Scottish Court of Session Decisions

[1] In 1996, the pursuer in the present action, Mrs. Anne McLaughlin, raised an action of divorce against her husband Robert McLaughlin. He is the second defender in this action but has not entered appearance. On 11 September 1996, he lodged with Allied Irish Bank plc, the first defenders, a cheque in his favour for £36,120.34, drawn on the Royal Bank of Scotland by his pension trustees. Later that day, by virtue of a warrant for arrestment on the dependence which had been obtained by the pursuer in the divorce action, arrestment was effected against the bank by personal service. Mrs. McLaughlin subsequently obtained a decree against her husband, in the divorce action, for payment of £15,000 with interest. She avers, and this is not disputed, that Mr. McLaughlin has made no payment to the pursuer in settlement of this decree, and he has signed no mandate in her favour to let her uplift the said sum from the first named defenders. In these circumstances she has raised the present action of furthcoming, seeking payment of the sum for which she holds the decree, on the basis that from 11 September 1996 the bank came under an obligation to account to Mr. McLaughlin to the amount of the cheque which he had paid into his account with them. By interlocutor of 21 July 1999, the sheriff granted decree against the first named defenders for payment of £15,000 and interest. The pursuer appeals against that interlocutor.

[2] In moving us to recall that interlocutor, and to grant decree of dismissal, Mr. Wolffe on behalf of the first defender and appellant submitted that the issue was a sharp one. When a customer had lodged a cheque with his bank for collection, but the cheque had not yet been cleared by the paying bank, what was the effect, if any, of an arrestment served on the collecting bank by a creditor of its customer? The foundation of the pursuer's case was to be found in an averment that, from the date when the bank received the cheque, they "came under an obligation to account to" Mr. McLaughlin for the sum of £36,120.34, and that the arrestment of the sum of £15,000 "was accordingly effective as of 11 September, 1996". On behalf of the Bank it was submitted that these propositions were quite simply wrong in law. It was submitted that until a collecting bank actually received payment from the paying bank, there was no arrestable obligation in respect of the amount of the cheque. In relation to amounts which had actually been received by the Bank, and credited to a customer's account, the relationship between them was that of debtor and creditor. But in relation to a cheque lodged for collection, which had not yet been cleared by payment from the paying bank to the collecting bank, the relationship between the customer and the collecting bank was simply that of principal and agent unless (as was not the position here) the parties in a particular case had agreed otherwise. In simple terms, the collecting bank did not have any funds until it received them from the paying bank, and until receipt of funds it was merely the customer's agent, obliged to present the cheque to the paying bank on his behalf, with a view to obtaining payment of the sum due to him in terms of the cheque. And indeed, if a customer changed his mind, and no longer wished the collecting bank to present the cheque for payment, he could terminate the agency, and require the collecting bank to return the cheque to him, subject only to any special rights of lien which might obtain in the circumstances.

[3] It was of course acknowledged by counsel for the Bank that in ordinary language one spoke of an amount being "paid in" or "credited" to a customer's account, when a cheque for that amount was lodged. Further, it was accepted that when an amount was thus paid in, the amount would be entered in the customer's account as a credit balance, and the customer would be given a pay slip, acknowledging that the amount had thus been credited or paid in to his account. Such language, and such facts, might in themselves be taken as suggesting that when a cheque was thus lodged, and when the entry was made, it had an immediate effect on the creditor-debtor relationship between the Bank and the customer (increasing the customer's credit balance, or reducing his debt to the Bank on overdraft) rather than constituting an extraneous relationship of principal and agent. No doubt the Bank's agreement to act as agent would normally lead to the sum being truly credited to the customer's account when the funds were received from the paying bank; but it would not itself, as the language might suggest, bring that about at once. At all events, and in accordance with general banking practice, in this particular case entry of the amount of the cheque as a credit item in the customer's account was merely provisional: it was liable to be reversed with retrospective effect if for any reason the cheque was not cleared and as a result payment was not made to the collecting bank. This was made abundantly clear on the pay slip given to Mr. McLaughlin: it was in no sense a receipt for the stated sum of money. It was an acknowledgement of the lodgment of the cheque and bore a note in the following terms:

The position was not merely that the customer was not entitled to draw upon funds standing at his credit in an account with the Bank (which could occur, as for example where notice had to be given in advance of drawing). The position was that cheques which had been lodged should not be drawn against until cleared precisely because, until cleared, they had not yet produced any funds standing to the customer's credit on his account with the Bank. The Bank would be the customer's debtor only when there were such funds, received from the paying bank. And although it was not formally admitted on the pursuer's pleadings that Mr. McLaughlin had received a copy of the Bank's Guide to Personal Banking, the terms of the relevant sections of that Guide had been set out in the defenders' answers, since the matter was before the Sheriff, and made the position very clear: "it takes four working days excluding the date of lodgment for a sterling cheque to clear on your account" and "a cheque lodged on a Wednesday will not provide cleared funds until the following Wednesday, i.e. money you can withdraw." And "Until such items have been cleared, the corresponding credit entries on statements of your account are to be regarded as provisional only".

[4] The practice of provisionally crediting a sum to a customer's account at the time when a cheque is lodged, and indeed making a corresponding credit entry in the Bank's books at that time, is obviously convenient, and in the vast majority of cases will give rise to no kind of problem. The practice no doubt grew up in an era where the lapse of time between lodgment and clearance was usually shorter than it seems now to be. It is now all the more necessary that the customer should appreciate that he cannot draw upon the amount of the lodged cheque, until it is cleared. In such circumstances, the language of paying in and crediting, at the time of lodgement, is not perhaps ideal. But both in general and in this particular case, it is plain that at the time of lodgment, there is no question of the Bank becoming immediately indebted to the customer in the amount of the cheque, as it would, say, if cash were lodged.

[5] On behalf of the pursuer, counsel did not contend that the creditor-debtor relationship between Mr. McLaughlin and the Bank, which would exist when there were sums at his credit on his account, came about either by virtue of the simple fact of the cheque being lodged, or because one could speak of it having been paid in or credited to his account at that stage. It was not suggested that the sum was credited to his account other than provisionally, and subject to retrospective reversal in the event of the cheque not being cleared. Equally, it was not disputed that when a cheque was lodged for collection, the collecting bank was correctly to be regarded as an agent of the customer in respect of his duty to present the cheque for collection. Moreover, turning from the law of banking to the law of diligence, it was accepted that if the legal relationship between customer and Bank, when a cheque was thus lodged for collection, was that of principal and agent and no more, that simple relationship would not constitute a sufficient basis for any effective arrestment by a creditor of the customer. It was not said that the Bank was Mr. McLaughlin's debtor. It was not said that its position as his agent would provide a basis for arrestment. What was said was what was said on record: that from the date when the Bank received the cheque from the second-named defender they "came under an obligation to account to the second-named defender for the sum of £36,120.34 in that regard." It was in respect of that obligation to account that the arrestment was said to be effective. It was submitted that this obligation to account, in relation to such proceeds as the cheque might subsequently bring into the hands of the collecting bank, came into existence in advance of the receipt of such proceeds, as soon as the Bank had accepted the cheque from the customer and become entitled to demand payment from the paying bank. What was attached by the arrestment was not a pecuniary debt, but this obligation to account. The Bank's agency in relation to a cheque held for collection could be distinguished from other types of agency, where the obligations of the agent could be contrasted with any obligation to account: the Sheriff had held that the pursuer's arrestment in the hand of the Bank was effective to arrest the liability of the Bank to account, and that finding was sound.

[6] That came to be the single issue between the parties. In his very careful Note, the Sheriff considers a wide range of matters, in relation to both banking law and the law of diligence; and he cites and discusses a number of authorities which have a bearing upon these two areas of law, and their interaction. Much of what he says is not disputed, and we do not think it appropriate, at this stage, to review matters as widely as he did. It is important to note that counsel for the pursuer distinguished the situation not merely from that of a principal and agent, and that of creditor and debtor, but also from that where a question arises as to arrestment of a future or contingent debts. It is not a future or contingent debt that is said to have been attached - it is an obligation to account.

[7] As to the existence of an obligation to account, counsel for the defenders and reclaimers referred us to a number of textbooks and authorities. Byles on Bills of Exchange, 26th edition, at page 316 expressed the matter thus: "Where a cheque is paid by a customer into his account, the banker prima facie takes and holds it for collection as agent for the customer; he is not accountable to the customer for the amount of the cheque until it is cleared." A normal case such as the present could be distinguished from cases like McLean v. Clydesdale Bank Limited 1883 11 R. (H.L.) 1 where the customer had truly received credit "precisely as if it had been a £250 Bank of England note" so that the Bank was effectively acting for itself. In Clydesdale Bank v. Liquidators of James Allan Senior & Son 1926 S.C. 235, the Bank had had rights of lien, but endorsed bills held for the limited purpose of collection remained the property of the customer, and in accordance with Bells Commentaries, 1 at page 290, a banker holding a bill for the special purpose of getting payment was seen as a "mere agent". Counsel for the Bank submitted that none of the cases which dealt with the legal relationship between a collecting bank and its customer indicated that the bank was anything more than a mere agent. He referred to a number of such cases: Whatmough's Trustee v. British Linen Bank 1934 S.C. (H.L.) 51; National Australia Bank Limited v. K.D.S. Construction Services Proprietary Limited [1987] 163 C.L.R. 6608; Gaden v. Newfoundland Savings Bank [1899] AC 281; in re Farrow's Bank Limited 1923 1 Ch. 41; A. L. Underwood Limited v. Barclays Bank 1924 1 K.B. 775 (referred to in Whatmough's Trustees by Lord Thankerton at page 60); Barclays Bank v. The Bank of England 1985 1 All E.R. 385 and Sutherland v. The Royal Bank of Scotland 1997 S.L.T. 329. It was clear from these cases that in relation to a cheque lodged for collection, and indeed its proceeds, the collecting bank was indeed merely an agent acting on behalf of the customer as principal, without any additional role or accountability until proceeds were received. The fact that a collecting bank was thus acting as agent in relation to that particular cheque was extraneous to, and had no effect upon, the ordinary and continuing relationship of debtor and creditor in respect of the customer's account. The balance on that account remained unchanged, and the fact of a further cheque being lodged would not, for example, have any effect, until proceeds were actually received, upon such matters as liability for interest on an overdraft. There was no additional "obligation to account" over and above these familiar and readily understood relationships.

[8] Having referred us to these authorities in the field of banking law, counsel for the Bank moved on to consider certain authorities in the field of diligence. Like the Sheriff, he took as a starting point certain passages in Graham Stewart on Diligence. He acknowledged that while in general it would be necessary that an arrestee be in possession of funds or goods to which the common debtor was entitled, obligations to account could also be attached by arrestment. And while the mere fact of agency did not give rise to an obligation to account, it was acknowledged that an obligation to account could arise in the context of agency, and in particular when an agent actually received monies from his principal's debtor. Royal Bank of Scotland plc v. Sievewright 1995 S.C. 508 involved an agent acting in the sale of a house, and in due course receiving the purchase price. But the situation could be seen as analogous, in as much as that case and this case involved a principal putting something in the hands of an agent, to convert it into money. The principle that the agent had no general "obligation to account", at the stage when he merely held an asset which he could not realise for himself, applied in both situations, and perhaps more clearly in the case of a collecting bank. Johnston v. Dundas's Trustees (1837) 15 S. 904 provided another example of arrestment in the hands of a selling agent being regarded as premature when no part of the price had been paid to him. That was so even although the sale was made in the agent's name, and it was argued that what was attached by the arrestment was an obligation to account. That argument found some favour with Lord Medwyn, but it was rejected by the Lord Justice Clerk and the other Judges. It was of course accepted that a collecting bank would have duties in relation to presentation of the cheque, and an obligation to explain what had been done (or not done) in that regard. But there was nothing analogous to an arrestable obligation to account.

[9] Counsel for the Bank accepted that as between a debtor and creditor, the handing over of a cheque could be regarded as instant payment, equivalent to payment in cash, subject only to the condition that the cheque should be honoured. He referred to Leggat Brothers v. Gray 1908 S.C. 67, and in particular the observations of Lord President Dunedin at pages 74-75. The proposition that handing over a cheque was "as good as cash" was further vouched by Bank of Scotland plc v. Richmond & Company 1997 S.C.C.R. 303. But the position between the drawer of a cheque and the payee did not resolve questions as to the relationship between the payee of a cheque and the Bank with whom he lodged it for collection. The cases on diligence, like the cases on banking law, showed no room for an obligation to account of the kind contended for by the pursuer. Equally, if one turned from the expression "obligation to account" to the word "trustee" used in Graham Stewart, the pursuer's position was equally without foundation: there was no question here of trust, in any sense. Cases such as Riley v. Ellis 1910 S.C. 934 and Marshall v. Nimmo & Company 1847 10 D. 328 cast no light on cases such as the present.

[10] Counsel for the Bank also drew attention to the obligation owed by the drawer of the cheque to Mr. McLaughlin. While one did not know the precise foundation of the pension fund's obligation to Mr. McLaughlin, the cheque was plainly in extinction of some obligation, and it would appear that until that obligation was extinguished, as between those parties, there would be a debt, or possibly an obligation to account, arrestable in the hands of the pension trustees. Upon the pension trustees giving Mr. McLaughlin the cheque, and subject to conditions or qualifications if there were insufficient funds in the account upon which it was drawn, it appeared that the arrestable debt would be owed not by the pension trustees but by their bank - the paying bank. But it did not matter whether Mr. McLaughlin was a creditor of the pension trustees, or of their bank, or of one and then the other, or of both subject to conditions. There would be an arrestable debt in the hands of one or the other. That would remain the position until the debt was extinguished, by actual payment to Mr. McLaughlin, whether personally or into his Bank. That was the point of time when his Bank's debt to him arose, and when any other debt to him, by the pension trustees or their Bank, was extinguished.

[11] On behalf of the pursuer, it was submitted that the Sheriff had decided the matter correctly, and upon the correct grounds. The general position was as stated by Lord President Dunedin in Riley, at page 941-2: "In the case of a debt proper there is an obligation to pay, and an obligation to pay necessarily includes an obligation to account. But there may be an obligation to account when at the moment there is no obligation to pay". That proposition covered not only a claim for damages which had not yet been asserted (as in Riley) or claims where there was a share in a partnership, as envisaged by the Lord President. It would also cover cases such as the present, where "at the moment there is no obligation to pay" but there was a prior obligation to account. There was effectively a contingent or future debt; and while that was not said to be the actual subject of the present arrestment, its existence justified saying that there was a present obligation to account. Counsel compared Park, Dobson & Co. v. William Taylor and Son 1929 S.C. 571, a case in which arrestments had been laid at a time when the common debtor had begun work under an instalment contract, but when no instalment was yet payable. As Lord Blackburn had expressed the matter at page 581-2, it is competent for a creditor to arrest, in the hands of another, sums which may only be contingently due to his debtor by the arrestee. "The effect of the arrestment will be that, on the purification of the contingency, the arrestor will be immediately vested in the same rights against the arrestee as are at the time vested in the debtor to enable him to demand an immediate payment of the sum arrested." It was submitted that when Mr. McLaughlin lodged his cheque, the collecting bank became his debtor, contingently upon the monies coming in from the paying bank. It was this contingency, that the collecting bank would in due course become Mr. McLaughlin's debtor, that distinguished the situation from that of a mere agent. A cheque should be seen as "as good as cash" when lodged with a collecting bank and provisionally credited. And while of course the debt would only become unconditional when the Bank received payment from the paying bank, it made sense to say that there was an obligation to account, even before the condition was purified.

[12] Counsel adopted the reasoning of the Sheriff. He submitted that as the Sheriff had held (referring to Crerar Bank, Money and Commercial Paper at page 101) it was important to look at each individual transaction, and to take account of "particular obligations which exist from time to time and are co-existent with the main incidents of the debtor/creditor relationship." The Sheriff was plainly right in saying that "some kind of liability" arose on receipt of a cheque for collection, and was right to see that liability, in commercial reality, as a liability to account arrestable by the customer's creditor. The Sheriff was right to have seen the pension trustees' obligation as having been extinguished on their delivering the cheque to Mr. McLaughlin and as seeing it as implausible that a liability attached to the paying bank. There was, therefore, force in the argument that if liability to account did not attach to the collecting bank, then it appeared to "disappear into the ether". That confirmed that liability to account to the customer had arisen, and was arrestable, once the customer lodged the cheque for collection.

[13] We are not persuaded that any obligation to account arises upon lodgment of a cheque for collection. The obligation of the collecting bank, in such an event, is to present the cheque for payment to the paying bank, that obligation being extinguished by fulfilment, and any subsequent obligations, upon receipt of funds, being quite separate. There are, of course, obligations arising immediately on commencement of this specific agency. But we do not see any basis for saying that the Bank immediately incurs "some kind of liability" related to the amount for which the cheque is drawn, either in terms of there being a contingent debt, or in terms of an obligation to account.

[14] More fundamentally, and perhaps more obviously, we are satisfied that the solution to this question lies in a consideration of the common debtor's assets, and in particular, in the present case, his right to receive from the pension trustees, and their obligation to pay him, the sum for which the cheque was drawn. The purpose of delivering that cheque to Mr. McLaughlin was the extinction of the pension trustees' obligation, and satisfaction of his right to that payment. As between the trustees and Mr. McLaughlin, delivery of the cheque can properly be regarded as payment, comparable to payment in cash. But where payment is effected by cheque, there remains the possibility that the cheque will not be honoured. That being so, the payment does not, as a cash payment would, extinguish the creditor's rights or the debtor's obligations at the time when the payment is made. Extinction will occur only when the cheque is honoured. The pension trustees' obligation to pay Mr. McLaughlin £36,120.34 must be distinguished from the obligation upon Allied Irish Bank to pay Mr. McLaughlin that sum, which would arise if and when the pension trustees' obligation was extinguished by the cheque being honoured and paid. There is no transfer of the same obligation. Upon extinction of one party's obligation, another party comes under a quite new obligation. The collecting bank has its ordinary contractual obligations to its customer. But it does not, and will not at any stage, become the obligant in respect of the original debt due to Mr. McLaughlin by the pension trustees. Questions may no doubt arise, after a cheque has been delivered to the payee in a case such as this, as to the various possible mechanisms for exacting payment from the drawer of the cheque, or from the Bank upon which it is drawn. We do not see it as necessary to enter into such questions in the present case. But we are satisfied that until that debt is extinguished, the creditor's rights remain, whether against his original debtor or against that debtor's Bank. If they are extinguished by a payment to the drawee's Bank, he will correspondingly come into credit against that Bank for that amount. But until he does so, we see no basis upon which, in any form, there is an obligation to him on the part of that Bank, arising from his lodgment of the cheque with them, which is capable of attachment by arrestment.

[15] In these circumstances we recall the Sheriff's interlocutor of 21 July 1999, and dismiss the action.