United Kingdom House of Lords Decisions

Subject_Letter of Credit—Obligation—Mandate—Relevancy—Forgery by a Clerk—

A of Glasgow, obtained a letter of credit from the U. Bank there on a Liverpool Bank in favour of B of Liverpool, and duly posted the letter to B. When the letter reached Liverpool B was absent, and the only clerk in his office forged a cheque in B's name, and obtained payment from the Liverpool Bank, and absconded. The Liverpool Bank having thereafter declined to pay B's draft, B and A raised an action against the U. Bank for repayment, the defence being, that the U. Bank put the Liverpool Bank in funds, but that the latter was imposed on by a forged cheque:

Held (reversing judgment), That this was a relevant ground of action, and that the U. Bank was bound to shew either that the Liverpool Bank had actually paid the draft of B, or that the Liverpool Bank did something which, as between it and B, was equivalent to such payment.

Letter of Credit— A letter of credit is not a negotiable instrument, and payment cannot be resisted because the letter is not delivered up. ¹

This was an appeal against an interlocutor of the Court of Session assoilzieing the defenders, the now respondents, in an action raised against them by the now appellants. The appellants consist of four persons, William Orr and Alfred Barber, traders, carrying on business in partnership at Liverpool, and also at Buenos Ayres—Orr being resident, and managing the affairs of the firm at Liverpool, and Barber at Buenos Ayres; James Tassie, merchant in Glasgow, their mandatory; and Charles Campbell, executor of John Gordon Campbell deceased, who at the date of the occurrences in question was a merchant in Glasgow.

The transactions which gave rise to the action were as follows:—John Gordon Campbell had occasion to remit to Orr and Barber, in the usual course of business, a sum of £460 9 s., and for that purpose he, on the 22d Oct. 1844, paid that sum into the bank of the respondents in Glasgow, and obtained from them an order on a bank at Liverpool in these words:—

Union Bank of Scotland, Glasgow, 22nd October 1844

“No. 15/583, A. A.

“Please to honour the drafts of Messrs. Orr and Barber to the extent of £460 9 s., which charge to the bank. I am your obedient Servant,

(Signed) JA. Watson, Cashier.

£460 9 s.

Entd. M. G. H.

To the Manch. and Lpool. District Bank, Liverpool.

Not transferable.”

Mr. Campbell, having obtained this letter of credit, sent it on the same day by post, directed to Orr and Barber at Liverpool, with a letter advising them that he had done so. At the time when the letter reached Liverpool, the appellant Barber was at Buenos Ayres, and the appellant Orr was in Ireland. But Orr returned on the 31st Oct. to Liverpool. He then applied to the bank there to honour his draft for £460 9 s., but they refused to do so. The ground on which they rested their refusal was, that before Orr had returned to Liverpool, they had paid the money on a cheque drawn on them by one Smith his clerk, the truth being that the clerk had, on the arrival of the letter which inclosed the order, and which must have reached Liverpool on the 23rd or 24th, opened it, and presented it at the Liverpool Bank, together with a cheque for £460 9 s., which, without any authority, he had drawn on them in the names of Orr and Barber, dated 25th Oct. 1844. This cheque was in truth a forgery, but the bank, supposing it to be genuine, paid it, taking as their authority the Glasgow letter of credit of the 22d. The clerk, as soon as he had obtained the money, absconded, and fled to America.

Orr and Barber and the representative of J. G. Campbell then raised the present action against the Union Bank to recover back the £460 9 s. The Lord Ordinary (Cunninghame) found that no statement or pleas had been substantiated by the defenders, to bar the pursuers a proof in support of their action, and approved certain issues accordingly. The First Division, however, after ordering cases to be laid before all the other Judges, recalled the interlocutor of the Lord Ordinary, sustained the defences, and assoilzied the defenders. The pursuers then appealed.

_________________ Footnote _________________

¹ See previous report 14 D. 395; 24 Sc. Jur. 196. S. C. 1 Macq. Ap. 513: 26 Sc. Jur. 632.

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The appellants, in their printed case, contended that the interlocutors should be reversed, for the following reasons:—“1. Because it is competent to the person who obtains a letter of credit in favour of another, to countermand payment at any time before the money is actually paid over, or some binding engagement is entered into by the person to whom the letter of credit is addressed, with the person in whose favour it is drawn, so as to give the latter a remedy by action upon such engagement against the former; and it is plain that there was no such payment or engagement in the present case; no payment, because the draft upon the Liverpool Bank was a forgery; no engagement upon which Orr and Barber could sue, because their clerk was not acting by their authority in his dealings with the Liverpool Bank, and they have not ratified his acts, nor could they without ratifying all, including the felonious receipt of the money. 2. Because the amount paid for the letter of credit is recoverable, as upon a failure of consideration. 3. Because the Scotch Bank are in the position of agents employed to pay over money, who have not paid it over, or engaged with the intended payee to pay it over, and are therefore bound to return it on demand. 4. Because the materials before the Court did not justify the decision complained of.”

The respondents, in their printed case, contended that the interlocutor should be affirmed, for the following reasons:—“1. Because the pursuers have not shewn any contract which has been broken by the defenders. 2. Because the pursuers have not fulfilled those conditions which ought to have been performed by them, in order to entitle them to maintain the present action.”

Hugh Hill Q.C., for the appellants. This is a question of relevancy, and we are entitled to assume certain facts which we allege and are prepared to prove, if we had the opportunity. The letter of credit here was a mandate granted by the Scotch to the English Bank, directing the latter to pay Orr and Barber, but it did not raise any contract between the English Bank and Orr and Barber—in other words, there was no privity between the latter parties. The letter was not transferable, and no action could be maintained in England by Orr and Barber against the English Bank, till the latter had consented to hold the money for Orr and Barber's use. This had been decided over and over.— Williams v. Everett, 14 East, 582; Scott v. Porcher, 3 Meriv. 652; Baron v. Husband, 4 B. & Ad. 611; Mackersy v. Ramsay, 9 Cl. & Fin. 818. Now it cannot be said any such assent was ever given by the English Bank to hold the money for Orr and Barber, and so up to that time the Scotch Bank were responsible to Orr and Barber for their agents the English Bank. That the English Bank were merely the agents of the Scotch Bank, to do what the Scotch Bank undertook to do, viz. to pay Orr and Barber, is self-evident. If, then, the agent failed to discharge his duty, the conclusion is obvious, that the principal, i. e. the Scotch Bank, must be liable. The question then comes to be—Did the Scotch Bank or its agents fail to do its duty, and what was its duty? We say its duty was to pay Orr and Barber the money. It is said, all that the Scotch Bank undertook was to establish a credit with a solvent English Bank. If this means that Campbell paid his money for the mere chance of the English Bank being pleased to assent to hold the money for Orr and Barber's use, it is too absurd a view to be entertained; as nobody in his senses would ever pay away his money on such a risk. If, however, it means that the English Bank should pay Orr and Barber, and become their debtor, then the contract has not been fulfilled. As principal, the Scotch Bank was liable for more than the mere solvency of its agents, the English Bank—it was responsible for the latter paying the money to Orr and Barber, or Orr and Barber's authorized agent. The English Bank refused to pay Orr and Barber personally, and they have not paid Orr and Barber's authorized agent; for we say Smith was not authorized. The other side allege that he was, or at least that we ratified his acts constructively, i. e. by reason of our negligence; therefore, as we deny both these allegations, they are fit subjects for issues. Suppose that Campbell's letter to Orr and Barber had been stolen out of the post office before reaching Orr and Barber, and that the thief had forged a draft and obtained payment, would that affect Orr and Barber? Certainly not, because payment on a forged cheque is no payment at all as against the person whose name is forged.— Robarts v. Tucker, 16 Q.B. 560; Hall v. Fuller, 5 B. & Cr. 750; Johnston v. Windle, 3 Bing. N. C. 225. In the last case it was a clerk who forged the note. There is a case of Young v. Grote, 4 Bing. 253, where a customer of a bank was bound to bear the loss of a forged cheque, because his own negligence contributed to the forgery; but in the present case the negligence is a question for a jury, and we have been refused a jury by the Court below. Again, it is said the Scotch Bank is bound to pay only on the letter of credit being delivered up, which Orr and Barber have not done. The reason of our not delivering it up, of course, is, that the English Bank has got the letter of credit. But we contend that at common law there is no obligation on the payee to deliver up the letter of credit previous to demanding payment. A letter of credit is not a negotiable instrument, and is no part of the law merchant.— Hansard v. Robinson, 7 B. & Cr. 90; Ramus v. Crowe, 1 Exch. 167. Where an instrument is not negotiable, payment cannot be resisted on the ground that the document is not delivered up; such is the case even with a promissory note not negotiable.— Wain v. Baily, 10 Ad. & E. 616. Therefore the other side cannot import into the letter of credit the usages incident to a bill of exchange, and thereby give a meaning to the instrument which its terms do not warrant. Such is the law also in Scotland.— 1 Bell's Com. 371. For the same reason it is futile to say, that Orr and Barber did not within a

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reasonable time present the draft, for that is attaching to a letter of credit the incidents of a bill of exchange. It is also said that as between Orr and Barber and Campbell, the sending of the letter of credit operated as payment, especially as these parties had previously dealt in the same way. But it is well known that nothing but the giving of a negotiable instrument operates as a suspension of the remedy. — James v. Williams, 13 M. & W. 828, and 2 Exch. 798. And, as already stated, a letter of credit is not a negotiable instrument. As to the joining of Campbell with Orr and Barber as co-pursuers, that is in accordance with the practice in Scotland.

Bliss Q.C., and Forsyth, for respondents.—We object to the joinder of Campbell as pursuer in this action, but as the effect of the objection would probably only cause delay, we waive it. The other side rely on one of two positions, either—1. That the Scotch Bank gave an absolute guarantee that the English Bank would pay Orr and Barber, and that payment to Orr and Barber alone would be satisfaction; or, 2. That the letter of credit was a mere mandate, capable of being countermanded next day, and the mandatory failing to pay, the principal was liable to pay back the money. We contend, however, that the contract on our part was, that for money paid at Glasgow we would establish a credit at Liverpool, provided the letter of credit should be presented there by the payee, and the payee should draw drafts on the English Bank. We admit that the Scotch Bank guaranteed that money should be paid at Liverpool, though not absolutely, but depending on conditions to be performed by the appellants. These conditions were, first, that the letter of credit should be presented by Orr and Barber; for unless this was done, how could the Liverpool Bank know of the credit, as it was not our duty to advise them, and no such allegation of duty is contained in the summons? It was not a mere mandate, therefore, which could be revoked next day, for the contract was indissoluble as soon as the letter of credit was obtained, and the payee could not obtain the money except by drawing drafts on the English Bank. That was the plain result of the contract. Hence, in order to maintain an action against us, nothing less than a presentment of the letter and a dishonoured draft must be proved, and these cannot be dispensed with. — Bowes v. Howe, 5 Taunt. 29; Campbell v. French, 6 T. R. 200. A letter of credit is also strictly construed in Scotland, and the same conditions are implied. — Paisley v. Rattray, Mor. 8228. Independently, however, of the law merchant, there was no guarantee by us that the letter of credit would be paid. All we guaranteed was that there was a bonâ fide debt, and that the English Bank would be willing to pay on the draft being presented. It is a rule of the civil law and of universal law, that on the sale of a debt there is no implied guarantee that the debtor is solvent. Pardessus, de la vente des creances, Part 6, c. 3, tit. 1. This is like the sale of a bill of exchange, the only difference being, that instead of cash the payee must draw a draft.