Scottish Sheriff Court Decisions

ADAM ASSOCIATES (STRATHCLYDE) LIMITED v. CGU INSURANCE PLC [2000] ScotSC 18 (12th July, 2000)

A65/99

GLASGOW, 12 July 2000. The Sheriff Principal having resumed consideration of the cause, refuses the appeal and adheres to the sheriff's interlocutor complained of dated 7 April 2000; finds the pursuers and appellants liable to the defenders and respondents in the expenses of the appeal and remits the account thereof, when lodged, to the auditor of court to tax and to report thereon.

This appeal raises a short but interesting point regarding the effect of a cheque bearing an allegedly inadequate designation of the payee. The essential facts, which were established after proof, are in short compass. In April 1996 the defenders were liable to settle an insurance claim which had been submitted by the pursuer company, whose correct designation was "Adam Associates (Strathclyde) Limited". On 4 April of that year they sent a cheque for £12,000 to the pursuers' place of business. That cheque was made payable to "Adam Associates" and was crossed "A/c payee only not negotiable". It was received by the pursuers' sole director. She knew what the cheque was for and that it represented a sum due to the pursuers who were, at that stage, in financial difficulty. That director also operated, as sole proprietor or partner, two firms known as "Adam Associates, Supplies" and "Adam Associates, Services". Despite knowing that the cheque represented a sum due to the limited company she paid it into an account in name of "Adam Associates, Supplies". That account was maintained with different bankers to the account held by the limited company. Shortly after that, an administrative receiver was appointed to the pursuers. In the present action it is maintained on his behalf that making a payment by means of a cheque in the form described did not constitute a valid discharge of the debt due by the defenders to the pursuers. The pursuers accordingly seek decree for £12,000. The learned sheriff rejected that claim. He held, as part of his findings in fact and law, that "the sole director of the pursuers...could have lodged it with the pursuers' bank...in the normal way when it would have been cashed and cleared".

Two grounds of appeal were noted on behalf of the pursuers and these were developed in submissions before me. The first ground is that the sheriff erred in law by holding that the cheque was valid between the parties and capable of discharging the debt due by the defenders. The agent for the pursuers contended that this was the central issue. He referred to Gloag on Contract, 2^nd edition, at page 273 which states: "When a cheque is sent to a creditor the debt is extinguished subject to a resolutive condition; it has ceased to exist as a debt but will revive if the cheque is dishonoured". The case of Leggat Brothers v Gray 1908 SC 67 is cited in support, the statement in Gloag being derived from a passage in the Opinion of Lord President Dunedin at pages 73-74. These statements pre-supposed that the cheque was valid as between the parties. In fact, the present cheque was not. Section 81A of the Bills of Exchange Act 1882 as amended by section 1 of the Cheques Act 1992 provides "(1) 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". This cheque was only valid as between the defenders and an entity known as "Adam Associates" which in fact did not exist as the sheriff had recognised in finding in fact 10. In accordance with proper banking practice it would not have been regarded as a cheque in favour of the pursuers. Paget, The Law of Banking, at page 248 states "...a collecting bank should refuse to credit the proceeds of a cheque crossed account payee for anyone other than the named payee". That put it into the same position as a cheque that was never going to be cleared and as such was not capable of discharging the debt. The defenders founded on section 7 of the 1882 Act which provides: "Where a bill is not payable to bearer, the payee must be named or otherwise indicated therein with reasonable certainty". That did not avail them. Standing the existence of other entities bearing the "Adam Associates" label there was no such "reasonable certainty". The sheriff had not found in fact that the payee was designed "with reasonable certainty". The sheriff had dealt with the case on the basis of a failure in duty by the sole director and had not addressed the crucial question of whether the cheque was valid between the parties.

As an alternative, the agent for the pursuers submitted that as the defenders had facilitated payment of the cheque into the wrong account, responsibility for that lay with them and they could not contend that they had discharged their debt. There was little doubt on the evidence that by paying the cheque into an account in name of a business owned by her, the pursuers' director had misappropriated the £12000. Gloag (supra) at page 708 states: "A debtor ...takes the risk of loss or theft if he adopts some method of payment not in the ordinary course of business, and affording facilities for fraud". In Robb v Gow Brothers & Gemmell (1905) 8 F 90 a client of a firm of stockbrokers was held not to be entitled to delivery of share certificates when he had paid for them by uncrossed bearer cheque, handed to the stockbrokers' clerk and misappropriated. The Lord President said (at page 104): "A bearer cheque is no more than payment in bank notes, and it seems to me that if one is going to send money in a form which makes it so extremely easy of appropriation, he must take it upon himself to see that it gets properly to the hand for which he designed it". He continued: "It seems to me that as the defenders here really never got the money, the pursuer cannot say they must be held to have got it". In the present case the defenders knew the proper designation of the pursuers from the insurance contract itself; moreover, they had averred that the cheque was sent out in the form in which it was "in error". It was, in that form, tantamount to giving the director cash. To "facilitate" meant no more than making misappropriation easier, and the ratio of Robb v Gow Brothers should be followed.

The defenders' agent submitted in response that the case turned on one issue, namely whether the payee of the cheque was designed with reasonable certainty. Putting that in the form of a question, it was "Could it be said that the payee was not designed with reasonable certainty?" The answer to that was clearly no, particularly when one took into account evidence of previous cheques made out in a similar fashion. That evidence was summarised in finding in fact 11. It recorded that the pursuers' director had regularly received cheques payable to "Adam Associates". If the sums involved were payable to the pursuers she paid them into the pursuers' account with Allied Irish Bank; these were always accepted and duly cleared. That finding made it perfectly clear that a cheque payable to "Adam Associates" was capable of discharging a debt due to the pursuers. If there was any substance in the pursuers' contention that the designation was not "reasonably certain" from a banker's perspective, they ought to have led evidence from AIB or other bankers to that effect. The only way of determining the question of whether the cheque bore a "reasonably certain" designation was to look at it from the point of view of a receiving bank, and the only evidence suggested that they would not have rejected such a cheque. That, it was submitted, was conclusive of the case. The pursuers' alternative argument simply did not arise if the cheque was capable of discharging the defenders' debt. One did not get to the stage of examining the case of Robb v Gow Brothers but even if one did it was not in point. This was not a case of a cheque made payable to bearer. In any event it was doubtful whether Robb v Gow Brothers could still be regarded as sound in law. In the subsequent case of International Sponge Importers Limited v Watt & Sons 1911 SC (HL) 57 payments by both personal cheque and cash to a representative of the pursuers were held to constitute valid settlement of debts due to the pursuers in a situation where the defenders had no reason to believe that the representative was not entitled to receive such payments. That decision was arrived at against a background of a shift in English authorities to the view that a principal was liable for the fraud of his agent: cf. Lloyd v Grace Smith & Co 1912 AC 716. The decision in Robb v Gow Brothers reflected the law before that change. The defenders were entitled to rely on the fiduciary duties which the director owed to the pursuers. There was nothing to suggest to the defenders that she was not entitled to accept payments on the pursuer's behalf, or to give them notice that in making payment direct to her there was something in the nature of a risk.

I am far from persuaded that the sheriff was wrong to reject the pursuers' claim. It may be that the terms of his judgement place considerable weight on the right of the defenders to rely on the integrity of the pursuers' director and not on the point now focused, namely whether the payee of the cheque was designed with reasonable certainty. It does, however, appear to me that the onus of proof lay on the pursuers to establish that the designation on the cheque did not meet the requirement of "reasonable certainty". In the light of the evidence regarding the acceptance and clearing of other cheques in similar form they have conspicuously failed to do so. At an early stage of his submissions the pursuers' agent posed the question, "Was the cheque capable of discharging the defenders' debt?" In the light of finding in fact 11, which was not challenged, that question can only be answered in the affirmative, and that is fatal to the pursuers' main argument. I agree with the submission advanced by the agent for the defenders that by recording in finding in fact and law 1 that the cheque could have been lodged with the pursuers' bank in the normal way "when it would have been cashed and cleared" the sheriff was in effect holding that the designation of the payee was valid.

The second argument advanced on behalf of the pursuers is a true alternative, since their main proposition appears to be that the cheque tendered contained a designation so uncertain that it could not be regarded as payable to anyone. On that view it is hard to see how sending it could "facilitate fraud". The alternative must therefore proceed on the basis that the cheque was capable of being presented by anyone who had access to an account bearing an "Adams Associates" designation. Without some knowledge of the existence of any such entities it is a little hard to see why anyone tendering such a cheque would be "facilitating fraud".

It is, however, fair to say that the decision in Robb v Gow Brothers does tend to suggest that, even when payment is tendered in a form which can competently clear the debt, it may not do so if in fact it never reaches the creditor and was tendered in a form which makes fraud possible. Two observations should, however, be made. First, Lord President Dunedin did not use the word "facilitate" in relation to making fraud possible, nor did he use the expression "affording facilities for fraud" as used by Professor Gloag. He spoke of payment being made "in a form which makes it so extremely easy of appropriation". That expression was used in the context of a bearer cheque - an extreme case perhaps - and could hardly be said to have any applicability to a case involving a cheque crossed "not negotiable account payee only". Second, it is clear that the Court approached the matter on the basis that the funds never truly reached the intended recipient. In the light of subsequent decisions holding that a principal is liable for fraud of his agent whilst acting within the scope of his authority it is doubtful whether that view would be followed now, and I entertain distinct reservations as to whether at least part of the decision in Robb v Gow Brothers can still be regarded as sound. In any event I am not at all attracted to the proposition that what took place in this case "facilitated" fraud to the extent of preventing the defenders from contending that they had settled their debt. The defenders were, in my view entitled on the face of matters to rely on the integrity of the pursuers' director and her fiduciary duty to the company in the absence of knowledge which would put them "on risk". That view is, in my opinion, supported by the decision in the International Sponge Importers case. For these reasons I reject the pursuers' alternative argument.

In the whole circumstances I find myself in agreement with the conclusion reached by the learned sheriff and I shall adhere to his interlocutor. It was accepted that expenses would follow success.