knowledge of the employee's wrongful dealings with the cheques. If the plaintiff did not know all the details of the dishonesty it was content to leave them with the accountants. In those circumstances it was appropriate to treat the plaintiff as having the relevant knowledge. Buckley LJ was satisfied that the plaintiff had by its conduct adopted the conduct of the employee. After discovery of the defalcations they affirmed the employee's engagement. Phillimore LJ held that the principal had actual knowledge and that it was not necessary to decide whether means of knowledge was the same as knowledge. In those circumstances it is clear that this case concerned a plaintiff who had actual knowledge or to whom knowledge was to be imputed because it was held by its duly authorised agents, the accountants. Accordingly, in my judgment, this case does not support the proposition that constructive knowledge is enough.

11. There has been some discussion as to the meaning of constructive knowledge. Mr Chapman contended that to have constructive knowledge a party must owe a duty to the other party in question. Miss Brown disputes that. I will now refer to the description of the types of knowledge by Devlin J in Roper v. Taylors Central Garages (Exeter) Ltd [1951] 2 TLR 284, at 288-289 (Divisional Court)). (The case concerned an offence under the Road Traffic Act 1930). Devlin J analysed the different degrees of knowledge in what has become a classic statement. He said:-

Accordingly, it is clear that constructive knowledge is not actual knowledge at all. Devlin J's meaning of constructive knowledge accords more with that of Miss Brown than that of Mr Chapman.

12. It is constructive knowledge in the sense given by Devlin J on which the defence is based. It is not as I see it based on reason to know. Paragraph 2 of the defence states simply:-

The particulars allege that the claimant was alerted to the need for enquiries into the reason why its overdraft was so large, that there could not have been any vouchers to support the forged cheques (though this is disputed by Mr Chapman ) and that the claimant failed to carry out investigations which would have revealed the forgery. Accordingly, in my judgment the present pleading does not support (as suggested by Miss Brown) an allegation that the claimant had reasonable grounds to believe that there had been a forgery, even if that were a good ground in law. Paragraphs 4 and 5 of the defence (apart from the first line of paragraph 5) in my judgment run counter to Tai Hing Cotton Mill in any event in that they allege some wider duty to take precautions and to remove the accounts clerk or to supervise her, and accordingly they should be struck out for that separate reason. Paragraphs 6 and 7 are merely consequential allegations, that is allegations consequential on paragraphs 2 to 5 and if paragraphs 2 to 5 cannot stand they too must be struck out.

13. Miss Brown argued on the basis of Maha Cook v. Thomas Cook Inc (Court of Appeal, 3 June 1987 unreported) that I should not exercise the court's discretion to strike out the relevant paragraph of the defence because the facts ought to be investigated and are within the control of the claimant. A number of the facts necessary to support the plea of constructive knowledge are not in fact in the exclusive possession of the claimant (such as the publicly filed accounts). Irrespective, however, of that, it is clear that this part of the defence will involve substantial disclosure of documents and evidence. The present application raises a point of law which can be dealt with on this application, and in those circumstances I do not consider it would be appropriate to leave the allegations in question in the pleadings.

14. In conclusion, paragraphs 2 to 7 of the defence should in my judgment be struck out. As the learned Master refused the application, I allow the appeal.